How private equity firms play to their strengths with specialization

If one were to scrutinize the private equity industry, something would become blatantly apparent. The vast majority of firms specialize in particular industries; and this looks unlikely to change.

Of course, we should perhaps drill-down into this term before we embark on the remainder of this article. Specialization doesn’t necessarily mean that a company will only invest in one market. While this might be the case for small PE firms, for larger ones it could just mean that they have lots of industries, but happen to have lots of businesses within these industries. In other words, it’s quite a relative term.


If we take the previous paragraph a step further, let’s take a closer look at Sun Capital. This is the company run by Marc Leder and it’s safe to say that they are one of the big players in the industry. For this reason, they specialize in countless different industries. For example, they have a remarkable number of restaurants within their portfolio, as well as specializing in various retail and consumer product chains.

Now we have the boundaries established, why do private equity investors tend to opt for specialization? Let’s investigate the issue further.

Specialization is proven to prompt a higher ROI

We’ll start this point off with a fact; a study conducted in 2007 proved that those private equity firms that invested in specialization often had higher ROIs. It found that they were able to use their experience to yield huge competitive advantages, which was then reflected in the bottom line.

While the statistics might need reviewing as we write this several years on, at the time the study concluded that specialism tended to yield 4% more operating profit in the three years following the takeover.

Experience can reap more value

We’ve just touched on value and it’s interesting to see how investors can use their experience to reap more of it.

The fact that they already have immense experience in a particular industry is hugely enticing for customers. Sometimes, they possess the contacts, or at least the reputation, to drive a barrage of trade to their business just through their name alone.

If they were just entering an industry, this wouldn’t be likely to occur. Experience is everything – right the way down to a company’s customers.

They suddenly become much more attractive to companies

Staying on the topic of experience, it’s not just potential customers who might be attracted by this buzzword.

When hunting out a company to buy, it would be fair to say that not everyone is susceptible to private equity investors. Some only want to go down the route if they can be guaranteed that they will make a difference. Suffice to say, if they already have a proven track record in the industry, it immediately makes them more attractive in the eyes of a business who is being targeted.

Some companies may even take a lower offer, just to make the most of a particular private equity firm’s experience and contacts.