How Private Equity Firms Win Deals in the Crowded Mid Market

Introduction

Private equity firms are facing intense competition in the mid-market as the influx of capital and the number of active firms continue to rise. This blog explores five winning strategies for private equity professionals in the crowded mid-market.

Strategies for Private Equity Professionals in the Middle Market

• The private equity sector is experiencing a significant influx of capital, with about $700 billion being raised, including co-investments, direct investments, and separate accounts. However, the average deal size is shrinking, with almost half of the deals in the US being under the $25 million mark.

• The competition in the mid-market has intensified, as the number of active private equity firms globally has increased by 143 percent over a 15-year period, resulting in a flood of capital chasing smaller deals. In addition to private equity firms, large buyout shops, pension funds, and sovereign wealth funds are also competing for deals in the mid-market.

• While there is a prediction for an uptick in M&A activity, it is essential for private equity firms to offer a competitive edge to win deals in the current landscape, characterized by abundant capital and intense competition.

• Three private equity mid-market experts, David, Rob, and Mark, have shared five strategies to address the challenges faced by firms in the middle market. These strategies focus on areas such as relationship management, investment process, leveraging firm culture, and the role of technology.

• The first strategy discussed is the importance of relationship management for engaging intermediaries and reaching sellers. High Street Capital emphasizes the significance of providing access early in the process and building a reputation through consistent and respectful interactions.

• Edgewater Capital Partners highlights the need for a dedicated business development focus to avoid losing deal opportunities and ensure a consistent presence in the marketplace, especially crucial for their sector-focused approach.

• Centerfield Capital Partners, similar to Edgewater Capital, recognized the necessity of a more dedicated source and aligned their timing to develop a business plan that reflects a more focused approach to relationship building.

Building Strong Relationships and Disciplined Approach

• Building and maintaining strong relationships is crucial for sourcing deals in the private equity industry. Prioritizing relationships with intermediaries and other firms based on the likelihood of deal flow is essential.

• Having a disciplined investment process with clear protocols and stage gates helps to stay efficient and avoid wasting time on deals that may not align with the firm’s focus or expertise.

• The discipline also fosters a culture of accountability, where everyone involved in the deal process is expected to contribute meaningfully at each stage.

• Efficiency in the deal process, from initial contact to closing, is ultimately improved through this systematic and disciplined approach.

• Developing strong relationships with sources of deal flow involves not only being responsive and courteous, but also providing value to the intermediaries. This can be in the form of creative capital solutions, referrals, or helpful information for their business.

Investment Evaluation and Firm Culture

• The firm emphasizes the importance of time as a precious resource in the investment evaluation process.

• They focus on reviewing as many deals as possible but only spend time on the most quality deals, creating a filtering process.

• The investment committee plays a crucial role in the screening process, and senior-level individuals are involved early on to make key decisions.

• The firm has also inverted their process by involving operating partners in the early stages, leading to successful outcomes.

• Firm culture is vital, and the firm encourages feedback and engagement at all levels, creating a one-firm attitude and professional rapport.

The Importance of Culture in Private Equity Firms

• The speakers emphasize the significance of company culture in private equity firms, highlighting the priority of hiring and developing individuals over making financial investments.

• Open communication, respect for diverse viewpoints, and the encouragement of junior professionals to ask questions and support their reasoning with facts and data are key aspects of the firm’s culture.

• The smaller size of the firm allows ideas to be respected more than tenure or title, creating an environment where everyone is expected to have an opinion and is encouraged to contribute.

• The transition management, especially in small funds where partners are aging out, is highlighted as a complex challenge that requires careful handling to ensure fairness and sustainability.

• Smaller firms can leverage their size to be nimble and quick in decision-making, turning their size into an advantage. The focus and discipline involved in underwriting transactions to maintain a targeted level of return for investors is crucial.

• The use of technology, such as an integrated system like Avatar, is emphasized as a tool for better decision-making, efficiency, and improved business practices. The need for a top-down approach and firm-wide buy-in is noted to effectively integrate technology into the firm’s operations.

The Importance of Navitor in Facilitating Growth and Deals

• Navitor plays a crucial role in facilitating growth and winning deals, as highlighted by the experiences of the panelists.

• The panelists emphasized the necessity of a minimum commitment from all team members in using Navitor effectively to ensure its benefits are realized.

• It helps in maintaining discipline, especially in staying focused on sourcing amidst competing priorities, and enables the identification of key contacts and areas that require attention.

• The changing market landscape, with an increase in financial buyers, makes it essential to stay top of mind, and Navitor is a valuable tool in achieving this.

• The decision to overhaul IT systems, including implementing a CRM, requires significant commitment, buy-in from senior level personnel, and thoughtful consideration of the investment of time and resources.

• The competitive nature of the middle market and the challenges in sourcing non-auction deal flows were also discussed, highlighting the importance of discipline and efficiency in the current environment.

Conclusion

In conclusion, private equity firms operating in the crowded mid-market can gain a competitive edge by implementing strategic relationship management, a disciplined investment process, leveraging firm culture, and adopting technology. These strategies are crucial for success amidst the intense competition and abundant capital in the mid-market landscape.

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