Specialization: As the private equity environment gets more competitive, some firms are finding an advantage by specializing in specific sectors. And according to a new study from Cambridge Associates, their limited partners are benefitting from their specialization.
Sector-focused funds have returned an aggregate 2.2x multiple on invested capital and a 23.2 percent gross internal rate of return between 2001 and 2010, Cambridge said. That compares to the 1.9x multiple and 17.5 percent gross IRR returned by generalist funds during that time period.
Cambridge defines sector-focused funds as those that invest more than 70 percent of their capital in the consumer, financial services, healthcare or technology sectors.
“In an increasingly competitive private equity environment, a manager’s ability to demonstrate deep expertise in a focused field is a key differentiator,” Andrea Auerbach, global head of private investment research at Cambridge, said in a statement.
The challenge for LPs is to determine who is really a sector expert, Auerbach said in an interview.
Many firms claim to focus on several sectors, but it’s important to determine if they “live and breathe” the sector, or if they are simply calling themselves specialists “so the right sector banker can find you with their deal flow,” Auerbach said.
“You can have sector-focused individuals, or teams within larger firms who are ultimately competing against complete firms [where] that’s all they do is that sector,” Auerbach said.