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Private Equity

Disciplined Deal Sourcing: Getting to Close

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With increased access to the private capital markets, CEOs have the luxury of being fastidious when it’s time to sell their business. As a result, private equity firms are faced with the challenge of iterating on their tried-and-true deal sourcing strategies to keep up with competition and deploy capital.

Firms who are keen to close the gap between deals seen and deals closed must get serious about ironing out the inefficiencies within their deal sourcing and deal nurturing processes.

“As the private equity asset class continues to mature and returns regress to the mean, deal sourcing is still very inefficient,” says Nadim Malik, founder and CEO of Sutton Place Strategies. Malik and his firm goes so far as to say that “the best deal originators in this environment may very well be the best fund performers.”

Reach Into The Long Tail of Advisors

Sellside representation is a classic long-tail power curve, and private equity firms can gain an edge by adjusting to that reality. According to Sutton Place Strategies, there were 800 different entities that sold a business in 2015. Seventy-five percent of those firms brought only one or two deals to market.

“There’s a real opportunity for a private equity firm to chip away at that coverage [of those smaller firms] and see deals that are often quieter, limited processes that their peers are not seeing at times at lower entry multiples that could translate to better returns in this type of environment,” says Sutton Place’s Malik.

However, to reach into the long tail efficiently, you need leverage. It is too time consuming and expensive for a PE professional to personally call on those 600+ advisors who will only market one or two deals a year. There are two ways to tackle a very wide but shallow top of the funnel: you can use inexpensive labor or you can apply technology.

Historically, firms tried to solve this with war rooms of young college graduates dialing for leads, but CEOs and advisors have long cooled to this approach. A technology approach usually takes one of two forms: 1) buying and cleaning database leads and sending automated email campaigns; 2) tapping into online networks that automate discovery for you.

By using an online network, you can focus your energy on relationships that matter. As you think about your relationships, don’t just think about who “has good deals.” Think about the advisors and bankers who understand not only your criteria but what differentiates you from your competitors, and who have a proven track record of sharing the right deals with you.

Study Your Funnel Data

Private equity firms need to treat their entire deal process like a modern sales force, carefully evaluating every stage of the funnel and testing different tactics on how a prospect moves through the consideration process.

“The firms with the highest close rates are experts in deal funnel analysis,” says Sam Slevin, head of Axial’s Business Development Consulting team.

Here are a few places to start:

  1. Track where deals come and correlate the outcome of those deals against those sources to optimize where you spend your time and money.
  2. Examine your cycle times for how long it takes for deals to move across each stage from origination through close.
  3. Track how long it takes your firm to respond to the sellside, and compare that against deal outcomes.
  4. Compare differences in cycle times and outcomes based on different tactics and different messaging in order to optimize results.

For example, if your firm receives 100 deals a week, do you track how many responses you are actually getting back from those intermediaries or CEOs? Are you consistently meeting deadlines for NDAs and term sheets? Not only does this level of scrutiny help inform where you need to plug gaps in your funnel, but also often is an indicator of your likelihood to be able to be successfully close the deal.

“We tend to see a correlation between those who lack transparency into their deal funnel and those who have trouble closing deals,” says Slevin.

Control Your Narrative

It has long been the standard to overemphasize deal criteria in the first several conversations with a prospect, but now the “top of the funnel” must reflect a thoughtful yet carefully calculated approach. Do not underestimate the opportunity to tell a story about your firm and what you bring to the table as operational experts and long-term growth partners. Your messaging should consistently incorporate the firm’s industry specialization(s), track record, people and culture as well as deal criteria.

Gather success stories. Tombstones are great, but likely are not going to be the reason a CEO chooses to work with your firm. Appeal to a CEO’s emotions and his specific challenge or situation. Harness the stories of other company’s you’ve helped reach their goals in an aspirational and personal way. Video is great. Don’t wait for a CEO to ask for a referral, be proactive in getting this material out into the market.

Step into a CEO’s Shoes

By the time a CEO is actively looking to exit, they have likely been approached by dozens of investment bankers and private equity firms. They are fatigued with the idea of selling their business before the process has even begun. If anything, the solicitations they have received over the years have distracted from the operations of their business and have given them a false sense of valuation.

When it comes time to consider a buyer, most CEOs have a difficult time differentiating between those who have a shared vision for their business and those who don’t. In order to avoid competing solely on check size or valuation, private equity firms need to be able to prove the value they can bring to a company beyond their financial sponsorship.

Conclusion

Operationalizing the deal origination processes with technology, becoming data-informed in your firm’s funnel analysis, and mastering the art of storytelling takes firm-wide buy in. Make it part of the firm’s culture and operational standards that no deal goes unresponded to. Even if a deal is not a fit, respond to deals in a thoughtful, genuine manner. Everyone should have a shared responsibility in giving the firm the best reputation within a highly competitive market.

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