Exploring the Untapped Potential: European Venture Funds in Niche Investment Areas
The world of private equity markets has been revered for its delivery of risk-adjusted outperformance, leveraging the illiquidity premium advantage compared to public equity markets. However, within the broad PE landscape, a unique subclass has shown even greater promise: Niche Private Equity.
Niche PE diverges from the mainstream by targeting specialised, complex, or emerging business areas often undervalued by conventional PE. These targeted areas span a broad spectrum, from venture capital to hybrid financing of buyouts, and invest in a variety of industries. Key characteristics of Niche PE that make it particularly attractive are its low correlation with listed equity, resilience against economic cycle fluctuations, and potential for higher returns than mainstream PE.
Venture funds specialising in this area are poised to benefit significantly from the same elements that have driven the success of Niche PE and are also bolstered by the increasing number of institutional investors targeting the sector.
Recent data released by Mantra Investment Partners, a Niche PE specialist, in its quarterly Niche PE Index, showed an average Internal Rate of Return (IRR) of 39% and a 2.1x Multiple on Invested Capital (MOIC) net of fees over ten years for Niche PE funds. This significantly outperforms the average mainstream PE’s 19% IRR and 1.7x MOIC. Moreover, the consistent outperformance of Niche PE over shorter periods, with a five- and three-year average IRR of 48% and 47% respectively, outstripping the 23% and 22% IRR of mainstream PE, indicates the attractiveness of this investment strategy. The compelling performance of Niche PE extends to realised investments as well. Between 2010 and 2020, Niche PE funds and investments returned an average of 2.3x MOIC and 57% IRR net of fees.
Source: Mantra Investment Partners Niche Private Equity Index Report – May 2023
Óskare Capital’s investment scope and thesis fit in the category of Niche PE. The fund is targeting an emerging vertical in life science: therapeutics that target the Endocannabinoid System and “Picks and Shovel” investments that can be enablers for market expansion in this vertical. The sector is receiving increased coverage and interest from corporates (Óskare have partnered with a top 3 global CRO and multinational pharma company), as well as world renowned research institutes such as Harvard Medical School who recently published an article on the importance of the endocannabinoid system in medicine.
Investing in the endocannabinoid therapeutics sector, its innovative and complex nature, low penetration by mainstream PE/VC, and promising growth potential, can demonstrate similar, if not better, returns to Niche PE. The industry’s specialised nature, combined with its relatively untapped status in Europe and the rapidly evolving nature of the endocannabinoid therapeutics sector and its increasing acceptance in the European healthcare landscape, offers ample opportunities for funds focused in this area.
In conclusion, the Niche PE Index data from Mantra provides a convincing argument for the potential of Niche PE, and by extension, European venture funds focused on endocannabinoid therapeutics. The nature of this sector, coupled with the proven track record of Niche PE, indicates a promising future for investors seeking to explore this relatively untapped but lucrative investment avenue with the potential for tier 1 returns for its investors.