From fund administrators to VDRs, dozens of firms help M&A pros compete

Register now

The M&A industry is going strong, with no signs of slowing down. In today’s fast-paced market, M&A pros are looking for a leg up on the competition and seeking ways to maximize investment returns. Products and services that give dealmakers the upper hand are highly sought after. Here’s our updated annual look at the tools transaction professionals count on to help them source and close deals, organized into 9 categories.

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 in a private equity firm and started to see a void in the market as the industry became increasingly competitive. “After 2008, the competition in private equity became fierce,” Mooney says. “Every deal wasn’t a slam dunk and as time went on, private equity firms were required to do more and more for returns.” Mooney founded BluWave to help private equity firms and their portfolio companies select the best service providers.

“When used correctly, service providers can meaningfully improve the efficiency and productivity of your business and increase value,” he says. “Today, there are so many service providers and private equity firms don’t have the time or resources to make sure they are choosing the right provider. That’s where we come in.” In the past, private equity firms may have tried to forego the expense of outside help, but today, the industry has matured, and PE firms are more accepting of assistance.

BluWave can help connect private equity firms and their portfolio companies with everything from finding 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 outcomes.

“The challenge is that as service providers grow, the folks in the middle or lower middle market can’t afford them anymore,” Mooney says. “Also, things have become so specialized that you want to make sure you are turning to the right companies for help. Instead of doing these searches, management can focus more on strategic activities while we handle this work. We have a pre-vetted network and understand how to get strong results for PE firms.”

Private Equity firms such as Frontenac, Comvest Partners, GI Partners, Bunker Hill Capital and Blue Mountain Capital have used BluWave’s services.

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. The accounting 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 serious 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 January 2013, the firm has tripled its private equity assets under administration to more than $25 billion.

“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, but 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.”

Having the best team possible will undoubtedly lead to enterprise value. Corey Roberts, CEO of Talent Equity Group, says there is an untapped opportunity to increase portfolio company enterprise value by improving the quality of talent below the C-suite level. “While the correlation between quality of talent and enterprise value is an economic fact, many private equity firms don’t have enough visibility into the performance of talent that sits below the C-suite level,” says Roberts.

Unlike a recruiting firm or headhunter who will fill a position, Talent Equity Group allows companies to outsource their entire talent acquisition process, enabling a portfolio company to focus on key business priorities as well as retaining and measuring their core talent base.

“Most small to mid-cap companies lack the resources and bandwidth to efficiently compete for high quality talent,” Roberts says. “This is especially true for highly skilled talent that is in short supply such as physicians and other clinical professionals. The effective unemployment rate for high-quality and specialty talent is zero, and therefore up-to-date systems and processes need to be deployed in order to compete.” He says his firm has a solution that will enable a portfolio company to consistently exceed performance by having the right talent in place and in queue.

Talent Equity Group typically works with small to mid-cap companies with $50 million to $400 million in annual revenue. Each client is assigned an account director and a dedicated team that manages the entire talent process. The company also provides advisory services, which can assess the overall talent requirements of a portfolio company business, both pre-and post-acquisition. The company has more than 30 professionals and is expected to double in size this year. Additionally, TalentEquity Group covers most business sectors, but has particular success with companies that value human capital as a key to growth and success. “We provide a turn-key platform that brings best practices to hiring, retaining and promoting high quality talent.”

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. Axial is one of the more successful online deal networks that investment bankers, strategic buyers and private equity investors have adopted for business development, deal management and deal sourcing. Although the company has found early success, it’s always looking to fine-tune things.

To best serve the middle market’s investment bankers and their clients, the company made a significant decision in 2017 to make every deal on Axial 100 percent confidential and private. “There is no spammy or deal-blasting activity allowed,” says Peter Lehrman founder and CEO of the New York-based company. “This decision has led many investment bankers to take a hard second look at our tools, and that’s resulted in much higher-quality member deal activity over the last 12 months. To be a widely adopted dealmaking platform for the middle market’s investment bankers and their clients, it required that we walk away from some of the original decisions we’d made for how to get the platform up and running.”

In 2017, the revenues of businesses that made private transactions via the Axial deal network ranged from $2.9 million to $610 million, with Ebitda ranging from negative $19 million to $223 million. Top sectors of deal flow activity include business services, Software as a Service, healthcare information technology, distribution and logistics, and manufacturing.

Axial has brought more than 1,300 investment bankers into the fold including boutique investment banks like 41 North Partners, Allegiance Capital, Copper Run Capital, Capstone Headwaters, Hilliard Lyons, Progress Partners and Seven Mile Advisors.

Axial members include investment professionals at Alpine Investors, Decathlon Capital Partners, SFW Capital, Oaktree, Huron Capital Partners, Tregaron Capital and Sterling Commercial Credit. Its strategic buyer members include High Road Capital Partners’ marketing services platform BlueSpire, Levine Lichtman’s environmental services platform Trinity Consultants, Ontario Teachers’ Pension healthcare platform PhyMed Healthcare Group, and TPG’s healthcare services platform Precision for Medicine.

Sutton Place Strategies, known as SPS, 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 better fund performance can be achieved through better deal sourcing. Firms such as HighRoad Capital Partners, Huron Capital Partners, Little John & Co., Kolhberg Co., Monroe Capital and NexPhase Capital use SPS’ services.

“Given the complexities and competitiveness of sourcing quality deals at reasonable valuations in this market, we offer an intelligent platform for investors looking to alleviate the stresses of origination while enhancing their sourcing techniques to improve fund performance,” says SPS founder Nadim Malik. “Through unique tools and reports, SPS provides clients with real-time, actionable data and analysis to streamline business development,”

The company recently released its SPS Fusion software, which includes its customer relationship management integration strategy, and has rolled out many new features to its Portal software.“Getting real-time alerts to new deals closing and active professionals in your investment criteria can give you an edge in today’s hyper-competitive and mobile-first world.”

With nine U.S. offices and a 40-year history, Valuation Research Corp., known as VRC, calls itself one of the oldest and largest business valuation companies in the U.S. “We are a fully independent valuation firm, as we are not part of an accounting firm or investment bank, which means our clients enjoy specialized expertise and few conflicts,” says VRC managing director Jeff Miller. “We work with the fund itself or the portfolio companies, and offer experience across all major industries. And we can handle every valuation need – from fairness opinion to purchase allocation to stock-based comp and impairment – throughout the life cycle of the investment.”

The need for independent valuation services is increasing for the same reasons that fund administration services are on the rise. “There is increased audit scrutiny, and more pressure from the limited partners to have third-party valuations,” says Miller, who expects the pressure will continue to increase. “We also do positive assurance, and reviewing of firms’ internal valuations, and are seeing more private equity firms reaching out for third-party valuation support.”

VRC is seeing growth in purchase allocations for M&A in the middle market, and an increase in deals to take public companies private. “PE fund management groups are also continuing to set up new or additional credit funds, and we’ve been valuing many more of these debt positions, as well as increased support of daily-NAV mutual funds for their investments in such private companies as Uber,” Miller says.

Virtual data rooms, or VDRs, are now as much a part of the M&A industry as auction processes. Gone are the days of traveling to an office to search through papers in a physical data room. The virtual data room software niche should continue to grow as businesses continue to become more comfortable using online services, and as they transition away from physical data forms, according to research firm IBIS. At the end of 2017, the industry’s annual revenues were roughly $800 million.

More than 20 years ago, Intralinks was one of the first companies to introduce virtual data rooms to the private equity industry. Matthew Wells, senior director of strategy and product marketing with the company, says 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 the company is also very deeply committed to helping add efficiency and speed during the transaction process. For this reason the company recently released the latest version of its platform, with a new user interface focused on speed and ease of use. “We want it to be as easy as possible for our users,” Wells says. “Our new platform is 50 percent faster across the board so no one is spending more time than necessary in the VDR. We want to help users get to closing as fast as possible.”

Intralinks is also offering clients insights into future dealmaking. Given that Intralinks is seeing a significant percentage of M&A transactions, the company has started publishing their Deal Flow Predictor, which makes predictions on future M&A volume based on early-stage activity on its platform. “Deals on our platform are generally six months out from public announcement, thus we’re able to make predictions about aggregate deal volume half a year into the future,” says Wells.

Interlinks isn’t the only VDR company looking to entice clients with extra perks. Other data providers are also innovating to keep clients coming back for their services.

“The concept of the virtual data room is not new, but we have been doing a lot to wrap services around Venue, our VDR offering, to address the entire deal process,” says Craig Clay, president of global capital markets at Donnelley Financial Solutions (NYSE: DFIN). “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, Donnelley Financial Solutions 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.”

In today’s world where people’s actions can easily play out in 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. Companies, such as 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.

“As global M&A activity is forecasted to rise in 2018, we can also expect deals to face increased regulatory scrutiny. It is critical to have the right help early on to navigate deal complexities,” says Bill Moore, a senior manager at CT. Since formalizing its offering, For example, a CT client was buying a food manufacturer, and the reputational due diligence uncovered recalls, due to improperly listed allergens on product labels, a serious issue operationally and financially. The searches can also uncover information about company executives.

“As technology and the Internet evolves more and more, reputational as well as statistical and legal data is much more accessible to lenders and acquirers. Having the ability to dig deeper into the leaders of industries and entities is allowing for much more informed decisions,” says Moore. Anti-money-laundering and know-your-customer regulations have become important requirements of banks to verify the identity and business history of individuals with whom firms are considering doing business.

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. “Different kinds of businesses have different risks and due diligence requirements associated with them. It is all too easy to overlook critical information that could impact a deal timeline, or lead to fines, penalties and damaged reputation.”

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 books 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.”

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, or AIC. Founded in 2007 as the Private Equity Council, the Washington, D.C.-based organization lobbies on behalf of the private equity industry. AIC will host numerous events in 2018 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 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.

“Associations provide great networking opportunities; it’s great to hear what your peers are seeing in the market,” says Huron Capital Partners partner Gretchen Perkins. “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.

“Many of the associations and organizations in middle-market M&A have become invaluable tools because they are so efficient,” says the Riverside Co. chief operating officer Pam Hendrickson. “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.”

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 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. 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.

For reprint and licensing requests for this article, click here.