Earlier this month, the WSJ reported that “private-equity firms are spending more of their own cash to win deals as soaring purchase prices push debt markets to the limit.” According to the report, private equity investors are contributing more than 50% in the second quarter of 2019 to U.S. buyouts. That is a significant increase from even the first quarter of this year, which came in around 45%, and the lows of Q1 2018 at 42%.

Per the WSJ, much of this increase in spending is due to the fact that “lenders don’t typically provide debt to target companies in excess of six times earnings before interest, taxes, depreciation and amortization, or Ebitda…” Moreover, in 2018 nearly 40% of leveraged buyouts “raised debt that was seven times Ebitda, according to research by consulting firm Bain & Co. With debt markets already pushing their upper limit, buyout firms have to put in more of their own cash to hit currently elevated asking prices.” This is unprecedented behavior for private equity firms and a sign of the amount of capital and the competitive market these investors are currently facing to close worthwhile deals.

As investors grapple with current market conditions, including putting up more of their own cash to win and close deals, there has to be a better approach to sourcing deals. Rest assured, incorporating data and automation into your sourcing strategy can help alleviate some of the new challenges facing investors. That said, everyone is already drowning in data, so simply adding more doesn’t pass the common-sense check. Also, automation that depends on data to function, can only be as useful as the data it’s relying upon. You must first remove as much noise as possible and only then move ahead with analyzing relevant data points, that are then distilled down into much smaller volumes of actionable information.

Let’s use an Advanced Advisor Analysis (AAA) as a guide, which is a hyper-focused sourcing report that SPS builds from scratch for each individual client, upon request. The purpose is to find gaps within existing coverage, explore new approaches that offer low-hanging fruit, and streamline the overall workflow of identifying/qualifying/tiering advisors. The entire process should be reviewed, evaluated, and replicated once per year, followed by specific actions that are measurable. This will help determine the efficacy of analyzing advisor relationships, while revealing what aspects could be tweaked for future iterations.

Take a look at the AAA for PDLE Capital Management. This summary involves analyzing PDLE Capital’s internal advisor relationships against SPS market data to evaluate:

  • Trending Advisors: Firms that have completed more relevant deals based on PDLE Capital’s specific criterion in the most recent LTM period, compared with previous LTM periods
  • New Advisors: Intermediaries closing relevant deals, that have not appeared within PDLE Capital’s deal pipeline
  • Low Coverage Advisors: Intermediaries that PDLE Capital has relationships with, but are consistently closing a large number of relevant deals that are never seen by PDLE

PDLE Capital Management Sample Analysis

  • Transaction Value Range: $50-$250 MM EV
  • Deal activity time-period: 7/1/2016-6/30/2019
  • Trending Advisors: 37 intermediaries have completed more deals in the LTM June 2019 period, than the average of the previous two periods (LTM June 2018 and LTM June 2017).
  • New Advisors: 53 intermediaries did not exist in PDLE Capital’s deal data, but were active in the LTM June 2019 period.
  • Low Coverage Advisors: 42 intermediaries currently have an individual market coverage percentage below PDLE Capital’s overall percentage, and were active in the LTM June 2019 period.

As with most things in life, practice (and the right amount of analysis) makes better, and there is always room for improvement. Paring down a massive list of advisors for PDLE Capital Management can significantly impact how many existing relationships are in need of attention, the number of advisors that are new and worth building relationships with, and how to staff accordingly. Once those matters have been settled, take advantage of automation tools to drive targeted outbound engagement, such as SPS Alerts.

If you are interested in reviewing your own advisor report, contact us. And remember, this level of detail will only prove useful if it includes measurable results with actionable follow-ups that pertain to your sourcing strategy. Let’s try a new approach before paying 10+ times Ebitda.

Last week’s deals today

July 15-19, 2019
~114 deals traded

Deal of the week

NextEra Energy Inc. completed its acquisition of the San Francisco based Trans Bay Cable LLC. The target is an operator of a 53-mile, high-voltage direct current underwater transmission cable system. RBC Capital Markets acted as the sell-side financial advisor for this transaction and no terms were provided.

Most active subsectors
  • IT: Software & services
  • Industrial: Misc. equipment & products
  • Services: Staffing & human resources
Most active cities
  • San Francisco
  • New York
  • Seattle

Photo by Dmitry Moraine on Unsplash

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