Last week, during one of the panels at the AMAA’s summer conference, a fascinating statistic was revealed. Our friend, Nadim Malik, CEO of Sutton Place Strategies, presented data indicating that “PE firms on average miss 87.9% of relevant dealflow in their target markets among intermediaries who complete up to 2 transactions annually”. Wow.
That number is alarming, and it reinforces how much opportunity there is for private equity firms that specialize their investment efforts and make the corresponding investments in people, systems, tools and processes to build a truly comprehensive pipeline of on-target dealflow.
At Axial, we help deal professionals overcome this statistic by connecting into a real-time global network of deal professionals designed to maximize the ROI on their relationship management and business development efforts.
But there are multiple elements to a sustainable and successful private equity deal origination and business development effort, so we asked Nadim to write up a guest post to explain his findings and recommendations.
What follows is his guest post. Thanks Nadim!
When you hear Business Development in the world of private equity you think of someone who typically has an external role with a PE firm, someone in front of deal sources, on the road, an ambassador of the firm. But there’s a lot more to it than that. It also involves cutting edge market research and analytics, the ability to measure your “market penetration”, and what it would take to improve it. It’s all about knowing the numbers and how to improve them, just like in any industry.
Consistent deal flow is the life blood of any private equity firm. But the goal of a PE firm is not so much to increase the quantity of deals seen, but to grow the number of truly relevant deals seen.
It’s about using data and relationships to work smarter. You don’t want to see every deal, but you would like to see as many relevant deals as possible.
The first step is self-evaluation. Our clients who have been performing regular analysis, on both the effectiveness of their deal sourcing and how to become better, for longer than a year have improved their market coverage by an average of 25%. You can’t really know how to become better without first knowing where the gaps are.
The second key is market coverage, not deal volume. In other words, it’s not about how many deals you see, it’s how effective you are. This approach is far more eye-opening for our clients, because it enables them to review the granular detail on deal sources and their historical interaction with them. This helps to identify any gaps and ensure that they have the proper share of mind with the appropriate relationships moving forward.
According to Sutton Place Strategies’ proprietary database, there were 372 different sell-side advisors that sold at least one company to a middle market PE firm during 2011. Interestingly, 75% of these intermediaries did 2 or fewer deals that entire year. How good a PE firm is at identifying and capturing share of mind from these deal sources, which often represent quieter processes and not broad auctions, gives them an enormous advantage.
It may be hard to believe, but PE firms do not see the majority of relevant deals in their target market. In fact, PE firms on average see 12.1% of relevant deals in their target market that were represented by intermediaries completing only 1-2 transactions per year (see table below).
One trend we’ve seen to address this gap is the emergence of dedicated Business Development professionals, a function in which the deal professional spends a majority, if not all of their time, originating transaction opportunities. Five years ago, there were approximately 50 PE firms with a dedicated BD person or team. Today, approximately 250 PE firms have chosen to have at least one person in this role. Note to private equity BD professionals: if you’re doing a good job and can show it, your stock is rising!
This summer, Sutton Place Strategies is releasing the private equity industry’s first Deal Origination Benchmark Report. Inspired by clients’ requests and created with their input, it is the first of its kind to quantitatively benchmark a PE firm’s deal sourcing efforts against their peers (i.e., are we top quartile?). BD professionals, especially, desire this service to demonstrate to their partners and colleagues their contributions to closed deals and overall partnership success.
To summarize, there is no secret to quality deal flow, there’s no “easy button”. It takes hard work, good information and an enormous investment of time and effort to build and maintain quality relationships. With the right metrics and analytics in place, and making some simple adjustments based on that information, a PE firm can avoid missing critically important opportunities and maximize their access to relevant deal flow.