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3 Ways PE Can Compete in a Changing Landscape

As private equity evolves with the global economy, the traditional buyout model is being challenged. Non-buyout funds outpaced their traditional peers’ growth by 10 percentage points over the past decade. Alternative strategies, specialist firms, ESG-focused funds, and a bias for growth are taking share away from the old deal types, especially among mega cap firms and emerging managers in the lower middle market.

Small and mid-market buyout deals outperform larger ones on average, but the results are much more volatile. Returns on these smaller buyouts are also less correlated to public equities. For middle market firms, balancing this opportunity with risk is important for developing and maintaining a competitive advantage.

The traditional buyout model is far from extinct, but they’re no longer the de facto deal type. Middle market firms (and professionals) that want to remain competitive need to think about their place in this shifting landscape and identify growth opportunities. Here are three strategies to consider.

1. Specialize

For some firms, specialization may be the answer. Many investors prefer funds with a track record in very specific sub-sectors, in hopes of ensuring better returns. Investments by specialist PE firms outperform those by generalist firms by nearly five percent, according to a 2019 Cambridge Associates report. Specialization might limit the addressable market for capital deployment, but advancements in data collection and analytics have made it easier for firms to identify target companies even in highly specific fields.

Shifting towards a specialist strategy requires the right team members, along with an overhaul in process, including deal sourcing, analysis, and investor communication. It may also necessitate hiring new advisors and enhancing tech capabilities to participate effectively.

There’s a good amount of executional risk (along with capital investment) to make that shift, so the most impactful moves won’t be drastic. Managers should consider the most apparent adjacent capabilities, or the most natural niches within their existing book. Build upon the products and industries that are already in your wheelhouse. Those avenues will be the easiest and least expensive to embrace, which should unlock the most value in the shortest timeline.

2. Adopt alternative structures

Employing a wider array of products and deal structures can also give firms an edge in a competitive landscape. SPACs, PIPEs, minority stakes, secondaries, and various partnerships have all increased in the past two years, motivated by both necessity and opportunity. As LPs and firms become more familiar with these deal types, adoption will only to continue to accelerate. For firms, executing new structures will require the development of internal expertise, so it’s best to take a measured approach when considering new options. New hires along with external advisors can play an important role.

3. Shift to earlier stage investments

Middle market firms may also consider shifting toward earlier stage growth investments. Most PE funds aren’t about to become seed investors with no regard for medium-term profitability, but many are encroaching on late-stage VC’s turf. Increased familiarity with growth investing, the pervasive nature of software across industries, and the allure of popular unicorns are some of the factors fueling this fire.


The best path forward for any firm really depends on existing capabilities and opportunities. In addition to considering new strategies and products, private equity firms need well-defined plans around digital transformation and ESG to remain competitive in the future. Organizations who dismiss these factors as distractions from the core business are likely to cede ground to competitors, regardless of their success in other areas.

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