The New England Patriots. Alabama. Clemson. Even if you don’t consider yourself a football fan, you probably at least recognize those names - and are vaguely aware that each team wins. A lot. And you’re not wrong - these organizations are perennial winners. Which isn’t to say they always win. They face challenges from flash-in-the-pan contenders and sometimes fall short. But, even after losing, they remain elite and competitive every year.
Why? What makes them different from their less-consistent competition? Elite teams enjoy systematic access to talent and resources that other organizations simply don’t have. It’s easy to look at the private equity landscape the same way - divided into the megafunds and everyone else. Your private equity organization probably isn’t a megafund, and (forgive my bluntness) it’s a waste of time to try to become one. Major players can access resources that smaller equity firms can’t hope to replicate anytime soon.
And that isn’t a bad thing.
Or, perhaps more accurately, it doesn’t have to be a bad thing. With a combination of pragmatism, creativity, and the right support, your private equity firm can react, operate, and succeed like megafunds. One important note: you probably won’t be able to go at it alone. Fortunately, you don’t have to.
You will, however, have to:
1. Think Big. React Small.
If you want to replicate larger firms’ successes, first identify what makes them successful. Hint: it’s not size. In some ways, their size makes it harder for mega- and large-funds to operate. They can’t respond as quickly as their smaller competitors, and the sheer number of decision-makers makes them less efficient. If you’re a smaller private equity organization, then your agility is your strength. Don’t give it up in the hopes that getting bigger will make you better.
If larger firms don’t succeed based on size alone, then why are they more successful than smaller funds? It’s because they can dedicate significant operating resources to their investments. In the cases of mega and large funds, they have sufficient in-house operating resources to drive meaningful differences in returns. In fact, according to the Hamilton Lane analysis, 64% of megafunds with operating resources are in the top half of their peer group. However, only 45% of megafunds without operating resources are in the top half of private equity overall.
So, what does this mean? It means that there is a material difference in a highly competitive market for firms who do access talent and provide resources.
2. Build Support Systems
Operating resources are obviously valuable. But what are they exactly? Are all operating resources created equal? And, most significantly, how can small and medium private equity firms benefit from operating resources at the same level as mega and large funds?
To answer the first question, operating resources are resources dedicated to improving the day-to-day operations of investment organizations. They can be:
Deeply experienced operating executives
Management consultants for strategy and operations
Human talent solutions
Process improvements and growth strategies
Mega and large firms incorporate in-house operating resources into their overall acquisition strategies - and see success as a result. While small and medium firms generally can’t sustain in-house operating resources at the same level, that doesn’t mean they can’t benefit from operating resources at all.
If you’re a small private equity firm and you’re trying to compete with a megafund, accessing operating resources are the key to your success. Identify which resource will have the greatest impact on your investment. Does your target acquisition need a 180-day plan or help improving internal processes? Do they need the help of experienced operating execs in overseeing execution or development of a strategy? Once you have your answer, bring in outside support. There are organizations that can provide the operating resource your private equity firm needs to make your investment a success. All you need to do is identify your needs and find the right partner.
3. Listen to Experts
So, what makes an outside organization the right partner? Besides a proven track record of successfully delivering the support your firm needs, they will ideally be experts in your target investment’s industry. Some industries, notably healthcare, are veritable mazes of laws and regulations. In these industries, it can be hard for an outsider to succeed. But, if the organization supplying your operating resources is made up of industry experts, they can supply the inside information you need to identify red flags and avoid pitfalls.
Your organization can compete with megafunds, but you can’t do it alone. You need an industry expert partner ready to provide the operating resources necessary to make your investments successful. The Bancroft Group and our extensive network of healthcare executives might be able to deliver the support you need to operate at the same level as industry leaders. Reach out today to learn more about how we can help you succeed.