In a competitive fundraising environment, general partners, particularly first-time funds, must work hard to stand out from the crowd. Managers are being pushed to offer something unique to catch the eye of investors.
And they are doing so by a variety of means: fee arrangements, partnership terms, co-investment opportunities like first time fund Castik Capital Partners that raised €1 billion in August, or a specialised investment strategy such as Cairngorm Capital that closed its debut fund in September which, on the urging of its limited partners, is specialising in operational improvements.
In Europe, a rising number of general partners are focusing on a specific sector. They are using that industry expertise and the claim of a superior ability to source and execute deals, as well as grow their investment and exit, to promise commensurate returns.
One placement agent notes that she recently received a private placement memorandum from a sports fund and another from a TMT vehicle. Another has seen a leisure fund and flags the broader categories of healthcare, banking, industrial, technology, energy and food and beverage as sectors where there are increasing numbers of European managers offering specialised vehicles.
One such manager is healthcare specialist GHO Capital Partners, which did its first deal this week from a debut fund currently in the market having raised €400 million of its €500 million target so far, according to PEI Research & Analytics.
GHO is an unusual beast: a European healthcare specialist targeting mid-market companies ripe for European expansion. It’s not the first to develop the strategy but there haven’t been many. According to PEI Research & Analytics, since 2008 only 16 European funds dedicated exclusively to healthcare have closed, including G Square Capital I and Gilde Health Care Services I and II. Only a further five are in market.
But the sector specific strategy is not without risk. Healthcare and its sub-sectors are to some extent immune to the market cycles, but other investors dedicated to industries such as retail and banking can be dragged through booms and busts with no escape.
The barriers to entry in some sectors, such as banking, energy, healthcare and IT, are high given the level of technical expertise and regulatory knowledge required. These segments favour investors with specialist expertise. That said, single sector-focused GPs will bump up against both mid-market and large-cap generalist funds, many of which have targeted healthcare, TMT, financial services or other sectors for years and have dedicated sector teams.
Like most things in private equity, it all comes down to what limited partners want. For some LPs, specialist funds may be too small to absorb their typical commitment size or they may feel there’s sector concentration risk that could have an impact on returns should that industry wobble. Others are increasingly seeking out smaller vehicles with more differentiated strategies, which some argue gives the LP even more control over sector exposure(s) across the portfolio.
In the coming months, as funds are on track to surpass last year’s global fundraising total of $386 billion, whether there is sufficient investor appetite for a rising number of sector-specific funds will be tested. The generalist versus specialist approach will be one of the key battlegrounds for LP commitments.
*The original version of this story published on 16 October incorrectly stated that GHO Capital Partners had raised €100 million toward a target of €500 million. The story has been amended to show the correct figure raised is €400 million. To read our news story on GHO Capital, click here.