Middle Market Innovation has continued in the face of the COVID-19 pandemic, with companies mobilizing research and development efforts into manufacturing and sales. Healthcare services have reacted to permanently changed delivery and protocols. Business services, especially those in data management and in the field of science, have found themselves at the core of supporting sustainable practices to understand the rapidly changing landscape. The tech-enabling skill sets, a common planning point for value-add with portfolio companies, has provided many companies with a competitive advantage. The emergence of new communications platforms provide day-to-day necessities to assist companies to lower their carbon footprint and increase employee productivity while working remotely.
Bain & Company reported (below) the average MOICs for the last decade, broken down by sectors across the private equity landscape are as follows: Technology (2.9x) and Healthcare (2.4x) led the eight-segment universe, followed closely by a tie between Industrials (2.3x) and Business Services (2.3x).
The opportunity overlap at the intersection of Industrials and Business Services blends the old world economy with sustainable business practices — in effect, fueling efficient supply chains around better customer and product data science. Rounding out the list are Financials, Media, and Natural Resources (2.1-2.2x) and finally the Consumer segment (1.8x). All are representative of the liquidity premium expected.
The Overton window (generally defined in political circles as the willingness a population has to change towards new policies) now has a new reference – consumers’ willingness to change behavior. Businesses are facing a vast opening of their Overton window, as loyalties are fragile post-COVID disruptions. Changing opinions and behaviors will cause additional volatility in market share, creating what we view as an opportunity for smaller competitors to pounce.
One example of this is found among the recent healthcare delivery protocol adaptations, disrupting product needs and uses. This new openness to changing protocols will continue to disrupt industries and underscores the premium LPs will place on sector expertise.