Which kind of companies are investors gravitating toward? And what role do
they expect to play in companies they’ve made investments in? The survey shows
that while technology IPOs may dominate the headlines, investors are also
attracted to the potential blurring of lines between technology and financial
services, as “financial technology” (fintech) startups get more attention.
Moreover, investors aren’t seeking to gain a dominant position in the
companies they’re backing.
“As a growth investor, you want to have enough equity to influence and earn a
board seat,” says Bingham. “That is typically in the 10% to 20% range.”
Tech is still king – but so is specialization
The role of boutique investors, with real expertise in specific sectors like
biotech or big data, may be underestimated. This is especially true since
technology and biotech investments round out the top three industries in which
our survey respondents make investments.
The days of the generalist in investing are mostly gone, but the days
of specialists are still ahead of us. Firms that have been the most
successful over the past five years have been both sector specialists and
activists in term of pursuing excellence in operational performance.
Whitney Bowers, a private equity investor with HgCapital based in Boston
says, “The days of the generalist in investing are mostly gone, but the days
of specialists are still ahead of us. Firms that have been the most successful
over the past five years have been both sector specialists and activists in
terms of pursuing excellence in operational performance.”
The interest expressed in fintech investments could reflect the recent
interest in companies at the frontiers of both sectors, given recent
high-profile IPOs. In contrast, media, real estate, transportation and retail
are “out of favor” among our respondents. This matches EY’s overview of the
IPO market in 2015, where most deals occurred in the industrials, health care,
technology, consumer products and materials spaces.
Yet, experts note that in today’s world it’s hard to escape technology’s
influence. “Every sector now is at some level a technology play,” says
Snapshot: Regional differences
The survey showed some differences by region, underscoring that what
appeals in one market may not appeal in another. Here are some of the
- German investors place more importance on market growth (55%) and
valuations of peer companies (48%) than investors in other countries.
- While the majority of all investors tend to invest locally in their own
markets, US investors are the most likely (35%) to make cross-border
investments, while Japan (26%) is the least likely.
- French investors favor telecoms significantly over their peers (27% versus
the average of 10%).
- UK investors show a similar bias toward investments in media and
entertainment companies (26% versus the average of 7%).
These speak to differences in culture, regulations and investor sentiment,
and are important factors to understanding how investors view pre-IPO
Close to home or new pastures?
Investor respondents conduct less cross-border investment than what one might
expect in a globalized economy. They tend to stick to tried and tested areas
of investments based in familiar geographies. Investors in the US are
significantly more likely to invest in North American companies; investors in
Japan are more likely to invest in Asian companies, and so on. What’s more,
their return expectations are similarly modest.
This is not true of the whole investment community, however. “We are
cross-border investors,” says Bingham. “We invest in growth wherever we find
it. It’s just more difficult to give those investments what they need over and
above just cash and for me private equity investing is far more about what you
can bring as a contributor to the effort, leveraging your network, than it is
about capital investing.”