Let’s get a few things straight to begin with. Firstly, the characteristics of an attractive industry are the same regardless of economic conditions; that is, prospective industries should always present opportunity and not represent excessive risk. (Oxymoron you may say, but it doesn’t have to be.) Secondly, an attractive industry today isn’t necessarily an attractive industry tomorrow; fundamentals can change quite quickly. Lastly, an attractive industry for you should also be an attractive industry for me. Some firms may specialise, but I’m talking in general terms here. 

Here is a list of characteristics that lead towards an industry being attractive for private equity investment:

• Large market: the theory here is that the market needs to be large enough to support the type of business you are hoping to own at the end of your investment period without miracles occurring (such as abnormally large market share).
• Low reliance on uncontrollable variables: private equity is about backing a great management team and helping to drive a great business to abnormally high value creation. Uncontrollable variables such as the weather, commodity prices, burgeoning technologies, etc. unnecessarily detract from management’s ability to create value. 
• Moderate competitor fragmentation: low fragmentation may lead to fewer potential investees and a low chance of entering the industry. It may also be harder to invoke a roll-up strategy or take market share if there are fewer poor managers. However, if fragmentation is too high, it may be difficult to find a decent sized player and it may be difficult to gain traction through an acquisition strategy. 
• Low customer and supplier power: if either suppliers or customers have excessive power, than the pricing of products or services may not be adjustable. The ideal industry is at the most valuable point in its value chain; that is, the industry adds the value and the suppliers and customers are simply commodity traders or middlemen. Therefore, they have control of prices, profits and value.
• Attractive exit options: without a range of exit options, it is difficult to play potential buyers against each other and therefore secure the best price. There should always be an honest expectation to be able to list a firm because there’s no rule about a particular industry being un-listable; public markets will always be interested in a great business with sustainable and reliable cash flows. Similarly, there should be many potential trade buyers; again, if it’s a great business, others will want it. 

If you don’t agree with any item on my list or you believe I’ve missed an important point, please leave a comment for other readers to consider.