Best PE Sector to be in (tailwinds)
Which PE sector is the best to be in for the foreseeable future? Tech, Industrials, HC, Consumer, Real Estate, Infra, etc.
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Based on the most helpful WSO content, here are some insights into PE sectors with strong tailwinds:
Infrastructure PE: This sector is expected to remain robust due to the global shift towards renewables, utilities, and transportation assets. Infrastructure is seen as a stable, inflation-hedged investment with less correlation to GDP, making it attractive in uncertain economic environments.
Healthcare: Healthcare PE, including pharma, biotech, and medical devices, continues to thrive due to consistent demand, innovation in treatments, and regulatory-driven opportunities. Sub-sectors like healthcare IT and biopharma are particularly promising.
Private Credit: This area is highlighted as having more room to grow than traditional private equity, offering opportunities in a less saturated market.
Real Estate/Infrastructure Funds: These are expected to be "hot" for the next few years, especially in logistics, life sciences, and technology-related real estate (e.g., data centers, cell towers).
Technology: While tech remains a strong sector, certain areas may stagnate or decline. However, growth tech and innovative sub-sectors still offer significant opportunities.
Renewable Energy: Particularly in regions like Vietnam and other emerging markets, renewable energy (solar, wind) is booming due to government incentives and global sustainability trends.
Ultimately, the best sector depends on your expertise, interest, and the specific market dynamics.
Sources: PE long-term attractivity: Is the trodden path "broken"? Quo vadis gen Y?, PE Outlook over the next decade, https://www.wallstreetoasis.com/forum/hedge-fund/best-industries-to-specialize-in?customgpt=1, HF Industry Dying?, Overview of Infrastructure Private Equity
Tech, services are the safest bets. The rest is very difficult to invest in
Safest how? there has been a huge run up in multiples even post 2021, despite a much harder sales environment
All of the sectors you listed have their unique advantages and challenges.
Tech (mostly talking about software here in the context of PE) is arguably the best business model to invest in from a PE perspective, given the inherently superior fundamentals and FCF visibility - this has been well reflected in the increased share of PE capital allocated towards tech (mostly software) over the past 2 decades. However, this comes at the cost of high competition for quality assets and thus high entry multiples.
Healthcare PE, on the other hand, is a much less competitive sector overall compared to tech from a PE capital allocation perspective, despite having many long-term secular and structural tailwinds just like tech. A part of the reason is that it's a sector that generally requires deep industry expertise in order to successfully underwrite investments, in contrast to the pure-play software PE firms (TB, Vista, etc.) whom I consider to be business model investors as opposed to industry experts. As such, you see many non-specialists either tried but had little success (ex. KKR / Envision) in healthcare, or stayed out of healthcare.
It's also very important to dissect healthcare into sub-sectors (HC services, pharma, medtech, HCIT, etc.) when analyzing long-term outlook, as opposed to making broad generalizations. For instance, many PE firms that invested heavily in HC services will continue to experience strong regulatory headwinds (e.g. WCAS) and potential LP implications surrounding ethics (e.g. LGP / Prospect Medical, Apollo / Lifepoint, Cerberus / Steward).
However, will echo many other on this forum that HCIT / healthcare software is a sub-sector that combines the many advantages of tech and healthcare, with less of the downsides. EQT and Nordic Capital are two large-cap PE firms that have a strong focus and track record in this attractive intersection between tech and healthcare, at least in the US. Coincidentally or not, both firms have also seen strong recent returns and fundraising momentum in spite of the broader PE industry headwinds. Nordic Capital, in particular, has hit many homeruns by focusing on healthcare software and fintech companies specializing in the more complicated and less competitive sub-verticals, such as pharma commercialization software or IP management software. These nuanced end-markets have very steep learning curves, and could take decades in order for a PE investor to gain true expertise, making it difficult for new entrants to compete against the incumbent PE firms in this space. So if you're one of the 2/3 true sub-industry experts, you will be able to acquire ultra-high quality assets at attractive multiples. This is in contrast to the type of investing done by the pure-play software guys at TB / Vista, for example, who are widely known for overpaying (e.g. Pluralsight).
This is an incredibly insightful analysis, agree with all of the points above. Would you be able to share your views on the other sectors (Industrials, consumer, FIG, infra, etc.) as well? Very curious to hear. For context, I'm a long-time healthcare banker and formerly a FIG banker.
It is indeed difficult to find sub-sectors that check each of the 3 boxes:
(1) Sustained long-term secular tailwinds
(2) LBO-friendly
(3) Attractive entry multiples
Agree that HCIT and healthcare software is the perfect sweet spot that captures the advantages of both tech and healthcare, and it is definitely one of the best positioned sub-sectors in PE over the next 10-20 years.
Will add fintech / payments / financial services software to this conversation as well. Just like HCIT, the intersection between tech and FIG has many attractive business model fundamentals and characteristics inherent in high-quality tech / SaaS businesses, but a lot of nuanced sub-sectors requires deep FIG industry expertise beyond the level achieved by most tech PE or generalist PE investors. This creates a natural barrier to entry and results in more attractive returns compared to investing in much of the broader tech universe, but only if you have that level of FIG industry expertise that is.
Like healthcare, FIG is one of the most under-digitized industries, which could create a multi-decade long secular growth tailwind for companies operating at the intersection between tech and FIG.
Glad that you mentioned Nordic Capital - they like to maintain a low profile despite being a large cap fund, and I understand the reason now. If you discovered a way to achieve outsized returns consistently, why let any potential new entrants know of your success? Nordic has mastered the art of acquiring diamonds in the rough by investing in high-quality companies operating at the intersection between technology and highly nuanced / complicated vertical end-markets (e.g. healthcare software, FIG tech, payments). Like you mentioned, these end-markets have very steep learning curves that helps the incumbent PE firms like Nordic Capital maintain a wide moat and competitive advantage against both the "industry-agnostic" generalist PE funds and the "pure-play" tech PE funds.
This post and the one above it read like AI-generated marketing content for Nordic. The last paragraph in particular.
Phenomenal post! Outside of EQT / Nordic, know any smaller cap players in the HCIT investment space? Trying to go into an Ops role at a PE Portco in that space and would appreciate any names that might come to your mind.
Here are some firms that play in the space that are more mid-market oriented:
FP, THLee, TA, GI, WCAS, AKKR, Great Hill
Probably missing a few but those are the ones off the top of my head.
Depending on what type of ops role you're looking for, below are some relevant current or pending PE Portcos that you might consider looking into:
- AdvancedMD: Medical office software provider pending acquisition by FP for $1.1 billion
- Nexus: E-health company pending acquisition by TA for $1.3 billion
- Vee Healthtek: RCM provider pending acquisition by TA for $250 million
- Anaqua: IP management software company pending acquisition by Nordic for $2.5 billion
- GeBBS: RCM and medical billing company pending acquisition by EQT for $850 million
- IMO: Healthcare data enablement company acquired by THLee for $1.5 billion
- Merative (IBM Watson Health): Healthcare data & analytics company acquired by FP for $1 billion
- Inovalon: Healthcare data & analytics company taken private by Nordic for $7.3 billion
- Waystar: RCM company acquired by EQT for $2.7 billion, gone public this year
FP has also been active and successful in HCIT right
Lots of tailwinds in retirement services
Is retirement services consideres PE/PC? Notices a lot of PE firms like Apollo, Brookfield, BX are doing this type of strategy. Is it considered a buy side gig like PE/PC? How is the pay?
No i meant investing in retirement services lol. Lots of dry powder are now looking into this space.
Anything to do with providing a solution to the foreseeable ageing population
Know a successful founder who sold a company in this space to a LMM fund.
In theory, this niche sounds like a great idea but incredibly hard to operate a company within this space especially with how challenging it is to navigate reimburement / profitable revenue streams.
That being said, I'm in touch with another healthcare portco C-suite who also agrees whoever is able to crack this code will be an appealing asset for investors to own.
Going into generalist M&a program. What sectors do you recommend getting more exposure to and specializing in?
Bump
Bump
Secondaries - any industry / vertical
Energy.
Yes i can't wait to join an O&G pe fund i love levering up E&Ps
Gotta be aerospace and defense, all the global conflict plus NATO defence spending increase, travel boom massive demand and supply issues
I would argue the larger tailwind is space commercialization, though definitely much longer term.
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