The data is in, and smaller niche-focused private equity funds are what limited partners are looking for these days. Sector specialists outperformed generalist funds year-over-year between 2001 and 2010, according to a recent research note from Cambridge Associates.
The internal rate of return for specialized funds outperformed the IRR for generalist funds by an average of 10 percent, as of December 2013. The data in Flag Capital’s recent white paper shows that funds with greater than $750 million have a net IRR of 6.3 percent over a 10-year period compared with 12.2 percent for firms with less than $750 million.
No wonder the next generation of PE pros is targeting niche sectors and smaller fund sizes. New firms adhering to the new rules include: Blue Sea Capital, Lariat Partners, ParkerGale Capital and Shore Capital Partners.
“Focused funds perform better than generalist funds, and investors are following the data,” says Devin Mathews (pictured), co-founder of ParkerGale Capital. “You will see a lot more spinouts of teams with sector expertise.” Mathews and four other partners from the technology sector team at Chicago Growth Partners founded ParkerGale in 2014 after CGP decided not to raise a third fund.
ParkerGale is targeting $200 million to invest in buyouts of tech-enabled service companies with heavy operational needs. The firm’s investment thesis is stated clearly on its website: “We only take majority control positions in profitable technology-enabled services companies where we are the first institutional capital. We look for companies with subscription or transaction-based revenue models and $2 million to $6 million in profits. Management teams that need help with technology, sales and strategy are a great fit for what we are good at. We want to be an extension of your team to help you build your company. We only invest in North America.”
See the next trend in our special report: More PE Pros Will Focus On Deal Sourcing