Home / Private Equity / Savvy equity plays see Fortitude ride out broader economic slowdown

The Brisbane-based private equity team has made a point of seeking out investee companies that are well equipped to handle a slow-motion recovery in the domestic economy.

As the domestic economy teeters on the edge of an inflation-induced tipping point, the small-to-medium enterprise sector continues to struggle, with the capital injection expected from an eventual inflationary decline still waiting in the wings.

For private equity investment teams that have invested in companies that depend on a rapid turnaround in the economy, the wait is interminable. The ones that have put capital behind companies that are less tied to the economic cycle, however, are better equipped to rise out the current inflationary stalemate.

According to Nick Miller, partner and co-founder at Brisbane private equity outfit Fortitude Investment Partners, there are no “significant catalysts to change” emerging in the economy, and while rates will eventually ease and subsequent rate cuts will bring spending back, the turnaround will not happen quickly.

Fortitude is well-placed in this lagged turnaround, Miller believes, because the team has always been cognisant that its investee companies shouldn’t be heavily correlated to the ups and downs of the economic cycle.

“For investors who have high beta businesses – those that are leveraged into the economic cycle and that perform poorly when spending is reducing, or have high leverage, it could present strong danger,” Miller says of the delayed economic recovery. “For investors who have focused on businesses that are not highly correlated to the economic cycle and with growth drivers that are not related to discretionary expenditure, then it would be business as usual.”

The danger of a protracted economic recovery should come as “no surprise,” Miller says, given the Reserve Bank of Australia’s intention to reduce inflation back to its target band while minimising the economic harm to consumers. To guard against this outcome, he says, Fortitude’s approach has been to select high-quality businesses that exist in markets with strong secular growth potential and to not use too much debt.

That positioning has also meant Fortitude has been able to remain ready to invest at a time when company prices are becoming attractive.

“Whilst our portfolio does have some consumer discretionary exposure, so there is some impact, the majority of our portfolio continues to grow strongly,” he says. “We saw a 15 per cent growth in yearly EBITDA across our portfolio in the last quarter versus 0.2 per cent GDP growth, so whilst we are alert to the current economic environment we are not alarmed and continue to invest.”

Fortitude’s version of private equity is relatively anomalous in the private capital world. Instead of creating a unitised fund with a hodge-podge of investee companies, Fortitude invests $10 million to $50 million in carefully selected companies that investors can then back individually. They focus on a handful of sectors – healthcare, technology, food and industrial – and, as Miller told The Inside Adviser in June, “stack the deck” by using a network of over 100 expert consultants to help investee companies grow scale.

While buying into resilient companies is important, Miller says, it’s this expert advantage that gives Fortitude its real edge in the competitive private equity market.

“We seek to understand key drivers of our businesses from a wide variety of experts. We have over 100 operating partners who have seen many cycles and have deep understanding of their niches. This helps us to make informed decisions but also to not have too many knee jerk reactions to the latest news cycle.

“I’m much more interested in how we can improve market share within our portfolio companies by 10-20 per cent, rather than whether GDP  was flat or grew by 0.2 per cent.”