Whether it’s in the doctor’s office or the boardroom, the world is becoming an increasingly specialized place. This is increasingly true in private equity, where fierce competition for deals demands ever greater differentiation among various buyout shops. It’s one of the reasons that few firms –The Riverside Company included–boast about their generalist credentials anymore.
We’re all developing our industry specializations. Unique sectors where a firm has proven experience and deep expertise allow it to stand out from competitors.
It’s tempting to say this shift is due to the long-running seller’s market, but the biggest reason is simpler: Specializations work. The focus on industry specializations is a long-term trend that is part of the natural evolution of private equity. Specializations improve the deal process every step of the way, from sourcing all the way through to exit.
Specializations deliver efficiency and effectiveness. In a seller’s market with hundreds of firms, those that have both experience and expertise in the industries they target for investment have an advantage.
Sellers appreciate PE firms that understand their industry. It often speeds up the sales process, and it allows the owner to entrust his or her company to a knowledgeable partner with the optimal resources and skills for growing their company. At Riverside, we prefer to work with owners who retain a stake in their companies, so specializations help forge that early partnership, and when all goes as planned it helps deliver a successful investment.
Specialization lets us invest in companies we otherwise would be unable to buy. As we at Riverside approach our 400th investment, industry knowledge and expertise help us to recognize patterns, competitive factors, growth opportunities and risks that naturally steer us towards or away from investments.
Over the years, we’ve tailored specialized teams for select industries, carefully integrating professionals in origination, transacting and operating roles. Industry sector heads and senior advisors with decades of experience in each specialization help lead the way, and Riverside has formal processes for sharing knowledge on investing within each specialization.
Industry specialization team members are active every step of the deal process. Their expertise optimizes the origination process by providing more rapid assessments of an investment’s value and potential. They play a crucial role in the due diligence process, finding hidden weaknesses and untapped opportunity. After closing a deal, specialists work with the deal team to increase value, sharing insights with the board, helping find and evaluate add-on acquisitions, tackling challenges and finding ways to grow.
Riverside’s recent exit of Emergency Communications Network (ECN) is a good example of a specialization at work. ECN provides SaaS-based mass emergency notifications for government and commercial clients. With a Software and IT Services specialization that’s completed more than 50 deals, Riverside had the background and people to help ECN grow rapidly during the four-year hold, including sourcing and integrating six add-on acquisitions. Riverside’s specialized approach helped ECN add new products, expand its leadership position in its core market, and add customers in new and existing verticals.
Riverside is not unique in our need to leverage years of experience and deep expertise in select industry verticals to be more competitive. This is not a short-term trend. Specializations are just what the doctor ordered.
Stewart Kohl and Béla Szigethy are Co-CEOs of The Riverside Company, a lower-mid-market global private equity firm.