Summary

financial institutions. At the time of writing the implications from changing regulation on the merchant banking activity of Goldman Sachs were quite instructive.⁴⁰ Taken together, the results with respect to the confines of the boundary of the strategic space of PE are too inconclusive and will be investigated in more detail in chapter 6.

represents the mathematical equivalent of the strategy of a homogeneous group of firms (see Table 8). The following section summarizes the strategic pattern of each centroid. Moreover, the empirical results section of chapter 6 provides in-depth cases studies of selected firms in order to make the interpretation of the results more tangible.

The centroid of SG1 can be coined as ‘product specialist’. Compared to sector average, the product specialist is of younger tenure, has more exposure to more mature PE markets, and pursues a more extensive corporate expansion into non-traditional PE businesses. Oaktree Capital Management, for example, offers a broad range of products in the universe of alternative asset classes comprising high yield debt, convertibles, distressed debt, traditional PE, real estate, and public equity. Silver Lake focuses on large cap technology investments through Silver Lake Partners, on middle market technology investments through Silver Lake Sumeru, and on credit opportunities through Silver Lake Financial. Silver Lake itself claims to source undervalued, stressed and distressed debt opportunities through the proprietary Silver Lake network. Another example is Audax Group, which was established in 1999 and as of 2010 manages over $4b of capital in traditional PE funds, mezzanine, and senior secured debt, while claiming on its website that its debt business benefits from the middle market expertise and transaction sourcing capabilities of the group. Overall, the centroid of SG1 shows a strong focus on mid cap transactions and moderate investment sector concentration.

The centroid of SG2 can be coined as the ‘sector specialist’. The sector specialist is also of younger tenure, yet otherwise the strategic pattern of the sector specialist (SG2) is quite diametric to the strategic pattern of the product specialist (SG1). Unlike the centroid of SG1, the centroid of SG2 has more exposure to less mature PE markets, is focused on traditional PE, and pursues industry leading sector focus relative to all other SGs. Bridgepoint, for example, the largest PE firm affiliated with SG2 is exclusively focused on traditional PE.

HgCapital, another European SG2 firm, also focuses exclusively on traditional PE, while over 70% of HgCapital’s investments are concentrated on its top three sectors, notably industrials, computer software, and healthcare. Mid Europa Partners is a monolithic PE firm focused on investments in Central and Eastern Europe and has over 90% of its investments concentrated in the telecom sector.

While the ‘sector specialist’ centroid (SG2) is more focused on building out domain expertise in specific investment sectors, the ‘product specialist’ centroid (SG1) is more focused on building out a broader and more integrated capital intermediation platform.

The centroid of SG3 can be classified as the ‘sector-focused investment firm’. It is the more mature and more advanced business model version of the sector specialist (SG2). The centroid of SG3 also shows a relatively high investment sector concentration, yet it targets larger deals while pursuing a moderate corporate expansion into non-traditional PE businesses.

First Reserve, for example, one of the largest SG3 firms, has over 90% of its investments concentrated in one primary sector: energy. First Reserve manages $13b of capital in traditional PE and $8b in infrastructure. Onex is another representative example of the SG3 firm. Founded in 1984 as a monolithic PE firm, today Onex manages obout $12b of capital through four investment platforms: Onex Partners (large cap traditional PE), Oncap (mid cap

traditional PE), Onex Real Estate Partners, and Onex Credit Partners. In spite of this expansion into non-traditional PE activity, Onex still has 95% of its investments concentrated in three sectors: healthcare, consumer related, and transportation. Abraaj Capital, the Middle Eastern SG3 firm, manages traditional PE, infrastructure, and real estate funds, while 90% of its investments are concentrated on three sectors: transportation, financial services, and consumer related.

The centroid of SG4, the ‘multi-business investment firm’, can be seen as the more mature and more advanced version of the centroid of SG1. SG4 comprises PE firms such as Carlyle, KKR, Apollo, Blackstone, and Bain Capital. The centroid of SG4 is characterized by the highest degree of bundling of traditional PE and non-traditional PE businesses. The centroid has industry leading capital supply, industry leading deal flow, and industry leading investment size. In spite of its broader expansion into non-traditional PE, the multi-business investment firm centroid still remains moderately disciplined in terms of investment sector concentration and investment region concentration. In fact, a strong positive correlation exists between the existence of SG4 firms and their regional presence in more mature PE markets.

The SG4 centroid also operates more centralized relative to all other centroids.

SG5 represents the ‘small cap generalist’ model. The centroid of SG5 is the oldest centroid and its strategic pattern is quite distinct from all other centroids. The small cap generalist centroid is characterized by a moderate focus on traditional PE. At the same time it shows lowest investment size, lowest sector concentration, lowest regional concentration, and lowest investment stage concentration. The average concentration of all PE firms in the whole sample on each firm’s top two sectors, top two regions, and top two stages, is 63%, 87%, and 90%, respectively. Warburg Pincus, for example, has a concentration of 29%, 72%, and 69%

on these three strategic dimensions, i.e. 34%, 15%, and 21% below average. One of the oldest PE firms, 3i, has a concentration of 28%, 53%, and 85% on the three strategic dimensions, i.e.

35%, 34%, and 5% below average. HarbourVest Partner, another SG5 firm, has a concentration of 30%, 68%, and 54% on the three strategic dimensions, i.e. 33%, 19%, and 36% below average. The investment size of centroid SG5 is almost two standard deviations below average. Overall the firms affiliated with SG5 appear to be branching out on primary strategic dimensions of the monolithic PE model, yet at the same time they remain rather focused on traditional PE.

Comparing the two most mature SGs, i.e. SG4 and SG5, it appears that after a certain threshold in their life cycles PE firms naturally start branching out, either by bundling traditional PE with other businesses (SG4) or by diversifying heavily in terms of investment sectors, investment regions, and investment stages (SG5).

In terms of performance of the different models, measured by operational efficiency, investment performance, market share, and reputation, overall the evidence suggests that there is not one best strategic pattern in the PE sector. The centroid of SG3 and the centroid of SG4, in fact the most diametric centroids, are both comparably successful and both outperform all other centroids. The small cap generalist is the least successful centroid.

Over time the investment performance of the centroids of SG1, SG2, SG3, and SG4 increases while investment performance of the SG5 centroid decreases. Not only investment performance but also intra-group investment performance homogeneity increases in more successful groups over time, suggesting that firms affiliated to successful SGs converge toward their strategic center points, while consciously or unconsciously picturing them as their strategic reference points.

The findings also confirm that the boundary of the strategic space of PE is fuzzier than might immediately appear. The multi-business investment firm centroid (SG4) is traversing the confines of the traditional PE sector. The possibility that this observation occurred by chance alone is less than 5%. Not only holds SG4 the largest share of aggregated assets under management in PE relative to all other SGs, the multi-business investment firm model also leads the industry in several other strategic dimensions such as capital supply, deal flow, investment size, market share, and reputation, while ranking only second (after SG3) in terms of investment performance.

Taken together, hypotheses A1, B1, C1 and D1 can be accepted. Strategic groups do exist in the PE sector, several successful strategies can be pursued, PE firms converge to the center point in successful SGs over time, and one SG, in fact the industry leader, is traversing the confines of the traditional PE sector.

The results concerning hypothesis E1 are inconclusive. This study cannot validate whether the traversing group (SG4) is shaping the boundary of the PE sector, or whether it will migrate to another strategic space, e.g. investment banking or asset management.

Uncertainty with respect to future investor sentiment and regulatory changes do not allow for a robust conclusion at this point, while an in-depth investigation of potential actions of investors and of regulators would go beyond the scope of this study.

Until now, most, if not all, PE related studies have focused on traditional monolithic PE activity. However, the findings suggest that the relevance of the SG4 model can no longer be ignored. In the words of a Senior Managing Director of a leading PE firm: “The days of the one trick pony are over”.