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The Sourcing Edge | Middle Market Growth


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It’s not uncommon for remote workers to feel overlooked, and there’s plenty of research and literature that speaks to why. While business development professionals in private equity don’t technically work remotely, most can certainly relate, as it’s challenging to put in requisite face time when you’re on the road 80% of the workweek.

Few, if any, private equity firms overlook the vital role of the business development professional. However, many may not fully recognize the benefits of an aligned and highly functioning sourcing process. Even in an era of competitive bidding—when internal emphasis may shift to operational levers to fuel company growth—business development remains a mostly untapped area where firms can distinguish themselves across the broader deal community.

The Rainmaker’s Evolution

Twenty years ago, private equity had little need for dedicated sourcing professionals. The most well-known private equity firms had all the prospective investments they could handle with inbound deal flow from Wall Street’s investment banks. In the middle market, where a handful of firms generally “owned” a specific geography or certain specializations, a local presence or loose network of intermediaries was often enough to ensure full deal pipelines. That was a time when sponsors could transact outside of a formal process through proprietary means. Fast forward two decades, and many off-market deals typically involve companies that can’t secure an adviser, whether due to operational performance or inherent industry difficulties.

Ironically, as proprietary deals have disappeared, the number of business development professionals has grown exponentially. This phenomenon seems to reflect a growing appreciation that the sourcing function is indeed helping develop relationships, providing access to decision-makers, and instilling discipline to help uncover higher quality portfolio companies.

A challenge for private equity firms is that the commitment required to create a worthwhile and prolific business development capability is by no means easy to justify. Over the years, the rise of formal networking groups, M&A “speed-dating” events, and digital platforms (Axial, MergersClub, Dealgate, etc. ) are premised on simplifying and streamlining business development. These services can be beneficial, but a differentiated process will not be achieved by merely entering a virtual room or checking a box at an event. Meanwhile, the time and effort required to develop a unique business development function rarely provide immediate results. This delayed gratification tends to disincentivize the kind of behaviors necessary for success.

What It Takes

Most sports fans have heard announcers refer to a player’s motor. In hockey, it might be characterized by a defenseman showing as much grit and speed at the end of his shift as in the beginning, or it could be a penalty-killing forward willing to put his body on the line, blocking 90 mile-per-hour slapshots. The same competitive drive and enthusiasm are necessary for business development.

At HKW, our sourcing team typically participates in over 1,000 in-person meetings annually. On some days, a sourcing professional may meet with as many as 15 to 20 intermediaries, spending the majority of their week on the road. But attending meetings is not enough. For these relationships to be mutually beneficial, it takes preparation and research—sometimes we welcome flight delays to utilize the time to prepare for upcoming meetings. If travel interruptions can ruin your day, business development may be the wrong career path.

In private equity, a motor is not defined merely by what occurs in the day to day. It’s a passion for the business and a belief that it’s a contact sport. The very best sourcing professionals want to be in the mix of every deal. They’d gladly endure another dinner in the airport food court if it translates into a mutually beneficial relationship, opportunity or seed of a connection—even when the gestation period is measured in years versus months.

Look Where Others Don’t

The concept, “look where others don’t,” is no different than leveraging any other market inefficiencies. The same is true when it comes to developing and maintaining intermediary relationships. The biggest and most active banks are a proven source of opportunities. But we’ve found that the smaller boutique shops, which might market three or four deals a year, are just as valuable. Moreover, they’re often motivated to work with buyers with whom they have relationships and trust, given that they have proportionately more riding on the successful closing of each deal.

If effort represents half of the business development job description, then being tactical in recognizing the white space is the other half. We’ve found that hard-to-reach, less-trafficked markets can also cultivate quality deal flow. The fact that a destination like Kansas City has so few direct flights works in favor of those willing to endure a layover.

Other circles of influence, including lawyers, accountants and CFOs, can be equally advantageous, particularly when building a presence in a niche sector. For example, hundreds of firms may be chasing technology and software deals. If a firm can dominate a specific segment within the sector and then broadcast the message through the industry’s influencers, the deal flow will find you. Sponsors can also leverage buy-side banks to augment add-on sourcing activities, as the end market and deal criteria are well-defined.

Integrity Is a Prerequisite

Integrity is the fuel in the motor of business development. Some would argue that the most challenging aspect of the profession is prioritizing the little things that ultimately matter most. Private equity may seem to be the very definition of a “transactional” business, but I argue we are in the relationship business, which requires continual development.

At HKW, we look at approximately 1,000  prospective deals each year and aim to complete potentially five to seven M&A transactions annually. This rate of acquisition puts us effectively in the business of saying “no,” which can damage relationships if not handled gracefully and with tact. If handled properly, declining a deal presents an opportunity to positively differentiate yourself and your company by offering constructive and thoughtful feedback to executives or intermediaries and taking care not to waste their time. Our philosophy is never to give our relationships a reason to not to show us their next deal.

At one time, just having a dedicated business development team represented a differentiator for private equity firms. Today, the business development role is experiencing rapid rates of adoption and sophistication with the hiring of talented professionals across the industry. This baseline in the industry is why forward-thinking investors increasingly want to understand how the firm retains and compensates their business development professionals and supports their career advancement.

I believe when all else is equal, relationships do tip the scale in favor of those who develop sincere trust and long-term partnerships. Even in a competitive process, banks may invite the preferred bidder to match the highest offer. In other cases, some sellers may be willing to accept a discounted bid to work with a partner they trust. It’s one thing to have a dedicated business development function; it is another to have a process and culture that genuinely supports the firm’s business development efforts.


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