New York, October 24, 2019 – Fresh data from Sutton Place Strategies (SPS) suggesting that nearly 60 percent of private equity firms have dedicated deal originators made a splash this month in the trade press.
All told some 59 percent of the 144 private equity firms that participated in this year’s report have at least one dedicated deal originator, or business development professional. That’s up from 47 percent two years ago.
The rapid growth in the origination profession corresponds with improvement in market coverage by buyout shops, defined as the percentage of relevant, completed, advisor-marketed transactions that firms review. Median market coverage rose to 18.8 percent for the year ending June 2019, up from 17.2 percent for year before.
“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.”
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.
Consistent with prior years, all of the firms with the top market coverage in each of the eight peer groups—deemed a “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.
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 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.
· 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,” said Malik of Sutton Place Strategies.
“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.”