PE fund differentiation
There's plenty of talk about how PE is over for our generation but I'd like to pose a different question: what are ways (big or small) that specific funds actually are differentiated? Or are they really all doing the same things more or less? To get us started:
- Shore capital: high velocity sourcing DNA. Maintaining equity check size despite growing the fund size
- Serent: Embedding payments capabilities into vertical software companies
- TA: Sourcing DNA, high partner ownership of the GP
- Thoma Bravo: higher discipline than most (monthly board meetings), cost cutting experience
- Vista: Vista Standard Operating Procedures (VSOPs) playbooks, aptitude tests for employees of portcos
- Crosslink: Heavy cybersecurity focus
Based on the most helpful WSO content, private equity (PE) funds differentiate themselves in several ways, often through their investment strategies, operational expertise, and unique approaches to value creation. Here are some key ways funds stand out:
Sourcing and Deal Flow:
Operational Expertise:
Sector Specialization:
Value Creation Playbooks:
Fund Size and Investment Focus:
Cultural and Strategic Alignment:
While many PE funds may appear to follow similar models, these differentiators—whether in sourcing, operational expertise, sector focus, or value creation strategies—help them carve out unique niches in the competitive PE landscape.
Sources: Differences between Co-invest and Secondaries?, https://www.wallstreetoasis.com/forums/the-only-post-about-active-investing-you-will-ever-need-to-read?customgpt=1, some basic questions about PE
Sector specialization and operating partners who know the industries will continue to be more important going forward. The actual investment process is becoming increasingly commoditized. For the most part we all see the same value levers and risks, and there are too many of us chasing the same assets that has resulted in prices being pushed higher and higher. If you're going to pay the highest price, you need a real angle and some sort of differentiating factor that others don't have.
Building on this there are now newly formed PE firms founded by purely operators because the financial side is a commodity, whereas having run a business before is not and sort of never will be because it requires decision making, judgement which are built through experience.
I would also argue that the Shore keeping check sizes the same despite increasing fund size as semi disingenuous. Naturally when the fund is 10x the size, if check size remains the same it means they have to make ~10x more platform investments, meaning they are diluting themselves. Sure it also means they have more dry capital to scale platforms more than in the past but the # of investments their funds make today versus Fund 1 is 5-6x more. Add in they now have 8 different funds doing different things and I think it's pretty easy to say they are nothing like what they were 10-15 years ago. The area they originally trafficked in is wildly saturated with HC roll-ups and that segment in general is pretty soured on these days to boot. I think that's probably why they're trying to diversify their business is they know the best days of the HC business are 10 years behind them.
Naive question - what examples come to mind for newly formed PE funds run strictly by operators?
I question whether those types of firms will make it. While the investment skillset is becoming more commoditized, I still think you need both skillsets. One example of where that type of model has utterly failed is MiddleGround. Their founder/CIO is a former operator and their funds are underperforming by a wide margin.
It will be interesting to track performance by new PE firms founded by operators.
Aware of a few sector specific funds that had co-founders that were from the operational side but they were always balanced out by a financial co-founder (ex-IB MD, ex-MF MD etc.).
I haven't seen any pure operator PE funds. Know of a private credit fund that has a few seniors that are ex-operators but not PE.
Curious what job opportunities are available/helpful for IB analysts/PE Associates looking to build an "operator" skillset.
I wouldn’t necessarily say they are more disciplined than most, didn’t they invest their entire XIV 18bn 2021 vintage fund in like 1 year?
A legitimate edge often comes from relationships and the sourcing side. Or said another way, any ability to not have to compete in silly bank-led auctions with 10 other undisciplined buyers in which the CIM shows a flat business growing 50%/yr over the next 5 years.
^this
That's true for LMM firms but the vast majority of businesses that are >$100mm in sales will hire a bank to get the highest price when exiting
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