rel="nofollow" href="#ulink_6e9c4902-5969-5e8b-92cc-fb9d5b701ce0">3 such as barriers to entry, the degree of rivalry among competitors, supplier power and buyer power as well as the prevalence of product substitutes and complements.
Pricing. What grows faster: supply or demand? What side of the market has a greater influence on price? Are there any unusual factors influencing a free market price mechanism, like an ongoing price war, taxes, surcharges, government incentives or regulatory caps?
Typical cost structure. What is the ratio between fixed and variable costs? What are the historic and projected trends in the major cost categories? Are companies able to pass cost increases to buyers?
Industry operating metrics. What are the relevant aggregate sector statistics? What are the typical operating ratios at the company level? Is it a capital-intensive sector? Does the industry earn its cost of capital?
Sector risks and threats. What are key risks faced by the sector, such as regulatory, economic, political? Is there a threat of industry disruption, product obsolescence or technological change?
Key takeaways and next steps. Summarize the key insights relevant to your investment thesis to be confirmed in subsequent meetings with industry experts and companies. What are the recent sector developments or major sector news that you need to keep in mind? What are the gaps in the market data you have been able to gather?
These questions constitute the bulk of your research work and once you have gone through each one you will have learned a lot about the industry. Have you discovered any negative features of the sector, such as overcapacity, product commoditization, wild fluctuations in demand or major structural shifts? If, from the sources that you have reviewed so far, you come to a view that the industry is weak and not structurally suitable for private equity transactions, consider stopping your research at this stage. Making a private equity investment in a challenging sector is very risky and can make your life miserable down the road. Even teaming up with the world's most capable management team will hardly be enough to withstand the forces of abysmal industry fundamentals and it is best to stop work in order to avoid a potentially loss-making investment.
What sources can you utilize for your industry research, especially if you are on a limited budget? If there are publicly listed companies operating in the sector, I always find it useful to read reports prepared by equity research analysts that cover these companies. Typically, company initiation research reports tend to be quite comprehensive and feature a detailed industry section. It is also worth keeping an eye out for any up-to-date comments on the industry provided in the investor relations sections of websites of publicly listed companies as well as in their annual reports. Regulatory bodies, industry associations and trade journals may also publish extensive information about the sector.
Make sure to check out sources such as current news and in-depth articles about the industry as well. Is there valuable information you can gather from reputable industry blogs or relevant online business communities? If you have a budget for this project, you might decide to purchase extensive industry reports from specialized market research firms or hire strategy consultants to perform a tailored industry analysis for your fund. In case the sector becomes of significant strategic importance to your organization and there are imperative issues that you need to investigate, consider conducting a private survey4 that addresses your specific research questions.
3. Elaborate on your knowledge by mapping out key players operating in the industry
This step enables you to understand the market structure, evaluate what competitive forces are at play and benchmark the companies against each other as well as against best-in-class peers. You may also be able to discover valuable second-order effects from this exercise, such as identifying suppliers or customers of the industry that may be interesting deal targets in their own right. In every industry analysis, I find that some companies can be difficult to research because they may represent smaller subsidiaries of big publicly listed enterprises or may already be owned by private equity or big strategic conglomerates. Private companies, as a rule, do not disclose many details of their operations. Ideally, you should aim to gather enough data to cover the following areas:
Company overview. This section should include a business overview, description of products or services, market share, strategic positioning, high-level financials, ownership details and any recent company news.
Benchmarking. What are the key operating statistics for each company? How do they compare to direct competitors and global best-in-class peers? Are you able to assess the key success factors for companies operating in this industry? Are there companies that you have identified in the sector that went out of business recently? Are you able to understand why?
There are several ways I typically go about gathering the necessary information. To the extent that there are public companies in this universe, locating recent equity research reports can help you gain insight into the company itself, as well as its peer group and global competitors. Public equity research reports also help you to get up to speed on what operating metrics are used in the sector.
Other useful sources for mapping out who is active in the sector are participant lists of relevant trade fairs and industry award ceremonies, membership directories of leading industry associations as well as speakers and sponsors at industry conferences. Another option is to conduct a search through a paid-for company intelligence database that allows you to narrow down potential targets by industry classification, geography, company description, shareholder details and keywords. While potentially expensive, these databases provide comprehensive information on both public and private companies that includes key financials and recent developments, such as ownership changes.
4. Build a network of experts and company executives to fill knowledge gaps
We are more than halfway through the Thematic Deal Sourcing ICEBERG Roadmap™! Now that you have done a good amount of thorough sector research, you should have a good sense of the areas where there are gaps in your knowledge and who can help you at this stage. Apart from striving to perfect your understanding of the industry, you should begin to think about building productive relationships with people who might assist you with transactions down the road. Who can help you generate actionable deal ideas, introduce you to companies or even serve as a Chairman or a Chief Executive Officer (“CEO”) in a target company?
There are numerous resources at your disposal:
The existing network of your firm. If you are working on an industry already known to your firm (i.e. someone worked on a similar investment in a different geography), it is a good idea to connect with your colleagues and understand the sources of insight that they found valuable. What existing network does your firm already have and who can help you with introductions?
Your personal network. Next, explore your own network, including any second or third-degree connections that you have: Can you detect any actionable links to the industry that you are researching?
Reaching out to industry experts on your own. Through your sector research, you might have already identified prominent figures in the sector. Who is regularly talking to the press about key sector issues? Who are keynote speakers at industry events? Who is on the board of the industry association?
