The Private Equity Toolkit. Tamara Sakovska

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Is your team busy around the clock with live deal executions? Do you feel like you are dropping in and out of the private equity marketplace and sometimes unable to follow up on some of the potential transactions that require an effort of being developed and nurtured? Do you operate in a market that is fiercely competitive, with numerous buyers vying for the same investment opportunities? If any of the above applies to your fund, there might be impending limits to your organization's ability to expand and accelerate its deal sourcing capabilities. It would definitely benefit you to consider establishing a dedicated business development function fully devoted to deal sourcing.

      How to go about doing so is largely dependent on your fund's mandate and operating style. Let's review some options that exist in the private equity industry.

      Firms operating in the growth equity sector and lower mid-market typically have to contact and follow up with several hundred potential deal targets every year in order to convert just a few of them into executed transactions. Given the sheer scale of the required deal sourcing effort, establishing a dedicated business development team is probably the best way to allocate organizational resources. Illustrative of this approach are the previously discussed business models of TA Associates and Summit Partners, which employ junior professionals to pursue high-volume cold calling programs. Another example is that of a growth equity firm, The Riverside Company, that has a dedicated deal origination team of nearly 20 professionals covering the firm's global investment mandate from offices on various continents. One point of differentiation, however, is that the majority of deal originators at Riverside are seasoned finance professionals. They possess the business experience and internal influence to enable a prompt and thorough transaction review before it is passed to the execution team.

      Business development teams can be quite effective in large generalist funds, especially those operating in developed markets. From what I have seen in the private equity markets, once the investment team at a typical fund exceeds about 30 people, there is a tendency toward greater specialization, both by sector and by functional expertise. There are several solutions that a generalist fund might employ at this stage to enhance its deal origination capabilities.

One possibility is hiring young, bright and dynamic origination professionals who will be tasked with thinking creatively about unexploited investment niches, identifying new deal targets and ensuring timely deal follow-up. Another approach would be to designate a senior partner who will champion the deal origination strategy for the fund and make it an institutional priority across the firm.

      The involvement of an experienced partner with authority and gravitas can be an effective mechanism for motivating the entire investment team to engage in deal sourcing. Greater emphasis on deal origination efforts will encourage the investment team to bring to completion the mundane yet unavoidable parts of the successful sourcing process, such as deal tracking and scheduled follow-up meetings with deal targets, even during the busiest times for the firm.

      There are instances, however, in which an internal business development function may not be an appropriate solution. Private equity funds that operate in emerging markets tend to focus on finding great businesses in a riskier geography: for this mandate, a sector-agnostic approach in which all deal professionals actively filter through investment ideas might make the most sense. Similarly, investment professionals at deep sector specialist funds with unique expertise might find it difficult to outsource deal origination in their specialized industry to an internal business development team and are most likely to resort to finding deals themselves or enlisting industry experts for help.

      No matter what the circumstances of your fund may be, the point of this discussion is to encourage you to keep up to date with the fluid landscape of business development best practices in the private equity industry in order to stay ahead of your competition.

Good news! We have now reached the end of the DATABASE Roadmap™. You're probably wondering who on Earth has time to go through every step described in the framework? I get asked this question often and the honest answer is nobody. But if nobody really does the whole thing, what is the point of considering every step? Here is what I think. The goal you should set for yourself is to do more than your direct competitors and at all times aim to be a few steps ahead of them. The objective of your job is to find practical ways to attain a competitive advantage. It can mean different things in practice. If you, like most of us, operate in a fiercely competitive private equity market, your best bet is to learn what best practices look like and incorporate as many of them as possible in your day-to-day deal sourcing activities in order to derive maximum benefit from your opportunistic deal sourcing process.

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