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50% of Private Equity Firms Miss Out On Off-Market Deals

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More than 50% of private equity firms do not leverage their own network that can help them source off-market deals, according to a survey that was part of Navatar’s roundtable hosted with ACG. Most firms struggle with institutionalizing their relationship data (as opposed to each partner owning their own contacts) which could lead them to attractive proprietary deals.

Matthew Gooch, the head of business development at Berkshire Partners, called this result “surprising”, adding that it’s nearly impossible to “weaponize your team if you’re not tracking and assigning relationships.”

Successful private equity dealmakers will say they win opportunities before anyone else by tapping into their network.  Lawyers, advisors, C-level executives, even journalists, come up as entry points for referrals and exclusive market insights few others are hearing.  This is especially important in today’s environment, where growing concerns of a recession will only sideline buyers and sellers from traditional deal channels in the coming months.

“Looking ahead, fund managers will be challenged to put a record amount of dry powder to work amid the disruption posed by the COVID 19 crisis and worsening macro conditions globally, while being mindful that private equity has realized outsized returns coming out of past recessions.” said Or Skolnik, a partner from Bain & Co,  one of our panelists.

In these unprecedented times, how are leading private equity firms weaponizing their network for quality deal flow? Here are four ways that you too can harness the power of your relationships:

Increase Referrals

At a fundamental level, you need to track the different sources of referral coming into your firm – whether it’s by strategics, other buyers, lenders, lawyers, consultants, etc – and their quality. This allows you to understand what types of relationships are yielding the most referrals over time, and how far those opportunities have gone in your pipeline.  By reverse engineering the paths that lead to the most lucrative deals, you know which relationships to cultivate at both the firm and individual level.

Find Warm Intros

Beyond referrals, your firm also needs to be capturing the interconnections within your entire M&A ecosystem.  This means that all partners need to contribute so that you can see which of your colleagues has a connection to a key contact you could leverage for business development. Furthermore, if you’re hiring advisors on due diligence, it’s important to track which other clients they are working with.  It’s this type of information that will allow you to build ‘relationship bridges.’ Let’s say you want to reach out to the CEO of a target company on your watchlist, and you can see that a lawyer in your network has worked with the company before. This is prime opportunity to ask your contact for a warm introduction, which is much more likely to yield a positive response over that of a cold call.

Monitor Secondaries Opportunities

A growing channel of deal flow comes from the portfolio companies of other private equity firms.  Recognizing the long sales cycle, you need a process for tracking, nurturing and qualifying these portfolio companies long before they reach maturation for exit.  The goal is to consistently engage in conversation with the portco executives and deal partners, so that you are top of mind whenever the target company is ready to be sold.  By having a system in place that monitors the aging and investment fit of these portfolio companies, your team can focus on targets most primed for a deal, knowing that your business development team has been cultivating these relationships for years prior.

Track Broken Deals

An emerging strategy some private equity firms are using is tracking past deals that went to IOI or LOI, but ultimately did not close. By combining your deal history with 3rd party market intelligence, you can be alerted to broken deals that still haven’t closed six months later.  To make this strategy more actionable, you should also be tracking the reason the deal did not advance to assess its viability.  For example, pursuing a broken deal that was lost due to pricing terms rather than a cultural gap with the management team is more likely to lead to success.

With off-market channels more important than ever, leading private equity firms are creating opportunities from broken deals, monitoring secondaries opportunities, refining referral channels and leveraging warm intros for business development. Navatar can help you execute on these strategies so you don’t miss the next opportunity. Contact us for a personalized demo to see how you can maximize the value of your network across asset classes, sectors and investment strategies.

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