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Edged out: Where’s the Opportunity for Private Equity Buyout Shops?

3 Min Read

It is no secret that competition has ramped up in private equity, as new players—corporations, more private equity firms, and non-traditional investors—have entered the market, making it harder to find qualified targets. Private equity firms alone have grown by leaps and bounds over the last 20 years; around 5,000 firms now operate around the world.

What’s more, deals in the market are currently at a premium, priced at a median of 9.2 times earnings globally, and 10.9 times in America, the highest since 2007, according to Dealogic. It can be challenging to compete in this environment. Indeed, in 2016 private equity’s global share of deals slipped to 4.2%, the lowest level since 2009.

There’s plenty that private equity firms can do though to differentiate themselves and break into the top quartile. Some firms have found success competing less on price and more on factors such as speed. Setting up specialized teams of bankers, analysts and consultants even earlier in the process of a prospective deal has worked for some, and many develop “shadow portfolios” of companies they like well before they come up for sale.

Make your firm stand out

Facing competition from strategic acquirers, many private equity firms have begun to source smarter by honing in on a specialty or specialties. Identifying the deals you excel at and want to find more of—long before those deals become actual options—will greatly help you in sourcing high-potential deals. At the same time, expanding your network of advisors is invaluable to finding the best possible targets.

A solid network can help you find potential assets, gives you access to management teams that can provide valuable insight, helps you zero in on investment themes, and helps you avoid waste by filtering out less desirable opportunities. A good network will give you access to a wider array of deals, and advisors’ input can also help you to enhance your investment theses. Cultivating a strong network goes hand-in-hand with honing in on your sweet spot.

Once you’ve identified your specialty, the expert network you’ve created can help you execute on your strategy, fully exploring and understanding the space even before any deals come to market. Your network can help keep you top-of-mind in the space and develop relationships in the industry that could be useful down the road.

A high-profile network can also add credibility to an offer when it comes to high-profile targets. Typically, the cost of cultivating this expert network is offset many times over as you more efficiently allocate resources, according to a recent Bain report.

Cultivate a solid network

Two types of networks worth cultivating are an institutional network of advisors who are always available, and a temporary network that can help you with a specific opportunity. For each network, it’s important to ensure members can truly provide your firm with specialized insight or access. Contacts should be well-connected and willing to advocate for your firm. Once these relationships are established, it’s critical to have regular contact with them to maintain your connection.

Easy steps to take to maintain strong relationships with your network include sending an article you see that might be of interest to them, bonding over a shared interest or scheduling a lunch with them when you visit their city. Bain data shows that managing directors spend about 30% of their time on networking.

Another way to gain an edge in the current competitive environment is to mine online data to learn more about the strengths and weaknesses of a potential target. Valuable information can be gained from sources such as social media sites and e-commerce traffic, and many private equity firms are starting to take note.

Advanced analytical tools can help reassure you that you’re paying the right price for an asset, and can complement traditional research such as interviews and site visits. Firms are using software tools that can organize and analyze data such as employee compensation and customer reviews. Specialized tools such as Tableau can quickly show patterns in the data, helping you to make faster—and more informed—decisions on a potential target, and ultimately helping you make your business stronger.

At Apex Leaders, we work to connect you to hand-picked industry experts to help you make confident investment decisions. Every ‘River guide’ we introduce you to builds your network and ensures ungated access to the benefit of on-the-curve insights, every time. Learn more about our distinction from traditional expert networks.