Follow These Sector Thesis Best Practices to Become a Preferred Buyer

7 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 to win. 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.

While all firms struggle with allocating finite resources, they also risk falling into the common trap of focusing too much on the day-to-day; instead of formulating 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 pointing to the need for 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.

Because many deals are high in price, they’re difficult to secure through auction. By creating a focused thesis, your research will lead to more proprietary deals. You’ll connect with expert advisors who will alert you to sales in your chosen industries, and you’ll find paths to cultivate relationships with company owners even before they are ready to sell.

Once they are, you’ll go in with more knowledge, ask better questions and present your firm better than the competition so you can drive out your competition and position your firm as the preferred buyer from the beginning.

Not only does a relationship-driven approach comfort the seller, it also removes uncertainty about the future if they want to, for example, stay on as CEO. Relationships are key to winning deals in today’s market. Let industry executives guide you — allow them to become what we call a river guide.

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, in only a few words, 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 investment 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 specialization. In the current market, it’s hard to invest and win in industries and niches you know nothing about. Sellers expect more — they want to trust the firm that’s buying their company and know they understand the nuances of their industry.

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 specializing?

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

Firms that don’t specialize, on the other hand, run the risk of common pitfalls:

• Deals strung out in an auction that end up wasting precious 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 specializing, your firm will pulse slower and generate more waste.

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

How should a firm approach thesis strategy work?

Developing an internal process to successfully execute on a thesis initiative can be tricky at first. Some firms create theses 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.

Other firms take a more creative approach to thesis ideation, such as implementing a “start-stop-keep” program in which each investment professional brings a thesis idea to team meetings every 90 days. During these sessions, the team reviews ideas and identifies which to work on. At the same time, they review their existing theses, deciding to kill or keep them for further investigation.

Another strategy firms use is to have all their team members develop new theses and develop a voting currency to help select top ideas. The firm then pursues the winning themes over the next three years and kick off a new wave of theses each year.

You also don’t have to do investment thesis development internally. Partnering with a private equity consulting firm like Apex Leaders can elevate your strategy work even further. Expert advisors bring specialized knowledge of niche industries and sub-sectors, helping your team validate ideas and refine your sector thesis with greater precision. This external perspective ensures your investment themes are backed by real-world insights and industry data, reducing risk and accelerating execution—giving you a competitive advantage.

How many investment themes should a firm have?

The good news, and bad news, is that there isn’t an ideal number. The right number for your firm may be too broad or too narrow for another firm.

Some private equity firms take a unique approach to developing a broad range of theses. Each quarter, associates on their investment teams bring sector ideas to planning meetings that get prioritized, researched, vetted and then shelved until a deal comes along in that space.

As described earlier, when a deal does become available, the firm is that much further along and doesn’t have to start from scratch. Instead of starting at zero, they are executing from a knowledge base of 80 percent regarding the industry. The remaining twenty percent falls into the work of educating themselves on the target’s specifics. This trend continues to take hold as investors realize the importance of narrowing focus and forming relationships early in the game.

To determine the proper mix of investment themes for your firm, you’ll need to weigh your desire to invest with your ability to execute, while also nurturing advisor relationships you’ll need when a deal presents itself.

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 only select industry segments that can feed your deal pipeline for years to come.
• Develop differentiators for your firm — be the seller’s trusted source because of the relationship you’ve developed with them.