Most of what reaches an investment committee is a good business in a market we do not understand, or a market we understand containing a business we cannot fix. Separating the two is most of the work.
Five tests. An opportunity has to pass all of them, and the fifth is where nearly everything stops.
One. Can we name the operator?
Not the sector, not the thesis — the person who will run it on a Tuesday in the second year, when the launch is over and the numbers are ordinary. If that name is a placeholder, we are underwriting a search, not a business, and a search is a different risk with a different price.
Two. Does the cash convert?
Revenue is a claim; collection is a fact. In several of our markets the gap between the two is measured in quarters, and a model that ignores it is not optimistic, it is wrong. We ask to see the receivables ledger before we ask to see the forecast.
Three. What does the second year cost?
First-year economics are almost always flattered — by launch pricing, by founder effort nobody is charging for, by a landlord’s incentive. We underwrite year two, and we ask the seller to as well.
Four. Is the regulation stable, or merely quiet?
Healthcare and real estate are both licensed activities in every market we operate in. A licence that has not been tested is not the same as a licence that has been defended, and the difference only becomes visible under stress.
Five. What breaks if we are wrong?
The question is not whether the downside is survivable for SIRA. It is whether it is survivable for the operator, the staff and the partner who came in beside us.
This is the test most opportunities fail. A structure where our loss is capped and everyone else’s is not may be defensible on paper and is still, in our experience, a bad way to build a second deal with the same people.
What this rules out
- Businesses whose returns depend on a regulatory change that has not happened yet.
- Assets we would have to sell into the same conditions that caused the problem.
- Partnerships where our capital is the only thing at risk.
It rules out a great deal. That is the point of writing it down.