Embracing distress. Does the investment mandate allow your fund to be a white knight who can help out a company during troubled times? If so, you may find it useful to build connections with bank work-out departments, bankruptcy lawyers, restructuring teams at accounting firms and executors of estate assets. Set up alerts to inform you of all business news in your area of focus relating to companies that are reviewing strategic options, appointing administrators, negotiating to restructure or dealing with shareholders in financial trouble.
7. Set-up a dedicated digital platform to manage your deal origination workflows
We are fortunate to live during times of easy access to technology. When I started my career in finance, my colleagues and I thought our internal processes were quite high-tech: any paper documents were scanned immediately and virtually all of our workflows were backed up electronically. However, we operated a number of completely autonomous systems consisting of numerous spreadsheets, email messages, calendar entries and contact databases. While each team member was handling vast amounts of data, there was no easy way to connect various knowledge silos in order to inform our firmwide strategy. Integrating data was time-consuming and required cumbersome manual effort. These work processes were not considered unusual at the time, with most other funds facing the same challenges.
Luckily, legacy systems are being gradually replaced by powerful digital platforms that connect information from various sources quickly and seamlessly. Your fund is most likely already employing an integrated technology-enabled solution that allows you to optimize your workflows and access crucial information quickly. If this is not the case, you might want to raise this issue at your organization as a matter of priority: digital platforms provide significant operational efficiency and require relatively little human or financial capital. Learn to use and understand in detail the functionality of the technology platform that your firm has so that you can manage all your deal origination workflows digitally in order to enhance your productivity. What goals should you seek to accomplish? In my experience I have found several areas where digital tools can provide a competitive advantage:
Deal pipeline analytics. Capturing historical and current deal flow allows you to analyze transactions by deal origination source, calculate conversion ratios and benchmark the number of deals you see against transactions done in the broader market over a period of time. You can also garner strategic insights from analyzing what areas of your activity create the most value over time. How many companies did you screen and how many deals were selected for further due diligence? How many deals got executed and closed? What were the common traits of successful transactions? Who are the intermediaries who consistently make a positive contribution to your deal origination process?
Transaction tracking. Once you begin developing a deal lead or work on a live transaction, it is helpful to have one easily accessible place that keeps track of the current deal status and next steps. All your electronic notes can be tagged appropriately to make them searchable. You may decide to add any relevant documents, emails, meeting notes and latest updates on the transaction to ensure that your entire deal team has access to the same up-to-date information.
Relationship management. This is a good place to keep your network of contacts and track your conversations, emails and meeting notes with them. You can leverage your relationships better if you log a history of your most valuable contacts, from how you met to their current industry position and previous roles. Record their contributions to your firm and set up future reminders alerting you to follow up with them at an appropriate time to keep your network active.
Knowledge repository. This is very much an optional feature. To the extent your fund does not operate a firmwide information hub where teams can exchange insights or share industry reports, it might be appropriate to create a dedicated place for this kind of activity to live on the same platform. Integrating various knowledge silos across the entire organization, or at least across your team, provides you with a distinctive information advantage that will help you stand out from your competition.
8. Establish a business development team fully devoted to deal sourcing
Is your team busy around the clock with live deal executions? Do you feel like you are dropping in and out of the private equity marketplace and sometimes unable to follow up on some of the potential transactions that require an effort of being developed and nurtured? Do you operate in a market that is fiercely competitive, with numerous buyers vying for the same investment opportunities? If any of the above applies to your fund, there might be impending limits to your organization's ability to expand and accelerate its deal sourcing capabilities. It would definitely benefit you to consider establishing a dedicated business development function fully devoted to deal sourcing.
How to go about doing so is largely dependent on your fund's mandate and operating style. Let's review some options that exist in the private equity industry.
Firms operating in the growth equity sector and lower mid-market typically have to contact and follow up with several hundred potential deal targets every year in order to convert just a few of them into executed transactions. Given the sheer scale of the required deal sourcing effort, establishing a dedicated business development team is probably the best way to allocate organizational resources. Illustrative of this approach are the previously discussed business models of TA Associates and Summit Partners, which employ junior professionals to pursue high-volume cold calling programs. Another example is that of a growth equity firm, The Riverside Company, that has a dedicated deal origination team of nearly 20 professionals covering the firm's global investment mandate from offices on various continents. One point of differentiation, however, is that the majority of deal originators at Riverside are seasoned finance professionals. They possess the business experience and internal influence to enable a prompt and thorough transaction review before it is passed to the execution team.
Business development teams can be quite effective in large generalist funds, especially those operating in developed markets. From what I have seen in the private equity markets, once the investment team at a typical fund exceeds about 30 people, there is a tendency toward greater specialization, both by sector and by functional expertise. There are several solutions that a generalist fund might employ at this stage to enhance its deal origination capabilities.
One possibility is hiring young, bright and dynamic origination professionals who will be tasked with thinking creatively about unexploited investment niches, identifying new deal targets and ensuring timely deal follow-up. Another approach would be to designate a senior partner who will champion the deal origination strategy for the fund and make it an institutional priority across the firm.
The involvement of an experienced partner with authority and gravitas can be an effective mechanism for motivating the entire investment team to engage in deal sourcing. Greater emphasis on deal origination efforts will encourage the investment team to bring to completion the mundane yet unavoidable parts of the successful sourcing process, such as deal tracking and scheduled follow-up meetings with deal targets, even during the busiest times for the firm.
There are instances, however, in which an internal business development function may not be an appropriate solution. Private equity funds that operate in emerging markets tend to focus on finding great businesses in a riskier geography: for this mandate, a sector-agnostic approach in which all deal professionals actively filter through investment ideas might make the most sense. Similarly, investment professionals at deep sector specialist funds with unique expertise might