There’s a specific pattern that plays out every few years in private equity, and it’s worth naming because it’s happening again right now in a handful of sectors that are currently attracting a disproportionate share of capital relative to the number of genuinely good assets available. 

The pattern goes like this. A sector demonstrates real growth and real resilience, word spreads, and capital follows. That’s healthy, initially. The problem starts when the volume of capital chasing the sector outpaces the number of genuinely strong businesses in it, because at that point the deals that get done aren’t necessarily the best businesses, they’re whatever’s available at the point the capital needs deploying. 

Multiples get bid up on assets that wouldn’t have cleared the same bar a few years earlier, and underwriting assumptions quietly loosen to make the numbers work, because everyone involved wants the deal to happen. 

This isn’t a call to avoid hot sectors entirely, because sometimes the enthusiasm is entirely justified by the underlying fundamentals. 

It’s a call to be more sceptical, not less, when a sector is genuinely crowded, because crowding changes the population of deals available in ways that are easy to miss if you’re focused purely on the sector thesis rather than on the specific asset in front of you. 

The practical discipline worth applying: when a sector is visibly hot, hold the underwriting bar steady rather than letting it drift with the market, and be honest about whether a specific deal would still clear that bar if the sector weren’t fashionable right now. 

If the answer is that the deal only makes sense because everyone else believes the sector story too, that’s worth sitting with before signing, not after.