Differentiate Your Firm in 2019 With a Sector Focus

With private equity soaring to new heights in 2018, the competition continues to grow fierce. Firms are providing easier access to better data, playing up increased transparency, and promoting higher security to differentiate. But we’ve come to a point where these “advantages” are now considered industry standards.

So what can firms do to differentiate?

According to keynote speakers at 2018 PartnerConnect West, a focus on specific sectors like Technology, Healthcare, Consumer, or Financial Services is one option. Data from Cambridge Associates backs this sector-focus strategy up. Firms specializing in one sector see higher returns than those diversified in five or more sectors. In fact, consumer-focused, financial services-focused, health care-focused and technology-focused funds earned 2.3, 2.1, 2.2 and 2.3 times MOIC, respectively.

Stats like these have fueled a natural evolution for private equity firms, encouraging the transition from sector generalists to sector specialists. After all, by focusing on a single sector, LPs are more likely to notice emerging trends and industry insights that reveal which investments make sense—and translate into a better value.

At the same time, today’s business founders are more likely to trust and cooperate with firms that demonstrate deep expertise in their industry. Case in point? The Private Equity Trend Report 2018: The Coming of Age highlights the famed German family business, Ottobock and Schön Kliniken, who sought out the right private equity investors themselves to support the future of their businesses.

With that said, now is the time to differentiate your firm with a sector focus that will make you more attractive to investors. But making the switch doesn’t happen overnight. To help you plan an effective transition, we’ve rounded up some key recommendations.


Best Practices for Your Sector Strategy

Choose the best sector for your firm. Look at your ability to win based on a sector’s size, the rate of growth, ease of entry, competitive dynamics, and the availability of options.

Play to your strengths. Concentrate on a sector’s most promising segments and geographies where your firm can add value.

Cultivate a point of view on target subsectors. Develop insights about impending shifts in relative market share, earnings volatility, emerging new profit pools, and other industry-shaping trends.

Identify investment themes. Observe sector trends and dynamics and flesh out concrete investment theories.

Build a network of relationships. Tap industry insiders to source and screen targets compatible with your investment goals.

Define what makes you different. Perform an investment value-chain analysis and determine if you can offer a distinctive product or service that will attract investors.

Build an operating model. Develop a roster of internal talent, external partners, and technical advisers you can leverage to source deals, advise on due diligence, and work with portfolio companies.

Once you are ready to promote your firm as having deep sector expertise, you will be uniquely positioned to increase the volume and quality of deal flow. You’ll also be better equipped to screen out bad deals during due diligence, improve performance during acquisition, and present a deal in the most compelling light during a sale.

The benefits of adopting a sector focus speak for themselves. By specializing, you can create real value for companies and earn higher fund returns than your competitors.

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