Earlier this week, Mergers & Acquisitions spoke with Sutton Place Strategies, by Bain & Co. CEO Nadim Malik about the limited visibility most general partners have into deal flow in their target market. A middle-range general partner might see 15.8 percent of potential transactions before they are inked, compared to 54.3 percent visibility for the top performer. In today’s increasingly crowded market, seeing more deals could well be an advantage for financial performance. So what’s the difference between the median performer and the most in-touch GPs?
“Even though deal sourcing is evolving the business development role, probably about 20 to 30 companies had someone in that role [15 years ago],” Malik says. “And now about 70 percent have a dedicated person or team.”
The number of private equity firms with a dedicated business development team or role crossed the 50 percent threshold about three years ago, and the trend is expected to rise, Malik notes. Read more about PE firms embracing the trend in the cover story of our March issue.
“Deal professionals still generate deal flow and maintain relationships, but once they sign up a deal, they’re in the deal bunker for 6 weeks to 2 months and then can come up for air and start sourcing deals,” explains Malik. “In that time, they often can’t respond to existing deal flow, so if you have a business development team, they’ve formed dozens of relationships that could yield a deal ahead.”
The gap between the median and top PE firms ranked by fraction of target deals they see ahead of an announcement is large across target enterprise value and generalists and sector-focused firms. But it’s especially pronounced among sponsors whose investment bankers close the most deals (defined as 3+ per year with the same sponsor). In this category, the top PE firm saw 58.2 percent of target deals by geography, size and sector compared to the median firm’s 17.8.
Time to hire a dedicated development team!