Creative Destruction: How Private Equity BD May Change Forever
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“Every act of creation is first an act of destruction.” (Pablo Picasso)
The pandemic is stress testing everything, and COVID-19 may finally kill several BD strategies already in decline. This isn’t great news because finding good deals at reasonable prices is still challenging, and the menu of remaining strategies to stay ahead of the competition has become pretty limited. Just ask anyone who has submitted an indication of interest in a traditional auction process recently. It is not pretty.
As it pertains to deal sourcing, investors that want to survive will essentially have two options. First, they can go back to the well of the old reliable origination channels (i.e. intermediaries, executives, independent sponsors, direct sourcing, etc.) and commit to becoming truly excellent at the strategy or strategies where they think they have a shot at doing so. That’s one option. The other would be to invest in and treat deal sourcing like an innovation hub. A laboratory, if you will, to crack the code on the next wave of technology- and marketing-driven strategies that will entice the fish to jump in the boat, so to speak. I believe that the best originators in the lower middle market will start to approach the private equity game through the lens of a lead generator with the content and lead capture techniques to match. More on this later – first, we have to pay our respects to the deceased.
RIP Old BD Strategies
Not everyone is going to like or agree with what I’m about to say here, but it’s high time that we pour one out1 for a few strategies that just don’t move the needle anymore. For starters, the game of staffing up one or more business development professionals to focus their energies on literally the exact same strategy every other private equity fund is employing is simply dead. The famous investor Sir John Templeton once said, “It is impossible to produce superior performance unless you do something different.” This is sage advice as we usher in business development 3.0 and say farewell to the following activities that are sort of like rocking chairs – they give you something to do but don’t really get you anywhere.
Conference circuit. With apologies to the ACG, it’s sort of an open secret that these events are generally not a great use of time for tenured business development professionals. And, conferences will have ever diminishing value as investment banks increasingly adopt CRMs and automatically include buyers that have expressed an interest in seeing their deal flow. Yes, there are exceptions to every rule, but the primary remaining benefits to conference attendance from my perspective are (i) allowing new business development professionals to get critically important in-person time with intermediaries that they have not yet met, and (ii) giving tenured business development professionals an opportunity to be seen and market themselves to the industry for whatever career opportunities that may produce. Outside of that, I would advise staying home, spending more time with your family and focusing on strategies that produce deal sourcing alpha.
High volume / low value city visits. Another travel-based strategy with diminishing value is the approach of picking a city with a critical mass of intermediaries and setting up as many meetings as possible to remind investment bankers that you have a fund and want to do deals. While investment banks may be more inclined to take the meeting since you are going to be in town, the net result of most of these meetings is the same. In most cases, buyers leave with information that could have been gleaned from a phone call and investment bankers go back to doing something more productive with their time. The key here is quality over quantity and activities that produce real relationship development. Go see people in person, but be intentional about it, and go long form when you can, particularly if you can do so somewhere outside of the conference room.
Book collecting. Many (of course, not all) business development professionals are tasked with hunting down as many CIMs as possible. Their firms judge the success of their BD efforts by the percentage of the addressable market of teasers / books that they capture. While an understandable initial approach, as firms evolve their deal sourcing capabilities, they ultimately realize that a robust top of the funnel is worthless if you can’t advance those leads through the later stages of the funnel. This is where leveled up2 BD professionals earn their paycheck. Good business development pros will analyze every deal that comes in the door through what I’ll call an “angle matrix” and elevate those deals with relatively higher probabilities of closing. In other words, before any deal is analyzed on the basis of its investment merits, a firm needs to first determine if they have an angle that will allow them to prevail. As a reminder, eligible angles include process dynamics (e.g. more intimate auction), executive resources to bring to the table, prior experience / investments in a related space, a previously developed investment thesis and geographic proximity. In the end, a thousand opportunities are simply academic if the firm cannot close on one of them.
Celebrating the Birth of New Strategies
All is not lost. Like a phoenix, or odyssey3 of phoenixes, the following strategies are emerging from the ashes of deal sourcing strategies past. Some have been around for a while with varying adoption, but with necessity being the mother of invention, get ready to welcome the following approaches to the world in a much bigger way.
Specialization. This one goes out to all the generalists. Enough is enough. Pick a small handful of sectors on which to focus and become excellent at them. When a firm focuses, the brand becomes synonymous with the industries you care about and relevant deal flow will start to find you. The classic rebuttal to specialization is that a secular decline in one or more of the industries on which you’ve decided to focus could blow up your strategy if the timing doesn’t work in your favor. Solution: pick sectors that are specific enough to be memorable, but that are broad enough to offer room for pivots if need be.
Thesis development. Investors that put in the work to get off of their heels and proactively call their shots by developing investment theses have advantages over more reactive investors. I’m always amazed by how much incremental deal flow arrives when I market very specific sectors of interest to intermediaries and other deal referral sources. What’s also amazing is how long people remember that you’ve stated interest in a specific sector. I’ve had people call me years after I’ve ceased a search for deals in a given industry to ask if we are still looking. Thesis development also offers a sort of synthetic specialization to generalist investors to create advantages in sourcing and closing deals. The missing piece for a lot of firms, though, is knowing how to market their theses effectively.
Digital marketing for lead generation. If I could hold up one new deal sourcing strategy like a newborn Simba in the Lion King, it would be this one. The vast majority of private equity professionals could not articulate their firm’s digital marketing strategy despite an insistence that their portfolio companies have one. This creates a real opportunity for early movers to differentiate themselves with high quality content written for business owners that facilitates engagement. Despite an improving philosophy around PE website design that offers a more welcoming feel to business owners, funds still have a long way to go to make contacting them easier and less daunting. Hint #1: make it easier, not harder, for business owners to contact you. You don’t gain anything by being elusive. Post your e-mail address and telephone number on your website. My personal goal is to close a deal based on a lead that came in through a website form submission4. Hint #2: If you’re looking for a nudge in the right direction, look at management consulting websites for inspiration around content and website design – they are lightyears ahead of most private equity funds.
Own your local market. Yes, Virginia, private equity funds can still do proprietary deals. The way to do so is by leveraging geographic proximity to your firm, particularly in the era of COVID. All else equal, doing a deal with a local entity feels inherently more friendly, safer. Whether or not this is true is certainly debatable, but it does create an opportunity to avoid an auction process. In all likelihood, the buyer will not get a screaming bargain, because the valuation has to be sufficiently high to forestall an auction. However, the certainty of close improves dramatically. The hardest part about this approach is figuring out how to allocate the time / resources to best market yourself locally. Here are some ideas for consideration: membership in YPO or Vistage, providing regular content / interviews for the local business journal, sending personalized invitations to business owners to luncheons / events5, and partnering with law / accounting firms to deliver value-added in-person content (they have marketing departments after all).
Think like Gretzky: skate to where the puck is going to be. Indeed, there will be deals that get done through the old ways of doing things, but it doesn’t mean that this will last forever. If this stimulates any ideas or feedback, please call, email or comment on LinkedIn. Stay healthy my friends.
1The act of pouring an alcoholic beverage on the ground as a sign of reverence for friends or relatives that have passed away.
2”Leveled up” is video game speak for having attained sufficient strength and abilities with your character to take on more formidable adversaries.
3While I had initially used the word “flock” here, it turns out that the collective noun for multiple phoenixes is “odyssey”. As an aside, my personal favorite collective noun for a group of birds is a murder of crows. But what, you ask, shall we call a group of private equity business development professionals? How about a blazer of BDs (nod to Brendan Burke at Capstone Headwaters for this one)?
4For anyone who scoffs at this aspiration, remember the words of Arthur Schopenhauer, who said, “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”
5One last tip, if you are nearby a racetrack that offers an exotic car driving experience, your conversion rate on invitations for such an event will be exceptionally high.
About ClearLight Partners
ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.
Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.