Private Equity

Why Niche Private Equity Means Unlikely Returns

Why Pigeonholed Private Equity should be standard practice

Specified strategies within private equity investments have gained popularity as it offers a fresh way to approach a broad investment thesis and conquer specified mandates that can be harder to fulfill with traditional generalist firms. Although many assume that a niche’d down fund can create a pigeonhole where promising deals are missed due to a hyper-focused investment thesis, more often than not these niche industry funds are seeing more deals and getting more attention because of the specificity.

Firms like Vista Equity, which specializes within the software industry with funds up and down the vertical, maintain their own internal consulting team to save costly outside recruiters racking up billable hours on each investment. Vista has earned the right to charge a higher than industry average carry amount, and is oversubscribed on every fund they raise - something that standard generalist firms have trouble accomplishing once, not to mention fund after fund.

We’ve seen strategies that can get more niche than an industry characterization, with funds that are only investing in PoC or woman founders, or localized investors focusing on a region or state focus (company headquarter-wise as well as target market). Although going too niche can harm the ability to do a healthy fundraise, having a track record and a strong investment thesis will paint the majority of the picture, begging the chicken or the egg issue, do you start niche’d or do so after you’ve seen success in the broader market?

As with any strong CPG brand, conveying an emotional connection to the target audience allows people to release inhibitions and focus on the larger mission of the firm / brand. From an investment firm’s perspective, this allows ease in fundraising, a more dedicated audience, and following along with the acceleration in deal flow, as you become the ‘go-to guys’ for XYZ specialty. Take Bowery Capital, another specialized early-stage venture capital firm, that is very vocal about marketplace investing, going onto niche websites like Everything Marketplaces and discussing their investment strategy, how they help grow these marketplaces post-investment, and how to build a marketplace that is worth investing in. Not only are all of these things helping thousands of bright-eyed entrepreneurs build their startup the right way, it creates a sense of trust and respect for the advice. Guess who will be the first call once these founders hit these “investable” milestones? The overused venture mantra of ‘provide value’ really works.

This specialization combined with being loud on the internet about the mission, giving out some of the secret sauce as a teaser / lead magnet, and showing the human side of why this matter helps accelerate the private investment industry from the Wall Street, gold Rolex giants that were formerly feared / disliked into intelligent, purpose-driven people who are doing a net positive on society and accelerating an industry for the greater development of future technology.

If you’re a niche investment firm looking to help your founders grow their companies, email us below to determine if it’s a fit in working together from an operating talent perspective.

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