With private equity soaring to new heights, the competition is increasingly fierce. Firms are taking a sector focus approach by 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?
Choose The Right Sector Focus for Better Results
According to industry thought leaders and real-world successes, focusing on specific sectors like technology, healthcare, consumer, or financial services is an excellent strategy.
Data from Cambridge Associates backs this 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 choosing a sector focus, 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.
A case in point is The Private Equity Trend Report from PWC. It highlights the famed German family businesses Ottobock and Schön Kliniken, who sought out the right private equity investors themselves to support the future of their organizations.
Best Practices for Your Sector-Focused Strategy
As you lay out your plan for switching to a sector-focused strategy, be sure to:
Choose the best sector for your firm. Look at your ability to win based on a sector’s size, 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.
What to Expect from Adopting a Sector Focus
Once you are ready to promote your firm’s 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 the acquisition
- 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.
Informing Your Sector Focus: How to Report on Multiple Sectors
The key to establishing your sector-focus expertise is, of course, information. You’ve got to be able to get the answers you need on multiple sectors and how they affect your focus area quickly and efficiently. Altvia Answers is an end-to-end, private equity business intelligence solution. It serves as a single source of truth that unifies data sources and provides powerful data visualization and personalization capabilities to give team members fast access to the insights they need.
