Companies that provide vital products and services and have high customer retention are especially attractive in an uncertain economic environment, when investors want to make their portfolios more resilient.
The economic environment has undeniably become more challenging recently, compared to 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, investors are increasingly 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’ 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 typically display high customer retention, enabling the companies to pass on reasonable cost increases. This is an incredibly valuable attribute for investors in today’s economic climate.
To illustrate this point, Engineering Group, Solenis and Monroe Engineering operate in different sectors but all provide applications that are core to businesses and industries running efficiently.
Mission critical technology driving efficiencies
Engineering Group, a digital transformation company headquartered in Rome, develops and manages innovative solutions for business areas where digitalisation is having the biggest impact.
It operates in all 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, the 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 merger and acquisition activity. With a diversified portfolio built around proprietary solutions, best-of-breed market solutions and managed services, it has developed a leading market position in Italy and an expanding global footprint.
NB Private Equity Partners (NBPE) originally co-invested $10.5m 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 $27.7m. NBPE also reinvested $13.4m in Engineering to participate in further growth. As of 30 November 2023, NBPE’s investment in the Engineering Group is valued at $24.5m.
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 countries.
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 will be unable to produce paper, the key component of the food packaging industry – or without certain chemical solutions, adhesive producers will not be able to manufacture wood for use in furniture manufacturing.
Solenis stands as a key player in large, growing and resilient markets, driving high customer retention and strong reoccurring revenues. This resilience is further amplified by the company’s accretive acquisitions.
Since NBPE’s original investment, the company has completed five bolt-on acquisitions and a $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’s 11th largest company as of 30 November 2023.
Our portfolio includes multiple other companies within the mission-critical theme, including MHS (recently renamed Fortna), Excelitas and Verifone. 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.
Paul Daggett is a managing director at Neuberger Berman and is responsible for the NB Private Equity Partners investment trust. The views expressed above should not be taken as investment advice.
