Never Let a Good Crisis Go to Waste: Themes & Sectors to Watch During and After COVID-19

Read time: 3-4 minutes

“When written in Chinese, the word ‘crisis’ is composed of two characters.  One represents danger, and the other represents opportunity.” (John F. Kennedy)

 

Introduction

I just read (and re-read) an article that suggests a third of Americans are now showing signs of clinical anxiety or depression according to Census Bureau data from May of 2020.  In response to one question about depressed mood, the percentage reporting such symptoms showed a twofold increase from when a similar survey was taken in 2014.  That means we now have just over 109 million people pacing around their homes in suboptimal mental states – a sobering barometer of the psychological burden levied by the Coronavirus pandemic and other factors.

So, I’m going to propose a new rule.  From here on out, let’s only see the glass as half full.  Let’s look for the silver lining.  No more dour clickbait headlines.  Only good news.  Per Winston Churchill’s advice, let’s figure out how to not let this crisis go to waste.  With that in mind, I wanted to share some reflections on sectors and investment themes that I think will be well situated for recovery and growth both during and after COVID-19.

 

Investment Themes & Sectors to Watch During and After COVID-19

As a disclaimer, I would expect that most sectors will experience revivals, to greater and lesser degrees, coming out of the pandemic.  The investment themes and industries profiled below are those that I feel show particular promise and could produce opportunity for investors ready to deploy capital with conviction.  Also, COVID has acted as an accelerant to many themes that have been underway for a while now, and several of the topics I mention below are simply calling out trends that have picked up and/or attracted more attention in the recent months.

Additionally, it’s been proposed that habits are formed or dropped over the course of about a month, and we’ve been quarantined for going on five months now.  So, the key here is first recognizing that behaviors have changed. Then, the idea is to focus on the areas where people aren’t going to just go back to the old ways of doing things once we can all take our masks off.  So, without further ado…

 

Investment Themes:

Explanation
1. At-Home Convenience ServicesPre-COVID, I had not once had groceries delivered to my door. Because I had always driven to the supermarket and walked up and down the aisles like everyone else, it hadn’t occurred to me that there could be a better way. Well, there is. Order your groceries online and let someone deliver them to you. It’s amazing. I’m never going back. Look for ways to disrupt old life patterns that suggested that you had to be physically present to transact when in reality you did not.
2. Recurring RevenueYes, I realize that identifying recurring revenue as an attractive investment theme is tired and hackneyed at this point. But, boy are investors happy right now that have recurring revenue-driven businesses in their portfolio. Nothing like a once-in-a-lifetime, black swan pandemic to elevate the power of recurring monthly payments. Don’t take my word for it, talk to anyone, for instance, with a SaaS-focused investment strategy about how well they’re sleeping at night. SaaS isn’t the only way to participate in recurring revenue, though. What can be more interesting for investors is to identify de facto recurring revenue in sectors that have not yet thought about their business in that way.
3. Remote MonitoringRemote monitoring and other like processes that provide real-time data and analytics without requiring a human to be in the vicinity of what is being monitored are having their moment in the sun. Nothing like keeping tabs on something from the safety of whatever Coronavirus-free location you choose, and it’s an added bonus to eliminate the wasted time and monetary expense of air travel.
4. Small, Consummable LuxuriesTimes are hard right now, but a great way to boost morale is through small (i.e. inexpensive), consumable luxuries. For instance, we recently invested in an ice cream franchisor called Handel’s. For my money, nothing is going to pull me out of a funk faster than one of their extra thick strawberry milkshakes for around $6. It also gets the kids out of the house. As important, it gets me out of the house. Look for analogues to this in other areas where a relatively small monetary outlay produces an outsized happiness ROI on an ongoing basis.

 

Specific Industries:

Explanation
1. Outpatient Behavioral HealthYou saw the statistic I referenced earlier – we’ve got a third of our population dealing with anxiety or depression. This is a staggering number. The good news is that the behavioral health industry is here to listen to your problems one empathetic nod at a time. There are a lot of ways to do good / do well in behavioral health, but I’m personally attracted to outpatient behavioral therapy services. Feels like the stigma of seeking help for things like anxiety, depression, relationship issues, etc. is coming off. Further, the onset of an array of start-up teletherapy concepts could provide a sort of marketing halo effect that raises awareness of the broader behavioral therapy industry, benefitting all participants.
2. Express Car WashesIt dawned on me recently that owning an express car wash is sort of like owning a toll road except you have to spray water at the cars as they drive by. It’s automated, high margin, and recurring revenue hiding in plain sight, and the only reason many investors turned their nose up at the sector, until recently, is because we all saw Breaking Bad1 and observed how Walter White and his wife used their car wash business2. The beauty of the express wash model during COVID is that you don’t have to get out of your car. In other words, getting your car washed requires no (or very limited) human interaction. Many express car washes also sell monthly memberships which is a great way to play the recurring revenue theme.
3. FitnessPerhaps part of the reason everyone is depressed is because they haven’t been able to exercise as much (or how they would prefer), and exercise has been proven in some cases to be as effective as taking antidepressants. Once the doors of our favorite fitness concepts fling back open and we are comfortable engaging in a regular exercise regimen, the industry is poised to resume its gangbusters performance. Having invested in both the Planet Fitness and Orangetheory systems as franchisees, we’ve voted with our dollars about our view of the industry, and we see no signs of long-term headwinds.
4. IT and Other Tech-Enabled ServicesIT Services is one of those great industries that, in many cases, has continued to post growth amidst COVID. MSPs and other IT services companies have quietly pulled this off because a lot of their revenue is recurring, and a lot of what they do can be done remotely which captures two of the investment themes above. Look also to other tech-enabled services companies where recurring revenue and remote capabilities are present. My money is on tech-enabled services being one of the most dominant sectors to emerge from the pandemic. Investors with prior expertise with such companies will be well situated to capitalize on this trend.

 

Conclusion

Hopefully this has provided some food for thought. The easy part is identifying the trends and areas on which to focus. The hard part is actually sourcing relevant investments and deploying capital.

If you are a business owner that stands to benefit from any of the topics mentioned above, please reach out early and often! We’re here to help, so give us a call to start a conversation.

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1Breaking Bad initially aired in 2008. If you didn’t catch it during its heyday, I would need to hear a pretty good excuse as to why. If, now that we’ve been quarantined for nearly five months, you still have not seen it, then the only response is to look at you disapprovingly with arms crossed and silently shake my head. Watch it.

2To be clear, I am not advocating the use of a car wash in a manner similar to Walter White and his wife.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.