PEY focuses on direct private equity transactions alongside other Partners Group-managed funds and accounts, and private debt investments overseen by Partners Group, as well as co-investments with other private equity managers (such as 3i, the lead investor in PEY’s second-largest holding, Action). It invests mainly in mid-cap buyouts with an enterprise value of c €500m to €2bn where Partners Group has a controlling or majority position, either as the lead investor or co-lead with another private equity manager. PEY invests in these deals both through Partners Group’s flagship limited partnership funds and as a co-investor. Having previously invested in third-party private equity funds, this has not been a focus for PEY since 2011. While these funds still account for 8% of the portfolio, they are mature investments that are now largely in the process of returning capital. PEY is less diversified than a private equity fund of funds, which may be exposed to hundreds of underlying companies. Still, it does hold a relatively diversified portfolio and targets direct investments in c 50–80 companies (not including holdings in legacy third-party funds) to reduce the cash flow volatility that might occur with a more concentrated strategy. This is particularly important given its aim to sustain a regular high dividend payout.
Partners Group is a relative value investor, which means it examines the pricing of investment opportunities in the context of both historical valuations and a relevant peer group. The manager seeks to make direct investments in companies that are highly cash-generative and/or offer meaningful top-line growth potential. In an environment of generally high prices for private equity deals, Partners Group has found it beneficial to focus on companies that fit into one or more of the following categories:
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Well-managed platform companies that can be expanded via bolt-on acquisitions.
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Category winners with a strong competitive position in a growing market segment.
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Cash-generative and defensive leaders in sectors with high barriers to entry.
An essential part of the Partners Group private equity investment approach is its industry value creation team (see below), which it uses to help drive through initiatives to enable companies to strengthen their financial and competitive positions and achieve their full potential.
Private debt investments serve two purposes: uninvested cash may be used to purchase first-lien senior loans, which are relatively liquid but offer higher returns than other near-cash investments, while second-lien or mezzanine investments are longer term and may be used to gain exposure to favoured private companies that are not (yet) seeking additional equity financing.
Investment process: Proactive approach to deal sourcing
Through its primary and secondary private equity teams, along with private debt and infrastructure teams, Partners Group maintains a detailed database of over 8,000 companies used to source investment ideas. In total, the group has information on more than 36,000 businesses, relationships with more than 900 private equity general partners, and representation on more than 350 advisory boards. Every investment professional has a target list of companies in which they would like to invest if the opportunity arose, and the team spends time speaking to company managements, working out an investment case, and identifying value creation potential and likely M&A targets. In addition, the group can build detailed knowledge of the operational and financial characteristics of private companies (where publicly available information may be scant) through its debt investments, giving Partners Group’s investors an advantage in due diligence terms when these companies seek private equity funding. Partners Group has a highly selective approach to investment, with less than 1% of potential deals on average (0.9% in FY18) making it into the group’s portfolios in any given year. The team screens around 1,000 deals each year (1,054 in FY18) on a high-level basis, looking at industry developments, market attractiveness, headline company financials, return potential, exit scenarios and how Partners Group could add value to the business. From this initial screen, c 10–20% of potential deals (20.1% in FY18) are selected for initial due diligence, which assesses a range of quantitative and qualitative factors, with the most promising ideas (69 in FY18) moved to advanced due diligence, including in-depth financial modelling, scrutiny of legal terms and an assessment of environmental, social and governance (ESG) factors. Apart from checking how a company measures against various ESG metrics, the ESG team also suggests positive drivers, identifying initiatives that can improve the ESG profile of an asset and ultimately create value.
Following the due diligence stage, the Partners Group team comes up with a detailed investment thesis (including an operational assessment by the IVC team) and creates a 100-day plan for execution of the deal and implementation of value creation initiatives. The final step of the process is a positive or negative investment recommendation. PEY made nine new direct private equity investments in FY18 (five with Partners Group as lead investor and four co-investments), broadly in line with historical averages. In FY19, the company has so far made six new direct private equity investments (with another one yet to be closed).
PEY invests mainly through Partners Group’s flagship direct private equity funds, which are normally raised every three to four years. PEY makes commitments to these funds and may also conduct direct ‘top-up’ investments alongside them, providing flexibility to deploy additional capital. Funds may take several years to draw the commitments made at launch to make new investments, with the latest ongoing programme (Partners Group Direct Equity 2016) still in its investment period. However, as it is almost fully invested, the new Partners Group Direct Equity 2019 programme (the fourth global buyout fund) is already being marketed with the intention of raising up to US$6bn. To smooth the pace of investment and avoid cash drag, which may occur when cash is returned to the portfolio (for example, as a result of realisations from legacy third-party funds) but is not drawn down by the direct funds, PEY may also make direct co-investments with other managers to reduce cash drag and to bring additional diversification.
New private equity positions typically represent 0.5–3.0% of NAV, but PEY aims to express conviction in its investments and position sizes are ideally around 2.0%. However, this is dependent on the size of the investee company and PEY’s liquidity position. During FY18, several new investments were large enough to be included in PEY’s top 10 holdings. PEY’s standard holding period is three to five years. Exits may be through trade sales, IPO or sale to another private equity buyer. Where an exit is executed through a company listing on a stock market, the manager will usually aim to gradually sell the investment within two years (subject to any lock-ups). However, listed companies may be held for longer if there is a strong investment case for doing so.
Partners Group closely monitors investee companies through its board representation, quarterly performance assessments, active engagement with stakeholders and the progress of value-creation initiatives. Private equity investments are revalued quarterly (in March, June, September and December), although material changes that may affect the value of an investment will be factored in as they occur.
On the private debt side (c 9% of the portfolio at end-September 2019), investments may be made directly by PEY or via Partners Group programmes. Second-lien or mezzanine debt investments target high single- to low double-digit returns, with typical holding periods of two to three years, while liquid first-lien loans are more short term in nature and are held mainly as a higher-yielding alternative to cash (although they are not traded on any public platform). Partners Group is a conservative lender with an emphasis on capital preservation, seeking businesses with predictable cash flows, sustainable margins, a conservative capital structure and a stable record of historical performance. All PEY’s debt investments have floating rather than fixed interest rates, which should be beneficial in a rising interest rate environment (while constituting a disadvantage during periods of monetary easing).
PEY uses hedging through options and forward contracts to limit the impact of currency fluctuations (primarily US$/€) on the portfolio. As a result, FX neither contributed to nor detracted from returns for FY18 as a whole, while 9M19 FX effects had a minor 0.1% positive impact on performance. At end-FY18, PEY’s portfolio currency exposure before and after hedging (post-hedging figures in brackets) was 57% euro (86%), 37% US dollar (11%), 5% sterling (2%), and 1% other (1%).
Industry value creation (IVC) team
Partners Group sees its IVC team as a key differentiating factor in its – and by extension PEY’s – offering. Rather than engaging management consultants to drive through operational improvements at investee companies (like many private equity groups), Partners Group has its own in-house team implementing value-add measures. As at end-June 2019, the team comprises more than 40 professionals (with Partners Group’s intention to expand it to 50 by the end of 2020), organised across six industry groups (healthcare, technology, media & telecoms, education, financial & business services, industrials and consumer), as well as infrastructure and real estate. Importantly, the IVC team is involved in the investment process from the earliest stage of deal sourcing, and a key factor in declining a potential investment would be where there is no clearly identifiable opportunity for the team to create value. Where initiatives can be identified, the IVC team draws up a 100-day plan from the point of investment and creates a five-year roadmap. The team coaches and assists the management of investee companies in the implementation of projects, with all IVC work co-ordinated through a strategic project management office. Examples of recent initiatives include the merger of industrial belt manufacturers Megadyne and Ammeraal Beltech in September 2018 (renamed to Ammega), consolidating the businesses in growing end-markets, creating economies of scale, optimising the footprint, and improving distribution and cross-selling opportunities. With the software developer GlobalLogic (a new investment in Q318 discussed in more detail in the top three snapshot section below), the Partners Group platform is a key driver of value creation, as other investee companies provide both a potential customer base and an additional source of distribution.
There are currently more than 200 value-creation initiatives in progress across Partners Group’s 2012 and 2016 direct programmes (funds). PEY director Felix Haldner points out that the systematic value-creation approach includes the time and consideration taken in composing investee company boards, so that they are tailored to the company and the investment thesis. Partners Group has a large industrial partner network from which it sources non-executive directors and will usually appoint a chairman with industry-relevant executive experience, who can step in as an interim CEO if required.
Financial resources and commitments
PEY’s unfunded commitments at end-October 2019 stood at €78.2m, down from €93.8m at end-2018, predominantly as a result of reduced commitments to legacy third-party funds dated pre-2009. It is important to note that the outstanding balance is somewhat overstated, given that c 36% is still attributable to these legacy funds, which have already reached their distribution phases, meaning that only a minor part of these commitments will be drawn.
As discussed earlier, PEY invests part of its liquidity in first-lien loans (€29.0m or 4% of NAV at end-2018). It also has a €50m credit facility, which is used to bridge the gap arising from the timing mismatch between investment opportunities and realisations rather than permanently gearing the portfolio. As of end-October, €25.5m of the facility has been drawn. PEY’s net gearing (including only cash and the drawn credit line) stood at a minor 2.3% at end-September 2019 vs 1.1% at end-2018. After adding PEY-calculated net gearing and subtracting the undrawn part of its credit facility from total unfunded commitments, we arrive at an overcommitment ratio (as a percentage of NAV) of c 10.0% at end-October 2019 (vs 11.1% at end-FY18, respectively).
Exhibit 2: Investments and unfunded commitments by vintage
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Current portfolio by investment year (%) |
Unfunded commitments by vintage (%) |
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Source: Princess Private Equity Holding, Edison Investment Research. Note: Current portfolio by investment year as at end-September 2019, unfunded commitments by vintage as at end-December 2018.
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Investments and realisations
PEY has invested c €52m capital ytd (until October), including €40m deployed in seven major new investments, as well as €8.0m in add-on growth financing to its largest portfolio holding Permotio. With respect to new investments, two were conducted in the consumer sector (Blue River PetCare and Schleich), two in healthcare (Confluent Health and Nestlé Skin Health – rebranded to Galderma), one in IT (Idera), one in the financials sector (Project Fox) and one in industrials (BCR Group). Below we briefly summarise each of the deals.
Project Fox (€8.9m invested by PEY in April 2019) is a speciality property and casualty (P&C) insurer and reinsurer focused on complex risks for commercial clients. The company was recently set up by a team of experienced risk experts and will initially focus on expanding its underwriting capacity and developing its underwriting strategies.
Idera (€7.9m invested in June 2019) provides on-premise and cloud-based infrastructure software solutions for more than 50,000 customers worldwide. PEY has acquired a minority stake as part of an equity recapitalisation alongside existing investors.
Confluent Health (€5.4m invested in June 2019) is a network of 198 outpatient physical therapy clinics in the US with ambitions to grow both organically and through acquisitions to benefit from an ageing population.
Blue River PetCare (€4.8m invested in August 2019) is a US-based veterinary network of more than 90 general practice hospitals, which plans to take part in consolidating this highly fragmented market (only 13% of the market is consolidated according to PEY).
BCR Group (€2.2m invested in September) is a Shanghai-based provider of retail display solutions. It offers design and manufacturing services as well as installation of display fixtures, mainly in the fast-growing Chinese sportswear segment. PEY will leverage the company as an investment platform and will assist the company in the construction of a new factory.
Schleich (€2.0m invested in August) is one of the largest toy manufacturers in Germany, selling its products in more than 50 countries. It posted a c 16% revenue CAGR in 2014–18 and PEY’s IVC team plans to support further international business expansion, facilitate its e-commerce roll-out and help improve its supply chain.
Nestlé Skin Health (€9.7m invested in October) is a carve-out from the food and beverage company Nestlé and was recently renamed Galderma. The company is the world’s largest independent dermatology company with three business segments, including aesthetics, prescription and consumer.
Moreover, in March 2019, PEY also made an €8.0m add-on investment in Permotio International Learning (c 12% of PEY’s NAV as at end-October 2019). Permotio is an owner and operator of private schools and education centres and is considered a platform investment for PEY to pursue a ‘buy-and-build’ strategy (see below for further details).
PEY has received €68.4m distributions ytd, which were mostly fuelled by steady inflows from the legacy third-party fund portfolio (€22.6m out of €49.3m in H119). In Q119, PEY’s largest exit was Universal Hospital Services, which translated into a distribution of €10.6m and a realised money multiple of 2.6x after an 11-year holding period. The transaction was executed at 27% above the previous carrying book value and already reflected in PEY’s end-2018 valuation. PEY continued selling down its stake in Ceridian HCM following its IPO in April 2018, realising €9.3m ytd to end-September. We note that these transactions were executed while the shares traded c 120% above the IPO price.
On top of the above, in October 2019, Princess announced that it expects to receive €17.8m in proceeds from fully exiting its investment in Vermaat Groep, a Dutch market leader in premium outsourced catering and hospitality services, at a price representing a c 27% uplift to the end-August 2019 carrying value. The deal is subject to regulatory approvals. Based on the disposal proceeds indicated by PEY, we estimate that it will achieve a c 30% IRR on disposal since its investment in December 2015. Finally, Partners Group has agreed to fully exit Action (PEY’s second largest holding at end-September 2019) as discussed in the top three snapshot section below.
Exhibit 3: New investments value by type (2019 ytd)
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Exhibit 4: New investments value by sector (2019 ytd)
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Source: Source: Princess Private Equity Holding, Edison Investment Research
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Source: Source: Princess Private Equity Holding, Edison Investment Research
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Exhibit 5: Investments and realisations in 2019 until end-October
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Source: Princess Private Equity Holding, Edison Investment Research
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Current portfolio positioning
At end-October 2019, PEY’s top 10 direct holdings represented c 50.5% of the portfolio (see Exhibit 1), up from 42.3% a year earlier. Among the top 10 holdings, Hearthside Food Solutions replaced Envision Healthcare Holdings. The total value of the top holdings increased by around €90m y-o-y to c €423m, with PEY providing a further €12.1m to its current largest holding, Permotio International Learning, and €4.5m to Hearthside Food Solutions over the last 12 months.
Exhibit 6: Investments by category and sector
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Investments by stages (%) |
Investments by industry sector (%) |
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Source: Princess Private Equity Holding, Edison Investment Research. Note: Investment by stages as at 31 October 2019 and investments by industry sector as at 30 September 2019.
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PEY primarily focuses on the mid-cap segment of the market, which made up 61% of the portfolio at end-October 2019. The fund is globally diversified, but with no hard limits with respect to regional exposure, taking a relative value approach to regional allocation (but with focus on developed markets). PEY’s legacy third-party funds had fallen to 8% of the portfolio from 12% a year earlier. Investments by geography remained broadly unchanged over the 12 months ended October 2019, with 54% of the portfolio invested in Europe (53% at end-October 2018), North American exposure at 32% (vs 35% a year ago) and Asia Pacific at 7% (vs 5% at end-October 2018).
The portfolio is also broadly diversified by sector (Exhibit 6, right-hand chart), although it has deliberately low exposure to cyclical industries. Compared with the MSCI AC World index, a broad global index of listed companies, PEY’s portfolio has a particularly high exposure to consumer discretionary companies (36% versus 11% for the index), and a significantly lower weighting to financial stocks (9% versus 16% for the index). We note that c 73% of the fund’s exposure to consumer discretionary is made up of three investments that do not seem particularly cyclical: Permotio (an owner and operator of private schools and education centres), Action (European non-food discount retailer) and KinderCare Education (US childcare provider). Sector allocations remained broadly stable over the last 12 months to June 2019, although exposure to consumer discretionary went up somewhat subsequently. Looking at a broader five-year perspective, PEY has been reducing its exposure to industrials (7% at end-September 2019 vs 25% at end-2014) and allocating its resources to consumer discretionary (36% vs 22%) and IT (15% vs 8%).
Exhibit 7: Portfolio by sponsor type (% unless stated)
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End-September 2019 |
End-June 2019 |
End-June 2018 |
Change (pp) |
Partners Group lead/co-lead |
70.0 |
68.0 |
55.0 |
13.0 |
Co-investments |
12.0 |
13.0 |
16.0 |
(3.0) |
Funds |
9.0 |
9.0 |
15.0 |
(6.0) |
Debt |
9.0 |
10.0 |
14.0 |
(4.0) |
|
|
100.0 |
100.0 |
- |
Source: Princess Private Equity Holding, Edison Investment Research
As shown in Exhibit 7, Partners Group lead or co-lead investments went up significantly as a percentage of the portfolio during the 12 months ended June 2019, while the proportion in funds continued to fall as the mature legacy fund holdings returned cash.
Exhibit 8: Sample* valuation and performance metrics for direct portfolio
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End-September 2019 |
End-June 2019 |
End-June 2018 |
Market transaction average** |
Valuation metrics |
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EV/EBITDA |
14.2x |
13.8x |
12.8x |
11.1x |
Net debt/EBITDA |
5.1x |
5.2x |
5.5x |
5.5x |
Weighted average leverage |
38.3%*** |
39.9%*** |
44.6%*** |
50.0%**** |
Weighted average EV |
€3.1bn |
€2.9bn |
€2.5bn |
US$157m |
Performance metrics (12m) |
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|
|
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Weighted average revenue growth |
11.7% |
11.6% |
9.9% |
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Weighted average EBITDA growth |
14.1% |
14.1% |
11.8% |
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Weighted average revenue |
€1.2bn |
€1.2bn |
€1.1bn |
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Source: Princess Private Equity Holding, Edison Investment Research. Note: *Valuation metrics are based on a sample of all direct equity investments, which constituted 84.3% of NAV at end-September 2019, 74.9% of NAV at end-H119 and 63.6% at end-H118. Performance metrics are based on sample of all companies where comparable data available and not driven mainly by M&A (69.1% of NAV at end-September 2019, 62.6% of NAV at end-H119 and 48.0% at end-H118). **2018 average global PE purchase multiples according to McKinsey Private markets come of age report. ***Defined as debt as a % of enterprise value. ****Median.
In terms of the performance of the portfolio companies (see Exhibit 8), they exhibited double-digit growth in revenues and EBITDA over the 12 months to September 2019 (weighted average growth at 11.7% and 14.1%, respectively), far in excess of GDP growth in any large economy. In valuation terms, the average EV/EBITDA multiple increased to 14.2x from 12.8x at end-H118 despite the EBITDA expansion, while net debt/EBITDA was down to 5.1x vs 5.5x at end-June 2018. Importantly, PEY predominantly values its investments based on the last 12 months rather than budgeted forward earnings.
Snapshot of selected top holdings
We have decided to provide some additional colour on some of PEY’s largest holdings, including Permotio International Learning, Action and GlobalLogic. These made up c 27.3% of its NAV at end-October 2019.
Permotio International Learning (11.9% of PEY’s NAV): The company is PEY’s basis to pursue a ‘buy-and-build’ strategy in the global education market under the International Schools Partnership umbrella. Interestingly, rather than acquiring a platform company which already had an extensive school chain, Partners Group set up an investment vehicle in 2013 specifically to consolidate the market and attracted an experienced leadership team composed of former senior executives of several for-profit school chains (World Class Learning, Alpha Plus, Cognita etc). The investment vehicle secured c £200m in prospective funding (investment commitments) through Partners Group in early 2014, and subsequently in May 2014, Permotio carried out its first acquisition of Colegios Laude, a company operating several internationally oriented schools in Spain. As a result of further acquisitions (five of which were completed in the 12 months ended June 2019) and like-for-like growth, the company’s adjusted LTM EBITDA as at end-June 2019 reached €74.4m (up 38.0% y-o-y). At end-June 2019, it operated 41 schools in 10 countries, with a student base at c 39,000.
Permotio’s customers may be divided into two groups: domestic middle-class parents interested in bilingual education for their children and expats who relocated together with their families. Importantly, the company puts more emphasis on the former group, which represents less cyclical demand in comparison to expats (who may be relocated back to their home countries by the employer during an economic recession). The investment manager seeks to implement a number of value-creation initiatives at the acquired schools to enhance the learning experience, strengthen the managerial capabilities within the schools and expand their key marketing activities.
PEY provided aggregate net funding of c €43m to Permotio up to end-June 2019, which compares with the end-October valuation of PEY’s stake at c €100m (based on our calculations). Consequently, the investment is held at a multiple of 2.3x cost. Having said that, we note that in the past, PEY was often able to realise a sizeable uplift vs the last book value on exit.
Action (10.7% of PEY’s NAV): The company is a western European non-food discount retailer offering a wide range of low-cost products from decoration, DIY, garden and outdoor through sports and multimedia to clothing, linen and personal care. Interestingly, only c 35% of its product range is fixed (unlike most traditional retailers). It operated more than 1,325 stores with over 46,000 employees across Europe at end-December 2018, including the Netherlands, Belgium, France, Germany, Austria and Poland. Rather than a platform investment, Action is a play on solid organic growth on the back of store expansion coupled with a defensive profile and high cash generation. It generated annual sales in excess of €4.0bn in FY18 (compared to €1.5bn in FY14) and EBITDA of around €450m (vs €166m in FY14).
PEY initially invested c €3.7m in 2011 alongside 3i, which acted as lead investor. Since then, Action has undergone five recapitalisations between 2013 and 2018. PEY’s current stake is valued at c €90m at end-October 2019. Importantly, Partners Group has recently agreed to sell its stake in Action to Hellman & Friedman and fully exit the investment. The transaction implies Action’s Enterprise Value at €10.25bn, which represents a minor uplift to the end-September 2019 valuation.
GlobalLogic (4.7% of PEY’s NAV): The company is an IT outsourcing firm which specializes in digital product engineering services, benefiting from the trend for digital transformation. This includes innovative technologies, such as cloud platforms, mobile and web applications, as well as the Internet of Things (IoT). It currently plans to expand its capabilities in niche areas such as machine learning and artificial intelligence by acquiring companies ranging from US$60m to US$250m in size. GlobalLogic’s customers include Microsoft, Oracle, Cisco and Coca Cola.
GlobalLogic has been fund-backed since inception in 2000. Partners Group acquired a stake in GlobalLogic in 2018 from funds advised by Apax Partners, valuing the business at more than US$2.0bn. As a result, Partners Group became an equal shareholder with Canada Pension Plan Investment Board (which acquired its stake from Apax in 2016) and both now fully control GlobalLogic. PEY’s initial investment amounted to €22.5m, which compares with the current valuation of c €40m (an c 80% implied uplift).
Even though GlobalLogic follows an inorganic growth model, it has also recently delivered an LTM organic growth rate in excess of 20% (while maintaining margins at around 20%). Interestingly, its key accounts provide 88% visibility of its 2019 budget. It aims to reach US$2bn in revenues by 2022 from more than US$0.5bn in 2018. This should be achieved through further acquisitions, as highlighted by the recent takeover of Skookum, a US-based digital strategy, design and development firm. While details of the transaction were not disclosed, Owler estimates Skookum’s annual revenue at c US$15m. PEY’s value creation initiatives involve international expansion (beyond North America), improving the pricing discipline in line with market/peers (aiming at a 3–4% average price increase pa vs the current 1-2% pa), as well as upgrades to sales and corporate finance teams.