Competition has increased in the private equity (PE) market. In the US, PE firms paid a 31% premium for acquisitions in 2016, an eight-year high according to Bloomberg data. There are a growing number of market participants chasing after ever scarcer quality businesses thereby causing price appreciation of businesses. In addition, the availability of low interest debt provides players with the financing to pursue these assets.

A competitive advantage

To remain competitive, there is a growing sentiment that PE firms should look to specialize, which many have already been doing. It can be difficult for PE firms to compete in the market without having deep industry expertise. PE firms cannot afford to do industry due diligence in real-time as they compete for assets. When going into a business, PE firms want resources around ownership to allow the management team guided by the PE investor to have the ability to make decisions that allow the company grow organically and inorganically. In Canada, PE firms have tended to specialize in the healthcare and the energy industry (including 1/3 of all 2016 Canadian PE investments being in the oil and gas sector).

Achieving specialization

One method PE firms are using to achieve specialization is by sourcing personnel that has deep industry expertise. These players (often referred to as operating partners or operating advisors) add value to the PE firm by thinking through strategies in considering businesses to invest in and by working in stride with the management of those businesses. These operating partners may play a role with a position in the management of the business or in a board position.

Having these specialists on the team of the PE firm is also vital for leveraging their industry contact network. This allows the operating partners to source transactions and identify potential assets before they come onto the market. Generally, limited partners like to see operating partners in the PE because it demonstrates expertise in managing the businesses. As one established LP stated “all emerging companies need handholding from an operating partner to succeed.”

The author would like to thank William Chalmers, Summer Student, for his assistance in preparing this legal update.

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