Private equity funds are facing more competition than ever before – making finding high-quality investment opportunities (at reasonable valuations) an increasingly difficult challenge. To keep up, firms are both devoting more resources to deal origination and becoming more creative in identifying their next great investment.
Placing more attention on these efforts, however, raises a natural question – who is in charge of making sure these initiatives perform as planned? Increasingly, firms have been hiring business development professionals to bridge that gap.
In this article, we’re going to discuss the rise of the business development role in private equity, why it’s essential, and the common strategies being used to increase deal flow.
Let’s dive right in.
The Rise of the Private Equity Business Development Role
Over the past few years, the demand for private equity business development professionals has skyrocketed. This is especially true in lower middle-market and middle-market private equity firms.
But why is this happening? And why now?
Well, there’s are several reasons for the growing demand:
- More capital to deploy: An uptick in capital being raised by PE firms (According to Pitchbook, by 3Q 2018, buyout funds collectively had $708.5 billion of undeployed equity capital in the middle market — all chasing the same private companies)
- Increasing competition: both due to new and existing private equity firms becoming more active (2018 had record deal volume and the same was expected for 2020)
- More deal sources to cover: with a larger than ever number of venture capital firms, investment banks, corporate development teams, and proprietary deal activity
- Need for leverage: With bigger investment teams and more portfolio company work, senior management team members are increasingly stretched and lack the bandwidth to send that next follow-up email.
In the past, originating deal flow was typically handled by senior investment professionals. But the above shifts require firms to devote more time and resources to finding deals and strain what’s possible for a partner or managing director to accomplish. This not only applies to the initial deal sourcing effort itself, but also the continuous improvement process of identifying missed opportunities, determining which sources give you the best return on investment, and other analysis that allows you to stay a step ahead of your competitors.
Having a dedicated business development team (or person) helps alleviate this strain, and helps firms to win an increasingly competitive marketplace. Yet, finding people to fill the role has become cumbersome.
Roughly 4 out of 5 PE firms are considering, actively looking for, or already have a dedicated deal originator. Unfortunately, there are more roles needing filling than there are experts in business development.
Top Private Equity Business Development Strategies Used Today
Conferences and Tradeshow coverage
One of the most popular tactics in a BD professional’s arsenal, hand-shaking” approach many PE firms are used to. And this can still work, especially since in-person relationship building is still a must.
Attending such events can be helpful, but also can be resource-consuming (time and money). Plus, many of these events are local, which requires significant travel to achieve good coverage. Vice presidents of business development commonly criss-cross the United States to attend the next relevant conference – traveling to New York one week, Miami the next, and Omaha the following week.
However, that travel schedule became untenable in the midst of the COVID pandemic and pushed much of this networking activity online. As a result, industry-specific conferences as well as ones that match up investment banking professionals and private equity funds (e.g., ACG, Opus Connect) invested heavily in virtual events that BD professionals can attend. Nearly all of these industry associations now host a combination of webinars, meetups, and even virtual tradeshows – some of which will likely outlast the pandemic.
Another traditional approach (albeit done at differing levels of sophistication/effectiveness) is building a robust network of investment bankers and brokers to source referrals. The logic of doing so is straightforward – investment bankers are consistently growing their network to uncover potential clients that may be interested in being acquired (by you or somebody else).
However, just meeting an intermediary isn’t enough to bring a steady flow of deals your way. Without active engagement, it’s easy to be treated like just another line in their excel spreadsheet or CRM that they may or may not remember to reach out to when a relevant company emerges. Moreover, not all investment bankers and brokers are equally relevant to your investment activity – for example, a boutique banker focused on healthcare companies is worth much less energy for an industrials focused middle-market fund. As a result, identifying the bankers that represent companies in the spaces you’re actively investing in and tiering them based on attractiveness can help you both better focus resources and ensure the most relevant intermediaries get regular, consistent, and personalized attention.
Another increasingly common tactic is working with marketing resources to nurture existing relationships while also creating opportunities for inbound deals. Similar to intermediary management, there are differing levels of sophistication that a firm can take towards their marketing efforts.
One of the lowest effort, highest ROI methods are regular newsletter updates on the portfolio, deal activity, and the team – which enables you to stay top of mind with other industry participants. Some firms take this a step further by providing content and research their audience finds valuable. For some firms, it might be packaging some of their research and learnings about the industries they know well. For others, it might be specific challenges that management teams they engage with come across (e.g., site selection and real estate, key operational metrics, or staffing and hiring challenges).
The Firm’s Relationship Network
While the investment professionals may spend a bit less time on deal origination with a business development team member on board, they still have incredibly robust and relevant networks for deal sourcing.
If those relationships are directly related to deal origination (e.g., with an investment banker), those relationships may be handed off to you. But there are many other connections of theirs that may be multi-purpose – for example, a portfolio CEO that you might leverage for due diligence and also for deal referrals. Or those two LPs of yours that happen to have a direct warm connection to the CFO of a company you’ve been trying to get in front of for months.
There’s also a growing number of sponsor-to-sponsor transactions, which require relationships with other private equity funds (in order to have access to their portfolio companies when the time comes). Those relationships are likely owned by the firm’s senior management (similar to investor relations), but also have some sourcing benefits.
While the benefits of your Partners and MDs ‘owning’ those relationships are clear, it’s often hard to uncover those relationships exist in the first place, or strong they are. Social networks and platforms like LinkedIn are certainly helpful in this regard, as are the new class of relationship intelligence solutions that are emerging.
Technology and Data Mining
Like every other portion of the economy, technology is fundamentally changing the private markets and capital markets. For business development practitioners, technology can both help streamline the workflow (and identify ways to improve sourcing efforts), and also uncover new businesses that might not otherwise have been on the radar.
To uncover and break into new companies, a combination of off the shelf software products is typically the highest ROI place to begin. Some examples include:
- Research databases (e.g., Pitchbook, Gain.pro)
- Company search tools (e.g., Sourcesrub, Grata)
- Sales engagement tools (e.g., Outreach, Salesloft)
- Relationship intelligence tools (e.g., 4Degrees)
Some private equity firms have also invested in their own internal technology stack and efforts to accelerate these efforts further (e.g., EQT’s Motherbrain).
To take best advantage of any of the above efforts also requires regular analysis and continuous improvement – understanding where your best deals are coming from, and how to deploy your limited resources to get more that fit your strike zone. Technology can also be powerful here as well, typically through a CRM or deal flow management system.
Leveraged well, technology can be a powerful source of proprietary advantage – one that makes your firm’s fundraising story to LPs unique in addition to sourcing your next deal. If you’re curious about more ways you can use technology to your advantage, we’ve written a fuller guide for the emerging categories of private equity software here.
The key business development skillsets
Since there’s no formal education or special “playbook” on business development in private equity, finding a great hire can be challenging. There’s no school or program you can pluck graduates from. Given the above strategies, what skills should funds be searching for to find the right person?
- Relationship building and management – because much of the role is engaging with people, your business development leader needs to be able to forge new relationships on behalf of the firm, while growing existing ones. Some business development professionals will also have a pre-existing Rolodex of relevant deal sources, depending on their prior roles.
- Organization and time management – given the sheer amount of companies, relationships, and sourcing channels to stay on top of, opportunities can easily fall through the cracks without a detail-oriented, organized person in the role.
- Quantitative skills – while their primary role isn’t to perform deep quantitative due diligence, the ability to use numerical data to quickly determine if a company’s metrics pass the ‘sniff test’ helps ensure investment team time is spent on the right opportunities.
- Comfort with technology – as more software enters the category to help investors identify new potential investments or streamline their workflow, having BD professionals who are versed in how to use software to accomplish their goals has moved from optional to essential.
The Bottom Line
Competition in the private equity realm is continuing to grow. How you approach it going forward is crucial to your firm’s success. If you’re not considering using private equity business development experts to enhance deal flow and sourcing, then you could get left behind by the PE firms that are.
Now, is the time to build a BD team and implement the right tools to help them succeed. If you’re not already using software to collect and track data on prospects, then check out our Private Equity CRM and Relationship Intelligence software today.