In 2015 private equity sector specialists should raise more than ever before, if investor expectations are a reliable indicator. Polls carried out this fall and winter among the more than 2,400 limited partner users that are members of Palico reveal that 89 percent of investors believe increasing specialization is “the future of PE,” while 60 percent said a majority of their PE capital commitment in the coming year would go to sector specialists rather than generalist funds.

A growing number of private equity funds follow niche strategies and specialization is increasingly seen by wily investors – whether their approach is top down or bottom up – as the best way to make double-digit annual returns from the activist, long-term investment approach that best defines PE.

Generalists – Too Much Capital Chasing Deals May Lower Returns

The huge oversupply of capital earmarked for traditional buyout funds goes a long way towards explaining the appeal of specialist strategies. Palico estimates that buyout fund managers already have some $450 billion in unspent commitments, or 2.1 times the value of deals they successfully concluded in 2014, which marked a seven-year high for PE acquisition.

Specialists – Less Competition

By contrast, in the most appealing specialist areas, the demand for capital far exceeds supply. Here are some illustrative numbers:

  • According to global accountants PricewaterhouseCoopers, European banks hold more than $3.3 trillion in loans deemed non-core or distressed, many of which they will sell over the next half-decade or so. To put that figure in perspective, private equity manages about $3.5 trillion in total assets around the world and across all strategies.
  • With energy prices plummeting, pundits estimate that more than $300 billion in oil industry assets may wind up on the block, with many sold through attractive debt-for-equity swaps.
  • In Sub-Saharan Africa, McKinsey & Company estimates that demand for capital will increase 8 percent annually between 2014 and 2018, a period that could see annual gross domestic product growth as high as 20 percent in Angola and nine other countries. McKinsey believes there is easily room for $50 billion of investment over the next decade, with current capital flows leaving plenty of potential gems untouched.
Historically, Specialists Outperform Generalists

Reinforcing the appeal of sector-focused private equity funds, a recent Cambridge Associates study, covering funds from 2001 to 2010 with realized and unrealized investments, found that managers who concentrated more than 70 percent of their capital in specific industries returned an aggregate 2.2 times invested capital for a 23.2 percent gross internal rate of return. The comparable figures for generalists is a 1.9 multiple and a 17.5 percent gross IRR.

Palico Helps You Find the Right Partners

Given our industry’s wealth of choice – augmented considerably by growing sector and geographic specialization – hooking up with the right partner can be difficult. If you are a GP or a service provider looking for visibility, or if you are a limited partner looking to navigate the growing diversity of PE opportunities, Palico is the place for you.

Investment Opportunities on Palico by Geography

Investment Opportunities on Palico by Geography

Investment Opportunities on Palico by Type

Investment Opportunities on Palico by Type