Sharpening focus on industry sectors and organizing around them help private equity firms–and other financial investors–create superior deals and returns. In deal generation, deep sector expertise strengthens contact with key people in an industry and increases the volume and quality of deal flow. In due diligence, it speeds a firm's ability to identify good deals and screen out bad ones, and brings to bear proprietary insights and credibility with the target's owners and managers that provide an edge in auctions. Following an acquisition, it helps quickly set the right strategic direction to improve performance and build value, recruit seasoned professionals and challenge management to hit operational targets. At exit time, a firm with deep sector expertise is uniquely able to identify the right buyers and present the sale in the most compelling light.
From our work with leading PE firms around the world, we've identified seven best practices:
- Define the right sector strategy. The best firms select sectors by weighing their attractiveness, looking at such characteristics as their size and rate of growth, ease of entry, competitive dynamics and availability of targets. In parallel, they take a cold-eyed look at their firm's ability to win in each of those sectors.
- Zero in on the right subsectors. They create sector "heat maps" that enable their sector teams to concentrate on the most promising segments and geographies within their sector where they can add value.
- Develop a point of view on target subsectors. They build deep proprietary insights about impending shifts in relative market share, earnings volatility, emerging new profit pools and other industry-shaping trends.
- Identify investment themes. They translate observed sector trends and dynamics into investment themes and flesh out concrete investment theses.
- Exploit investment opportunities. They build a network of industry insiders to source and screen targets compatible with their investment themes. They then devise plans to approach those targets and cultivate relationships.
- Define what makes them different. They don't dabble. They determine which activities along the investment value chain are proprietary, and they select ones where they will want to develop distinctive capabilities. They outsource the activities that are either too expensive to replicate or are commoditized.
- Build an operating model. They develop a deep bench of internal talent, external partners and technical advisers whom they can draw upon to source deals, advise on due diligence and work with portfolio companies. They also proactively address issues that are likely to arise between sector teams, clarifying procedures for sharing resources like analyst teams and portfolio experts.
Bain can support all stages of this process by helping identify promising sectors, assisting in developing proprietary insights and defining investment theses, helping design an organizational model and keeping sector plans updated as industry dynamics shift.