The M&A industry is more competitive than ever, and dealmakers are constantly looking for a leg up on their competition and for ways to maximize their investment returns. Products and services that may give dealmakers an upper hand are highly sought after. Here’s our updated annual look at some of the tools and services designed for dealmakers.

Data providers
No good dealmaker can make the right decisions without having the numbers. Access to reliable data is extremely important. The number of data providers in the industry has grown substantially over the years, as they recognize that dealmakers seem to have an insatiable appetite for data. 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.

Data providers are targeting narrow, tightly defined categories of customers according to size, geography and other criteria. Some of the most popular data providers are Dealogic, Pitchbook Data, Preqin and Thomson Reuters, all of which are constantly trying to gain market share. For example, Pitchbook, which had been covering private equity deals in the U.S. only, started covering M&A transactions globally in the last two years.

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. 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 Conshohocken, Pennsylvania-based GF Data. “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 guys 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.

VDRs
Virtual data rooms, or VDRs, are now as much a part of the M&A industry as auctions. Gone are the days of traveling to an office to search through papers in a physical data room. The virtual data room software niche continues to grow at a steady pace. The VDR market has hit its stride particularly over the last five years, growing 16 percent per year during that period, according to research firm IBIS. The market was roughly $625 million in 2012; it’s expected to reach more than $1.3 billion by 2017.

Because of fierce competition in the space, virtual data room providers are offering more services before the sale to entice sellers to work with them. For example, most virtual data rooms are offered as a secure place for documents that potential buyers review during their due diligence. But companies are increasingly using the virtual rooms to store documents permanently, keeping them in a constant state of readiness for sale opportunities that can pop up when least expected.

“The concept of the virtual data room is not new, but we have been doing a lot to wrap services around our VDR offering to address the entire deal process,” says Craig Clay, executive vice president of RR Donnelley’s (Nasdaq: RRD) financial services group. “We have also invested in innovative features, making it a lot easier to use.”

Virtual data room companies are also trying to stay on the cutting edge of technology to gain the upper hand with competitors. For example, RR Donnelley offers sellers options to create videos and graphics to tell their story. Instead of just creating a paper trail, users are able to communicate more personally through video.

“Typically, banks are used to putting out a classic pitch book, but with venue deal marketing, we bring deal information to life with video, audio and other rich media,” says Clay. “These are no longer stagnant PowerPoints. It makes the process much more interactive. We are communicating in an amazing new way today.”

Networking groups
Networking with the right people can go a long way. Investment bankers are always suggesting to clients that they meet people in the industry and keep taking the pulses of the markets they are interested in investing in. 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 many cases, a national voice for the M&A and private equity industries.

That is the case with the American Investment Council (AIC). Founded in 2007 as the Private Equity Council, the Washington, D.C.-based organization lobbies federal politicians on behalf of the private equity industry. In 2016, based on the increased diversity of private equity firms and growing focus on the industry, the organization changed its name to AIC. The organization’s mission is still the same.

AIC will host over 30 events in 2017 and convene various committees and working groups to share private equity best practices and insights. 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 has 14,500 members worldwide and offers guides on compliance issues, provides a job source network and works with AIC to lobby on behalf of the middle-market M&A industry.

“Associations provide great networking opportunities; it’s great to hear what your peers are seeing in the market,” says Gretchen Perkins, a partner with Huron Capital Partners. “They also work hard to promote the M&A and private equity because it has become increasingly important we have a voice in Washington, D.C.”

The Alliance of Merger & Acquisition Advisors focuses on dealmaking in the lower middle market, offering members networking opportunities as well educational classes. The alliance also lobbies on behalf of private placement brokers. The Small Business Investment Alliance focuses on the lower middle market and also provides networking opportunities and lobbies on behalf of the industry. These groups commonly work together.

Rounding out the top five associations or organizations in M&A today is the Turnaround Management Association, which targets a slightly different crowd by focusing on distressed investments. Many investment professionals belong to multiple organizations, and it’s important that they join groups that focus on their industry verticals.

“Many of the associations and organizations in middle-market M&A have become invaluable tools because they are so efficient,” says Pam Hendrickson, chief operating officer of the Riverside Co. “The ability to talk with peers about what’s happening in the market through either events or social media is a huge time saver. These organizations also provide a voice for the ‘middle child’ of the M&A industry, a group that represents over 90 percent of all M&A transactions. Historically this group has been absent from the major finance publications as well as from Washington. It is great and important to see us finally having a voice.”

Online services
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 Networks Inc. is one company that didn’t fit squarely in a category, so it created its own category: online deal networks. While using an investment banker or business broker is still the predominant way for companies to raise money and find buyers, Axial is one of the more successful online networks that sellers and buyers turn to for improved deal flow. More than 12,000 organizations use Axial to source deals and nurture connections with other dealmakers.

More than 12,000 organizations use Axial to source deals on the network, founded by CEO Peter Lehrman in 2010.
More than 12,000 organizations use Axial to source deals on the network, founded by CEO Peter Lehrman in 2010.
Axial Networks

“It’s a business development tool that enables investors, lenders, advisers and CEOs to connect with the most relevant partners at the right time,” says Peter Lehrman, who founded Axial in 2010 and serves as CEO. “Particularly in a fragmented and highly competitive market, investors are looking for more efficient ways to discover deal opportunities and the old way isn’t cutting it anymore. We’re seeing all types of capital providers turn to Axial to supercharge their deal-sourcing efforts.” In 2016, members of Axial signed more than 10,000 nondisclosure agreements and closed 647 transactions through the platform, representing more than $3 billion in total transaction volume, according to the company. Average revenue per closed transaction was $20 million, and Ebitda ranged from $390,000 to $17.9 million. Twenty-seven percent of 2016 buyers on Axial were strategic buyers, while 11 percent were family offices, reflecting the growing diversity of buyer types that are active in the middle market.

“When we started the company, private equity professionals and investment bankers were very skeptical that it would ever work. But today, the market increasingly appreciates that if you have no presence on online deal networks, you’re putting your head in the sand, as a large and growing new channel of deal flow and relationships opens up,” says Lehrman. “Over 3,000 investment bankers launched private deal processes on Axial in 2016, leveraging the platform to research buyers, close deals much faster, and get the best outcomes for their clients. And wherever the investment bankers and CEOs go, the investment and corporate development community tends to follow.”

As of late April, in 2017, bankers and CEOs have launched 906 private deal processes on Axial, and 179 deals have closed. Recently announced transactions originated via the Axial network include: Sterling Partners’ investment in Grand Rapids Ophthalmology; and The Courtney Group’s acquisition of Flojos. Recently active sellside members include Quarton International, Allegiance Capital, Cascadia Capital, and HT Capital Advisors. Sutton Place Strategies is another company that helps transaction professionals improve deal flow. The New York-based information services firm, which helps investors optimize their business development and deal sourcing effectiveness, was founded on the understanding that it’s almost impossible for dealmakers to view all of the transactions in their own sectors. Firms such as HighRoad Capital Partners, Huron Capital Partners, Little John & Co., Kolhberg Co. and Moelis Capital (now NexPhase Capital) have used Sutton Place’s services.

“Deal sourcing is so competitive today. At Sutton Place Strategies, we track all the transactions that have been completed in the M&A universe using a variety of methods, and we are able to show clients how many deals in their space they are not seeing on a regular basis,” says Nadim Malik, founder of Sutton Place Strategies. “We can let clients know what their level of market coverage is, and who the relevant deal sources are that they ought to be spending more time with, which is very important.”

The company recently rolled out a new feature that allows clients to see which processes were broad auctions or limited, and which banks ran them. Every intermediary is put on a scale based on the deals they closed over the last four years. “It’s very powerful to be able to target firms that are closing the most relevant deals via processes that best fit your business development strategy, as well as who you may want to engage on the sell side,” say Malik.

Another company catching dealmaker eyes is BoardProspects.com, which is a board recruitment network. Board members, aspiring board members and corporations join BoardProspects to find corporate governance news, education, best practices and board recruitment solutions. Founded in 2011, the members of BoardProspects include executives and board members of Fortune 100 companies, industry experts, former members of the U.S. Congress, university presidents and professors, retired military leaders and federal judges, and experienced corporate directors from well-known corporations including Dunkin’ Brands Group Inc. (Nasdaq: DNKN), Coca-Cola Co. (NYSE: KO), General Motors Co. (NYSE: GM) and Morgan Stanley (NYSE: MS).

Non-traditional due diligence
Due diligence isn’t a maybe when trying to close a deal; it’s a necessity. No deal is done without traditional financial due diligence. However, in today’s world where people’s actions can easily play out in the public, online or elsewhere, dealmakers are looking for a little more than traditional due diligence. More and more buyers perform reputational due diligence and anti-money-laundering/know-your-customer due diligence.

As part of reputational due diligence, many firms are opting to conduct negative news searches. Providers like CT Corp., a provider of business compliance and deal support services based in New York, comb through thousands of press outlets and alert clients to any red flags or negative information that could be potentially impactful.

“The risks around transactions have increased, and many lenders and buyers are requiring these types of due diligence searches,” says Ian Bone, who heads up new product development for CT’s due diligence offerings. Since formalizing their offering in late-2015, CT has seen a 300 percent jump in the searches, which comb through 18,000 global media outlets and bring the information to the attention of lawyers.

One CT client was buying a food manufacturer, and the reputational due diligence uncovered food product recalls for the manufacturer because allergens were not properly listed on the food labels--a serious issue operationally and financially. These types of searches can be run on individuals or legal entities, and can also uncover information about company executives who could be harmful.

“Things like criminal records were always public, but we find information that goes well beyond public documents,” says Bone.

Anti-money-laundering and know-your-customer regulations have become important requirements of banks to verify the identity and business history of individuals whom firms are considering doing business with. This type of search will uncover if someone has political exposure or affiliations and if that person is on a U.S. government or international watch list for money laundering or terrorist-related activities. It can also uncover things like past insider trading violations or other sanctions against a company or C-suite executives.

While other firms run these searches, not many specialize in this type of due diligence. “A provider or law firm may look into this for you, but most do not have a team of professionals who specialize in these new and at times esoteric searches like at CT,” says Bone. “In many cases people weren’t used to doing this type of due diligence before because the laws that brought this to the forefront, like the Patriot Act, are relatively new. So the volume our teams see has really made a competitive difference on output quality and turnaround.”

Back office technology
Technology provides new and innovative techniques to help chief financial officers do their job 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’s only so many things they can focus on and they are starting to recognize this is important,” says Backos.

RSM has been helping private equity firms with this for several years. The process requires RSM to assess the current situation, make recommendations and then implement 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? With the right technology and process you can, and this is so important, as key decisions are often made based on this financial information,” says Backos. “It’s like advertising you can lose 10 pounds in three days if you take certain steps. It really opens the CFOs’ eyes up, because it’s a game changer.”

The process of learning about automation options and then implementing them can take anywhere from three to six months, but can be worth it. Automation technology can save on staffing and other costs, and provide many additional benefits. Back office technology can help a company mine its data better and get all financial statements in a single repository.

Backos went through this process for a portfolio company of a reputable middle market private equity firm and it made a big difference. “You see immediate results. They had a team of people working 12 hours days and they were able to cut that down to eight hours with technology enhancements,” says Backos. “The client said, ‘The most important thing is making sure I can close my book and provide accurate financial reporting.’ The other thing he wanted was real-time visibility into the results of that month and to be able to compare them to previous months. That’s all doable today.”

Fund Administration
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 a life 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. They never raised a fund with the intention of becoming experts in fund administration, that’s not what they want to do,” says Robert Woosley, national practice leader at Frazier & Deeter, an accounting firm that offers fund administration services to private equity firms and real estate firms through FD Fund Administration.

Woosley says offering fund administration was a natural extension of Frazier & Deeter’s certified public accountant capabilities. The firm had a strong relationship with a multi-billion private equity firm that had a team of people that worked in the back office handling investor services, accounting, audits and valuations. In 2013, FD Fund Administration took a few of those employees out of 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. Since FD Fund Administration started operations in January 2013, the firm has added 19 new funds, representing more than $8 billion in new committed capital. “We knew there was a need for this. 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,” says Woosley. “We understand administration is not their core.”

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 a third-party administrator. While it’s not a requirement of private equity firms, each year more firms shift to a third-party model. According to estimates from BaseVenture, a software company that specializes in fund administration, only 30 percent of the assets under management in private equity and real estate funds are administered by third-party fund administrators, but that number is expected to increase to 45 percent by 2018.

In addition to a call for transparency from limited partners, the complexity of regulations and the ever emerging investment strategies today make working with a third-party fund administrator a more logical choice.

Says Woosley: “Private equity firms are starting to realize they should focus on what they do best and leave this to the experts.”

“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,” saysGraeme Frazier, a partner in GF Data.
“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. GF Data


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