Apart from impact investing and sustainable investments, there are many new trends underway in the Private Equity industry.
Traditionally famous for diversification, Private Equity deal-making are shifting toward specialized sectors. Then, the industry mavens are not only looking for MBA finance and Wall Street professionals for private equity jobs butare also seeking talent from non-conventional backgrounds. The streak of innovation is another prominent change overtaking this industry. Here’s a detailed view of the changes making strides in the top private equity firms across the world.
3 Changes in Private Equity
1. Opportunity in specialized sectors
As industry matures and huge capital flows into the hands of private equity investment professionals, the fund-raisingis moving toward highly specialized and niche sectors.
Big asset management firms of the likes of Blackstone and even mid-market PE firms are seeing an attenuationfor generalists. In comparison, small and specialized funds are reaping high returns. It is not to suggest that the industry is not diversifying into multiple sectors. Large firms continue to leverage their scale, and access to global resources to bank attractive opportunities. That said,
The mandate is that the big will continue to expand and become big in their scale of investment, and specialized will get even more specialized.
Every PE firm has General Partners (GPs) who specialize in a field, including large firms thathave dedicated branches for different sectors– say travel, health, TMT (technology, media, and telecom), and others. There is a true opportunity investing in not only real asset-based businesses, but also non-real assets-based businesses for those who can learn to benefit from specialization.
2. Innovation over exit
In general, the private equity industry is not good at innovating. Even though they expect their portfolio companies to innovate, they themselves are slow in adapting to change much less bringing it. Their focus is usually to maintain consistency in team, and preserve the structure and strategy of investment, which reiterates the status quo.
According to McKinsey, among the three categories of investment returns – financial arbitrage, market or sector appreciation, and company performance – the third factor, i.e. operations of the company leads most returns (63%), followed by sectoral appreciation (32%), and surprisingly the lowest by financial arbitrage (5%).
This clearly shows the importance of private equity firms to actively innovate their portfolio companies. Deal planning & execution, and exit planning & execution are now becoming table stakes for private equity professionals. The path to value and returns lie in leading innovation in portfolio management.
3. Hiring unconventional and diversebackgrounds
Idea generation and portfolio management add most value to the investment process in private equity. To this avail, private equity jobs can now be seen to be targeting non-conventional backgrounds. For instance, professionals specializing in hotel industry for the sector-specific investments. This change flows directly from the first.
PE firms are making dedicated efforts to diversity the skillsets and capabilities they have in their investment team. This is enabling professionals from different fields such as strategy consultants, turnaround professionals, etc. to pursue private equity careers. Professionals from non-traditional backgrounds are not only joining the forces in the industry, but also driving decision-making in deals.
In future, it wouldn’t be uncommon to have a private equity industry leader who is strikingly different than conventional wall street number cruncher. That said, financial jocks will remain in vogue, but to innovate (second wave of change) and venture into specialized sectors (first wave of change), investment teams with a mix of skillsets and backgrounds will be best placed to bring success.
Firms, which recognize the returns associated with specialized sectors, the need for imbibing innovative attitude, and the value of employing people from diverse backgrounds, will survive and thrive in the future.