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Opportunities Exist in Turbulent Times

The S&P 500 is down 40 percent. The Nasdaq is down 39 percent. Public companies with multi-billion dollar market caps are falling into bankruptcy in a few short quarters.

Sounds like today, but these stats actually come from eight years ago. Although the drivers were different, the investing landscapes in these two periods have similar characteristics. And the investment strategies that worked then can also work today.

Back in 2001, we asked ourselves when the financial destruction would end, and whether any company in which we made an investment could weather the storm. In short, we asked then as we do now: “Should we be IN or OUT of the market?”

To help answer that question today, we looked back at the investments we made during the last downturn. During the 24 months subsequent to 9/11, we invested in 22 companies. Eight of the 22 investments yielded excellent realized returns: We realized returns totaling $283 million on investments totaling $70, for an average return of 4.2x.

More to come

Eight promising investments remain in our portfolio. Seven of those companies are cash-flow positive and all are growing, so we expect attractive returns from this group.

Finally, six investments were less successful delivering realized proceeds of $15 million on a total investment of $25 million.

What did we do right— and wrong— during that period? For Trident Capital, success boils down to three principles:

1. Invest where you have domain expertise.

2. Pick high-growth but durable business models that can withstand troubled markets.

During the 24 months subsequent to 9/11, we invested in 22 companies. Eight of the 22 investments yielded excellent realized returns: We realized returns totaling $283 million on investments totaling $70, for an average return of 4.2x.

3. And back and build management teams with strong operational capabilities.

It has been our experience that when a company fails to perform it is typically due to one of two reasons: It either moved too slowly to address changing market conditions or it misjudged the intensity of the need for its products or services.

Three principles

In an ideal investment, the three principles converge and we find a company that fits the bill. First, we target companies where our domain expertise provides intimate knowledge of the customers, particularly where we can predict actual spending over the following 24 months.

Second, we form a strong thesis for why the business model can not only survive but thrive in a turbulent market, and why healthy acquirers will want to buy the company and/or the public markets will want to own its stock.

Finally we make sure we have a management team and investing partners with industry experience who can drive growth and achieve sustainable cash flow.

Health care information has been an important area of focus for Trident since our inception in 1993. In 2001, we scoured the markets for companies that could dramatically reduce the cost of health care by helping consumers make better purchasing decisions. Our thesis was that any company that could effectively do this would be valuable in any market and to a number of acquirers.

We found a small company, Resolution Health, which was on the verge of bankruptcy, but which had interesting technology in the consumer health arena. Under the management of a gifted CEO and a chairman who was a former Trident CEO, we helped the company re-craft its technology, rebuild the management team and establish key relationships with strategic customers. The result? We sold the company last year for an approximate 10x return.

Although the current economic climate looks bleak, turbulent times can create unique investment opportunities at excellent valuations. Durable business models and great teams are worth backing even in tough markets.

John Moragne is co-founder of Trident Capital, which invests in enterprise software and services, Internet, health care information technology and cleantech companies. He may be reached at jmoragne@tridentcap.com.