The Art & Science of Private Equity Firm Differentiation
Claiming “top quartile” performance was once the mark of quality and trust for a GP looking to raise a new fund.
But over time, due in part to the proliferation and opaqueness of private markets benchmarks, the statement, “we’re top quartile,” became less of a differentiator and its use grew more commonplace. Anyone could be top quartile if they chose the right benchmark.
We believe this trope is part of a larger discussion on the topic of differentiation.
In an increasingly crowded market, where performance is only one of many factors for an LP to consider, how are GPs successfully differentiating themselves from their peers?
To help answer this question we conducted a few experiments using artificial intelligence (AI), natural language processing (NLP), and old-fashioned statistics. We hope the findings bring some science to the art of differentiation.
To understand the level of differentiation in GP presentation decks, we conducted our experiments on a sample set of over 150 unique pitch decks from buyout fund managers, sourced from eVestment Market Lens.
In the first experiment, with the help of our partners at Nasdaq, we used artificial intelligence (AI) and natural language processing (NLP) to analyze the language used by managers in their presentations. We wanted to understand if terms like “top quartile” were, in fact, being over-used and whether the use of common superlative words and phrases was pervasive and therefore limiting differentiation.
In the second, we analyzed the use of quantitative value creation terms and overall deck statistics (words per slide, number of slides, etc.) to understand what LPs see when they review a GP’s presentation.
The First Experiment: Semantic Similarities
For our experiment on differentiation in word choice, we chose five superlative keywords and phrases to test.
As previously discussed, “Top Quartile” is a phrase that is ubiquitous across the industry, so it was the first on our list. The other four keywords and phrases were picked based on a mix of anecdotal evidence and a brainstorm of common adjectives that are used to express positivity or superiority.
Best in Class
For each deck and each keyword or phrase, the analysis used natural language processing and lexical relations to calculate a “Similarity Score.”
Lexical relations are words or phrases that are semantically similar to each of the five selected keywords and phrases, in layman’s terms: synonyms.
The Similarity Score represents the correlation between the keyword or phrase (and its lexical relations) and each individual deck.
The results were color-coded based on their degree of correlation, with yellow representing high correlation, and purple representing low correlation.
Each stripe of color represents an individual presentation deck’s Similarity Score for a given keyword or phrase.
Let’s look at some of the findings.
The Second Experiment: Quantitative Terms & Structure
LPs are increasingly focused on the quantitative side of GP value creation. To see if GPs have responded by featuring more data in their presentation decks, we looked for common quantitative terms to see how often they appeared.
Presentation Deck Structure
We also explored the structure of the presentation decks in the sample to understand the volume of data and information that LPs receive during the due diligence process.
As a GP you should carefully consider the slide length of your presentation deck and how you fill the space on each slide. Going overboard in either category can leave your potential investors overwhelmed and unable to digest your message.
While there is no “right” answer to what the ideal length or word count is for a pitch deck, these stats can help serve as a benchmark for GPs who are in the process of building or fine-tuning a presentation.
By the numbers
4 – 69
Slide count range
Average # of slides
Of individual slides
in sample with <100 words
Applying the Science to Your Art
Differentiate. Resonate. Close.
With LPs reviewing more GPs, standing out through strong differentiation and positioning is critical. Ensure your message resonates by truly understanding your competition and your investors.
This analysis was power by the competitive intelligence data that is available in Market Lens part of the Nasdaq eVestment platform.
The platform offers unparalleled insights into competitor pitch deck and investor rosters to help GPs answer the questions, “How are my peers presenting their firms, how can I stand out?”
By reviewing the actual due diligence memos from investors and investment recommendations from consultants, GPs can pinpoint the types of data and information that matter most to investors.
Fund managers must leverage tools like Market Lens to efficiently conduct a robust research process and set your firm up for future success.