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Thematic Investing Pulls Proactive Buyers to the M&A Market

Targeting industry niches can help BD professionals keep deal volume up during a slowdown

Thematic Investing Pulls Proactive Buyers to the M&A Market

Thematic investing, the strategy of pursuing acquisition targets in a particular industry niche, has become more prevalent among private equity firms since the 2022 slowdown in deal flow.

The shift toward specialization has been ongoing for the past few decades, but accelerated in this market lull, says Brent Kulman, managing director, business development for Reynolda Equity Partners. “A lot of investors were sitting around in the latter part of 2022 and the first part of this year thinking, ‘How are we going to deploy the capital that we’ve raised? We’re not seeing opportunities to anywhere near the extent we were seeing them previously.’”

Business development professionals have had to develop more proactive strategies to find investments rather than wait for investment bankers to come to them with investment opportunities. Demonstrating expertise in a sector can signal to business owners that an investment firm is serious about the space—and even motivate companies to consider connecting with an investment bank.

“This whole approach to thematic investing is developing from two angles,” notes Kulman. “One is trying to find companies that aren’t on the market, and the second is, how do you position yourself in a market of limited opportunities to compete for the assets you really want to pursue?”

Finding Your Niche

Reynolda invests in business-to-business (B2B) companies with service components, Kulman says, and is looking for add-ons for its five active platform businesses, four of which are in healthcare. It launched a platform in oral surgery, for example, early on before the field got crowded. “We’ve made about 10 add-ons for that platform and have letters of intent or are in advanced discussions with additional practices,” he says. “But that landscape is changing as a result of what’s happened in the industry over the last two years as there are more private equity-backed platforms competing for those assets.”

Reynolda is also interested in the water sector, driven by its familiarity with sector executives as well as the pressing need for water infrastructure upgrades, especially in the Western half of the U.S. “There are opportunities for consolidation in the sector,” he says.

Heather Madland, a partner at Huron Capital, says thematic investing is key to their investment approach. She points to Huron Capital’s ExecFactor platform, where they underwrite a thesis, partner with a CEO and target a cornerstone investment. “If we know the industry has all the things we like because of our thematic approach, then we can proactively go after target companies and build a business around a company, executive and (their) team.”

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There’s still more room for activity in facility and infrastructure services and professional services, she says, like commercial roofing. “There are strong secular tailwinds, such as aging building structures and shorter replacement cycles for newer roofing technology,” she says, “so they’ll need to be maintained or replaced more frequently.” She also highlights recent infrastructure spending bills at both municipal and national levels of government that will support investment in the built environment.

The firm has an active thesis around enterprise application services: one in test, inspection and calibration services for the built environment; one in industrial automation and one in commercial electrical services. Huron is always looking for executives, and finding them could lead to exploring another thesis, she adds. “I think this executive-led, thesis-led thematic investing is the next horizon for firms in the lower-middle market.”

A Competitive Edge

Being a thematic investor also means being able to more effectively assess relative value of a target based on other industry-specific factors, adds Madland. “You are better able to assess what a market clearing multiple needs to be and if you’re paying a premium or discount to that.”

Patrick Turner, a managing director at private investment firm VSS Capital Partners, says that while 10-15 years ago investors were more interested in private equity managers that took a generalist approach to investing, these days many of the more successful fund managers are specialized. This reflects a shift in general partner sentiment towards developing a deeper understanding of certain markets, according to Turner. “It’s the same in the lower-middle market for firms like VSS where we can leverage our specialized expertise in our core verticals and flexible capital solutions to better serve the businesses in which we invest,” he says.

VSS is focused on healthcare, outsourced business services and education. In addition to add-on acquisitions, the firm keeps an eye out for executives to add to their existing roster of business leaders, he says.

Ahmad Sheikh, a partner with SFW Capital Partners, says the firm, which launched in 2007 to invest in tech-enabled business service providers servicing the industrials and life sciences spaces, spends time reaching out to companies to gauge their interest in transactions. “Oftentimes [this kind of outreach] plants seeds for future interactions and engagements with those companies,” he says.

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With deal flow down year-over-year, it’s a good time to dive deep into sectors and market mapping, he says. “Firms are asking ‘What areas do we really want to spend our time in?’” he says, adding that in an environment where fewer investment opportunities are coming to them, investors gain a greater interest in the proactive approach of thematic investing.

It remains to be seen, however, whether the popularity of thematic investing will persist as the M&A environment rebounds. Sheikh, for one, predicts a return to more generalized deal sourcing.

“When volume and quality of opportunities are down, that’s when people can take a step back and do sector deep dives,” he adds. “That will change when deal flow starts. When activity picks up, the focus changes to companies that may be for sale.”


Karen Schwartz is a business reporter who has covered M&A, loans and trends in the U.S. and Latin American markets.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.