Competitive advantage for sector-focused PE funds

What is the main competitive advantage that sector-focused PE funds ($5bb+ fund size; Thoma Bravo, Vista, L Catterton, etc) have compared to broader industry-agnostic funds (BX/KKR/Carlyle/TPG + places like Berkshire Partners, CD&R and other large funds that invest across a variety of industries)?

I might be totally off here, but I have a few theories:

  1. High level of experience successfully scaling companies between specific revenue levels (e.g. 500mm to 1bb) or some other metric of past success
  2. Tighter / warmer relationships with potential targets given size of institution (i.e. if my company partners with you, will the company be just another line on the balance sheet for you to exploit? or does your record show that you care about seeing operational success in your portco's?)
  3. MFs are going after different size targets entirely - I think this is probably the least likely option, especially given that massive buyouts seem to be exceedingly uncommon

For reference, I'm looking at potentially recruiting for PE at the entry-level and I want to try and wrap my head around the industry dynamics a little better. I'm not in the industry, so some of my assumptions/categories here may be flawed - no animosity intended anywhere.


Comments (5)

Most Helpful
Mar 1, 2019

Definitely #1 once you have closed the deal (for example, I believe Thoma Bravo is known for taking mid to large sized high growth tech companies with good margins and getting them to a more mature companies with better profitability but lower growth). On the investing and sourcing side, there's also advantages in just knowing the sector and dealing with it day in and day out - you get to better know the specific subsectors, better understand valuations, and all the other nuances.

From a junior POV, i can tell you that while it sounds cool to be a generalist and look at different industries all the time, in practice, it's kind of annoying since I would be looking at a manufacturing business one day, energy the next, and some random SaaS business the day after that. And each time, assuming the deal picks up some traction, you need to get fully up to speed on a whole new industry and be expected to know the ins and outs (as opposed to leveraging knowledge from prior experience if you're just doing one sector every day).

Edit: also, forgot to mention that sector specific guys know all the players (consultants, bankers, company heads, etc.). For example, if you're industry agnostic, a tech banker may never know that you have an interest in a the sector, whereas they would almost certainly know all the tech PE firms.

The counterpoint is that as a generalist firm, you can chase deals wherever you want. If you're Thoma Bravo and you just raised a fund but tech valuations happen to be super rich, there's not much you can do - still gotta put that dry powder to work. If you're industry agnostic, you can pick and choose your opportunities a little more selectively, and a lot of generalist firms certainly do pursue different industries over time to mitigate some of what I mentioned above (i.e. they chase this sector this year because they think there's opportunity but may pivot to some other area next year or something like that).

    • 8
Mar 1, 2019

Great insight, thanks for your help. +SB'd

Mar 1, 2019

Try reading the 2019 edition of the Global Private Equity report published by Bain.
There's some content on core vs. diversified PEs, and specialised vs. generalist, among other topics.

All in all a nice read in terms of understanding dynamics and covers example deals here and there from exactly the kind of funds you mention above.

    • 4
Mar 1, 2019

Thanks! Looks like a great resource. SB'd

Mar 5, 2019