Narrow Niches and Big Returns


April 16, 2014

One of the top performing PE funds in the world today is Vista Equity Partners, according to Preqin data. Its founder Robert F. Smith is featured in the NY Times this week. What makes Vista special and apparently very successful (it has delivered a 31 percent average annual rate of return since 2000- even during the downturn) is its focus on enterprise software, a uniform transforming approach to creating growth and quality products in the companies it acquires, and a novel hiring methodology.


Some of the other top-performers, according to Preqin data (which we reported here), are Veritas Capital, a firm which specializes in defiance industry investments, Wynnchurch Capital, specialized in growing niche manufacturing, industrial services, and supply chain ventures, and Inflexion, a UK fund that in its own words specializes in potentially high-growth niche businesses.

Long ago, before Carlyle became a giant alternative investments company, it established its reputation as a specialized buyout fund, targeting highly regulated aerospace, healthcare, telecommunications and defense industry companies and spinoffs.

It looks like the smart money is on sector specialization and narrow niches pursued over a long period of time (at least two or more cycles). Yale Alumni recently heard this same view at a recent event and Finnish academics heard it here.

The performance of these PE funds confirms the attraction of the mid-market for PE and suggests a greater role for PE in a wide range of industries and service companies, one niche at a time.

It could mean lot more success stories, like what happened with a tiny mid-west manufacturer of sports mouth-guards doing less than USD 10 million in sales once two sets of private equity investors got their hands on it, according to the Star Tribune. They grew it to almost USD 100 million in turnover a year. Now, a third PE fund owns, Shock Doctor, and it plans to take it to the next milestone: a billion in turnover.

That’s not the financial engineering that PE may be known for. It sounds like hard work, human and operational excellence, along with a good deal of enterprising activity. (Image source: Oregon State website )

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