The Private Equity Toolkit. Tamara Sakovska
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similar environments and have an overlapping group of acquaintances, so you already know and experience a lot of what your friend does. However, more distant acquaintances are likely to operate in a completely different environment, have access to a totally new opportunity set and, therefore, present a valuable source of information.It is especially worth mentioning the value of “weak ties” within your educational network, i.e. the people who went to the same university as you. Fuchs et al. (2017) conducted research investigating the role of educational networks in private equity by analyzing a data set of over 3,000 buyout investments that were made in the United States and Western Europe between 1984 and 2010. The conclusion is very interesting: not only do educational ties exist in 15% of buyout deals in this data set, but they also seem to improve the odds of a fund winning a deal by 79%.3 Educational networks appear to serve as a productive source of deal origination and may provide easier deal access and a degree of exclusivity for funds sharing an educational connection with a target company.
Join new and relevant professional interest groups. Given that you have a clear idea of what types of deals you are looking for, consider joining communities that will enrich and strengthen your ability to find them. Aim to broaden your social contacts by becoming a member of relevant trade associations, curated industry networks and online platforms, where you can connect with relevant people or get more insights into your target market. Use every opportunity to broadcast a clear message to your network about what deals you are looking for and then rely on Metcalfe's Law to work its magic.
5. Build a strong brand
We see brands everywhere. Does a private equity fund need active brand management? If the goal is to be top of mind, then most definitely yes. If your fund has a superb investment track record, your firm will be top of mind without any marketing efforts on your part. LPs will be lining up to make an investment in your latest fund, sellers of businesses will approach your fund directly, and there will be no shortage of qualified job applicants. People want to associate themselves with top firms in order to maximize the likelihood of their own success.
What if your fund's track record is broadly comparable to that of many other firms? Or, what if you work for a new fund? Then, a serious marketing endeavor might be in order. After all, your brand needs to be recognized and respected by those people most likely to help you with opportunistic deal search. Brand sets expectations, and it is important to differentiate and strengthen your company's external image. How do you do that? My guess is that it will be hard to execute in-house without hiring a brand agency with experience in financial services.
It's difficult to find research on trends in private equity branding. The only brand study I could find that is specifically related to the private equity industry is a survey published in 2017 by a financial marketing firm, BackBay Communications. It has useful insights about brand management, rebranding activities and effective marketing communication in the private equity industry. This study inspired me to look around and think about how the private equity firms that I know well stay top of mind in their markets. Here is a list of my observations:
Corporate website. Private equity funds use every opportunity to communicate their history, investment approach and differentiated value-add on their website. It becomes increasingly more common to include fairly rich and highly specific content with insights about particular sectors, interviews with investment professionals and investment case studies about closed transactions.
Social media. Even the most conservative funds with a global footprint, such as KKR and Carlyle, use social media to promote their brand through news updates, podcasts, blogs and video recordings.4 It is easy to keep up to date with the latest investments, exits and fund closings.
Thought leadership. Many private equity firms seek to showcase their expertise by distributing internally generated research, such as specialist whitepapers, in-depth commentary on financing trends, or deal flow analyses. This is an additional outlet for raising awareness, staying top of mind and connecting with the professional community.
6. Apply creative thinking to supplement your opportunistic deal flow
We have already discussed a number of important ways for you to leverage the resources you can access. Now it's time to get creative in your search for opportunistic deals. Thinking outside the box can generate imaginative strategies to enhance your deal flow. Here are a few ideas to help you get started:
Second-order insights from your portfolio companies. Your fund's existing portfolio represents not only a valuable asset base but also a prolific source of new deal ideas. As a private equity owner, your fund has unique access to first-hand intelligence about industries and operating models of your portfolio companies. You can exploit this privileged knowledge by examining each portfolio company's strategic positioning and determining potential winners in its value profit chain. For example, do any of your portfolio companies’ customers or suppliers look attractive as potential standalone investments? What other second-order insights can you derive from information about your portfolio companies?
Second-order insights from recent private equity activity. Learn from your business environment as much as possible and generate your own insights from other people's deals. Look for notable transactions done by your direct competition. Can you apply the same investment thesis to a different sector or a new geography? Can you replicate any transactional breakthroughs, such as an innovative deal structure or a new financing instrument, to generate new investment opportunities in your market?
Second-order effects of M&A transactions. Keep track of the M&A activity that is relevant to your market, including mega-deals involving large diversified conglomerates. Following the initial deal euphoria, the merged entity will take some time to satisfy any antitrust conditions, generate synergies and fulfill, or fail to fulfill, the strategic rationale of the business combination. Watch out for any disposals that might come out of the merged business and could be of interest to your fund as potential investments.
Deal renaissance. This is a fancy expression for revisiting “dead” deals. Are you aware of any recent failed initial public offerings, broken auctions or unsuccessful private placements? Are you reviewing your own deal pipeline regularly to go over any old deals that your fund declined in the last 36 months because the companies were too small or too weak as investment targets? Focus on the most interesting companies on this list and try to think hard about potential ways to improve the investment thesis and turn these companies into compelling deal targets. For example, is it possible to manage investment risks by changing the structure of a transaction? Can you find an experienced manager who can lead and deliver an operational improvement plan at a target company? You might find that some dead deals are not as lifeless as they seem and are worth reviving.
Backing talent in your executive network. Keep in touch with all impressive industry experts, operating executives and CEOs whom you admire for their vision, managerial skills, leadership and insight. There are numerous ways to stay top of mind in the absence of a live transaction, such as exchanging views on a particular sector, organizing thematic events or getting together informally. Make sure the executives in your network are aware of your investment focus and your enthusiasm about working with them on a transaction. You never know, one of them might call you up with a deal idea some day.
Discovering unconventional partners. Are there any family offices, pension funds, sovereign wealth funds, multilateral institutions, fundless sponsors or other investment groups active in your private equity ecosystem? Spend time getting to know these investors and offering your knowledge, network and capital in exchange for access to their deal flow. While it is a less common strategy,