In an increasingly competitive private equity environment, sector-focused managers’ intimate knowledge of specific industries often enable them to outperform generalists invested in the same sectors, says a Cambridge Associates report.

However, incorporating these sector specialists into private equity portfolios has yet to gain widespread acceptance as a strategy, despite the significant number of sector specialists used in venture capital.

The report finds stark differences between sector-focused and generalist private equity funds.

Sector specialists, defined in the report as historically investing more than 70% of capital in one of four sectors—consumer, financial services, healthcare and technology—returned an aggregate 2.2 times multiple on invested capital (MOIC) and a 23.2% gross internal rate of return (IRR) between 2001 and 2010.

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Those returns handily outweigh the 1.9 times MOIC and 17.5% gross IRR returned by generalist funds invested in the same sectors.

“This outperformance comes from intimate knowledge of an industry—in an increasingly competitive private equity environment, a manager’s ability to demonstrate deep expertise in a focused field is a key differentiator,” says Andrea Auerbach, managing director and global head of private investment research at Cambridge Associates and co-author of the report. “Investors building private equity portfolios should keep them in mind as one arrow in their quiver of investment return generation.”

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Between 2001 and 2010, sector-focused investments in the consumer, financial services, healthcare and technology sectors outperformed generalists on a number of scales.

Sector-focused funds also outperformed generalists across the spectrum of fund sizes. They earned higher MOICs in each of the following fund size categories: funds of less than US$250 million, US$250 million to US$500 million, US$500 million to US$750 million, US$750 million to US$1 billion, and greater than US$1 billion.

Sector-focused investments have also resulted in fewer losses than generalist investments in those sectors. Examining the returns of sector-focused investments against generalist investments in the same space revealed capital invested by specialists more often led to higher returns, and less often led to lower returns.

“Not only do specialists identify better investment opportunities, they also avoid marginal ones,” she adds.


The report acknowledges investors will need to determine at what level—the overall portfolio level, the asset class level or the fund level—industry diversification will be taken into consideration.

“Although the narrower focus of sector specialists should not be overlooked in terms of overall portfolio construction, institutional investors should not assume that allocating capital to sector-specific managers removes the possibility of maintaining a healthy level of diversification,” says Auerbach.

“Since we expect the private equity industry to only become increasingly more complex and competitive, sector-focused private equity funds are worth considering when constructing a long-term investment portfolio.”

Copyright © 2020 Transcontinental Media G.P. Originally published on

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