Megatrends-Driven Investing
By: Rishi Verma
In a time when the business environment is rapidly evolving with multiple forces driving change in different directions, there are some underlying themes that we expect to persist over the medium to long term. Businesses that understand these long-term themes, or “Megatrends”, and tailor their range of products and/or services to benefit from these Megatrends will very likely benefit from “tailwinds” and businesses that do not have a range of products and/or services will very likely face adverse “headwinds”. From a PE firm’s perspective, it is crucial to periodically analyze these Megatrends and understand the likely headwind or tailwind consequences for their investments.
At GenNx360, we conduct a Megatrends review once every three years, and this review drives the focus of our investment activities during that period. This review consists of three phases.
Phase 1 of this review includes:
  1. a series of interviews aimed at understanding current perspectives on key trends and themes that will shape the nature of investing activity in the future. These interviews are conducted with:
    1. senior GenNx360 executives, our investment teams and our retained advisors
    2. senior executives at our current portfolio companies
    3. several industry and market experts, typically conducted on our behalf by our advisors
  2. an extensive review of data, both historical as well as forecasts, put out by different agencies, on issues identified in our interviews.
  3. an extensive review of published articles, reports and research material, on issues identified in our interviews.
The output of this phase would be a summary Megatrends report that lays out our understanding of the key Megatrends that are likely to impact investing activity in the next three-to-five years.
Phase 2 of this review includes:
  1.  an analysis to understand the likely impacts of these key Megatrends on industries where we have investment interest, both via our existing investments as well as our internal read of industries where we are likely to look for investment opportunities.
  2. Industry teams from within GenNx are tasked with doing independent deep dives into industry verticals with a focus on sectors we are interested in and develop our internal point of view on these industries.
The key step of this analysis is to understand, at an extremely detailed level, the possibility of any of these industry groups (or their sub-segments) to experience GDP+ growth, given the likely demand environment they would face, based on an analysis of the relative amount of Megatrend headwinds/tailwinds they are likely to face.
Some of the questions we would typically try to answer at this stage are:
  1. What are the likely headwind/tailwind implications for industries (and sub-segments) of interest to GenNx360?
  2. What is the likelihood of an industry (or sub-segment) experiencing GDP+, GDP, or GDP- growth, based on the Megatrends headwind/tailwind analysis?
  3. How attractive is the industry (or sub-segments) that are likely to experience GDP+ growth?
    1. What is the size of this industry segment?
    2. What is the prevalence of M&A activity in this sector?
    3. What are the prevailing valuations in this segment?
    4. Who are the key industry players?
    5. What is the level of competition in the industry?
    6. Are there any other structural threats to the industry – substitutes, low cost competition etc.?
    7. Who are the large corporates that operate within this segment? What is their level of M&A activity?
Phase 3 of this review is the concluding phase and involves taking decisions on both our existing portfolio, as well as our future focus areas. The key questions asked at this phase will be:
  1. Are there any investments in our existing portfolio that are likely to suffer from severe Megatrend headwinds? How do we limit our portfolio’s ongoing exposure to these headwinds?
  2. Are there any new industries (or sub-segments) that we should focus on? Do we have adequate capabilities within these segments to execute operational strategies within these industries?
  3. How has the business environment changed from our last Megatrends review and what are the ongoing implications of these changes on our investment philosophy?
Our periodic Megatrends review helps us understand and predict the likely nature of opportunities and threats that our portfolio will face. Being prepared with this analysis helps us proactively acquire and build businesses that are tailored to capture the benefits from the Megatrend tailwinds, thus providing us with the ability to better leverage our operating capabilities in the most favourable market environment.