Most investors intuitively grasp the idea that their relationship network is a key driver of their collective success. Nearly all of us can point to specific relationships that have been valuable to each of us on a personal and professional level. Yet across a firm, the business value of investing in relationships can sometimes feel nebulous and hard to grasp.
We at 4Degrees are huge believers in relationships being valuable in and of themselves. We are also privy to concrete ways that our Private Equity customers generate tangible value for themselves and their portfolio companies, through their relationship network.
Below, we detail eight common use cases we’ve seen for relationship management and intelligence in Private Equity to generate that value. Curious to see how many of them you’re doing in your firm? Read on!
- Use case #1: Getting connected to companies
- Use case #2: Staying engaged with key deal sources
- Use case #3: Staying engaged with companies
- Use case #4: Finding due diligence experts
- Use case #5: Finding great management talent
- Use case #6: Connecting companies to customers and experts
- Use case #7: Preparing for exits
- Use case #8: Limited Partner management
Use case #1: Getting connected to companies
All funds are looking to find great, undervalued businesses to deploy capital into and partner with. One of the best ways to do so is by sourcing an investment outside of an auction process. In many cases, you’ve identified those businesses – but are unaware of how you might get in front of the management team and convince them to have a conversation with you.
Your team’s combined relationship network can be a powerful asset in driving those opportunities. Your team and operating partner network very likely have connections to some of those companies that you’ve got on your wish list. Some of those are obvious – they are connected on LinkedIn, or were direct peers. Others are less so – they may be a part of similar industry groups or may be connected via common investors. Having a strong understanding of the team’s relationships across these direct and indirect channels gives you the warm introduction path that opens the door for an investment conversation.
Use case #2: Staying engaged with key deal sources
Given most Private Equity deal flow is intermediated, staying engaged with the right set of investment bankers and business brokers is critical to making sure you see the deals that are in your strike zone. At base, this means touching base with the critical members of that group regularly (e.g., quarterly), with differing levels of personalization
This category also encompasses the holy grail for many funds – proprietary deal flow. That deal flow is likely sourced through a combination of executive relationships, service providers, and other key nodes in the relevant ecosystem that come across interesting companies.
For both groups, tiering the broader set by their relevance to your areas of focus and existing relationship strength can help determine the level of attention that will maximize that investment. We’ve written a guide here that goes into more depth on this topic.
Use case #3: Staying engaged with companies
Not every moment you make contact with a management team will be the right timing to pursue a transaction together. The business may need to make more progress, the owner might not be ready to sell, Mercury might be in retrograde – the list of reasons not to work together at that moment is long and varied.
That said, if you find the dynamics of the business or industry attractive, remaining engaged and finding ways to demonstrate the value you can bring in a partnership allows you to stay top of mind for when the timing for a deal is better aligned.
Some ways you can demonstrate that value:
- Making customer introductions
- Sharing research or relevant content that might help inform their strategy or views on industry dynamics
- Inviting them to events where they can build relationships with peers and potential industry collaborators
Use case #4: Finding due diligence experts
As you’re assessing the attractiveness of a deal, being able to rely on your team’s network to find executives with relevant expertise is critical.
Experts you know will typically get you:
- Faster responses – which enable you to get to conviction more quickly. This helps you make progress faster in processes with compressed timeframes. You can also use the additional capacity to sharpen your analysis for value addition opportunities or analyze more deals.
- Higher quality answers – we inherently ‘believability-weight’ the responses we get from any source, including diligence experts. When you’re getting perspective from a source you trust, you can bid with confidence – and win more deals as a result.
- At a lower cost – A single hour-long conversation with an expert (using an expert network like Gerson Lehrman Group, for example), can cost you hundreds of dollars. Across a single diligence process, you can easily spend thousands to get the perspective you need.
Being able to call upon executives in your network for diligence requires that you’ve built the relationship to the point where they will take your call (and ideally get back to you in a timely fashion), and have a way of understanding who your teammates are connected to (so you’re not just relying on your individual network). You’ll also benefit from an organized way of understanding the expertise of those in your network (so you can find them when you need to).
Use case #5: Finding great management talent
Companies rise and fall with the level of talent that leads and operates them. As a result, one of the most important tasks that a fund can take on is the sourcing and selection of leadership teams to help shepherd and grow their portfolio companies.
Through your team’s conversations with industry executives, subject matter experts, portfolio leadership, and prospective investments, you’ve likely built a rich rolodex of potential executive candidates. However, there are two common challenges at this stage:
1. Being able to recall who you’ve met, and properly match them to opportunities
Dunbar’s law suggests there are only so many relationships we can keep top of mind – and across an organization that’s constantly engaging with new people, it’s very common for promising relationships to fall through the cracks. Even in the case where the person is top of mind within the organization, usually there isn’t enough shared context to place them as the right fit (given their skills, expertise) with the right opportunities.
2. Maintaining those relationships such that they can be called upon
Similar to company outreach – when you engage with an executive, the timing often isn’t aligned for open roles you currently have – but are often people you’d like to keep in your orbit. However, throwing them on a newsletter distribution list or hoping they’ll be responsive to an email when you haven’t spoken to them for 5 years is akin to ‘thoughts and prayers’. A robust relationship management system can help you keep these key members of your network engaged, and thereby ready to step into those positions when the timing is right.
Use case #6: Connecting companies to customers and experts
Besides building the team, one of the most powerful ways to grow the value of your investment is making a warm introduction to the C-suite of a landmark customer or business development partner. In addition to those direct connections, many portfolio companies go through complex procurement processes with multiple stakeholders and corporate politics to be managed – which are difficult to navigate without context. That context often exists within your team’s professional network. Harnessed well, your network is a conduit to directly grow revenue and connect your portfolio to new demand generation channels.
There are likely also experts within your network who can help your companies improve their operational efficiency. Engaging those experts in a strategic way are a lever to enable more efficient growth or cost reductions that boost profitability.
Use case #7: Preparing for exits
It’s great to have a portfolio company that’s growing in value, with a defensible position in a profitable market. But ultimately, DVPI is the key metric of success and comes with successful exits that translate that value into liquidity. As the trite saying goes – buy low, sell high.
‘Selling high’ is the result of a well-run process – with sell-side investment bankers and advisors with a depth of knowledge and relationships in the category. As you’re preparing a company for an exit, advisors can provide valuable intelligence about the exit conditions in the market, the metrics investors are using to make purchase and valuation decisions, and the likely buyers of the company. As the process begins, they can expand the set of buyers to target, backchannel with buyer decision-makers, and be a powerful advocate for you and the company. Their willingness to do so is partially driven by the relationship you’ve built together.
In addition to the network of bankers and advisors you build, having direct connections with potential acquirers is also powerful. Regular conversations enable you to understand where they’re focused, what they’re seeing in the market and competitive landscape, and what they find interesting. Done well, those discussions give you relevant input for your own investment strategy and enable you to be a better advisor to your management teams. Where your portfolio companies are potential acquisition targets, these pre-existing relationships can also increase their ability to lean in and move quickly.
Use case #8: Limited Partner management
With no Limited Partners, there is no fund. So these relationships are naturally amongst the most critical to maintain for any private equity fund. While on the fundraising trail, each engagement has stakes – and you want to make sure that each conversation goes as seamlessly as it can. Ensuring you walk in with the full context of your team’s prior interactions, all follow-ups are completed in a timely manner, and that you come across as organized and professional allows you to control the controllable – and increases your chances of converting them to an LP.
While there’s usually a full-court blitz as a team shifts into fundraising mode (and is courting new LPs), most institutional LPs are looking to make multi-fund commitments and deploy significant capital over time. Making that level of commitment requires trust and a relationship, often formed over multiple years and regular touchpoints. And in between funds, regular engagement (beyond annual letters and tax documents) with existing Limited Partners grows their conviction in you and your partnership together.
Did we miss any that you’ve found valuable? Let us know!