Private equity (PE) firms have long prided themselves on their ability to grow and prosper through good times and bad. But as we discuss in Bain & Company’s latest Global Private Equity Report, the nimble tactical maneuvering that enabled them to surf through PE’s cyclical ups and downs will not suffice in the more competitive post–financial crisis environment.
Traditionally, the single-minded pursuit of growth has been all the strategy many PE firms felt they needed. Growth still matters, but Bain believes that hewing to a growth strategy by itself is no longer a path to success open to most firms. Going forward, PE firms most likely to generate superior returns and win over limited partners (LPs) are those that differentiate themselves through their relentless focus on being the very best in particular sectors, regions or types of deals. Within those focused areas, they strengthen and deepen the capabilities that make them distinctive and build a repeatable model for sourcing deals, applying fresh insights before and after acquisitions. Differentiation breeds growth through demonstrated success that attracts more capital from LPs. It also points the way to sustained growth through moves into markets, sectors and deal types adjacent to the firm’s core areas of strength.
A strategy built on differentiation is not in conflict with a growth strategy, but for those that will emerge as PE leaders, it is the most promising route to the same destination (see Figure).
PE firms that follow only the growth imperative and ignore the differentiation imperative run the risk of being stranded in midstream-not yet big enough to enjoy the benefits of scale, on the one hand, and a little good at many things but outstanding at nothing, on the other.