PE Continues Dedicated Business Development Focus

Nearly 60 percent of U.S. private equity firms have hired at least one business development professional whose full-time job is to call on deal intermediaries and other sources of deal flow, a new report suggests.

That’s up from less than half of firms just two years ago, according to the just-released 2019 Deal Origination Benchmark Report (DOBR), published by deal-sourcing platform provider Sutton Place Strategies (SPS).

The SPS DOBR report also found a corresponding improvement in industry-wide market coverage, defined as the percentage of relevant, completed, advisor-marketed transactions that private equity firms review.

“The highest market coverage for any one firm in this year’s report for limited auctions
was 29 percent; for moderately marketed processes 50 percent; and for
broadly marketed processes 77 percent.”

All told, 59 percent of the 144 private equity firms that participated in this year’s report, all of them customers of Sutton Place Strategies, have at least one dedicated business development professional -up from 47 percent in the 2017 edition.

Median private equity market coverage was 18.8 percent for the 12-month period ending June 2019. That was up from 17.2 percent a year ago, and 16.6 percent for the corresponding period ending June 2017.

Every client of Sutton Place Strategies receives a custom version of the SPS DOBR report, showing its market coverage compared with all private equity firms as well as with any of eight peer groups. The peer groups are defined by strategy and by size of deals sought—see table below.

The steady rise of the business development professional has played a large part in impacting this upward trend. Last year was the first in which slightly over half of the participants in the analysis had at least one dedicated business development professional.

“Deal origination has evolved over the last decade as a mission-critical component of a private equity firm’s success and a key driver of fund performance,” said Nadim Malik, founder and CEO of Sutton Place Strategies. “The results from this year’s SPS DOBR report suggest that firms continue to increase their emphasis on quality deal sourcing against the backdrop of a very competitive environment.”

Consistent with prior years, all the firms with the top market coverage in each of the eight peer groups – deemed an “SPS Best-in-Class Deal Originator” – employ at least one dedicated business development professional.

In addition to human capital, private equity firms are beginning to embrace, albeit slowly, data analytics, technology, and automation to build a defensible edge as it relates to deal origination.

While there is no substitute for quality relationship building, analysis like that in the SPS DOBR report allows firms to measure the effectiveness of their sourcing efforts in the context of their peers. Sometimes all it takes is revealing the high-water mark among competitors as motivation to improve.

“An effective, metric-based deal sourcing strategy will help private-equity firms be more
prepared and resourceful in the eyes of their investors, especially when compared to the competition.”

Digging into the granular details of the analysis reveals areas to emphasize that may otherwise go undetected. Reviewing market coverage by geography can directly impact a firm’s travel schedule for the next year, raising the firm’s profile in neglected regions and small but growing cities.

Also, evaluating market coverage by sell-side process type enables private equity firms to determine the durability of mindshare among intermediaries when just a handful of buyers are invited (as in limited auctions), versus seeing only the broadly marketed opportunities.

The highest market coverage for any one firm in this year’s report for limited auctions was 29 percent; for moderately marketed processes 50 percent; and for broadly marketed processes 77 percent.

Building on prior years’ reports and feedback from clients, Sutton Place Strategies added three new metrics in the 2019 SPS DOBR.

  • Pipeline Closing Percent. This metric measures the portion of a private-equity firm’s reviewed deal flow that actually ends up trading.
  • The median number of unique intermediaries in the LTM period that a private equity firm sourced deals from. This was 166 for all participating firms, based on the subset of intermediaries that have closed at least one deal according to Sutton Place Strategies data.
  • The number of deals shown to a private-equity firm per unique intermediary. This came in at a median of three for the entire sample.

With these new datapoints as threads, private equity firms can weave a more complete and precise narrative on how to best allocate business development resources.

“Deal valuations continue to rise, which will likely compress returns in the years ahead given the prospect of significantly lower multiples when it comes time to exit,” added Mr. Malik. “An effective, metric-based deal sourcing strategy will help private-equity firms be more prepared and resourceful in the eyes of their investors, especially when compared to the competition. It will also lead to opportunities that others didn’t even have a chance to review, and with less competition comes lower purchase multiples and higher returns.”

New York-based Sutton Place Strategies is a provider of actionable data and analytics for private equity, and other merger and acquisition professionals to optimize their business development and deal sourcing efforts.

© 2019 Private Equity Professional | October 23, 2019

Print Friendly, PDF & Email

Related Articles

NovaQuest Hits Hard Cap on Latest Fund NovaQuest Capital has held a hard cap closing of NovaQuest Private Equity Fund I LP with $275 million of capital. NovaQuest now has more than $3 billi...
Gridiron Building IT and Data Operating Talent Gridiron Capital has hired Jeff Steinhorn as the firm’s newest operating partner. Gridiron has been active in expanding its operating capabilities in ...
Brookfield Closes Fund V at $9 Billion Brookfield Asset Management has held a final above target closing of its latest flagship global private equity fund, Brookfield Capital Partners V LP,...
2019 Carried Interest and Compensation Survey This is the twelfth edition of the Carried Interest and Compensation Survey. This year we had exactly 300 funds participate. The survey’s compensation...
Another Spin-Out from Lariat Three professionals from Lariat Partners - Kevin Mitchell, Sam Simpson and Josh Sartisky - have left the firm to join RedCloud Capital. This is a retu...
Halifax Adds a New Partner The Halifax Group has hired Doug Hill as a new partner and member of the firm’s investment committee. Mr. Hill, along with the firm’s other partners, ...