How a sector agnostic approach can benefit your VCT portfolio?
What are the benefits of using a VCT manager that undertakes a sector agnostic approach? Ben Leslie of Puma Private Equity examines why this investment strategy can be the winning ticket for boosting diversification, weathering market volatility and can lead to significant value creation within a portfolio.
First published by Intelligent Partnership
Sector specialist or sector agnostic? Two regular sparring partners and the undeniable yin and yang of the investment world, it’s a question mark that advisers often face when it comes to selecting a VCT manager. Which investment strategy has the edge?
Of course the answer isn’t as black and white as that, but in our eighteen years experience managing VCTs, following a sector agnostic approach has served us incredibly well. It’s given us an understanding and access to opportunities across the whole economy, whilst providing the ability to withstand any headwinds, which has been especially beneficial in the current period of sustained economic uncertainty.
Puma VCT 13, which hit its five-year performance in July, has invested into 20 UK qualifying businesses across several industries and operating models. We look beyond the core offering (such as software or consumer) and focus on the markets our portfolio companies operate in and the value they bring to their customers. The portfolio is currently diversified across multiple industries with exposure to: logistics technology, HR technology, advanced manufacturing, consumer, consumer services, hospitality, software and other technology, business services and financial and insurance technology.
Here we take a closer look at some of the key benefits of this investment approach and the types of investee companies that we believe are currently bringing exciting opportunities to investor’s portfolios.
The benefits of a diversified approach
Investment across sectors can improve the overall yield of a portfolio while reducing the risk of overexposure to specific sector bubbles or headwinds. In the last few years we have seen headline valuations for certain sectors, such as software companies, rise at an alarming pace before normalising in 2023. Our approach of consistently balancing the portfolio ensured our experience of investing within this sector bubble was limited and we remained cautiously mindful of how software valuations were beginning to significantly outstrip valuations in other sectors, a trend that we did not see as sustainable in the long term. Conversely, we have also been able to invest at attractive entry valuations in other sectors that some funds may not have focused on at the time.
Essentially, a diversified sector approach means you are not only hedged against a particular company’s performance but also against any sector wide volatility.
This was notably witnessed during the Covid-19 pandemic, with certain sectors caught in the headwinds of socio-economic pressures whilst others’ performance was unexpectedly accelerated. Our agility in looking across the entire market for those businesses that have demonstrated resilience during unprecedented levels of turbulence enables the team to be opportunistic in seeking the best possible scenarios for investment.
Sectors in the spotlight: responding to emerging trends and opportunities
When investing in the smaller company growth market, it’s inevitable that an investment manager will pick winners and losers. The rise and fall of industries can be difficult to predict and one of the most prominent advantages of choosing a VCT provider that undertakes a sector agnostic approach is the manager’s ability to respond to emerging trends that are transforming their respective market landscapes.
Here, we take a look at three investments made within the Puma VCT 13, all of which are operating across vastly different sectors and are being distinctly impacted by their own sector-specific demands and thematic trends.
Influencer
Software and computer services
In August 2019, Puma invested into Influencer, a leading influencer marketing platform with proprietary technology that is simplifying the entire process for both brands and creators.
Influencer marketing is an increasingly popular marketing channel that enables businesses to collaborate with influencers who have a social media following for increased brand exposure to sell its products or services.
As a sector, it’s a fairly new marketing solution that entered the landscape in recent years and has signalled a shift in consumer behaviour for younger generations which has largely been driven by the influence of social media. The industry is now valued at $21.1 billion as of 2023, maintaining an impressive growth trajectory and an overall market size that has more than doubled since 20191.
Foreseeing the growing market opportunity in this emerging sector, the Puma investment team deployed £3 million into the Company to fuel expansion plans, continue the onboarding of global clients and further innovate the proposition’s platform.
CameraMatics
Fleet technology
CameraMatics is an award-winning fleet management solution which delivers disruptive technology incorporating AI, machine learning, camera technology, vision systems and telematics to help fleet operators reduce risks and enhance safety standards at all levels of an organisation.
Ideally placed in one of the world’s fastest growing sectors, CameraMatics has grown steadily since launching in a market that is impacted by many macroeconomic mega-trends, such as ESG awareness and road safety. Earlier this year, the latest ‘Fleet Technology Index’ report demonstrated increased market readiness for key, emerging fleet technologies2 in a sector that is technologically advancing at a rapid pace.
Recognising the importance of this sector in years to come, Puma made its first investment into this exciting growth business in 2021 and has continued to back the founding team with £7.6 million of capital deployed across three tranches. This investment has funded the expansion of CameraMatic’s operations into both the US and Europe and has bolstered the existing product suite, allowing the Company to enter into new market verticals.
Ron Dorff
Consumer goods
Having launched in 2012, Ron Dorff saw a gap in the market to redefine men's modern sportswear. Focusing on more sustainable production and offering timeless pieces, the business has since gone from strength to strength to meet a growing demand of consumers looking for quality.
The Company now counts a number of high-profile celebrities as its brand ambassadors and has opened five own-brand stores across major global cities. In addition, the business has accumulated over 70 high-end wholesale partners and operates an e-commerce store that sells to customers in over 80 countries.
Impressed with the traction already made and seeing the market opportunity for luxury-yet-affordable menswear, Puma made its first investment in 2020 into the business and has deployed £7.6 million to date. This investment has successfully funded Ron Dorff’s launch into the lucrative US market, brand collaborations, and enabled a significant upgrade to the online store’s e-commerce capability.
A sector agnostic approach that delivers growth and creates cross-sector synergies
By investing in a diverse range of companies, we have found that the individual VCT portfolio companies themselves have been positively impacted by our ability to tap into cross-sector synergies that may not be as apparent in a sector-restricted portfolio.
Firstly, a diversified sector approach equals a diversified pool of founders. While the commercial landscape of each industry is different, the challenges founders face can be remarkably similar. We work closely with founders who have come from a range of backgrounds and bring different professional experiences. We therefore get to witness first-hand the benefit of seeing how teams from different industry backgrounds approach scaling a business and can then share successful approaches between teams.
Secondly, investing across a wider range of sectors means that we are able to understand and assess a broader range of commercial and operating models that may not be possible to witness in a sector-restricted portfolio. This allows us to look at hybrid business models with attractive entry valuations that not all funds will consider, therefore further enhancing opportunities for significant value creation within our VCT funds.
To give a bit more colour on this, we’ll take a closer look at a potential barrier a hardware enabled software company may encounter when looking to secure financing. This type of company may not be considered by specialist software funds, given the additional working capital complexity of holding stock. However, we are able to draw on our experience in the consumer space to help portfolio companies manage their working capital and cashflow efficiently, and access the appropriate facilities for them.
We are not just a source of capital that then takes a backseat for the rest of the growth journey. We pride ourselves on being a hands-on manager that is able to provide the framework and guidance to make the right strategic decisions, whilst knowing that the founding team are best placed to drive the commercial strategy.
If you would be interested to hear about our diversified offering and more about the exciting companies we invest in, the Puma VCT 13 is now open for investment. Please reach out to our dedicated Business Development team or find out more here.