As the industry moves out of the economic crisis, a number of funds have spent the last few years spending little money and building up their investment capital.
The annual HEC-Dow Jones Private Equity Fitness Ranking attempts to measure private equity houses’ future performance using ten separate criteria, three of which involve a sector specialisation element.
With private equity spending much more constrained and strategic in today’s market, sector specialisation has risen in importance.
Jeffrey Montgomery, managing director of European TMT-focused private equity firm GMT, says that having a sector speciality is just ‘common sense’.
He adds: ‘If you are a specialist in anything you have a superior understanding of all the aspects of what you are dealing with.
‘If you focus on a certain sector and sub sectors within an industry then you get to know all of the players in the market, whether they are the intermediaries, management teams or owners of companies, you become an expert at understanding the dynamics of the industry.’
The study found that Silver Lake, Warburg Pincus, Nordic Capital, Bain Capital and Doughty Hanson & Co attained the top five fitness scores.
The Private Equity Fitness Ranking aims to determine which firms are best positioned to generate strong long-term performance in the future. It does this by combining the results from the ten different criteria and historic performance.
The calculation takes into account factors such as active portfolio size, market and exit timing, and increase in scale. However, it is considerations such as level of industry focus, strategic uniqueness/differentiation and change in industry focus which point towards sector specialisation as an important element of private equity fitness.
Montgomery believes that it is imperative to carefully select the sector specialisation to optimise returns.
He explains: ‘It’s very important to pick the sector that is big and broad enough so that you don’t get caught up in the cyclicality that a more narrow sub sector might present.
‘If you pick a sector that is too narrow you can get killed.’