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Sector specialization takes center stage in the wake of the pandemic lockdown

Some of the most successful recent fundraisings have involved sector specialists, including those focused on software investing and various aspects of healthcare.

A trend that developed in the past few years of movement toward sector specialization accelerated in the pandemic-roiled markets as firms leaned heavily on expertise to weather the market chaos.

“Firms need in-depth intelligence on how the recovery will unfold in a given sector and where the ground has shifted,” according to Bain & Co‘s global private equity report, published earlier this month.

Revenue generation, customer expectations, innovation all potentially have changed since the lockdown, not to mention a rush to embrace digital evolution of processes that, especially in private equity, have remained stubbornly analog.

“The firms that can spot change first and build those insights into the PE value chain will have a distinct advantage in the post-covid future,” the report said.

Buyout funds held 41 percent of global PE assets under management in 2020, down from 62 percent in 2010, the report said. Other strategies like growth, venture and distressed took a great share of AUM by the end of last year.

And within the buyout category, generalist funds have been losing share to specialist managers. The share of capital raised for the classic buyout fund (as Bain & Co names it) slipped to 56 percent at the end of 2020, from 80 percent in 2013.

“If you’re a new fund, you need a reason to exits. There’s enough capital in the world … what you need is an idea and experience … to show how you’re different to get LPs excited,” Hugh MacArthur, head of global private equity at Bain & Co., told Buyouts in a recent interview.

Some of the most successful recent fundraisings have involved sector specialists, including those focused on software investing and various aspects of healthcare. Patient Square Capital, formed by ex-KKR healthcare chief Jim Momtazee, could raise $3 billion for its debut healthcare-focused fund. Another is tech-focused Crosspoint Capital, which is heading for its $1.2 billion hard cap, Buyouts previously reported.

The concern around specialization is the potential outsized risk of committing capital into one sector, if that sector happens to melt down, like certain segments of retail. But sector specialization usually narrows into sub-sector focus, providing diversification even within a given sector. Also, the recent market uncertainty is also what’s driving more interest in sector specialists, according to the report.

“Firms need in-depth intelligence on how the recovery will unfold in a given sector and where the ground has shifted,” the report said. Revenue generation, customer expectations, innovation all potentially have changed. “The firms that can spot change first and build those insights into the PE value chain will have a distinct advantage in the post-covid future.”