3 Themes for Private Equity

Private equity offers investors the chance to snap up stakes in fast-growing companies before they list on the stock market, but these investments are not without risk

Annalisa Esposito 1 December, 2020 | 10:10AM
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While the FTSE 100 is the first port of call for many investors choosing stocks for their portfolio, some of the fastest-growing companies are not yet listed on a stock market.

Private equity - investing in unlisted companies - has gained a lot of attention in recent years with the rise of so-called unicorn companies which are valued at $1 trillion or more before they event list on the stock market.

Investors are eager to snap up a stake in the next Tesla or Amazon, but not all private equity investments turn into success. As we have recently written, a number of much-hyped IPOs have been delayed or cancelled, while those who remember the dot com boom will recall how many firms listed at hefty valuations only to fail in a matter of months. 

Here we consider three of the biggest themes in private equity at the moment: 

Healthcare 

Paul Daggett, a program manager of Neuberger Berman Private Equity (NBPE), likes to keep the portfolio diversified, focusing on industries that are less cyclical, such as healthcare. “These sectors have served us well during the downturn,” he says. “We look for the right company and the right opportunity, and those which have demonstrated experience through the economic cycle.”

One company in the sector is Agiliti, which provides healthcare technology management and service solutions across the US. The company operates through three segments: medical equipment solutions, clinical engineering solutions, and surgical solutions. This gives the firm a diverse customer base, which includes around 7,000 national, regional and local acute care hospitals and site providers.

Meanwhile, FV Hospital is a unique gem in terms of its geographical diversification. The tertiary care provider is based in Vietnam's Ho Chi Minh City and its hospital employs 150 full-time physicians and 1,000 staff, serving more than half a million patient visits a year. 

A final healthcare pick is Cotiviti; not a healthcare company itself, it's connected to the industry as a provider of payment accuracy solutions for healthcare companies. The business provides technology, data and expertise to help healthcare companies enhance their claims payment accuracy. In practice this means taking in billions of clinical and financial data points, analysing them, and then helping clients discover ways they can improve efficiency and quality.

Future FAANGs

For most investors, the way to access private equity opportunities will be through an investment trust. This way there are teams of experts and analysts to do the research on companies for you, which can be more time-consuming than with firms lists on the stock market.

Helen Steers, manager of investment company Pantheon International (PIN), is finding interesting opportunities in technology firms, which may well turn in the FAANG stocks of the future. She likes companies such Adyen and Abacus Data Systems, which are “providing mission-critical software”.

Adyen is one example of a private equity success story as it listed on the stock market in 2018. Since then its share price has more than tripled from €420 to to €1,561. The firm, rated two-stars by Morningstar analysts, is a payments platform, providing technology that helps shoppers to pay online or through a contactless payments terminal. Morningstar analyst Niklas Kammer told us recently: "We do really like the company. There's not much to hate about their business model, their growth prospects or their management. But the valuation is just difficult to get to."

Steers adds: "Digital payments technology is an exciting sector, powered by the relentless move of consumers to purchasing goods and services online."

Steers also likes Recorded Future, a software company specilising in cyberthreat intelligence. “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," she adds.

Online Direct-to-Customer Interaction

Steven Tredget, Partner at Oakley Capital, is excited by businesses providing ways to enable companies to interact directly with their customers. Digitisation means companies are having conversations and resolves issues with their clients through online messaging and social media more than on the phone or face-to-face, and businesses need the tools to do this effectively. 

He sees opportunities for this in various industries including education and online tuition, shopping and online market places, and through business services such as software or web hosting. 

Tredget says: "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 example in Oakley's portfolio is Career Partner Group, the largest and fastest growing private university group in Germany. It has been able to use its position as the online market leader to benefit from an accelerated shift to online learning, leading to a significant increase in student intake in recent years and particularly in 2020.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Annalisa Esposito  is a data journalist for Morningstar.co.uk