Sector-specialty funds outperform general PE funds: Cambridge

  • Why it’s important: Sector-focused funds provide investors with deep knowledge of a specific industry

Sector specialists are a hot strategy today for limited partners, and there’s a reason — such focused strategies appear to outperform those of generalists, according to fresh research from Cambridge Associates.

The consultancy found that sector specific investments outperform funds from general private equity firms by 4.7 percentage points.

Sector specialists shape their investment strategies on their deep knowledge in specific areas, such as pricing acquisitions and finding the right investments without entering an auction process, according to Cambridge’s report.

Researchers looked at investments from 2001 to 2014 and found that the average internal rate of return by single sector funds was 22.6 percent, compared to 17.9 percent for generalists, according to a press release.

“Sector specialists argue that they have the ability to identify investment opportunities and value businesses accurately,” said Andrea Auerbach, global head of private investments at Cambridge, in a press release. “By being closer to the industry and the people in it, they should theoretically be better able to identify the trends and themes that will drive future growth.”

Specialists who focus on the healthcare industry saw the most success, where the average IRR of investments was 34.4 percent, compared to 19.2 percent from generalist funds, the research showed. Technology was the second-best performer, followed by the consumer and financial services.

Cambridge Associates’ research aligns with a summer 2018 survey by Coller Capital, which showed that LPs were gearing up to focus on sector-specific funds, with a majority focused on the healthcare/pharmaceutical industry, Buyouts reported earlier this year.

“All of the advantages in sourcing and operating businesses help lead to higher returns over time, making sector specialists worthy of consideration by investors,” said Auerbach.

The risk of backing a sector specialist is if a particular sector gets hit by macro events that negatively impact the growth prospects for the whole sector. Such specialists have no diversification outside the sector to help dilute that exposure. This occurred in the energy sector, where a collapse and subsequent volatility in oil and gas prices has negatively affected numerous funds focused on that strategy.

Still, many of the most popular emerging funds in the market today are sector specialists, especially those in healthcare and technology, Buyouts has previously reported.

Cambridge Associates did not return Buyouts request for comment.

Correction: The second paragraph of this story was corrected to say that sector-specific funds outperform generalist funds by 4.7 percentage points.