In the evolving landscape of private equity industry, a shift toward specialization has emerged that is challenging the wisdom of the traditional generalist approach of PE firms.
According to the 2023 Global Private Equity Report by Bain & Company, there is a noticeable trend as both limited partners and deal teams are increasingly pursuing specialized strategies. This move is driven by the desire to stand out in a crowded market and attract investors looking for unique opportunities in less saturated segments of the market.
A Key Differentiator
Specialization in private equity can manifest in various forms.
It may involve a focus on a specific industry, such as real estate technology or tourism, a particular sector like manufacturing, a defined stage of business development (e.g., startup or late stage), a geographical area, or even a unique investing approach like turnarounds or roll-ups.
Such a targeted approach enables firms to leverage deep sector-specific knowledge, fostering more strategic investments and potentially yielding higher returns. In support of this trend, research from Mantra Investment Partners indicates that from 2010 to 2020, PE funds classified as “niche” garnered an average internal rate of return (IRR) of 38%, significantly outpacing the 18% achieved by mainstream funds.
While it is challenging to pin down whether this success is due to causation or correlation, the data suggests that specialization could indeed be a key differentiator in enhancing fund performance.
Challenges
Examples of specialization success can be seen with prominent firms such as Accel-KKR and Riverstone Holdings.
Accel-KKR, which focusses on technology, not only invests but also connects its portfolio companies with potential service providers and customers globally. Riverstone Holdings, specializing in the energy sector, combines industry expertise with investment acumen, creating a formidable team that understands the nuances of the energy market.
Specialization, however, is not without its challenges.
One major concern is over-specialization, where a deep focus might restrict a firm’s ability to see broader market opportunities and limit its ability to adapt to changing economic conditions.
While specialization in private equity offers distinct advantages in terms of targeted expertise and potentially higher returns, it requires a balanced approach to avoid the risks of being too narrowly focused.
And, as the industry continues to evolve, the value of specialization – particularly in a competitive and complex market – is likely to grow, emphasizing the importance of branding in the strategic planning of both new and established PE firms.
The Role of Branding
As specialists in B2B brand strategy, we find this specialization trend of particular interest. Applying our own expertise to the situation, we see several distinct brand imperatives for PE firms and their portfolio companies to apply in support of their strategies:
- Clear and compelling value propositions must be crafted to the specific needs and pain points of target audiences.
- Messaging should build on and further articulate those value propositions across customer touch points.
- Brand identity elements – name, logo, and visual elements – should work together to position the firm squarely in its area of expertise.
- And, finally, all these elements must come to life powerfully across all channels, particularly online, to engage audiences and build a community.
As PE specialization continues, it only intensifies the need for portfolio companies to adopt a proactive approach and employ more holistic branding to stand out and win in the market.