Private Tech-quity

Private equity managers reflect on COVID and share outlooks for tech.

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The outperformance of the tech sector during COVID-19 has never been far from the headlines. But some of the fastest-growing technology companies fly under the radar, as they are not quoted on public markets. Private equity investment companies offer a way to access some of these opportunities, which may turn into the FAANG stocks of the future.

The private equity sector’s exposure to tech has been one factor driving its strong performance over the past six months, when the sector has delivered a total return of 30%. Performance is up 4% over 12 months, and over the long term it is strong with a total return of 215% over the past decade1.

On Monday 16 November 2020, the Association of Investment Companies (AIC) hosted a media webinar with Steven Tredget, Partner of Oakley Capital, the manager of Oakley Capital Investments; David Toms and Laura Dixon, Director of Research and Senior Investor Relations Manager at Hg, the manager of HgCapital Trust; and Paul Daggett, Manager of NB Private Equity Partners. They discussed investing in technology, where they are seeing opportunities and risks, recent portfolio adjustments and their outlook.

Their views have been collated alongside comments from Colm Walsh, Managing Director of ICG Enterprise Trust; Helen Steers, Partner at Pantheon, the manager of Pantheon International Plc (PIP); and Richard Hickman, Director of Investment and Operations at HarbourVest Global Private Equity.

What are the most exciting areas of tech and how are you getting exposure?

David Toms, Director of Research at Hg, the manager of HgCapital Trust, said: “For us, the most exciting areas are the ones that most people would consider the most dull! We love companies that help automate administrative processes, freeing people up for more interesting tasks that benefit from human involvement. By providing software and specialist services to perform the routine tasks – producing hundreds of thousands of invoices or payslips, scanning legal documents for differences, routing x-rays and logging who has verified them – we can help businesses and people focus on the things they do best: interacting with customers, making complex decisions on imperfect information, providing detailed advice.”

Helen Steers, Partner at Pantheon, the manager of Pantheon International Plc (PIP), said: “The digital transformation of the economy was underway long before the COVID-19 crisis and has only been accelerated by the events of 2020, which have provided a powerful tailwind to areas such as cloud-based software that enable remote working. For example, PIP has exposure to companies providing mission-critical software, such as Abacus Data Systems, which serves the legal and accounting industry in the US. Cybersecurity is another area of interest, given the greater volume and severity of cyber-attacks, amplified by the booming number of connected devices and increased vulnerability due to working from home. Recorded Future would be a good example of a SaaS-based cyberthreat intelligence provider in PIP’s portfolio. Finally, digital payment technology is another exciting sector, powered by the relentless move of consumers to purchasing goods and services online. An example in PIP’s portfolio would be Adyen, which develops multi-channel payment platforms, allowing shoppers to pay online, in app or in store, all over the world.”

Steven Tredget, Partner at Oakley Capital, the manager of Oakley Capital Investments, said: “We are excited by the digital tools and platforms that are becoming increasingly popular B2C and B2B solutions across multiple sectors. Solutions that are enabling online, direct-to-customer interaction, whether in education (edtech and online tuition), digital consumer (online market places) or business services (hosting and ERP software solutions). We specialise in backing leading digital participants in either traditionally less digitised parts of the economy or in geographies where adoption of digital infrastructure, e-commerce or cloud migration has lagged more mature markets like the UK and the US.

“One such example is Oakley’s portfolio company Career Partner Group, the largest and fastest growing private university group in Germany, which has been able to use its position as the online market leader to benefit from an accelerated shift to online learning, experiencing a significant increase in student intake in recent years and particularly in 2020.”

How have you navigated COVID? Have you made any adjustments to your portfolio?

Paul Daggett, Manager of NB Private Equity Partners (NBPE), said: “Over the past few years before the COVID-19 crisis, NBPE’s portfolio had been deliberately positioned for a late cycle environment, which we believe has served the portfolio well. Overall, the portfolio is generally weighted to less cyclical sectors and/or companies operating in subsectors where we believe there are long-term secular growth drivers. The fact that overall revenue and EBITDA (earnings before interest, tax, depreciation and amortisation) still grew, despite the global lockdowns in the second quarter of 2020, illustrates the resilience of many companies in the portfolio.”

Richard Hickman, Director of Investment and Operations, HarbourVest Global Private Equity, said: “For us, the most critical factor has been ensuring the strength of the balance sheet through the crisis. In private equity we make binding commitments to underlying funds and therefore it’s essential, come what may, that we can fund these commitments as they are called over time. Additionally, investing into private equity funds means cashflows can be unpredictable, particularly during times of crisis, and as a result, we continually stress test the balance sheet. With the onset of COVID-19, we re-modelled all of our cashflow scenarios to ensure the balance sheet could withstand potential prolonged negative cashflows. We focused on the company’s portfolio construction priorities to ensure we navigated through the chaos as calmly as possible. Our existing unfunded commitments continued to be called and so we have still been investing through the crisis.”

David Toms, Director of Research at Hg, the manager of HgCapital Trust, said: “The software industry has been remarkably robust, not least due to its mission critical nature in so many business processes. It has also provided solutions to many of the new challenges that we face, ranging from how to roster medical staff in an entirely new environment, to how to send invoices when you can’t access your office. Our overall portfolio continued to deliver robust top and bottom-line growth all through the crisis. We constantly course-correct for new information, but we’ve been investing in this area for over two decades now, so we’ve navigated economic downturns before. The new challenge this time has been dealing with the human side of the crisis – helping our own and portfolio staff move to new working environments and deal with many of their own uncertainties and challenges – sometimes very fundamental ones such as health, family and childcare.”

Opportunities outside tech

Helen Steers, Partner of Pantheon, the manager of Pantheon International Plc (PIP), said: “In addition to technology, we also like healthcare, which is PIP’s second largest sector, after IT. Again, the secular trends have been favourable, with ageing populations in the developed world and increased demand for specialty pharmaceutical products and services. So we have been adding to our exposure in the medical care, pharmaceutical and health tech areas.”

Steven Tredget, Partner at Oakley Capital, the manager of Oakley Capital Investments, said: “Tech-enabled businesses can span multiple industries and that is one of the sector’s main attractive qualities, for example consumer-tech companies or education-tech companies, which use technology to provide an edge over more traditional competitors. The global pandemic has accelerated an already-growing trend for traditional businesses needing to adapt and offer a digital or tech-enabled service, so the opportunities across all sectors of the economy are extensive. The businesses that will be most in demand will be those that are more defensive, for example, those that are highly cash generative, have sticky customer bases, and which benefit from online platforms.”

What are investors in quoted equities missing out on?

Colm Walsh, Managing Director of ICG Enterprise Trust, said: “Many quoted equities in the technology space are growing revenue very fast and therefore attract very high valuations but are often not profitable or cashflow generative. Investors also often have to suffer poor governance. By comparison private equity, specifically buyouts, tend to focus on tech companies with growing revenues but which critically are either already profitable and cash generative or have a demonstrable path to get there. Private equity firms work closely with investee companies to drive value creation through multiple levers and play an active role in driving operational improvement and ensuring sound governance. We believe that the return profile from investing in private equity is potentially more attractive compared to many quoted equities and is likely to be more consistent over time. Many of the current valuations on quoted markets are sentiment-driven and inherently more volatile.”

Helen Steers, Partner of Pantheon, the manager of Pantheon International Plc (PIP), said: “Ambitious companies developing exciting tech products increasingly look to private equity to supply operational expertise and management support, as well as long-term capital, instead of turning to public markets. Many of these businesses may never IPO, since their growth can be funded entirely though private equity, therefore investors who don’t add exposure to private equity-backed tech companies in their portfolios are potentially missing out on exciting opportunities which could enhance returns over the long term.”

Richard Hickman, Director of Investment and Operations, HarbourVest Global Private Equity, said: “Put simply, any early upside! Much of the growth of private companies now happens away from the public markets. Not only that, not all these companies will IPO – some will be acquired by trade buyers, and others will be bought by other private equity managers who can help with their next stage of growth. In light of this, we are starting to see an increase in ‘crossover investors’, who aim to benefit from all stages of the company’s lifecycle by investing in the private and pre-IPO space. But this isn’t a benefit afforded to most retail investors, as they can rarely access the private funds. We are also seeing mainstream equity managers shifting portfolios to take advantage of the strong growth potential of unlisted companies – we naturally agree with the potential here, but when it comes down to it, the pure play listed private equity firms have been doing this for much longer.”

Steven Tredget, Partner at Oakley Capital, the manager of Oakley Capital Investments, said: “Many technology-driven companies, or in fact many companies full stop, are remaining private for longer or shunning the public market altogether. That reflects the growing level of private capital available to them and the significant benefits and expertise that accompany private equity investment. In contrast, the growing cost, regulatory burden and restrictions imposed by a public listing are increasing deterrents. In short, private equity funds may be the only avenue to access some emerging sectors or company types.”

David Toms, Director of Research at Hg, the manager of HgCapital Trust, said: “We are able to leverage over 20 years of experience across scores of deals in our industry, to optimise our businesses on an industrial scale. No public investor will have access to the same dedicated in-house resource pool, ranging from cyber-security specialists to data scientists, all working with around 100 investment professionals with well over a thousand person-years’ experience in their sectors.”

Outlook for the private equity sector

Richard Hickman, Director of Investment and Operations, HarbourVest Global Private Equity, said: “Naturally, we’re positive about the sector. Private equity has the luxury of time – if the time isn’t right to sell a business, it won’t. Furthermore, in conjunction with the industry maturing, and the dynamic of companies staying private for longer, it feels as if private equity cannot be ignored. These aspects play into the hands of the asset class. Private equity has a way of innovating in the face of adversity – it did this after the global financial crisis and there is no reason the sector won’t do it again if has to. If anything, the opportunities are stronger than ever before.” 

Colm Walsh, Managing Director of ICG Enterprise Trust, said: “2020 has taught us, amongst other things, not to make bold predictions about the future. We believe that private equity has yet again demonstrated that it is a model which is well adapted for dealing with periods of volatility and uncertainty and we expect that as an asset class, it will continue to generate strong returns compared to listed markets for investors with a long-term focus.”

Paul Daggett, Manager of NB Private Equity Partners, said: “The state of the fund-raising market is a reflection of investor sentiment towards the private equity asset class and a barometer for the health of the private equity industry. Precise numbers for capital raised in 2020 won’t be available for some time, but Neuberger Berman’s observations and experience as a meaningful market participant suggests that 2020 will be a strong year for private equity capital formation. This illustrates a vote of confidence in the asset class by institutional investors in private equity funds. Neuberger Berman believes that private equity has become more strategic to institutional investors over time, and strong demand for the asset class is likely to continue into the future.”

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Notes to editors

  1. Data is SPTR to end 13/11/2020. Source AIC/Morningstar.
  2. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 358 members and the industry has total assets of approximately £209 billion.
  3. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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