This article originally appeared on AME Info.
To source more potential deals, some leading private equity firms have narrowed the aperture to focus on an investment “sweet spot.” They look only for assets that live in the realm where they have already executed successful deals. Contours of the sweet spot are defined by variables such as the firm’s geographic footprint, target ownership and primary investment thesis. Deals within a firm’s sweet spot, we have found, consistently and significantly outperform opportunistic deals that stray from it.
We see several basic approaches PE firms are using to develop a sharp point of view on attractive potential deals, as described in Bain & Company’s newly released Global Private Equity Report 2017. Some PE firms have a well-defined playbook that they use for specific types of assets, often in one or two vertical industries. Others become expert in a macro topic such as demographics, China’s economy or new forms of business models, which allows them to develop investment ideas by anticipating second- or third-order effects that the market has not yet fully priced. And some firms cross-pollinate, taking investment theses that work well in one geography or market and playing them out in other areas.
A fourth interesting approach is contrarian investing. This involves a willingness to zig when the rest of the pack zags—investing in out-of-favor businesses or industries that are either due for a favorable turn of the cycle or can be fixed because they have valuable capabilities locked inside an outwardly ugly shell. The strategy requires a deep understanding of what drives demand in the target asset’s industry and when the recovery will occur. Investing in broken businesses also requires a high degree of self-awareness regarding the PE firm’s abilities to fix what’s broken, perform rigorous due diligence and capture value after the close.
Grégory Garnier is a partner in Bain & Company’s Dubai office. He is the leader of Bain’s Private Equity and Digital practices in the Middle East and a core member of the firm’s Telecommunications, Media and Technology practices.