In a market where deal sourcing networks are a go-to differentiator for limited partners looking to invest, how much deal flow GPs see in a year is a valuable metric. Curious how your general partner stacks up? Nadim Malik, the CEO of of Bain & Co’s SPS subsidiary, walks us through benchmarks by fund specialization and size. “SPS helps us see, ‘Are we average? Are we top quartile?’” Malik says. “Deal sourcing is becoming a more critical component to deal success.”
Upper middle market firms, defined as those pursuing targets with $250 million-plus enterprise value, see the largest share of deals in their defined area of interest by sector, geography, and size, the data show. The median GP sees nearly a third of deal flow, while a fund in the top quartile has access to 38 percent of companies for sale. The share of deal visibility trends lower across funds (segmented as generalist, quasi-generalist, and sector-focused by SPS) as deal size declines. In the $10 million to $50 million in EV category, for comparison, a top quartile fund sees 9.8 only percent of deal flow.
What about specialist funds? LPs told us back in July that they lean toward specialist GPs in the belief that deeper sector expertise means both more access to potential deals and greater value extraction from inked transactions. Sutton Place data indicate that thesis is murky, at least in deals with a sell-side advisor. For buyers targeting a range including $50 million in EV and lower, the median specialist fund saw 13.2 percent of target deal flow versus 8.9 percent for generalist peers. That figure is only marginally reversed among firms that invest in companies generating $50 to $250 million in EV. There, median generalists have access to 24.6 percent of relevant deals compared to specialists’ 22.6 percent.
Why such a small gap? The data excludes transactions where the buyer is not private equity and where there is no intermediary such as an investment banker or broker. That means specialist funds could well have deep sourcing networks that don’t show up in the data precisely because there was no bank-run auction to aggregate in the survey. You might also be able to conceive of more active corporate M&A teams snagging deals for larger targets in that $50 million to $250 million EV space, eliminating deals from the data set where a specialist fund may have otherwise had an information or operational advantage over a generalist.
What the results do show, though, is that PE is really in the early days of searching for targets efficiently. “PE firms still see 15 percent of the deals they would’ve liked to have seen,” Malik says, referring to the aggregate basket of the 157 surveyed generalist and specialist firms. “This doesn’t include deals that don’t have a bank, or deals that went to a corporate buyer, so if you expand it, you can say it’s even lower.”
Tune in later this week for Malik’s take on how GPs with maximum visibility are seeing deal flow so much better than their peers.