By Tom Wrenn, Managing Partner, at ECI Partners, the leading growth-focused mid-market private equity firm

With the unprecedented shocks that the last 15 months have presented, it’s become increasingly important that investors need to take a long-term view when it comes to private market investing. When we try to assess the potential of any growth business, it’s important to understand how sustainable its competitive position is and the headroom for growth over a minimum of the next 5-10 years.

A successful ECI investment is one that allows our team to partner with market-leading businesses with clear and sustainable growth trajectories, targeting sub-sectors that we know well and which demonstrate good revenue visibility and predictability of earnings. Inevitably this focus is on long-term growth from businesses with the capacity for organic and – where relevant – acquisitive growth, with sufficient headroom and market capacity to be relevant for the next owner or investor.

The drivers of sustainable growth

ECI has a focused investment strategy with a clear vision of the growth drivers we are looking for. We can afford to be highly selective as we are only making 3-4 platform transactions per annum.  Some of the criteria we are looking may include:

1. Business model

Operating subscription-based or high recurring revenue models will provide a solid platform for further growth if client retention or renewals are high. Many tech businesses, for example, are subscription-based, with long-term customer agreements or other high levels of recurring revenues, which means they have strong visibility of predicted future revenues. These factors are critical considerations, especially in an uncertain macroeconomic climate as we have seen since March 2020 given the impact of Covid-19.

2. Scalability

Whilst sustainable growth is the central metric we are assessing at entry, it’s also important to consider the capacity for investments to become businesses of scale. There are many routes to scale, including organic growth if the market headroom exists, through M&A, or through international growth.

The potential to diversify revenue streams across different geographies is something ECI supports a lot of investments through, with 40% of the portfolio revenue being generated internationally.  For example, when ECI invested in IoT connectivity provider, Arkessa, in July 2018 the growth strategy included supporting the management team’s international growth ambitions. The subsequent acquisition of a Netherlands-based firm in August 2020 allowed the business to increase its market footprint in the European cellular IoT connectivity market, and following its acquisition by former ECI investment, Wireless Logic, the combined Group is now a tech-unicorn, valued at over £1billion Enterprise Value.  

3. Resilience

Successful ECI investments are ones which not only have clear and sustainable growth drivers, but also a degree of revenue resilience and a secure market position. Whilst a pandemic might be a once century risk, over our 45 years of backing businesses to grow, we’ve seen that the potential for major, unexpected shocks is much higher than any of us would like.  We therefore consider several different aspects of a business’s resilience including how broad and diverse its customer base is, what its cash generation profile looks like and the ability to withstand bumps in the road ahead.

4. High quality management teams

At ECI, we want to work in partnership with management teams, and we look for high quality, ambitious teams to collaborate with. We have over our investment history developed capabilities and invested in people who can work together with management teams to unlock growth opportunities. Through developing a deep understanding of their business and sharing the experience we’ve learned over 250+ investments, we believe we can deliver value to management teams who are receptive to that partnership.

Understanding sector nuances

Whilst all these factors are important, it’s vital for any investor to really understand the marketplace that the target business operates in. At ECI, the approach is centered around sub-sectors where we have a wealth of experience and have invested over different cycles.

Take the ‘Internet of Things’ as an example – the market which encompasses an increasing number of applications is seeing +20% annual growth. The ‘always on’ operationality of IoT businesses, prevalence of subscription-based models and smart investment in technology have all contributed to the growth and resilience of this sub sector over the course of the last decade since ECI first invested in Wireless Logic in 2011.

Since then ECI has invested in three other IoT businesses and has a deep understanding of this sub-sector. A current portfolio example is ECI’s investment in CSL, which operates in the fast-growing critical connectivity market. CSL is a supplier of critical connectivity managed services that includes the provision of proprietary modules for M2M and IoT applications. Through expansion into new international markets, CSL has been able to further cement its market-leading position across the fire and security and more recently the telehealth verticals.

Ultimately, ECI is excited about opportunities that will continue to demonstrate sustainable growth over the next decade and beyond. Having this longer-term perspective means that we are highly selective, and having that understanding at a sub-sector level, allows us to truly support management teams make the most of opportunities available.