By David Hall, Managing Partner, YFM EquityPartners

Investors are increasingly frustrated at the low levels of return from mainstream asset classes. And with troubled times likely to continue, there is the desire to seek out other classes that will deliver better returns. Tempting though it might be, now is not the time to chase faddish products or start undertaking what I call “mid life crisis investment”. These are my fundamental guiding principles:

1. Absolutely don’t throw away all of your experience and don’t change your core criteria just because the economic news is bad.

2. Listen to your instincts, especially if you are an experienced serial investor and/or businessperson/entrepreneur - if it feels bad it probably is!

3. Be prepared to take an even longer term view than you were before. There is a degree of consensus at the moment amongst professional investors that whatever solutions are proffered by governments and others to the dampening pressures on growth, all will take longer to occur because the solution will involve multi-country politics rather than single markets. Investors need to look therefore for the slow big buck not quick fast buck.

4. Look at things that are counter intuitive or counter cyclical. Business angels should hunt out innovative solutions, which can make more money by changing the markets they are operating in, but they should bear in mind the well established precedent that evolutionary product developments tend to make more money than revolutionary ones. This is likely to be even truer in today’s climate because customers are more cautious. So they are more likely to be tempted to buy things they know and understand.

5. If your instincts do lead you towards backing something which will cause a revolutionary change in the ultimate market, redo the numbers on the basis that everything will not just take twice as long, cost twice as much and get half the projected sales, but take four times as long, cost four times as much and generate a quarter of the sales.

6. Look at what worked and thrived through the last recession. Seek out opportunities in countercyclical industries such as energy and food. Within these sectors you will find a number of well run manufacturing and other businesses well worth investing in.

7. Look for a team that takes the long view, especially in regards to continuous investment in their core assets, particularly their staff. I particularly like companies that have regular retained apprenticeship teams. They will have continuous pool talented people at different stages of development which provides core strength to the business, not just now but in the future and will be able to scale up more easily as the recovery comes.

8. Look for businesses to back that are really good with their customers. In hard times customers continue to trade with their “go to” suppliers, ahead of the fly by nights. They also stick with suppliers who will work with them to survive yesterday’s, today’s and tomorrow’s downturns. These suppliers will tend to trade well and increase market share at the expense of the competition, putting them in a stronger position when the upturn comes.

9. Invest in people you really get on with, not those you think you might get on with “as they come to see your point of view...”

10. Take equity in businesses where even though the market is going to face a degree of change, it is not going away anytime soon. Look for businesses that will help the market overcome challenges better, easier and quicker. The NHS, for example, which is facing a hiatus period as new supply chains are put in place over the next nine months or so, will still be around for many years to come. Avoid red neck businesses which are struggling to cope with changes or have models that are hard to adapt to changing conditions.

11. When it comes to businesses servicing the public sector, bear in mind that in the future the entire public sector will rely on those it knows and can trust. It is likely to have fewer bigger relationships. Look for these sorts of patterns in this and other markets you are investing in, so you can take advantage of change.

12. There is no obvious business you can rely on for a big growth opportunity. You have to hunt out the best in class in each sector and be prepared to look at many different sectors at one time. For us this means we are investing in a much greater variety of businesses from a four-five year old power efficiency business to a 20 year old complex payroll solution one. We are also investing in a specialist dental reconstruction business and a physical and online auction house, at the moment. What you have to look for is common degrees of quality regardless of sector.

13. Scale of resource will matter in terms of finding and delivering the best deals, so do not operate alone. I remain thankful that YFM has a national presence and offices throughout the UK so we can be on the ground - hunting out new investments and with ready access to our portfolio companies. If you are an individual investor ally yourself with others who can help you access those high levels of resource — join that business angel community or invest through or co-invest with a VC.

14. Remember that in the future 2011/12 could well be seen as vintage years for investors. You will have been able to buy low and in time you will be able to sell high. The YFM team have been investing for 30 years and we have seen enough cycles to know that you should be happy buying on the way down and selling on the way up; you don’t have to call the very top or the very bottom. The trick of course will be in timing the exit!

15. Last but not least take advantage of the extras you will be offered as a private investor with cash in your pocket — such things as the bonus offers being given to investors by VCT and EIS fund managers who submit their forms before Christmas!

YFM Equity Partners has now opened two new fundraisings for the 2011/12 Tax year, British Smaller Companies VCT2 and British Smaller Companies EIS. If you share David’s philosophies of investment and like investing in Britain while accessing attractive HMRC Tax relief contact David’s colleague Tracey Nice to find out more via tracey.nice@yfmep.com or by telephone 0113 294 5055 or visit YFM Equity Partners’ website www.yfmep.com

Join us on
Follow @freshbusiness