I enjoyed participating in last week's Capital Roundtable Private Equity Masterclass on "Best Practices for Sourcing Quality Deal Flow & Developing New Business" (May 26th, 2011). Our star intern Adam Kalamchi took detailed notes, below.
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Chairman's Keynote: How to Win -The Five S's of Successful Deal Sourcing
Richard J. Fitzsimmons, High Road Capital Partners
(Presentation included above)
Most funds have ~7 deals total, or about two deals per year. Finding the right deal can make or break that particular fund.
Sources: identify the right places out of innumerable sources
Of 5 million companies registered with the IRS, 4 million are S corp. pass throughs (individual owners); 1 million C corp (shareholders)
They prefer deals represented by intermediaries because it signals the owner is willing to sell. Otherwise, private owners tend to have unrealistic expectations or an arbitrary sale price expectation.
Banks, brokers, Advisors
They have the confidence and trust of the business owner
Deal aggregation websites
Increasing in popularity, trying to increase market efficiency.
He thinks it's a tool, but will not displace traditional M&A
PE-Nexus, AxialMarket, CapitalSphere, DealMarket, MergerID, etc.
Good at finding unusual opportunities at good prices
Estimated 100 - 200 total entities
Friends & family - basic networking
Strategies: how do you generate returns
He doesn't believe you can build sustainable proprietary deal flow; they believe in pro-active, outbound deal sourcing effort
After you've applied all of your filters, surprisingly hard to find under-priced assets, especially when intermediated
Signature: what makes you unique and how do you get people to recognize that?
Must build and promote your reputation / expertise
Flow is a function of reputation and share of mind in target market
Signature and messaging will vary by market and audience, but must be internally consistent
Spreading the word: gain awareness of your firm; define and spread your message
Email is quite effective at keeping top of mind. Build and maintain large email database.
Phone is slower and less scalable, but good quality and intimacy
Industry events have good value for face time in such a personal business
LinkedIn is increasingly effective for companies in addition to individuals
Statistics: must quantitatively measure your deal flow process in order to improve
Use statistics to test anecdotal hunches
Benchmark yourself to overall market activity
Panel 1: Creating The Right Deal Flow -- Creating & Managing Sustainable, Replicable Strategies
Richard P. Prestegaard, High Road Capital Partners
Robert P. Bennett, GroundSwell Capital LLC
David C. Glickman, Resilience Capital Partners LLC
Luke Johnson, Platinum Equity LLC
Robert B. Landis, The Riverside Company
Robert E. Michalik, Kinderhook Industries LLC
Brokers tend to show deals to the people that are top of mind / they have seen recently, so staying visible and in touch is important
Being responsive to brokers respects their time, especially when you are not interested in a deal so they can move on to a higher potential buyer
Question: How are you organized? How do you align incentives?
Larger funds tend to have industry-specialized sourcing, but less so at the smaller funds due to lack of scale
Riverside shares deal-based compensation, so that the sourcing team works together and it's not zero sum in terms of hoarding contacts
Question: Where do the panelists want to improve their current sourcing?
Having flexible, searchable databases accessible on mobile devices
Move from partner- or people-oriented function to more institutionalized, systematic, and scalable
Question: How do you handle in-bound emails?
Platinum has a single individual who receives and sorts through inbounds, uses discretion if and how to react
Resilience responds every briefly to all credible emails to maintain their brand.
Question: What portion of your deal flow is proprietary?
Panelists do not believe there is sustainable truly proprietary flow (though I think they are defining this too narrowly as sales with only 1 buyer)
Platinum looks at as direct- (20%) and indirect-sourced (80%), not proprietary vs. non-proprietary. They are looking to improve self-creation of deals.
Riverside defines proprietary as any sale less than ~3 buyers involved
Kinderhook looks for the "broken" auctions that didn't get the right attention of the PE community
Question: What fee structure do you use for proprietary deals?
Truly proprietary deals have no fees - you are interacting directly with the seller
No negotiation on fees if there is an intermediary
Kinderhook pays 1% or a book and 2% for a phone number under the assumption that if there's a book created there are other buyers
Question: Thoughts on how to use social media to generate deal flow?
The feeling is that they've started, but recognize there is value they are not tapping
Some are skeptical, especially how to drive quality vs. just more quantity
Question: If you are starting a business development group, what are the top three things you should do?
Focus, don't be all things to everyone, focus on key markets
Know what your company wants so you can speak as a decision-maker and not just a broker
Panel 2: Positioning Yourself to Win - Four I-Bankers Explain How to Compete for the Good Deals
Richard J. Fitzsimmons, High Road Capital Partners
David Deutsch, David N. Deutsch & Co. LLC
Thomas P. O'Connor, Berkery Noyes & Co. LLC
John L. Tye, Edgeview Partners LLC
Harold J. Williams III, Dickinson Williams & Co. Inc.
Question: When you start a process, how many buyers do you reach out to on average? Most? Least?
Start with a hit list of several hundred strategic and financial buyers. Articulate thesis for each counterparty, then run ideas and work with clients to narrow the list. End up approaching 20-30 strategic and 50 financials.
To maximize value and sale price, wider net is better
There is a lot of un-invested capital sitting in funds and outside-in it is hard to tell the internal dynamics, so casting a wide net increases chances of a good outcome
Question: How many PE firms are in your databases?
Several thousand---- then narrow down based on objectives and focus etc.
Don't be "Just Another Middle Market Buy-out Fund (JAMMBOF)"
Opportunistic, no focus
Question: How do generalist PE funds differentiate and get in the advisers list?
Good funds pro-actively stay in touch with bankers
Understand what each bank's coverage model is. How do they prioritize and assign responsibilities? Then develop personal relationship with whoever is covering you.
Staying on the buyers' lists is based on how well you conduct yourself in the diligence processes, "beauty contest"
Banks are aware of your funding situation and your portfolio / investment thesis. More likely to attract deals if you have a good specialty / strategic thesis vs. being just opportunistic.
"Strength and length of relationship"
Show enthusiasm, ask questions, express interest directly that this is one of the deals in your sweet spot
PE funds can reach out to companies directly, but you need to manage and related personalities this carefully. Certainly has upside if the business owner through these communications develops a preference for a specific PE fund. Once the process starts officially, need to follow protocol through the bankers; it really ticks off the bankers if you interact directly with the CEO.
Question: How do PE funds differentiate in the LOI phase?
Bring substantive content and 'meat on the bone'
Everything you have done until that point builds your credibility
Show that you have fully leveraged the data room
Having unanimous buy-in from your own investment committee is important. Do not want surprises, as deal gets closer to closing, and then suddenly the investment committee reads the documents more closely and asks questions that should have been asked earlier.
Question: What is the discount you get for being the preferred buyer?
Don't really give discounts, but call the preferred buyer and tell them the terms they need to match to close the deal.
Question: Which corporate deal sources have the most effective pipelines?
Many, many approaches
Apple's lead is overly friendly and kind
Some have interns periodically call to check in
"I believe there is proprietary flow, since he's seen buyers who consistently are single-bidders."
If you are known as someone who is truly helpful, you will always get calls with an opportunity or just for advice
Teten question: What will the impact be of deal aggregating websites (Axialmarket, MergerID, PE-Nexus, PEGBASE, CapitalSphere, DealMarket, BizBuySell,) on the investment banking industry?
Tye: they are still evaluating and thinking about how to make it value-creating
Some of the others haven't seen them impact their markets
They will get calls from banks if they develop trust not to front-run processes
Panel 3: Finding Hidden Gems - Four Proprietary Deal Flow Experts Discuss How They Advise Their Clients
Richard P. Prestegaard, High Road Capital Parnters
Zubin Avari, Charter Oak Equity LP
Christopher A. Gebelein, Private Equity Growth Advisors LLC
Sven A. Kins, Cook M&A Advisory Services
Matthew S. Wells, PE-Nexus LLC
Question: When clients reach out for help, what are they asking?
PE clients don't know whom to call within corporations to discuss something like a divestiture
PE funds get busy and sometimes periodically reach out and then fail to follow up. Advisers can help by rounding out their contact list and then having a consistent cadence of following up and messaging with business owners. Many middle market firms don't have enough business development capacity.
Question: In divestitures, which comes first, the buyer or the seller?
Private Equity Growth Advisors:
Focuses on the corporate client who has the need to sell. It's very hard to just call corporations and just ask what they have for sale. These communications are largely ignored. The better approach is to try to solve the problems of corporate development people who want to grow their businesses.
It takes corporate executives a long time to decide to divest. Even once the decision is made, the business have been neglected and getting a healthy auction going are quite low. There are lots of risks that the business deteriorates during the sale process. So, there is a sense of urgency.
They try to have a 60-90 day process. Much of this is done for quarterly earnings management reasons. This can be proprietary since there is just no time to run a process.
Accounting and incentives systems drive behavior within the corporation and you must be aware of this as a buyer (e.g., the manager won't realize the loss which will affect their business unit's reporting and therefore their personal bonuses).
Question: In the above, how do you convince potential corporate seller not to engage in a full process with bankers and advisers?
Many times there is not enough time due to quarter end or the business itself will not last throughout a protracted sales process
Of course, the larger the deal, the high the chances the corporate seller does hire a banker to be able to justify price to their board
They stay close to corporate development officer to understand all of the non-price items that are important to them. This is important for getting their clients into the final bidding round.
Question: What are some issues with divestitures?
Financials (e.g., balance sheet) are not held at the business unit or asset level
Sellers may not be as sophisticated in terms of understanding how PE funds think and operate
Question: How does PE-Nexus work?
This is a technology-enabled solution to compliment the existing, traditional process
Casts a wider, more efficient net than existing channels with a more robust database and a more detailed search function
Question: Is the PE-Nexus platform for all market segments?
The platform is really for the middle market, not KKR / Goldman Sachs
Question: How does Charter Oak Equity source their deals?
They are a sponsor and they act as if they were investing their own capital
Certainty to close is critical before they take deals to the PE groups
They are also so aligned with the PE group in terms of reputation and returns that they like repeat business with the same groups
Question: How do each of the panelists get paid?
Charter Oak Equity LP
Fee at close
Part of management fee
Part of carry
Private Equity Growth Advisors LLC
Some clients pay a monthly retainer which gives PE fund credibility with corporate contacts
Cook M&A Advisory Services
Success fee upon closing
Hope to be part of the add-on process if part of growth plan
Straight subscription fee from buy-side clients
No success fee
No charge to the sell side, their currency is the data
Keynote Presentation 2: Virtual Handshake
You can download the slides at teten.com/deals .
David Teten, CEO, Navon Partners LLC
People are increasingly online and connected, but we are still at the very early stage of social media having a material impact on how we do businesses
Our kids are the future business leaders and they carry the habits they are developing today into their future business habits
There is an incredible amount of data leaked online
Need to stay top of mind
Diverse networks have much larger value than more focused networks
Social media is a low cost way (time and money) to extend the reach of your network
Leverage multiple media formats - this increases trust. More likely you hit their preferred channel. Also allows people to do diligence ahead of time rather than a cold meet.
Online communities are great sources of free consulting services
Five next steps
Google yourself and see what people are saying about you
Be a data hound
Reduce email use: move communications to thinks like wikis that are better stores of information and less re-emailing (social text is a good corporate wiki)
Find people to meet online - zoominfo aggregates all publically available information.
Join the right clubs
Question about companies that help manage email / contacts :
rapportive - pulls in all publically available data when you email someone from gmail
xobni - gives you insight into frequency of interaction
Panel 4: Alternative Deal Resources - Four Other Advisors Discuss the Value They Add to the Process
Robert J. Fitzsimmons, High Road Capital Partners
Howard M. Berkower, McCarter & English LLP
Jake E. Lilie, Dynamic Data Inc.
Nadim Malik, Sutton Place Strategies LLC
Roland W. Tomforde, Broadgate Consultants LLC
Question: How can firms use their technology to improve deal flow?
Excel is a way of the past, everyone is using CRM now, generate reports for Monday morning meetings
Salesforce - lower priced option
Social media is a great way to personalize your firm
LinkedIn, Twitter, Facebook
Question: How can firms use data to improve deal flow?
Know your market penetration, share of target market
Know the details about what is falling through the cracks - which deals did you miss and why?
90% of their effort is to understand how the buy and seller get / got connected
Question: What are other ways firms drive good deal flow, especially since some are publicity shy? Should they be shy?
Roland agrees that PE firms are shy
There are ways to create localized branding e.g., in your industry
Each opportunity must been a seen as an opportunity to underscore your key messages
Question: What is an ideal level of email traffic?
Don't wear out your welcome, but hard to pinpoint a specific number. Need to avoid people instinctively reaching for the delete key.