Insights

How Business Development Has Changed in Private Equity 
POSTED 11.10.20 M&A

As with so many areas of our lives, COVID-19 has had a huge impact on business development among Private Equity firms. The “old ways” of finding and connecting with potential acquisitions and deals are disappearing, a trend that was already happening but was sped up by the travel and other restrictions brought about by coronavirus.

As Mark Gartner, head of investment development at lower middle market-focused Private Equity firm ClearLight Partners LLC, put it in a recent article, “Creative Destruction: How Private Equity BD May Change Forever”:

“The pandemic is stress testing everything, and COVID-19 may finally kill several BD strategies already in decline.”

“I believe that the best originators in the lower middle market will start to approach the private equity game through the lens of a lead generator with the content and lead capture techniques to match.”

Gone are the days of constantly traveling for in-person meetings with investment bankers, M&A advisors, and other reps for target companies. To be honest, all the information you glean from these meetings could be handled in a phone call.

An inability to travel, says Gartner, has hastened the decline of what he calls “high volume, low value city visits.” But that doesn’t mean all travel is out, says Gartner, who still sees a need for visits that emphasize quality over quantity and activities that produce real relationship development.

Also, out the window: BD pros collecting as many CIMs (confidential information memorandums) as possible to fill their PE firm’s funnel. The idea is that the more “books” they have, the more winning deals will come out of it.

Gartner recommends PE firms instead have their BD team analyze potential deals based on what he calls an “angle matrix” and concentrate on deals that they have a higher probability of closing because they have the right angle, which could be “process dynamics, executive resources to bring to the table, prior experience/investments in a related space, a previously developed investment thesis, and geographic proximity.”

What other changes are on the horizon? A PE firm has a great story… the trick is now to get the word out through different channels.

There are several more strategies that have been building for some time that are now experiencing faster adoption due to the pandemic, says Gartner.

Specialization

Generalist PE firms may think that casting a wider net will result in catching more deals. A better strategy is to pick a small group of sectors to get really good at. Soon, you’ll build a brand – and reputation – associated with those industries and, as Gartner says, “relevant deal flow will start to find you.”

If you’re worried that concentrating on a limited number of industries could backfire if those sectors go into decline, Gartner recommends this strategy:

“Pick sectors that are specific enough to be memorable, but that are broad enough to offer room for pivots if need be.”

Thesis Development

An investment thesis is, of course, a PE firm’s plan to make an acquired business more valuable within a few years. It essentially lays out the reasons to do a deal.

Gartner maintains that today this tool is more important than ever. As he puts it:

“Investors that put in the work to get off of their heels and proactively call their shots by developing investment theses have advantages over more reactive investors. I’m always amazed by how much incremental deal flow arrives when I market very specific sectors of interest to intermediaries and other deal referral sources.”

This strategy goes along with the move from being generalist to specialist.

Digital Marketing for Lead Generation

It’s amazing how difficult some PE firms make it for business owners and dealmakers to contact them. And how little they take advantage of the online tools that are available for reaching out to potential targets and their reps… and turning them into leads.

Creating valuable content written for business owners is key to creating engagement. This could be articles and blog posts… even a podcast… to get the word out about a PE firm and what makes it different than others out there.

Also, says Gartner, make sure the firm’s website is clear and easy to navigate, with contact information clearly visible. For website design, he recommends looking at management consulting websites.

Own Your Local Market

In the time of COVID, Gartner says there’s never been a better time to leverage the geographic proximity of a PE firm to potential acquisitions. Staying local means no travel and, whether or not it is true, feels safer.

To market locally does require a different approach. These are some avenues Gartner recommends:

“Membership in YPO or Vistage, providing regular content / interviews for the local business journal, sending personalized invitations to business owners to luncheons / events, and partnering with law / accounting firms to deliver value-added in-person content.”

Where We Go From Here

Business development for PE firms is changing forever. But by being nimble and quick to adapt to the new reality, savvy firms can differentiate themselves from competitors and nab the better deals.

For more on this and other topics from Mark Gartner of ClearLight Partners LLC, be sure to listen to my interview with him from my podcast, M&A Masters.