This article is sponsored by Triton
Triton won the PEI award for Mid-Market Firm of the Year in Europe 2020. How did the pandemic impact the European mid-market?
2020 placed a lot of pressure on management teams, testing their resilience and ability. The impact on the European PE market varied by sector; leisure businesses were hit particularly hard, while healthcare and digitally enabled industrials and services businesses were more resilient and, in some cases, outperformed. While previous crises have caused the PE deal market to seize up, we did not really see this in 2020 as well-positioned investors sought to capture the opportunities that inevitably stem from times of upheaval.
Triton remained highly active last year due to our 20 years of experience of investing through economic cycles and our ‘all weather’ strategy. We focus on businesses in the services, consumer, healthcare and industrials sector that have strong prospects but are not reaching their potential. This is where Triton can add value using our deep sub-sector knowledge, operational skillset and industry experts, to solve complexities, improve operations and build better businesses.
From an operational level, our focus on digitalisation, both at a GP and a company level, meant we were able to move seamlessly to remote working, assisting our portfolio companies and seeking out the opportunities to invest in hidden gems. For example, Triton made four new attractive platform investments, including one public-to-private investment, and over 35 add-ons across 2020.
How did you support portfolio companies during the pandemic?
We pride ourselves on our ability to navigate periods of uncertainty and volatility. Using a hands-on approach, our teams worked closely to ensure the health and safety of employees and assess the potential impact on portfolio companies’ financial situations.
We also assisted the management teams with scenario planning. At the same time, we challenged our portfolio companies to re-assess their business plans in light of the changing environment. The response from our management teams was overwhelming, resulting in several new value creation initiatives. Take Flokk for example, a European leader in office seating solutions. With the core business slowing down due to covid, the company quickly adapted and decided to invest behind work-from-home solutions, which has proved highly successful.
Despite the pandemic, we kept sustainable operational improvements and growth at the centre of our focus. This year we hosted our annual ESG Forum for portfolio company representatives virtually to continue to raise awareness of material ESG issues and maintain our momentum on these improving initiatives.
One year on, are you seeing any opportunities emerge from the crisis?
While the situation is different from prior crises, times of uncertainty have generally led to an increase in investment opportunities. Our most active investment year was 2009 after the financial crisis when we acquired the most companies. One of the key developments of the pandemic has been the acceleration of pre-existing trends and themes that Triton has been investing behind for years; the growing importance of healthcare services, the increasing digitalisation of traditional business models and the adaptation of industrial assets into nimbler, asset light services businesses. We expect these trends will only continue to push ahead.
How does Triton’s approach to value creation differ between carve-outs and buy-and-build strategies?
Around half of Triton’s investments have been corporate carve-outs and we have made several acquisitions from the same corporate sellers. A corporate carve-out can add additional complexity to an investment – during the negotiations and after the acquisition. It is often important to the corporate seller that the business finds a good home with a responsible buyer who knows how to deal with creating a stand-alone entity while effecting rapid change.
Buy-and-build is another value creation strategy and will often be part of the business plan. In such situations, we will quickly ensure that management and the organisation is set up to execute and more importantly integrate multiple acquisitions. All4Labels, another Triton portfolio company, took advantage of the current environment to execute several important add-on acquisitions in 2020.
Another example in the Triton portfolio is Assemblin, an end-to-end technical assistance and service provider. Since we acquired the company in November 2015 (in a corporate carve-out), the company has made more than 30 add-on acquisitions while improving margins.
ESG and digitalisation have become increasingly important value creation levers; how do you expect this to develop going forward?
At Triton, ESG is not a box-ticking exercise and we apply our approach to both Triton as a firm, and each of our portfolio companies too. ESG factors are considered at every stage of our investment process and continue throughout the firm’s ownership period, providing appropriate levels of oversight and accountability.
We are leveraging digital in our portfolio companies to concretely address ESG and environmental impact in a positive way. For example, Assemblin has acquired Fidelix, a building management system company that has solutions to substantially lower the energy consumption and environmental impact of buildings and is positioning Assemblin as a leader in the smart-building market.
Digital factors are considered at each stage of our investment process and throughout the firm’s ownership period. Triton actively encourages portfolio companies to show digital leadership in the markets in which they operate. For example, Chevron, which is part of our Work Zone Safety Group, has acquired HRS, a cloud company providing road safety solutions. This has improved customer wins and digital revenues are growing considerably.
What trends will shape the mid-market in 2021?
With the ongoing roll-out of the various covid vaccines, investors are beginning to show greater confidence and the outlook for the industry is positive. The continued demand for the attractive risk-adjusted returns that PE can deliver, combined with the existing high levels of dry powder will lead to greater competition for the most attractive assets. As such, it is more important than ever for GPs to have a truly differentiated approach to both sourcing deals at attractive multiples, and their ability to then create meaningful, sustainable long-term value.
ESG considerations will be a key theme in 2021 and beyond. The pandemic has created a renewed focus on societal and governance issues and now more than ever LPs are factoring in ESG considerations into the investment cycle. We view ESG as a vital tool for value creation and are encouraged by the fact that private capital investors increasingly recognise that there does not have to be a trade-off of returns and that ‘doing good’ and ‘doing well’ can be synonymous by aligning the creation of shareholder value with the creation of positive impact.