Specialization: The new term in private equity

Private equity is one industry where rules simply don’t exist.

We by no means this in a negative way. What we’re trying to say is that it’s an industry which contains so many companies, who have umpteen ways of working, that it’s simply not a case of things being black and white.

In fact, there are countless grey areas. What might work for one company most certainly won’t be the priority of another.

One thing which most will agree on is specialization though. In other words, if a company can dedicate its resources to investing in certain industries, the chances of success happen to be much higher.

Sure, for new companies it’s not going to be possible. However, if you look at some of the more established ones, it becomes clear that this is one of their main tactics. Sun Capital is a prime example and if you were to study some of the comments from Marc Leder over recent times, you’d see that specialization is big on his agenda (just look at how they have invested in the restaurants industry).

Bearing the above in mind, let’s take a look at how specialization can be such a powerful weapon for any private equity company who is serious about their business.

Successful tactics can be shared

This is by far and away the main advantage for these types of companies – and is again the reason why a lot of newly-formed private equity firms just aren’t able to carry out specialization nearly as successfully.

Let’s take the Sun Capital example again, with restaurant chains. We’re not going to name each and every one that they own, but it’s fair to say that they gain significant knowledge when they make an acquisition. They know the market trends, they know that certain types of fast-food outlets don’t work, while they know that a specific type of branding is only going to appeal to the modern consumer. You only have to take a look at some of their work with Johnny Rockets to see the importance of a rebrand.

Let’s take a look at the opposite approach – investing in multiple industries. Sure, there’s the diversification factor, but they are essentially starting from scratch. With the specialized approach, they are given a head-start, they have a direct advantage over other companies who might already be considering investment.

The bulk-buy factor

Secondly, there’s the bulk-buy factor. This is a pretty non-technical way of talking about the matter, but in essence we’re talking about the power of buying for several businesses at a time. In the vast majority of industries this is going to result in huge savings. Again, with the case of the restaurant, the savings for buying a thousand industrial ovens are going to be pretty enormous – and this again relates to specialization. There’s the added benefit of gaining relationships with other companies in the industry, like equipment manufacturers, and this is again a huge money-saving exercise at various points in the business’ life.

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