Why zig when you can zag? Thematic investing enables private equity investors to get an early jump on emerging macro trends
Bain & Company’s recently released Global Private Equity Report suggests private equity funds that pounce on big themes stand a better chance of getting ahead in an increasingly competitive investment landscape
New York – July 12, 2016 – Around the world, the ground is shifting beneath the feet of private equity (PE) investors as the forces that once drove business expansion and powered investment returns from the earliest days of the PE industry are winding down. Baby Boomers’ consumption patterns are evolving as that generation eases into retirement. The breakthroughs in computing and telecommunications that drove the information technology revolution are giving way to robotics, genomics and artificial intelligence that will usher in the next wave of commercial development. How are private equity firms getting – and staying – ahead as these and other changes push the global economy toward a major inflection point?
Bain & Company, the leading advisor to PE investors, in its seventh annual bellwether Global Private Equity Report, identifies one critical way that PE firms can gain a distinctive advantage in today’s challenging environment: taking a thematic approach to investing.
“In our work with PE investors around the world, we’ve seen the payoff from thematic investing,” said Hugh MacArthur, who leads Bain’s Global Private Equity Practice. “This approach enables firms to get an early jump on emerging macro forces, organize around them and incorporate a deep understanding of their potential impacts on the deals they choose to make, or walk away from.”
MacArthur says the practical benefits that accrue to thematically oriented PE firms are considerable and include: a more confident understanding of the types of opportunities they want to pursue and a network of contacts that will help them find suitable deals; streamlined due diligence, which helps firms quickly size up whether potential deals satisfy the macro criteria they have prioritized and dismiss the ones that fall short; greater confidence in determining when to bid aggressively and when to hold back; and the ability to align their organizations around a common macro thesis and develop areas of expertise that cut across traditional geographic and business sector boundaries.
Bain found that all successful thematic investors follow two sequential steps for converting themes into actionable investment criteria:
1) Identify and analyze – Thematic investors cast a wide net to pick up the early thread of an emerging macro force that might move the economy, looking for bold, counterintuitive opportunities
2) Drill down and codify – They also conduct deeper analysis to understand how the fund’s specific capabilities can make the themes actionable, which enables GPs to sort out what truly suits them versus what is merely interesting
“We’re just seeing the tip of the iceberg when it comes to thematic investing, but the effects are impressive,” said MacArthur. “PE firms focused on macro trends have much more clarity and confidence in building their portfolios, which will help drive superior performance in the years to come.”
To arrange an interview with Mr. MacArthur, contact: Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102
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