The Private equity asset class has gone through several dramatic changes over the past decade, and particularly over the past seven years. Many of those changes can be traced back to the dynamics displayed in this chart:
With those inflows of capital searching for great investments, the competition for deals has never been stiffer. One of the outcomes of that competition is increased demand for and supply of innovation – to allow firms to find companies before anyone else, or create value post-investment to achieve top-tier returns.
As the amount of capital in the space has accelerated, so too has the innovation – to the point where it’s hard for fund managers to make sense of it all. In this guide, we’ll examine 6 categories of private equity software being increasingly used by firms in the past 2-3 years to gain a competitive advantage. We’ll focus on front-office activities – so stay tuned for a follow-up post on back-office software (e.g., fund administration, fund accounting, investor relations, investor portals, and portfolio monitoring).
For each, we’ll dive into:
- What the category consists of
- Why those solutions are used and the value they deliver
- Where they typically fall in the Private equity software stack
- Some of the up and coming vendors in the space
Without further ado, let’s begin!
One of the most critical activities for any private equity and venture capital firm is sourcing deals. Depending on the size and industries you focus on, the deals you’re looking for may be more or less heavily intermediated. For instance, it’s rare to find a company doing billions of dollars of revenue that’s hiding in plain sight, and that will go through an acquisition process without hiring a bank to run a process. However, in the middle market and lower middle market, though it is increasingly common to also work through bankers, there are still opportunities to source proprietary deal flow.
That proprietary deal flow is often sourced through relationship networks (tackled in more depth in the relationship intelligence section), but a new class of private equity software is arising to help surface companies using non-relationship-based signals. These include lists of attendees for conferences in specific domains, pulling in search engine data and parsing the results for companies that fit a fund’s parameters, or building out a graph of industry participants based on news data.
The end goal of all of the company search providers is to streamline company search and surface new companies in areas of interest of yours that would not have been on your radar without using them. And given the meaningful returns that can come from just one of these ‘hitting’ on a company you purchase, this class of private equity software can pay for itself rapidly.
The companies surfaced from these channels usually flow into your team’s CRM (either automatically via an API, or by your team), where the next step is determining how best to get in front of them (which is tackled in the Relationship Intelligence and Sales Engagement sections of this guide).
Some of the key providers in this space include:
- Sourcescrub: Likely the best known in this category, Sourcescrub has many offerings, including the aggregation of founder-owned businesses from several different sources (e.g., conference and award lists). The company has also built a range of CRM integrations to handle the syncing of data to those core systems (including Salesforce, and one with 4Degrees coming soon!).
- Cyndx: An up and coming player in the market, Cyndx has built an engine to make searching through private company data straightforward, based on many parameters – allowing you to find new companies to target.
- Udu: Using a combination of machine learning techniques and online data, Udu takes the parameters you teach it and uses those to search for similar targets (for either platform or add-ons).
Finding companies that seem to be attractive targets (and getting their contact information) is a big part of the battle. That said, once you’ve found those companies, you need to convince them to have a conversation with you.
Most business owners and management teams are busy – and depending on the industry, may not be in front of their computers or phones that often. Getting to them can often require multiple, personalized outreaches through multiple channels (especially least without relationship intelligence) – which can easily be pushed to the wayside in favor of less tedious, more intellectually fulfilling work.
While we’ve been talking about these challenges for private equity investors, the underlying problem here is very similar to those that sales teams face daily. Given that, it’s unsurprising that a class of sales solutions has started to take hold in private equity to help progress conversations with management teams.
This class is Sales Engagement – which sets up sequences of templated messages and tasks (e.g., view this person’s LinkedIn profile, call this person) with the goal of having a live conversation with the prospect. These solutions provide several benefits to a team:
- Efficiency: because you can set up and schedule these messages ahead of time, simplifying your workflow by removing the work involved in crafting a fresh message for each outreach
- Compliance: tedious work often gets skipped – so a software solution ensures these messages are sent in the first place, which is a non-trivial part of the battle
- Consistency: while a templatized email (even with some personalization) typically won’t approach the quality of a truly bespoke email, automation can ensure a consistent standard (vs. the lower quality ones that will occur over time)
- Fidelity: because the messaging is consistent, the team can gather a clearer understanding of what approaches are working, enabling experimentation and improvement over time.
These systems typically plug into the CRM and use the contacts and companies residing in the system as a basis to build out the sequences targeted at those companies. They usually then sync back any activities done in the Sales Engagement system back into the CRM once completed.
The number of providers in this space is large (likely 50+ viable products). The most known providers in this category include:
- Outreach: Likely the leading software solution in the space at the moment, their product combines the benefits of the above with some additional functionality, including automation (e.g., detecting when you’ve received an auto-responder and pushing the next email until after their return)
- SalesLoft: One of the founding pioneers in the category. In addition to the benefits mentioned above, they also provide “conversation intelligence”, where they do some analysis of phone conversations to identify key takeaways and transcribe meeting notes.
Private equity has always been and continues to be a heavily relationship-driven business. It’s not hard to understand why:
- If a lawyer is considering who to mention when a business owner is considering a transition, or when an investment banker considers who to include in a process, they will bias towards those they have strong relationships with.
- A business owner is far more likely to have an exploratory conversation with a fund that has been vouched for by someone they trust vs. a cold email or phone call.
- A company that has been in a family for generations, or that represents the life’s work of a management team, won’t be handed off to just anyone. Who the owners trust to be good stewards of the business (and their legacy) is a critical part of the decision making process.
- Conversely, when you’re deciding whether to invest tens of millions or billions of dollars and to work with a management team for the next five years, you need to have a bedrock of trust that comes from relationships.
In each of these scenarios, the relationship network of the firm can be the determining factor for winning a deal, getting in front of a management team, or even hearing about the company in the first place. Recognizing the breadth of their network is critical, firms have begun to hire operating partners with depth in their investment areas – who typically bring highly relevant relationships to bear in sourcing, evaluating, and supporting investments.
However, private equity funds have historically not had a centralized view into the team’s relationship network, or a directed effort towards organizing and leveraging them. The underlying information of ‘who knows who’ has usually been scattered amongst their CRM system, Excel spreadsheets, disparate LinkedIn networks, and Outlook contacts – leading to either heavy inefficiencies at best, or (most frequently) missed opportunities to source and win deals.
With the increased competition in the category, more funds are investing in understanding their collective networks as a competitive advantage – leading to the rise of a new category of private equity software: Relationship Intelligence. These systems generally integrate with many different communication channels (e.g., email, calendar, social media, news) and can either be integrated with or natively part of a CRM system. Across these different solutions, they track who the team has connected to and communicated with historically (and on an ongoing basis) and uses that information to deliver a real-time view of a team’s relationship network. In essence, they are the single source of truth for your and your team’s relationship network.
Done well, these solutions:
- Uncover connectivity to companies you’re looking to get in front of, allowing for warm introductions to those management teams
- Help you manage engagement with service providers (e.g., lawyers, accountants) that result in staying top of mind and the possibility of proprietary deal flow
- Ensure you touch base regularly with your key investment banking and business broker relationships, so you’re included in processes that fit your mandate
- Help you influence management team members if a potential investment comes down to you and a few other contenders
- Reduce data entry and coordination costs to understand where connections to source deals (or help portfolio companies sell) may lie
This space is emerging, and as a result, the number of viable providers is relatively small. They include:
- 4Degrees: our product captures the benefits of network visibility mentioned above, along with searching the world for information about your team’s relationship network. That both reduces data entry (picking up current and prior roles + locations for you), and also helps surface ways to triggers to either strengthen specific relationships or engage on a prospective deal opportunity.
- Relationship Science: one of the earliest entrants in the market, which does some lightweight relationship scoring – but also combines it with potential 2nd and 3rd-degree connections based on looking at overlapping work experiences.
- Affinity: a newer entrant that does some relationship scoring, and also allows groups across funds to share their networks with each other (what they call “Alliances”).
The forms of private equity software we’ve covered, including company search, using research providers like Pitchbook, and a dedicated Relationship Intelligence effort can expand the scope of deals a private equity firm sees materially. That said, there are still many companies who find representation from an investment bank or business broker that either aren’t accessible through your team’s relationship network or aren’t receptive to cold outreach. In the past, these would have remained frustratingly out of reach for your team, despite being a part of the ‘addressable’ universe of companies in your mandate.
However, some intermediaries have begun digitizing the process of marketing deals to prospective buyers. This digitization process has taken many forms – email newsletters, establishing internal CRM systems themselves, and more recently, deal marketplaces. These services allow intermediaries (or business owners themselves) to provide some preliminary information about the company (e.g. a teaser that includes some information about the operations, industry, and financial profile). Prospective investors can then review this information, and if interested, reach out to ask for an NDA to dive more deeply into a data room about the potential investment opportunity.
Though these services do (by their nature) create a competitive situation vs. other prospective buyers, they also bring forth many benefits:
- Clear interest in a transaction, so there’s less uncertainty about management’s desire to move forward
- Broader geographic coverage than might be feasible to accomplish with your team’s traditional efforts
- Increased efficiency due to the ability to filter down to businesses that fit your fund’s thesis and operating structure
- Higher general volume of prospective deals (thereby improving the probability of finding a good potential investment)
Once you’ve deemed the deal interesting enough, you’d typically need to manually add it to your CRM or pipeline management system to have a 360-degree view of all of your potential deals in one place.
This category of private equity software is fairly new, with two key providers at this stage:
- Axial: the likely category leader at this stage, Axial has 20K+ private market deal professionals who are involved in buying, selling, advising, and lending to businesses in the lower middle market, and has a long list of closed transactions through its platform.
- Aurigin: a similar underlying product, but with a slightly broader mandate (including buyouts, project finance, and real estate investments). They claim to have $600B+ in transaction value produced in introductions they’ve facilitated.
Due Diligence Services
If a deal is starting to pass your initial filters as an opportunity, you’ll likely create a team internally to dive into due diligence. That team dives into the existing financials and operational metrics of the business to understand them at a granular level. Those investment team members will likely also do some work on the market the company plays in to understand how attractive it is. This work includes determining who the key competitors are and how customers perceive differentiation, the company’s reputation in the market, and other industry dynamics.
To do so, you typically have three options:
- Reach out to experts that are close to the firm who can provide perspective on the company, the market, and the investment opportunity overall
- Find people outside of your network who might be willing to engage in helping you answer those questions
- Hire a consulting firm (e.g., Bain & Company) to do one or both of the first two options for you.
The first can be done by tapping into the network of operating partners and team members. There is also a variant of Relationship Intelligence solutions that can help with this challenge, through the automated categorization of the team’s relationship network – which allows your team to filter your connections to find people you trust that have the required expertise. Today, 4Degrees is the only Relationship Intelligence solution with that capability.
The second has historically been the territory of the expert networks, who will go and identify experts (either currently in their network or that they can get to), and set up conversations with your team. These calls can be expensive but can save you a lot more in lost capital and opportunity cost if they sway your investment decision.
The most well-known of these providers is the Gerson Lehrman Group (GLG), with AlphaSights and Coleman Research as two leading competitors. However, a new set of providers that have emerged with different value propositions, including:
- Making the transcripts of conversations searchable (allowing you to benefit from prior work done). Tegus is a great example of this for institutional public and private market investors.
- Employing one-off researchers to perform tasks that require less in-depth market knowledge. Wonder is likely the leading provider of this category of service.
- Engaging a network of gig economy workers to execute specific tasks that can be aggregated into market insights. For example, using a service like Gigwalk to track the placement of a specific item across grocery stores to understand how they are positioned to consumers.
For many firms, investing starts with finding a great business. For others, it starts by identifying great executives that you’d like to partner with – and then working with them to find the right companies for them to lead. The benefit of this strategy is a few-fold:
- Access to the executive’s network and expertise: great operators have a deep understanding of the markets they are excited about, which helps surface opportunities that might go undiscovered without their network. quickly and thoroughly vet the, and favorably influence deal terms
- Alignment: through working together to build the thesis and identify the business, there’s clear buy-in on both sides of the agreement on day one, lessening the chance of strategic disagreement down the line.
- Less execution risk: by partnering with proven, successful operators, the value creation path you set out will likely be executed at a world-class level.
For firms with this strategy, executive sourcing and management is arguably a more engine to build and hone than company sourcing. Even for firms that source ‘company-first’, there’s a meaningful chance that some members of the management team will need to be replaced over time. As a result, this class of private equity software has value across the life cycle – from sourcing to investment management.
However, few firms have historically invested in internal capabilities around executive relationship management. That lack of investment either leads to a small, somewhat random set of executives being top of mind in these moments, or (most commonly), reaching out to an executive search firm to help source executives. Similar to expert networks, these aren’t cheap – but the cost of bad leadership in a portfolio company is likely orders of magnitude higher.
Lately, the tides have changed – with funds increasingly hiring internal talent leadership to drive these initiatives at the firm and portfolio company level. The increase in hiring has also lead to the adoption of more software products to help coordinate these efforts. These systems are sometimes connected to and part of a CRM system, and sometimes are held entirely separate (depending on the firm’s use case).
Private equity investors are largely new to this use case, so most of the providers are borrowed from the world of Executive Search:
- Thrive TRM: built by an executive search firm (True) and then spun out as a separate business, Thrive is a traditional recruiting database with a more modern SaaS interface – and has seen solid adoption in the category.
- Clockwork + Filefinder: two of the legacy, but well-established products in this space
- 4Degrees: our product’s automatic categorization capabilities, mixed with our constant searching of the world for news and information enable our customers to also drive executive relationship management. Some examples include searching their network of executives to match them to opportunities and strengthening their relationships with key executives by knowing if they’ve been in the news, having recurring reminders to engage them, and getting alerts if they are traveling to their city.
The Innovation is Just Beginning
Despite our discussion of six new categories where technology is rapidly emerging in private equity, we’re just at the beginning of how innovation will impact the industry. As the private equity landscape continues to get more competitive (and as the private equity software vendors mentioned in this guide continue to mature their offerings), in a few years the more pertinent question will be which categories of work in private equity haven’t yet been remade by technology. In the same way that Marc Andreesen, the founder of Netscape, predicted that software would ‘eat the world’, we predict that every private equity fund will be heavily underpinned by technology – either through adoption or attrition.
Here’s to the next decade of innovation!
Stay tuned for a future guide to back-office software (where we’ll cover fund accounting software, capital call management, investor reporting, and other common business processes).