Introduction
Integral Capital Partners is a partnership form of business that is found in the technology arena. Roger Mc Namee is the founder of capital integral partners This partnership managed a family of limited partnerships that specialized in investing in technology industry. McNamee alongside his partner John Powell had managed to raise three investment partnerships and had so far enjoyed six years of good results in the business. These two partners were planning to close their second partnership and raise a fourth one. Before they could do this they had to make some strategic decisions. Integral as a partnership was advantaged by some factors for instance the less restrictive nature of its structure which made them to invest in both public and private companies. The open–ended charter also provided for integral to take on more concentrated positions than the traditional mutual funds could do. The charter allowed Integral to have advanced trading strategies. This was vital for the purpose of enhancing the partnerships return whether on short term or long term. The structure of integral enabled the partnership to enjoy the advantage of closed–end partnerships. The investment philosophy of Integral was very fundamental in as far a developing a sustainable competitive advantage that has seen all the success the partnership has been enjoying.
Discussion
The main issue here is that the great results that had been enjoyed by integral for the past six years were not forthcoming with the changes in the technology sector which made it difficult for the company to realize the gains.
There is an issue concerning valuation in the investment in technology sector. Valuations were becoming high in the technology arena and particularly for private companies, with poor rates of return on investment. The consequence of the increased valuations is that integral was finding it hard to get a compelling company with attractive valuations. The advantages of venture investments emerge and it is argued that reducing the funds on venture investment would reduce the overall performance of the partnership. Another issue concerned the growing maturity in the technology industry. That there was a possibility of a shift in valuation with the increasing competition in the industry. As a result of these issues, a large proportion of the market was becoming unstable and that’s is why McNamee and Powell.
The first option was to put focus on short selling. This would be in acceptance of the fact that the technology industry was overheating and focus on short-selling the overvalued investments. The advantages of this option include the fact that it existed in the original charter of the partnership which stated that the partnership would engage in short sells as the opportunity to do so arose. Secondly, with this option there would be no short-term problems.
The disadvantage of this option concerns the long term risk of the partnership being referred to as an active short seller. It would henceforth brand the partnership as an outsider and is likely to have negative effects on data gathering and research activities.
This move would also eliminate the advantage integral had over its competitors in terms of working with the entrepreneurs to build businesses. To add to this, there was no clarification on how integral was going to execute the short sell effectively with the existence of idiosyncrasies in the technology market. The so-called “paired approach” would prove difficult to accomplish. This would involve the picking of winners and losers in a specific market segment and taking offsetting positions in each. For example taking long in Dell and short in Compaq. This would completely neutralize the exposure of integral in the personal computer segment. It was unfortunate that pairing shorts and longs did but work well with the emerging segments. This is because of issues to do with valuations and hedging which make it difficult to pursue the strategy effectively.
Selling companies short required a totally different investment style and temperament other than investing in companies. Integral though had held a strong track record in investments, it was not a good stock seller. Therefore the short-selling strategy would not be the better option for integral partnership.
The second strategy that integral could adopt was taking controlling interests in companies. This alternative would involve controlling interests in troubled companies and working towards turning them around. This would have been a sort of leveraged buyouts or private equity strategy of investment. This had not been pursued so much in the history of technology sector due to some reasons. One of the reasons is that this sector had not matured enough to support the critical mass of leveraged buyouts or private equity investments. The second reason in the lack of the necessary specialized skills for technology investments in the private equity firms. The fact that technology markets were growth oriented could not allow them to fit with the traditional risk management oriented leverage buyout markets. This would bring complications in the situation. Then there was this perceived lack of the enduring franchise in the technology industry.
It is important to note that the business model of integral was not configured at that time to be involved in controlling interests. They could be allowed to participate in the transactions of LBOs and private equity transactions but could not take controlling interests. Besides, integral was tailored fro its crossover mission and therefore it was clear that it did not have the necessary skills. It would therefore call for additional people from outside with expertise in fields such as management and banking and this would imply additional costs.
The advantages of this alternative revolved around the increase in the number of technology companies for the past five to ten years. Then there was an argument by companies such as Microsoft that in the fast growing technology industry, development of enduring franchise was possible with time. Secondly there was a feeling in integral that the partnership was in a better position for this strategy. This is because the investment philosophy of the partnership could fit well within this alternative. With players such as KPCB and Morgan Stanley, integral had proved to be effective in management of third party relationships. Infact they had experienced success when they turned around companies such as Platinum Softwares and Flextronics.
Continuing with the current strategy.
The last option for integral would be to continue with the current strategy. This was so because it was becoming very hard for integral to find investments with an attractive price. This would require integral to expand its research capacity or increase the size of the partnership. This can be attributed to the fact that integral has an investment style that is time-consuming and therefore needs more planning and adequate resources. It is actually because of this time-consuming style that the partners were forced to come up with an investment decision. This current style presents a number of shortcomings amongst which include the limited nature of the partnership to the number of venture investments they can undertake. This is also coupled by the fact that there was fear on the expected impact the partnership would have on the smaller private companies the partnership have invested in. This means that the size of the partnership has been put on the limit by the significance of the venture returns to the entire strategy.
The option of reducing the fourth funds size would have been attractive to the founders for the sake of making them to relax a bit and maybe see a reduction in the number of working hours per day. This is normally a trend in some venture funds whereby the founders decide to go relaxing immediately their businesses start experiencing success that Integral has witnessed. The repercussions of such a move will imply that integral would not be able to survive after the founders have been retired.
It is vital to mention here that an increase in the size of the partnership would mean that additional personnel would be hired to take charge of the investments that would be left hanging. Increasing the number of associates has various implications for integral. First of all it has to be understood that with the current state, the formal investment process cannot fit well with such additional associates. This would therefore call for changes in the processes. Additional administration and policy–setting would also be required in this process. In short the point here is that additional people in the team would mean that decision making especially concerning matters of investment agenda would be slowed down. This would consequently affect the investment philosophy of integral.
Conclusion
After careful analysis of the various alternatives that integral founders are faced with it is important to emphasize the significance investment philosophy that has brought integral to its current state. Any strategic decision that would see the integral through the dilemma should not interfere with the investment philosophy. This is because it is with such a philosophy that the partnership has been able to enjoy its success for six years. Therefore it still remains vital to the partnership and its relevance should not be overlooked. Since going for a strategy that will see an increase in the number of associates, tends to interfere with the investment philosophy of integral I would not advocate for such a strategy. I would advice the founders of integral to go for a strategy that will address the current needs pf the partnership while being cost effective. The long-term implications of the strategy are the ones to be given the necessary attention they deserve otherwise the short-term strategies would not be suitable for the partnerships future. The adopted strategy should also be in harmony with the other small private companies that integral has invested in since their contribution remains relevant for the success of integral. If these considerations are put in place then there is no doubt that as Integral takes the new strategy it will be able to achieve levels of success in the course of its existence.