How To Differentiate Your Firm with a Sector Focus

 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, 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.

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 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.

A traditional crm was built for general ‘customer’ scenarios

Software platforms have made the world a better place by making work a better place. Indeed the world is better off when people enjoy their jobs even marginally more, and workplace applications on big CRM platforms like Salesforce.com have done that and much more.

But the potential that platforms like these offer presents diminishing returns: once the platform provider has engineered too many industry specific components into its platform, its usefulness for other industries begins to be threatened, and with that so do the usefulness of the component tools built into the platform.

So it is with the CRM category that Salesforce.com has defined: it is generic enough to work for many industries, and yet still offers the potential for others to round off the edges and nail more vertically-oriented and extremely tailored software solutions.

Private capital markets are actually a great demonstration of this dynamic. Where generic CRM platforms simplify — appropriately so — to assume there’s a business, a customer, a sale, and service of that customer, there are a few industry-specific pieces that are missing.

Take for example, that investors become customers by investing through legal entities the GP raises. It’s a subtle but important nuance that just doesn’t make sense at a platform-as-a-service level (because it’s overly complicated for a simple one-time sale that many industries require), but which can easily be added without 10 years or software engineering. Once provided, the rest of the platform’s components become tremendously powerful again and you’re set to take over the world.

As a traditional CRM in our pillars methodology, these nuances must be present to properly account for investors in these legal entities, potential target companies and which are owned by these entities, the context of all interactions with these parties (as well as the appropriate overlap, ie co-investments), and how you’re arriving at finding these opportunities on both sides of the equation, such that you’re able to piece together what’s effective and what’s not. Not just because we say so, but because these are the very relationships and data that are key to the motivation behind a CRM in any industry.

It’s critical, too, that the valuable publicly-available information that helps to enrich CRM systems and save users painful steps of entering it themselves is fully-integrated at the platform level.

Again, look no further than the 3,000+ pre-built integrations that Salesforce.com — the creator of the CRM platform concept — has at a platform level to do so, and which only exists by way of holding just short of overly-specifying certain industry workflows that would present challenges to properly integrate.

Stakeholder reporting and communication (investor relations) draws on a range of datasets

The traditional “customer service” model of CRM systems once again makes overly-simplified assumptions about the customer relationship when applied to private capital markets.

In fifteen years I personally have yet to hear the terms “warranty” or “service call” in this market because it’s just not the same. But make no mistake, as uncomfortable as it may be to say aloud, customer service is more important now than ever and it’s constantly happening; the industry is, after all, considered to be a financial “service”.

As it turns out, that service is primarily information-based — it’s driven by data and takes the form of reports and analysis that drive decisions, and then end up again in investor-facing reports and analysis.

The foundational elements of a private capital markets CRM must be built such that they accommodate this data (like we discussed above), but so too that it can accommodate additional supporting data that investors (customers!) need in the context of service.

Oftentimes this supporting data — financial metrics and time-based values, for example — is believed not to meet the traditional definition of CRM and the natural thought is “well, better do this in Excel!”.

While I happen to believe Excel is still the greatest software application ever built, its introduction to this value chain we’ve discussed herein actually creates the problem many firms suffer from: key data needed to provide customer service (again: effectively the entirety of a firm’s reports and analysis) is now in disparate systems and detached.

Both of those dynamics are important and distinct: not only is this supplemental data disparate, but when brought together there is no logical association that can be made between the two data sets.

Allow me, then, to make the point very simply: not only can this financial and time-based value data (you may be thinking about is as “portfolio monitoring” or “accounting”) be a part of a CRM, it is arguably the most important part of a CRM because it’s at the core of what providing service to the customer entails — information that comes out of data!

Firms need a digital method to engage stakeholders (ie investor portals)

Investor portals are not new; in fact, for many of us — including myself — they conjure up horrifying nightmares in which we’re aimlessly guessing at folders to find the newest document we need.

So in lies the opportunity: not only have the portals we’ve come to hate not simplified the process of acquiring information, they’ve failed to create an entirely new experience that is “customer service” driven.

To be fair, this is not a B2C market where you’d be long out of business for not having focused on customer service and thus the customer’s technology-driven experience. But don’t expect to be around too much longer if you aren’t thinking about this shift.

Today’s institutional investors increasingly expect this same consumer-like experience, and a massive opportunity is being missed by not providing it. It’s not about providing them the experience they desire; it’s more about the ability to measure engagement that is had in return.

Put simply: what’s keeping the market from providing this experience is the availability of the information that’s required to create the service that provides the experience.

If you’ve hung in this long, you know that by focusing on your CRM, you have the data that’s required to manage the customer relationship and the technology-driven experience through which that information is shared to create a differentiated and opportunistic customer experience.

sector focus