22.02.21

The importance of sector selection

Tom Matthews

During a recent investor call, we were asked how Pemba has been able to achieve such impressive investment returns. The reality is it’s down to not one but a mix of factors – our focus on partnering with SME businesses, the sectors we invest in, the way we organise ourselves internally, our buy and build strategy to help accelerate growth, our partnership style, etc.

However, as I reflect further on this question, if I had to rank one of these factors as the most important, then it would be the pivoting of our investment model to focus on identifying growth opportunities in more defensive sectors.

Our top-down approach to sector origination

At Pemba, we take a top-down thematically driven approach to investing. We focus on five key defensive growth sectors and organise ourselves internally into distinct sector teams.

Each sector team meets on a regular basis to discuss the trends, opportunities and key threats in each sector. We also spend a lot of time segmenting each sector into specific sub-sectors and niches, overlaying our key investment criteria to these niches and then doing a “deep-dive” on niches that fit these investment criteria. These deep-dives include meetings with industry experts to corroborate our view on the relative attractiveness of that niche.

If our detailed analysis supports our view, then we will “green-light” that niche. Once we have green-lighted a niche, we will then seek to understand the best companies to partner with in that niche.

Some examples

It is this top-down thematically driven approach to sector origination that led Pemba to tech businesses well before the majority of our competitors in the Australian private equity market.

Technology has become a very successful sector for us. We have become known as a leading tech growth investor, having completed more than 20 tech investments.

At Pemba, we have invested in highly attractive tech niches, such as education tech, employment tech, Government software, cyber security, software testing, hospitality tech, pharma software, etc. Many of these tech niches have gone on to become “hot sectors” and are benefiting from significant demand from investors wanting to enter these attractive markets.

The listed markets

This top-down thematically driven approach is equally as applicable to the listed market as it is to the private market. In fact, Benjamin Graham (known as the father of value investing), in his book: The Intelligent Investor wrote:

“It has long been the prevalent view that the art of successful investment lies first in the choice of those industries that are most likely to grow in the future and then in identifying the most promising companies in these industries.”

Final thoughts

If you would like to find out more about Pemba’s top-down, thematically driven sector origination approach, then please InMail me and I’ll be happy to discuss further.

Photo by Artificial Photography on Unsplash

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