The economic environment has undeniably become more challenging than what we have been accustomed to over the past decade or more. With uncertainty in the economic outlook likely to continue for the foreseeable future, private equity investors are understandably prioritising companies displaying resilient, consistent revenue streams.
In this quest for reliability, these investors are often turning towards companies providing mission-critical products and services.
The term 'mission-critical' refers to systems, applications, products, or services which are essential to the fundamental operations of a business – as failure could disrupt productivity or impair the business’s operations and potentially trigger significant losses.
It is easy to associate the term 'mission-critical' exclusively with industries such as technology, telecommunications, transportation, and power – given the immediate, visible disruption likely to ensue should operations suddenly halt. However, there is a vast array of companies across diverse industries providing pivotal functions. Disruptions to these companies could in turn affect the ability of customers to maintain production or functionality.
In addition to providing predictable cash flows and having an ability to successfully operate with leverage – key qualities sought after by private equity funds – providers of mission-critical products and services often display high customer retention, enabling the companies to pass on reasonable cost increases where necessary. This is an incredibly valuable attribute for investors in today’s economic climate.
In the second of our three-part series on resilient growth, we shine a spotlight on a number of appealing mission-critical opportunities and look at three very different companies, operating in diverse sectors, but all providing applications that are core to businesses and industries running efficiently.
Mission Critical Technology Driving Efficiencies
Headquartered in Rome, the Engineering Group is a digital transformation company. The business develops and manages innovative solutions for business areas where digitalisation is having the biggest impact. It operates in multiple market segments (from finance to healthcare, from utilities to manufacturing and many more), providing clients with technology, software, system integration and consulting services with a focus on solutions that drive value and improve processes. For example, in the healthcare sector, it designs systems to digitise processes and leverage technologies to improve patient care, quality of work of medical operators and the overall sustainability of healthcare systems. In the utilities sector, it has developed an end-to-end water management system to manage and reduce water loss. The system digitises information, locates leaks, shares data in real time, performs predictive analysis of water network deterioration, and alerts and manages field teams. The business has grown organically and through M&A and with a diversified portfolio built around proprietary solutions, best-of-breed market solutions, and managed services it has built a leading market position in Italy and an expanding global footprint. NBPE originally co-invested $10.5 million in Engineering Group in 2016 alongside NB Renaissance, a leading Italian mid-market private equity firm. In 2020, NBPE had an opportunity to realise its investment in the business, generating proceeds of $27.7 million. NBPE then chose to reinvest$13.4 million in Engineering to participate in further expected growth. At 30 November 2023, NBPE’s reinvestment in the Engineering Group is valued at $24.5 million.
Specialist Solutions
In 2021, NBPE co-invested in Solenis, a leading provider of special chemicals and solutions to water-intensive industries, alongside Platinum Equity. With over 15,400 employees and 71 manufacturing facilities, its operations span 130 countries1.
The solutions Solenis provides are critical to its customers, providing an essential input without which these businesses could not fulfil products for their end customers. For instance, without purified water, paper mills would be unable to produce paper, the key component of the food packaging industry – or without certain chemical solutions, adhesive producers would not be able to manufacture wood adhesive for use in furniture manufacturing.
Solenis stands as a key player in large, growing and resilient markets, driving high customer retention and strong reocurring revenues. This resilience is further amplified by the company’s accretive acquisitions. Since NBPE’s original investment, the company has completed six acquisitions including the $4.6bn transformative acquisition of Diversey in July. These acquisitions have created a company with significantly increased scale, broader global reach and the ability to offer a ‘one-stop shop’ suite of solutions for water management, cleaning and hygiene issues on a global basis. These strategic moves position Solenis as an even more valuable partner for its customers.
Critical Components
Monroe Engineering is another mission-critical company we have invested in, alongside AEA Investors. The company supplies a wide range of engineered products – including fasteners, casters, hinges, handles and magnets to various end markets such as aerospace, defence, medical, renewable energy, transportation, consumer goods and other diversified industrial markets.
For example, its fasteners are a critical component of an aircraft, while its hinges are used in manufacturing conveyor dishwashing machines, which are essential in the hospitality sector. With a comprehensive selection of both standard and custom-engineered products, Monroe caters to customers looking to simplify their component design and procurement process. Additionally, with exposure to 20 different end markets, Monroe’s essential products are relied upon by a local customer base, helping to build stable longer-term revenues. Since our investment in 2021, Monroe has continued to grow both organically and through acquisition and is now NBPE’s11th largest company as of 31 December 2023.
Our portfolio includes multiple other companies within the mission-critical theme, including MHS (recently renamed Fortna) and Excelitas . The unique attributes of these groups, including indispensable services and high customer retention, help build steady and recurring / reoccurring revenue streams. As a result, these companies should significantly contribute to the resilience of our portfolio – even amid the continued challenging economic conditions.
IMPORTANT INFORMATION
Past performance is not a reliable indicator of future returns. The value of investments and the income from them can go down as well as up, so you may get back less than you invest. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser and prospective investors are advised to seek expert legal, financial, tax and other professional advice before making any investment decision. Overseas investments are subject to currency fluctuations. The shares of NBPE are listed on the London Stock Exchange and their price is affected by supply and demand and the discount at which NBPE trades could vary significantly based on these factors. NBPE can gain additional exposure to the market, known as gearing, potentially increasing volatility. Investors should note that the views expressed may no longer be current and may have already been acted upon. Statements contained in this document that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of NBPE's investment manager. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this document may contain "forward-looking statements." Actual events or results or the actual performance of NBPE may differ materially from those reflected or contemplated in such targets or forward-looking statements.