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4.2 Activity Classification

The first PECCS pillar captures the industrial activity of private companies, organised into classes and subclasses. Private companies operating in the same industrial activity face similar investment opportunities, mixes of tangible and intangible assets, exposure to systematic factors, regulatory environments, competitive forces, and employ related technologies in production. These overlaps make this a key pillar in the risk factors that affect a private company.

Prior academic work strongly supports the existence of a strong industry effect in valuations and consequently returns. For example, hot IPO (initial public offerings) and SEO (seasoned equity offerings) markets are characterised by large and numerous issuances, high valuation, and lower subsequent returns and are usually concentrated in industries (e.g., Helwege and Liang, 2004). Waves of mergers and acquisitions (M&A) propagate through industry links (Ahern and Harford, 2014). In addition, investment opportunities and financing policies are closely correlated among industry firms, resulting in industry momentum in returns (e.g., Moskowitz and Grinblatt, 1999). Consequently, dividing private companies by activity helps to capture the key systematic risk factors of private investments.

NACE Taxonomy

Any new proposed activity scheme needs to be comprehensive and reflect all of the kinds of businesses performed by private companies. Moreover, it should be simple and easy to adopt for market partcipants who are already exposed to numerous classification schemes. To satisfy these requirements of ease of use, familiarity, and interoperability, we evaluated the common schemes already available to investors, such as the SIC, NAICS, or NACE codes, and selected NACE to form the basis of the activity pillar.

NACE (or Nomenclature of Economic Activities) is the taxonomy of economic activities proposed by Eurostat, the statistical office of the European Communities. NACE has characteristics that are especially beneficial when applied to classifying a global universe of private companies in a multipillar framework:

Objective: NACE classification is not dependent on the type of ownership, legal, or organisational structures, the technology in production, or commercial viability of the activity. But rather NACE focuses on the economic activity, which takes place when resources such as capital goods, labour, manufacturing techniques or intermediary products are combined to produce specific goods or services (Carré, 2008).

Scope: NACE is compatible and builds on top of the United Nation’s International Standard Industrial Classification of All Economic Activities (or ISIC), thus making the scheme more relevant at classifying a global sample of companies.

Updates: NACE is more frequently updated when compared to other schemes such as SIC or NAICS codes. The latest version of NACE, the NACE Rev 2.1 is distributed in February 2023, making it the most recent publicly available activity classification scheme. Also, the revisions are undertaken with significant feedback and participation from industry, ensuring that all evolving changes are reflected in the classification in a timely manner.

Granularity: NACE is extremely granular, which can be exploited to identify very similar companies. NACE is currently structured as four nested levels consisting of 22 sections at level 1, 87 divisions in level 2, 277 groups in level 3, and 651 classes in level 4. Each category in the framework is mutually exclusive (i.e., one activity can belong to only one category without overlaps) and exhaustive (i.e., all activities can be classified) and characterises the majority of the products and services produced by a company.

Thus, NACE provides the most representative, up-to-date, and relevant classification when considering a global opportunity set of private companies.

Approach

The first two levels of activities as classified by NACE Rev 2.1 which includes 22 sections at level 1 and 87 divisions in level 2, are adopted to constitute the activity pillar of PECCS. A dualclass system offers flexibility when applied to private companies as it allows both coarse and granular groupings.

NACE, however, does not take into consideration the extent of how populated (or not) each group could be. Such a consideration is important for a taxonomy for investors, as each subsegment should be investable and present enough choices for investors. With those principles in mind, a few of the level 1 sections are grouped into fewer classes based on economic similarity (e.g., return correlation, performance correlation) and business similarity (e.g., whether the business descriptions of companies in the two groups are similar). Below, the consolidated groups with the name of PECCS activity in the left and the corresponding NACE sections in the right, are described.

  1. Natural resources: Includes 1) Agriculture, forestry and fishing, and 2) Mining and quarrying

  2. Utilities: Includes 1) Electricity, gas, steam and air conditioning supply, and 2) Water supply, sewerage, waste management and remediation activities

  3. Real estate and construction: Includes 1) Construction and 2) Real estate

  4. Hospitality and entertainment: Includes 1) Accommodation and food service activities, 2) Publishing and broadcasting, and 3) Arts, entertainment, and recreation

  5. Professional and admin services: Includes Professional, scientific, and technical, 2) Admin and support services, and 3) Other services

  6. Education and public: Includes 1) Public admin, defence, and social security and 2) Education

Other than these groupings at level 1 NACE Rev 2.1 sections, households and extraterrestrial activities are excluded from PECCS activity pillars as these activities are less investable in private markets.

Furthermore, as NACE Rev 2.1 is a flexible and principle based framework, the derived activity pillar of PECCS, is also seamlessly mappable to other industry schemes, allowing users to integrate PECCS into their current workflows.

For example, the classification of infrastructure companies, which forms a growing and increasingly important part of private companies, can be performed on the basis of TICCS®, which is mappable to NACE, and hence with PECCS. The TICCS® is the predominant industry classification standard for infrastructure companies, developed by EDHEC Infra and Private Assets, and adopted by a majority of infrastructure asset owners and fund managers.

PECCS™ Industrial Classification

Under PECCS, each private company is assigned to its class and subclass based on the closest match of its key business activity with the definitions of these classes and subclasses. In total, PECCS divides key business activities into:

  • 12 activity classes

  • 67 activity subclasses

The table below shows the detailed definitions of each class in PECCS, their original names in NACE Rev 2.1, and their definitions.

Table 1: Activity definitions

Code

Activity Class

NACE Rev 2.1 Section

Definition

AC01

Education and public

1. Education
2. Public Administration And Defence; Compulsory Social Security

Companies that are involved in activities relating to education, public administration, defense, and compulsory social security.

AC02

Financials

Financial And Insurance Activities

Companies that are involved in financial service activities, insurance and reinsurance activities, and similar auxiliary activities.

AC03

Health

Human Health And Social Work Activities

Companies that are involved in healthcare-related activities, residential care activities, and social work activities without provision of accommodation.

AC04

Hospitality and entertainment

1. Accommodation And Food Service
2. Publishing, Broadcasting, And Content Production And Distribution Activities
3. Arts, Sports And Recreation

Companies that are involved in accommodation and food service activities, publishing, broadcasting, content production and distribution, and those in arts, sports, and recreation activities.

AC05

Information and communication

Telecommunication, Computer Programming, Consulting, Computing Infrastructure And Other Information Service Activities

Companies that are involved in telecommunication, computer programming, consulting, computing infrastructure, and other information service activities.

AC06

Manufacturing

Manufacturing

Companies that are involved in manufacturing activities, including repaid and maintenance activities.

AC07

Natural resources

1. Agriculture, Forestry And Fishing
2. Mining And Quarrying

Companies that are involved in agriculture, forestry, fishing, mining, and quarrying-related activities.

AC08

Professional and other services

1. Professional, Scientific And Technical Activities
2. Administrative And Support Service Activities
3. Other Service Activities

Companies that are involved in professional, scientific, and technical activities, those involved in administrative and support services, and other services offered to consumers.

AC09

Real estate and construction

1. Construction
2. Real Estate Activities

Companies that are involved in real estate activities and in construction activities.

AC10

Retail

Wholesale And Retail Trade

Companies that are involved in wholesale and retail trade.

AC11

Transportation

Transportation And Storage

Companies that are involved in transportation and storage-related activities, including all modes of transportation and warehousing.

AC12

Utilities

1. Electricity, Gas, Steam And Air Conditioning Supply
2. Water Supply; Sewerage, Waste Management And Remediation Activities

Companies that are involved in electricity generation and supply, supply of steam, air conditioning, and water, and those that provide sewerage, waste management, and remediation services.

The following table lists the PECCS subclasses which assume the same name as the level 2 in NACE Rev 2.1, to avoid confusion.

Table: Activity Subclasses

Subclass Code

AC Class

NACE Rev 2.1 Section

AC Subclass (NACE Rev 2.1 Division)

AC01001

Education and public

1. Education
2. Public Administration And Defence; Compulsory Social Security

Education

AC01002

Education and public

1. Education
2. Public Administration And Defence; Compulsory Social Security

Public administration and defence; compulsory social security

AC02001

Financials

Financial And Insurance Activities

Activities auxiliary to financial services and insurance activities

AC02002

Financials

Financial And Insurance Activities

Financial service activities, except insurance and pension funding

AC02003

Financials

Financial And Insurance Activities

Insurance, reinsurance and pension funding, except compulsory social security

AC03001

Health

Human Health And Social Work Activities

Human health activities

AC03002

Health

Human Health And Social Work Activities

Residential care activities

AC04001

Hospitality and entertainment

1. Accommodation And Food Service
2. Publishing, Broadcasting, And Content Production And Distribution Activities Activities
3. Arts, Sports And Recreation

Accommodation

AC04002

Hospitality and entertainment

1. Accommodation And Food Service
2. Publishing, Broadcasting, And Content Production And Distribution Activities Activities
3. Arts, Sports And Recreation

Food and beverage service activities

AC04003

Hospitality and entertainment

1. Accommodation And Food Service
2. Publishing, Broadcasting, And Content Production And Distribution Activities Activities
3. Arts, Sports And Recreation

Gambling and betting activities

AC04004

Hospitality and entertainment

1. Accommodation And Food Service
2. Publishing, Broadcasting, And Content Production And Distribution Activities Activities
3. Arts, Sports And Recreation

Motion picture, video and television programme production, sound recording and music publishing activities

AC04005

Hospitality and entertainment

1. Accommodation And Food Service
2. Publishing, Broadcasting, And Content Production And Distribution Activities Activities
3. Arts, Sports And Recreation

Programming, broadcasting, news agency and other content distribution activities

AC04006

Hospitality and entertainment

1. Accommodation And Food Service
2. Publishing, Broadcasting, And Content Production And Distribution Activities Activities
3. Arts, Sports And Recreation

Publishing activities

AC04007

Hospitality and entertainment

1. Accommodation And Food Service
2. Publishing, Broadcasting, And Content Production And Distribution Activities Activities
3. Arts, Sports And Recreation

Sports activities and amusement and recreation activities

AC05001

Information and communication

Telecommunication, Computer Programming, Consulting, Computing Infrastructure And Other Information Service Activities

Computer programming, consultancy and related activities

AC05002

Information and communication

Telecommunication, Computer Programming, Consulting, Computing Infrastructure And Other Information Service Activities

Computing infrastructure, data processing, hosting and other information service activities

AC05003

Information and communication

Telecommunication, Computer Programming, Consulting, Computing Infrastructure And Other Information Service Activities

Telecommunication

AC06001

Manufacturing

Manufacturing

Manufacture of basic pharmaceutical products and pharmaceutical preparations

AC06002

Manufacturing

Manufacturing

Manufacture of beverages

AC06003

Manufacturing

Manufacturing

Manufacture of chemicals and chemical products

AC06004

Manufacturing

Manufacturing

Manufacture of coke and refined petroleum products

AC06005

Manufacturing

Manufacturing

Manufacture of computer, electronic and optical products

AC06006

Manufacturing

Manufacturing

Manufacture of electrical equipment

AC06007

Manufacturing

Manufacturing

Manufacture of fabricated metal products, except machinery and equipment

AC06008

Manufacturing

Manufacturing

Manufacture of food products

AC06009

Manufacturing

Manufacturing

Manufacture of furniture

AC06010

Manufacturing

Manufacturing

Manufacture of leather and related products of other materials

AC06011

Manufacturing

Manufacturing

Manufacture of machinery and equipment n.e.c.

AC06012

Manufacturing

Manufacturing

Manufacture of motor vehicles, trailers and semi-trailers

AC06013

Manufacturing

Manufacturing

Manufacture of other non-metallic mineral products

AC06014

Manufacturing

Manufacturing

Manufacture of paper and paper products

AC06015

Manufacturing

Manufacturing

Manufacture of rubber and plastic products

AC06016

Manufacturing

Manufacturing

Manufacture of textiles

AC06017

Manufacturing

Manufacturing

Manufacture of wearing apparel

AC06018

Manufacturing

Manufacturing

Manufacture of wood and of products of wood and cork, except furniture; manufacture of articles of straw and plaiting materials

AC06019

Manufacturing

Manufacturing

Other manufacturing

AC06020

Manufacturing

Manufacturing

Repair, maintenance and installation of machinery and equipment

AC07001

Natural resources

1. Agriculture, Forestry And Fishing
2. Mining And Quarrying

Crop and animal production, hunting and related service activities

AC07002

Natural resources

1. Agriculture, Forestry And Fishing
2. Mining And Quarrying

Extraction of crude petroleum and natural gas

AC07003

Natural resources

1. Agriculture, Forestry And Fishing
2. Mining And Quarrying

Fishing and aquaculture

AC07004

Natural resources

1. Agriculture, Forestry And Fishing
2. Mining And Quarrying

Forestry and logging

AC07005

Natural resources

1. Agriculture, Forestry And Fishing
2. Mining And Quarrying

Mining of coal and lignite

AC07006

Natural resources

1. Agriculture, Forestry And Fishing
2. Mining And Quarrying

Mining of metal ores

AC07007

Natural resources

1. Agriculture, Forestry And Fishing
2. Mining And Quarrying

Mining support service activities

AC07008

Natural resources

1. Agriculture, Forestry And Fishing
2. Mining And Quarrying

Other mining and quarrying

AC08001

Professional and other services

1. Professional, Scientific And Technical Activities
2. Administrative And Support Service Activities
3. Other Service Activities

Activities of head offices and management consultancy

AC08002

Professional and other services

1. Professional, Scientific And Technical Activities
2. Administrative And Support Service Activities
3. Other Service Activities

Activities of membership organisations

AC08003

Professional and other services

1. Professional, Scientific And Technical Activities
2. Administrative And Support Service Activities
3. Other Service Activities

Employment activities

AC08004

Professional and other services

1. Professional, Scientific And Technical Activities
2. Administrative And Support Service Activities
3. Other Service Activities

Investigation and security activities

AC08005

Professional and other services

1. Professional, Scientific And Technical Activities
2. Administrative And Support Service Activities
3. Other Service Activities

Legal and accounting activities

AC08006

Professional and other services

1. Professional, Scientific And Technical Activities
2. Administrative And Support Service Activities
3. Other Service Activities

Office administrative, office support and other business support activities

AC08007

Professional and other services

1. Professional, Scientific And Technical Activities
2. Administrative And Support Service Activities
3. Other Service Activities

Other professional, scientific and technical activities

AC08008

Professional and other services

1. Professional, Scientific And Technical Activities
2. Administrative And Support Service Activities
3. Other Service Activities

Personal service activities

AC08009

Professional and other services

1. Professional, Scientific And Technical Activities
2. Administrative And Support Service Activities
3. Other Service Activities

Rental and leasing activities

AC08010

Professional and other services

1. Professional, Scientific And Technical Activities
2. Administrative And Support Service Activities
3. Other Service Activities

Repair and maintenance of computers, personal and household goods, and motor vehicles and motorcycles

AC09001

Real estate and construction

1. Construction
2. Real Estate Activities

Construction of residential and non-residential buildings

AC09002

Real estate and construction

1. Construction
2. Real Estate Activities

Real estate activities

AC10001

Retail

Wholesale And Retail Trade

Retail trade

AC10002

Retail

Wholesale And Retail Trade

Wholesale trade

AC11001

Transportation

Transportation And Storage

Air transport

AC11002

Transportation

Transportation And Storage

Land transport and transport via pipelines

AC11003

Transportation

Transportation And Storage

Postal and courier activities

AC11004

Transportation

Transportation And Storage

Warehousing, storage and support activities for transportation

AC11005

Transportation

Transportation And Storage

Water transport

AC12001

Utilities

1. Electricity, Gas, Steam And Air Conditioning Supply
2. Water Supply; Sewerage, Waste Management And Remediation Activities

Electricity, gas, steam and air conditioning supply

AC12002

Utilities

1. Electricity, Gas, Steam And Air Conditioning Supply
2. Water Supply; Sewerage, Waste Management And Remediation Activities

Waste collection, recovery and disposal activities

AC12003

Utilities

1. Electricity, Gas, Steam And Air Conditioning Supply
2. Water Supply; Sewerage, Waste Management And Remediation Activities

Water collection, treatment and supply

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