With competition among private equity firms more intense than ever, finding the right deals is crucial. Covid restrictions have made face-to-face meetings rare, highlighting the value of good deal origination processes. Today, limited partners are demanding an unprecedented level of professionalism in business development activities, as Mergers & Acquisitions explores in the cover story of our March issue.
Even as the private equity industry matured and became more mainstream, the “deal finder” remained the person who found the deal, made the deal and nurtured the deal. At most private equity firms, there was no secret sauce or process in place for deal sourcing. TA Associates and Summit Partners, with their elaborate call center strategies, had the closest things mirroring the deal sourcing machines we see today.
Over the past decade, the role of the business development professional began to take shape and is now more popular than ever. Even successful firms that traditionally operated without business development professionals have embraced the role.
MidOcean Partners hired Dan Ryan as managing director and head of business development in 2020. Ryan had been a partner at Milestone Capital Partners. MidOcean, a successful middle market private equity firm, conducted a survey in the industry to assess gaps in market coverage, the quality of existing relationships, and the market’s perception of the MidOcean brand.
As a result of the survey findings, the firm decided to create a dedicated business development function. “The team realized they needed a resource devoted to upholding the brand every day, maintaining their relationships and communicating a consistent story to the entire market,” Ryan says.
“Middle market private equity is all about relationships and trust. Processes are quick and competitive and investment firms can’t afford to lose sight of the importance of relationships. The business development role shows the industry that you are investing in relationships in a meaningful way.”
MidOcean Partners isn’t the only PE firm changing its views on the BD function. Freeman Spogli & Co., a sizeable mid-market firm that’s working out of its eighth fund, just hired Richard Prestegaard as head of business development. He had spent 13 years with High Road Capital Partners. According to a poll completed by Navatar, four out of five private equity firms were at least considering hiring a business development professional, while almost half already have a dedicated deal originator in place.
“The position has evolved and is now cemented as a permanent part of private equity firms,” says Jeremy Holland, a managing partner and head of origination with the Riverside Co. “Private equity firms are adding layers of support and limited partners continue to drive the push for the development role, LPs want to know how you find deals and if you have a repeatable process. They no longer want anecdotes on how you found your deals. They want to know you will find the right deals and that they are actionable.”
What LPs Want
LPs are certainly part of what is driving private equity firms to continue to professionalize their businesses with business development professionals. There was a time when firms would only have to look through a handful of deals. Today, that number has grown exponentially with the more creative dealmaking options, more businesses being sold and the use of technology to allow for more organized processes. LPs have come to expect a formal approach to deal making.
For 747 Capital, a fund-of-funds, secondary and co-investor in the lower middle market, deal sourcing capabilities are extremely important. When deciding to invest in a private equity firm 747 looks at three things: sourcing capabilities, what their teams can do with the company once they own it and then the firm’s track record.
“Sourcing is critical. Any team that takes a highly pro-active approach stands out to us. Finding good businesses is the hardest thing to do,” says Joshua Sobeck, a managing partner with 747, adding that he has seen the utilization of the business development professional increase in the last decade. “The rise of the business development professional is consistent with the growth in specialization at the private equity firms. We want to make sure firms we invest in have a repeatable, professional way to source deals. They need a methodology we can understand. Business development professionals can make this happen.”
The value of the biz dev professional was certainly proven during 2020. Many private equity firms leaned on their business development professionals more than ever during the pandemic to keep deal flow and opportunities coming in the door at a time when there was so much uncertainty and deal flow was scarce—particularly in the second quarter.
As Pitchbook’s US PE Breakdown 2020 Annual Report put it, U.S. private equity dealmaking activity in 2020 was a rollercoaster. The year started out at a fervent pace in the first quarter before going into freefall in Q2 and finally rebounding in the back half of 2020.
Private equity deal activity saw 5,309 deals close for a combined $708.4 billion—year-over-year dips of 3.4 percent and 7.3 percent, respectively. This marks the first time since 2009 that both dealmaking value and count diminished.
The market dynamics led to a tale of two cities. Firms with strong leadership in the BD role definitely had an advantage while others toiled. “2020 really showed the value of existing and deep relationships. Zoom worked, but you don’t build new relationships over Zoom. Firms with longstanding relationships were able to continue to navigate the deal environment and leverage the people they know and trust,” says Riverside’s Holland.
Riverside has leaned into the business development role with more than a dozen team members working in the firm’s deal origination group. Throughout 2020, the firm’s origination team reached out to every single company they had met with in the last year and half if they hadn’t heard the company made a deal. The team’s persistence paid off.
“We just kept putting one foot in front of the other. Many of the larger deals, north of $7 million of Ebitda, got put on hold, but if you had flexibility and the right relationships, there were deals to be found and made,” says Holland. The team completed more total new investments in 2020 than in any prior year in the firm’s history. Ten of the firm’s investments were done out of Riverside Acceleration Capital, the firm’s SaaS focused, non-dilutive growth capital fund.
Riverside’s ability to source more growth equity deals in 2020 was in line with a larger trend in the industry. According to Pitchbook, growth equity was a standout performer in 2020, reaching the highest deal value on record despite the dip in private equity deal making overall. The strategy notched $62.5 billion in deal value, up 8.8 percent from 2019.
Huron Capital also had an historic year in 2020 in terms of deals completed. The firm’s deal flow was down 35 percent overall, yet Huron had a record-breaking year.
“People were uncertain in the spring and deal flow grinded to a halt. But once the bottom fell out, we gained momentum and doubled down on our sourcing efforts,” says Heather Madland, partner and head of business development at Huron. Madland and her team’s efforts resulted in Huron’s completing 22 investments in 2020, including one platform and 21 add-ons—making it the second most active year in the firm’s history.
MidOcean had a history-making year, completing four platform acquisitions and 10 add-on acquisitions. “It was one of the busiest years for MidOcean, not in terms of capital deployed, but in deal opportunities,” says Ryan. “Forging the right relationships help you close the best deals in any environment.”
The add-on strategy was one that many private equity firms employed during 2020. In 2020, add-ons accounted for 72.5 percent of all buyouts, an all-time high. This easily outpaces the 68.5 percent achieved in 2019, the previous record, according to Pitchbook.
“Deal sourcing is not just about deal flow,” says Madland. “It’s about finding the right deals and prioritizing quality over quantity. The pandemic led to a tremendous opportunity for business development professionals to demonstrate the depth of their referral source relationships and prove they can source actionable deals without being face-to-face. If you had a solid foundation of relationships prior to the pandemic, they thrived during the pandemic.”
Moving forward, the business development role may look slightly different. While most business development professionals agree that there are certain meetings that have to be done face-to-face, there are other meetings where the virtual world works quite well and makes processes more efficient.
Instead of flying around the U.S. for fireside chats, “previews” or casual meetings with management teams, many firms are restricting travel, which could be something that stays in effect after the pandemic.
“The net result is we will be more thoughtful about where we travel and why we travel. We will travel when necessary. What you won’t see is people just flying around the way they used too. If someone has to be met or an issue needs to be addressed, you are getting on a plane. We are focused on keeping our staff safe and putting money to work. That won’t change, but how we do it has,” says Holland.
There are some advantages to working virtually. Gretchen Perkins, a partner at Avance Investment Management, a new private equity firm founded by ex-Palladium partners in 2020, says there is more efficiency.
“Business development has been accomplished in 2020 via Zoom – Zoom meetings one after another throughout the day,” Perkins says. “This role has always been about face-to-face contact and developing and furthering relationships, and we have all adapted to the only way we could continue that face-face contact. It is extremely efficient, with most funds savings hundreds of thousands of dollars in travel costs. With virtual meetings, BD professionals can easily have 15 to 16 meetings a day; whereas, in person, the number of meetings able to be practically accomplished was more like six or seven if travelling to offices for meetings, or 10 meetings if at a conference.”
Madland says her team also finds the virtual world more efficient and has led to more productive deal making. “We have to meet management before we close a deal. We have to look people in the face. That’s how we build trust. But just about everything else that we can make virtual, we do. We will do as much of the due diligence virtually as people are comfortable with. In most ways, it’s actually more efficient,” she says, adding, as an example, that her team has also been hosting early lender meetings virtually, giving more lenders access to management than pre-Covid, when most lender meetings were in person. In some cases, this has led to better deal terms.
Access to virtual technology is also having an impact on banker processes, allowing more access to management teams earlier in the process. Providing access early allows potential buyers the opportunity to bow out of a process early or lean in early.
Hosting virtual management meetings prior to an indication of interest may add an additional step in the process, but can result in a smaller, higher quality group of buyers, which is a good thing.
“You narrow it down early on, run a more efficient process, and give buyers the opportunity to differentiate themselves through conviction and then speed, ultimately increasing certainty of close. I think this will continue post-Covid for situations where it makes the most sense,” says Madland.
In addition to learning more about companies, some argue the Covid era actually helped them spend more time with bankers and deepen existing relationships. “Given the lower deal volume, it has enabled BD professionals to spend far more time with bankers discussing deals, and to get to know the industry coverage bankers as well. We are all more available now with a lack of travel. This is a silver lining of Covid times,” says Perkins.
The other big change for business development professionals that may endure post-Covid is remote participation in group activities and conferences. In pre-Covid times, business development professionals were crisscrossing the country multiple times every month, resulting in limited time for in-person speaking engagements and programming
“I’ve participated in over a dozen webinars since April of last year; I could have never achieved that while traveling to the extent that I did pre-Covid. Content is easier to create or produce online so folks are leaning into this medium from both an advertising and also info-gathering perspective. This will be sure to continue,” says Madland.
And although the pandemic persists, dealmakers expect 2021 to remain robust, and business development professionals will keep busy. Many observers are predicting that dealmakers will be more comfortable deploying more capital in 2021 and that sellers will be looking to sell.
“When I think of dealmaking in 2021, the word robust comes to mind,” says Holland. “There is a backlog of private equity-owned assets that have been on hold, and high-quality companies that will be sold. Baby boomers do not want to go through another cycle. And the debt markets are favorable.”
For more from the March issue of Mergers & Acquisitions, see the Digital Edition.