The Services sector is large and wide-ranging and is traditionally split into ‘horizontal’ business models such as business process outsourcing, facilities management or testing and inspection provision. In contrast, HgCapital’s Services Team’s investment thinking focuses much more on specific end-markets or customer segments which we believe leads to attractive business model characteristics. We have invested time to develop a strong understanding of the industry dynamics through top-down research or existing investments, identifying service companies that sell into those specific end markets.
Within the Services sector, the investment themes that have attracted us have typically featured large fragmented SME customer bases, long-term and stable customer relationships, and businesses which provide business-critical services, preferably on a repeat or recurrent basis. We target businesses with market leading positions within a niche, typically reflected by strong margins, and we aim to grow and scale these businesses, either organically within existing markets (selling into their customer bases) or through acquisitions.
Existing investments include companies that provide services across a range of industries from commercial laundry equipment distribution, business solutions for internationalisation, and vehicle leasing and fleet management, but all have in common a number of business model characteristics including strong, stable and diverse customer bases and critical, repeated use products. A good example of an investment within this theme is JLA.