Today's active M&A market demands a robust set of tools and services. Enter service providers. From consultancies like Accordion, which serves the CFO and is led by Nick Leopard (pictured) to those that help private equity firms administer funds, like Frazier & Deeter's FD Fund Administration, the service providers featured here in Mergers & Acquisitions' updated annual dealmaker's guide help get transactions done.
Serving the CFO
Back in 2009, Nick Leopard set out on a mission to prove that there was a better way to work in finance – and more specifically, a better way to unlock value potential in private equity portfolio companies. He founded private equity consultancy firm Accordion to work alongside sponsor management teams and focus exclusively on the office of the chief financial officer.
Before launching Accordion, Leopard was part of the investment team of a $200 million mezzanine debt fund, BHC Interim Funding LP, which focuses on short-term investments in companies with $50 million to $500 million of revenue. Prior to BHC, he was a member of the FIG Investment Banking Department of Bear, Stearns & Co. LLC. He began his career at CapitalSource Finance (NYSE: CSE), where he focused on securing and analyzing senior and subordinated debt opportunities. During his time at CapitalSource, Nick built and maintained more than 300 relationships with private equity funds, senior lenders, and investment banks.
Under Leopard’s leadership, Accordion has to serve more than 150 PE firms and their portfolio companies. The roster of clients is impressive. The firm’s website includes a long list of large PE firms, such as the Blackstone Group LP (NYSE: BX), the Carlyle Group LP (Nasdaq: CG) and KKR & Co. (NYSE: KKR), as well as middle-market firms, such as HGGC, the Riverside Co. and TA Associates.
PE-backed CFOs will have the best chance at fostering partnerships with PE sponsors by “proactively and collectively mapping business goals, communicating candidly and frequently, consistently tracking against targets, and translating data into actionable insights to drive the business forward,” Leopard wrote in a recent guest article in Mergers & Acquisitions.
Online networks fuel deal flow
A slew of services don’t fit neatly into well-defined categories, but they shouldn’t be dismissed, because they can be very important for dealmakers. Axial doesn’t fit squarely in a category: It takes a hybrid online/offline approach, offering online deal management and deal sourcing along with offline elements like events.
The company’s online deal platform allows buyers and investors to source deals within specific criteria across financials, geography, keywords and more than 20,000 verticals and sub-sectors.
“There is no ability to ‘post’ or ‘list’ a deal publicly on Axial,” says Peter Lehrman, founder and CEO of the New York-based company. “This has led to Axial being a trusted resource for investment bankers, resulting in higher-quality member deal activity over the last 12 months.”
Axial is exclusively focused on lower middle market, change of control, debt, minority equity and co-investment transactions involving companies with $5 million to $150 million in revenue and $500,000 to $20 million in Ebitda. Top sectors of deal flow activity include industrial services, business services, Software-as-a Service, healthcare information technology, distribution and logistics, and manufacturing. Axial has brought more than 3,400 investment bankers and advisory firms into the fold, including Stephens, KPMG, 41 North Partners, Allegiance Capital, Copper Run Capital, Capstone Headwaters, Hilliard Lyons and Roth Capital.
Other information services include Sutton Place Strategies, or SPS, which focuses on deal sourcing. SPS shows customers deals they aren’t seeing from their regular sources. The New York firm, which helps investors optimize their business development and deal sourcing effectiveness, was founded on the understanding that better fund performance can be achieved through better deal sourcing. Clients include HighRoad Capital Partners, The Gores Group, Littlejohn & Co., Kohlberg & Co., Monroe Capital and Comvest Partners.
“Sourcing quality deals at reasonable valuations is critical to top-quartile fund performance," says SPS founder Nadim Malik. "We leverage data, technology, and automation to help investors efficiently enhance their sourcing effectiveness and closing rates. We’ve also recently rolled out customized applications for the broader M&A community, including investment banks, law firms, and lenders, that combine our proprietary data with a creative analytics-based referral approach.”
The company has also released SPS Fusion, which includes its CRM integration strategy, and SPS Alerts, which provides real-time alerts on deals closing, new active professionals in your market, and other timely information.
Outsourcing the back office
No private equity firm sets out to build a giant back office, but over time, as funds and firms grow, back-office fund administration processes can take on lives of their own. “A lot of firms start off small, and they have a small back office, but the next thing you know, they have a big operation,” says Robert Woosley, national practice leader at Frazier & Deeter accounting firm. “They never raised a fund with the intention of becoming experts in fund administration, that’s not what they want to do.” The firm’s subsidiary, FD Fund Administration, offers fund administration services to private equity firms and real estate firms.
“There are so many compliance requirements now and pressure from the limited partners for reporting, it’s driving the whole industry to move forward and think more seriously about fund administration.” Woosley says.
Woosley says fund administration was a natural extension of Frazier & Deeter’s certified public accountant capabilities. The firm had a strong relationship with a multi-billion-dollar private equity firm that had its own back office handling investor services, accounting, audits and valuations. In 2013, FD Fund Administration hired a few of those employees from the firm and worked with them side by side. The test was successful, and the new practice line was born.
Today, FD Fund Administration provides back-office fund administration for many well-known firms, including Hamilton Lane and real estate firm Lubert Adler. To give clients a seamless interaction, FD and Frazier & Deeter’s tax division work together. “We have sophisticated tax strategies in house that really sets us apart from the competition,” Woosley says. “You don’t want a fund administrator that doesn’t understand all the issues that private equity firms are dealing with. We are a one-stop shop, instead of having five vendors who don’t communicate with each other.”
Since FD Fund Administration started operations in 2013, the firm has tripled its private equity assets under administration to more than $30 billion.
“We knew there was a need for this,” Woosley says. “A lot of firms start off small, build strong reputations and grow. They create their own back office, but that’s not their sweet spot. Their sweet spot is finding deals, creating value and putting investors’ capital to work….We understand administration is not their core, but it is required more frequently.”
Using a third-party fund administrator is becoming more acceptable to limited partners who are looking for a higher level of transparency. Hedge funds are required to have third-party administrators. While it’s not a requirement for private equity firms, each year more PE firms shift to a third-party model.
Working with a third-party fund administrator is a more logical choice, not only because of transparency demands from limited partners, but because of the complexity of regulations and today’s ever-emerging investment strategies, Woosley says. “Private equity firms realize they should focus on what they do best and leave this to the experts.”
Valuation services are vital
With nine U.S. offices and nearing its 45th year in business, Valuation Research Corp., known as VRC, calls itself one of the largest and oldest business valuation firms in the U.S.
“Our focus is on delivering independent valuation and advisory services—our professionals live and breathe their practice areas—and because we aren’t part of an accounting firm or investment bank, our clients truly benefit from that deep expertise,” says Jeff Miller, VRC managing director. “The level of trust in our work product also aligns us, almost embeds us actually, into the deal team at our corporate, private equity and PE portfolio company clients. They know we can handle every valuation need throughout the life cycle of the investment, and they know it will stand up to auditor and investor scrutiny.”
The need for independent valuation services has no signs of a plateau because audit and limited partner scrutiny shows no evidence of leveling off, Miller says. “PE fund managers are relying more heavily on a third-party valuation firm for the purpose of managing investor reporting requirements that must be completed on a periodic basis,” he says. “Investors expect transparency into valuation estimates including info on methodologies, key market inputs, valuation models and accurate markets for performance measurements.” Miller also notes this is pressing for limited partners and asset managers that focus on non-traded, illiquid assets, which can be difficult to value and can have a material impact on reported figures.
VDRs have become ubiquitous
Virtual data rooms, or VDRs, are now as much a part of the M&A industry as auction processes. The virtual data room software niche should continue to grow as businesses become more comfortable using online services, and as they transition away from physical data rooms, according to research firm Ibis. Over the past five years, the VDR industry has grown by 9.4 percent to reach revenue of $920 million in 2018, up from $800 million in 2017.
More than 20 years ago, Intralinks pioneered the VDR, changing how M&A deals are done. Matthew Wells, senior director of strategy and product marketing, says Intralinks remains committed to improving the M&A process through technology and innovation.
First and foremost, Intralinks focuses on security. “We are hosting the most sensitive and confidential data for some of the largest companies in the world, so we have a strong focus on security,” says Wells, adding that the company is also committed to helping add efficiency and speed during the transaction process.
The company recently released the latest version of its platform, which features the Data Room Insights Dashboard. “We want it to be as easy as possible for our users to determine buyer engagement levels," Wells explains.
Data sources offer metrics
The number of data providers has grown substantially over the years. Venture Economics, now known as Thomson Reuters Corp. (NYSE: TRI), used to be the only formidable game in town, but today the industry has a wide variety of data providers.
They are targeting narrow, tightly defined categories of customers according to size, geography and other relevant criteria.
Some of the most popular data providers are Dealogic, PitchBook, Preqin and Thomson Reuters, all of which are constantly trying to gain market share.
Despite the growth in data providers, the managers of GF Data Resources LLC still felt there wasn’t enough data available on the lower-middle market. In 2006, the company started collecting data on deal values from private equity groups and selling it to other PE groups, investment banks and others in the middle market.
Specializing in private-equity-sponsored transactions with enterprise values of $10 million to $250 million, GF Data has provided benchmark historic data for firms to value their portfolio companies based on fair value accounting standards.
However, many dealmakers are also increasingly using the data of GF Data and other providers to guide the valuation expectations of sellers.
“There was so little data available for deals in the $10 million to $250 million enterprise value range, which is why we launched the firm,” says Graeme Frazier, a partner in GF Data of Conshohocken, Pennsylvania.
“Today, we find business owners will say they had a friend that sold for a high multiple and then they expect the same. The reality is this is a one-time event for most of these folks and they need perspective on what drives valuations. Buyers use the data to show the sellers examples of what deals sold for and why.”
Investment bankers and private equity firms are particularly interested in this issue because usually they have to set sellers’ expectations. The data allows them to show the seller similar companies and explain why the company was valued as it was. “Instead of calling the baby ugly, you are showing the sellers real examples of deals that are similar to theirs that have closed. It really helps define expectations,” says Frazier.
In addition to helping to set deal prices and showing market trends, the data can help the involved parties understand the entire capital structure, including the debt and sub-debt in the deal.
Frazier is also the founder of Private Capital Research LLC , an investment and consulting organization. Prior to PCR, he was the director of research for the Private Capital Group of Berwind Financial Group LP, a subsidiary of the Berwind Corp.
Drawing from a broad base of operational and investment experience, Frazier also directed the process that provided both proprietary and opportunistic deal flow for the Leveraged Acquisitions Group.
Growing back-office tech
Technology provides new and innovative techniques to help chief financial officers do their jobs more effectively and more accurately, yet many CFOs are not taking advantage of it.
“It’s unfortunate, but private equity firms usually find two or three key things to prioritize at portfolio companies and back office support isn’t always on that list,” says Gavin Backos, principal, technology and management consulting at RSM US. “But most CFOs have the same issues and there are tools to alleviate some of the burden.”
Many accounting firms known for their due diligence on private equity deals have expanded their offerings to include sizing up back-office technology offerings that private equity firms and portfolio companies could benefit from. Not all private equity firms take advantage of the new offerings, but their interest is increasing. “We do have more firms coming to us to help them because there are only so many things they can focus on, and they are starting to recognize this is important.” says Backos.
For several years, RSM has been helping private equity firms assess their current situation, then making recommendations and implementing new technology.
“What if you can give your CFO the tools to close their books in a timely manner and feel confident that they have accurate information?” Backos asks. “With the right technology and process you can.”
Groups deliver connections
Networking with the right people can go a long way. And as the M&A industry has grown over the years, organizations supporting the industry have also grown substantially.
These organizations not only provide networking opportunities, but a sense of community, and in some cases, a national voice for the M&A and private equity industries.
That is the case with the American Investment Council, or AIC. Founded in 2007 as the Private Equity Council, the Washington, D.C.-based organization lobbies on behalf of the private equity industry. But AIC is just one of many organizations M&A and private equity professionals belong to today. The Association for Corporate Growth has become a go-to networking organization for middle-market M&A professionals. Although the association was founded in the 1950s, it wasn’t until the late 1990s that the association started focusing its efforts on the private equity community. Today, the association offers guidance on compliance issues, provides a job source network and works with AIC to lobby on behalf of the middle-market M&A industry.
Newer associations are focusing more on different groups within private equity. Exponent, which launched in 2018, focuses on bringing together women in the PE ecosystem to provide meaningful interactions and strong content.
“Our goal for Exponent is for women in finance to collaborate, to connect,and to pool our knowledge and experience,” says Amy Weisman, one of the founders of Exponent and director of business development at Sterling Investment Partners. “Our mission is to act as a trusted organization and a platform for the exchange of information and the closing of deals. In today’s PE environment, there is a gender tipping point as more women hold senior decision making positions in the industry. Exponent gives momentum to this change. Our events have an exponential effect for our attendees by accelerating and solidifying these relationships. To say the least, it is very exciting.”
Weisman says that as the PE marketplace has gotten more crowded, and deal flow development more reliant on technology, making personal connections has been more difficult. Investment professionals are inundated with requests and information.
“Technology is a good way to create efficiencies, but this must not replace person-to-person connections,” Weisman says. “Networking events leverage our time by bringing together professionals to facilitate interaction and communication with many relevant people. The personal touch remains critical, because it creates an environment of trust and understanding.”
Exponent is gearing up for its Annual Exchange, which brings together 200 women dealmakers for a focused day of robust content and networking. In 2019, the event will take place at Second in New York, on July 11. The Exchange provides attendees with opportunities to establish new connections, and absorb relevant knowledge from industry leaders.
Finding the right providers
Think Gartner meets Angie’s List, and there lies BluWave. The idea for BluWave grew over a 20-year span, while Sean Mooney was working as a partner in a private equity firm and saw a void in the market as the industry became increasingly competitive. “When I started in the industry, we would buy low, do one or two things, and sell high. Now PE firms have to buy high and do 10 to 20 things to create enough value to sell higher.” Mooney founded BluWave to help private equity firms and their portfolio companies to more confidently and effectively utilize service providers for diligence and value creation.
“Private equity funds have no choice today but to leverage third parties as force multipliers. They no longer have the time or room to full-time hire their way out of problems,” he says. “However, at the same time it’s really hard to know who’s good and even harder to hold service providers accountable. That’s where we come in. We’re the expert of experts.” In the past, private equity firms may have tried to forego the expense of outside help, but today, the industry has matured, and virtually all PE firms are bringing in assistance.
BluWave helps connect private equity firms and their portfolio companies with everything from finding niche due-diligence experts and executives to value-creation initiatives, with the idea that being able to quickly pinpoint the right help will ultimately save companies time and money while producing better results. It then gathers objective data on outcomes from its more than 250 private equity fund clients to help hold service providers accountable for their results.
“The challenge is that the needs of private equity funds are so varied it’s hard for them to know all the resources before they need it,” Mooney says. “And as soon as a PE fund has a project, the requirements are different enough each time that really expensive PE professionals then have to start Googling and boil the ocean. Instead of doing these craft searches, PE deal and operations teams call us because we already know the best-fit resource for the job and free them to focus on more strategic priorities. Given our background, we intimately understand the unique standards of PE and help make things easier for them.”
Private equity firms such as Pritzker Group, Hidden Harbor Capital, Cressey & Company, Inverness Graham, Genstar, Pamlico and Blue Mountain Capital have used BluWave’s services.
“One of the biggest things that can bog down a sales process is when interested parties discover aspects of the business that are different than those represented in offering materials,” says Mooney. “To avoid this, it is well worth the time and money to do diligence on yourself. Hiring quality of earnings advisors, tax advisors, and even market sizing, competitive landscaping, and IT consultants to do pre-diligence will give you much more confidence going into a process that you won’t encounter a surprise that could impact time and value.”