Follow These Sector Thesis Best Practices to Become a Preferred Buyer

6 Min Read

The private equity market has changed, and we’re often asked if firms are evolving fast enough to keep up. The answer is different at every firm, but one universal truth stands out—PE firms cannot afford to be just a financial partner; they have to do their homework much earlier in the deal process in order to win deals. Developing a solid sector thesis, also known as an investment thesis, is one of the best ways to demonstrate your expertise and stand out as a preferred buyer.

According to a recent report filed by Preqin, valuations remain the number one concern among fund managers, and 58% of those surveyed report that pricing for portfolio companies is higher than it was a year ago. With company valuations climbing higher and higher, there are more dollars chasing fewer deals, and attractive investments are increasingly difficult to source.

Now more than ever, you need to carefully choose the industries where you want to specialize and differentiate your firm as a preferred buyer. With too few firms specializing in specific industries, you have the opportunity to stand out by demonstrating that you know the competitive landscape, the nuances of the industry, and can clearly articulate a vision for management and growth.  A strong sector thesis will help guide this specialization and provide a framework for making informed investment decisions.

Firms striving for sustained growth face the challenge of allocating finite resources while also needing to avoid the common pitfall of overemphasizing daily operations at the expense of developing a long-term sector strategy.

Operationally-focused firms that show a seller they have a strong vision for company growth will be a preferred buyer over a firm that’s focused solely on financial engineering to generate a return. A solid sector thesis will position your firm to meet these challenges and become a preferred buyer.

As firms venture down the path of developing a strong private equity investment thesis and strategy, we find they have a few common questions, and the answers all point to the power of a well-executed sector thesis sprint.

FAQs: a solid sector thesis sprint

Why develop an investment thesis?

A sector thesis will define your firm’s investment sweet spot. Top-performing funds proactively develop an investment focus, so they’re ready when a deal becomes available. The sooner you create an informational advantage over other buyers with a specific thesis, the better you can execute quickly and with confidence.

By zeroing in on your thesis, you’ll map the target landscape and connect with expert advisors. This gives you early access to potential deals and helps you build relationships with owners before they’re even thinking of selling. So, when they are ready, you’ll approach deals with more knowledge, ask sharper questions, and position your firm for the win from the start.

Relationships drive successful deals. Period. Sellers want assurance, particularly on their leadership role. Apex Leaders provides those expert “river guides” to get you there.

What are the most important things to consider in a sector thesis?

A solid thesis makes all the difference. The best ones are clear, simple, and lay out fundamental changes that will transform the company. As you develop a thesis of your own, these tips will help you focus your efforts and streamline the process:

• Look at macro-economic trends and political/administration changes. What big-picture economic and government changes are happening in the industry? How should this guide your thesis?
• Pay attention to buyer appetites and disruptors in the industry. Watch for trends and shifting dynamics that could change your direction. For instance, is new technology emerging that could eliminate demand for the current business model?
• Research industry fragmentation—is the environment right for you to move forward or are there too many small players to make a buy-and-build strategy feasible?
• Use your existing portfolio companies to help focus your efforts. By looking at your current portfolio, you’ll recognize trends pointing to your firm’s investment strengths and weaknesses.

What are the advantages of a well-executed sector thesis?

If developed correctly, a sector thesis will help narrow your focus and expedite your efforts. In about six to eight weeks, you should be able to:

• Accelerate internal learning curves and hone in on compelling subsectors.
• Build a bench of relevant executive advisors for each subsector.
• Drive a deal flow that aligns with thesis work.
• Develop an informational advantage in future transactions.

It’s worth noting that the disciplined and timely manner in which you approach sector thesis work makes all the difference in the utility of the thesis. Don’t prolong thesis work over the course of several months. Given the rate at which deals are moving, if you aren’t educating yourself before a deal comes to light, it will be too late to win.

Why should PE firms specialize, and how will a sector thesis help?

Many of today’s private equity firms are considered generalists or industry agnostic—they invest across multiple spaces without singular specialization. In the current market, it’s hard to invest and win in industries and niches you know nothing about. Sellers require buyers to demonstrate real industry know-how.

A well-executed sector thesis developed with trusted private equity advisors helps firms narrow investment focus and develops the niche industry knowledge and key advisory relationships buyers want to see.

Is there an added cost associated with not conducting thesis work?

The confidence, relationships and extensive knowledge you gain with a thesis-driven investment focus will provide a distinct advantage on deal price, position and exclusivity.

Firms that don’t run thesis work run the risk of common pitfalls:

• Deals strung out in an auction that end up wasting time and money.
• Sinking reputations of the firm and individual investors as they fail to attract investments and generate returns for stakeholders.
• Seller trust—if a firm doesn’t specialize in an industry, why should a seller trust them? They’ll likely choose a preferred buyer in the industry.
• Wasted time—perhaps your firm’s most important resource is its time. Without thesis work, your firm will pulse slower and generate more waste.

A narrower, thesis-driven strategy will guide how you make decisions and dictate the speed at which you execute.

How should a firm approach thesis strategy work?

Building a successful thesis strategy isn’t always straightforward and there are many approaches that firms take to develop a thesis-driven strategy.

• Start. Stop. Keep. A “start-stop-keep” program encourages investment professionals pitch thesis ideas every 90 days. The team vets these ideas, deciding which to pursue and which existing theses to kill or keep.
• Thesis Voting System: Team members develop new theses and use a voting system to select the best ideas, pursuing those themes for the next three years before starting a new cycle.
• Reactive Thesis Creation: Thesis creation after reviewing books and participating in processes they didn’t know much about, but saw an opportunity in what they learned about a specific sub-sector in a broader industry.

While these methods can work, you don’t have to develop your investment thesis internally. Partnering with a private equity consulting firm like Apex Leaders can significantly elevate your strategy. Expert advisors bring specialized knowledge of niche industries and sub-sectors, validating your ideas and refining your sector thesis with precision. This outside perspective delivers real-world insights and industry data, reducing risk and accelerating execution—giving you a decisive competitive edge.

How many investment themes should a firm have?

There’s no magic number for theses—what’s right for one firm is wrong for another. However, firms shouldn’t wait for deals to fall into their laps. The most effective PE firms proactively develop and execute theses to drive deal flow, not just react to it.

While some firms generate a wide range of theses by having associates pitch sector ideas in quarterly meetings—prioritizing, researching, and vetting them to be shelved until a relevant deal emerges—this approach can lead to missed opportunities. Proactive firmd use their theses to target specific companies and initiate contact. This strategic approach allows them to operate from an 80% knowledge base before the deal is even on the table, focusing the remaining 20% on the target’s specifics. This proactive strategy is gaining traction as leading investors recognize that focus and early relationship building are essential for creating opportunities, not just reacting to them.

Ultimately, the right mix of investment themes depends on balancing your investment goals with your ability to execute and the need to cultivate key advisor relationships to support proactive deal origination.

How do PE firms choose the right industries?

So where should your firm specialize? Like any investment, you’re looking for the obvious—growth potential, fewer competitors, solid margin potential, and fragmented markets that could benefit from a buy-and-build strategy.

But your sweet spot is likely more personal.

Choose those in which you have a strong track record, team knowledge and interest. Often, less traditional niche segments in which publicly available information is limited, are ideal. They offer a greater chance to develop an edge over the competition if you can connect with key experts in the space to gather privileged insight. If your firm has the right blend of skills, experience and interest, you’re more likely to turn a poorly performing business into a top performer.

What is the ideal outcome?

With an investment strategy and solid sector thesis process, your firm will have no problem defining its investment sweet spot and remaining focused on long-term strategy.

These tips will help you along the way:

• Establish a strategic direction: Define your sector niche and what you want to pursue. Your strategy provides a foundation for every move you make.
• Increase deal flow: Narrow your focus and build relationships in industry segments that can feed your deal pipeline for years to come.
• Become the sector expert: Carve out your niche and build expertise that no one else can match.