Here’s How Specialized Private Equity Firms Capture Dealflow

Today, some private equity firms are narrowing their focus to stay top of mind and close more deals.

Private investment firms focused on deals in a specialized industry have an entirely different deal funnel and business development process than a firm who has a generalist focus.

The specialist deal funnel is often leaner and filled with fewer, more targeted deals — the result of long-time relationships, operational experience, or marketing efforts. In contrast, a generalist firm may pursue a similar number of deals and end up closing a similar number of transactions, but the very top of their funnel tends to be much wider.

Compare the deal funnel of specialist firm on Axial to that of a generalist firm:

The generalist firm is recommended over three times as many deals as the specialist firm, but both end up pursuing the same number. For specialist private equity firms, it’s crucial to take these differences into account while sourcing deals.

Here are a few tips.

Keep a High Profile

Specialist firms with a robust marketing plan or sophisticated brand strategy face the challenge of identifying predictable sources of dealflow head-on. To keep a high profile in the industry and identify new transactions and connections, many attend industry-specific conferences and webinars.

However, since banks with decades of experience in just one industry can and will have exclusive engagements with privately held corporations across a number of industries, attending industry-specific conferences isn’t always sufficient.

Stay Current

Like generalist firms, specialist firms need to keep coverage on bankers and brokers across a wide variety of industries. However, specialist firms should focus on specific types of data.

Take a firm solely interested in technology and tech-enabled business services. Their business development professional should make sure information about past transactions in SaaS, software, IT consulting, etc., are well-documented and detailed in the firm’s relationship management tools. That way, associates placing calls or directing marketing content can reference industry-specific synergies to small brokerages and boutique banks alike.

This deep industry expertise is what differentiates specialist firms. Generalist firms may collect some of the same data. But quality, highly-specialized buyers simultaneously observe trends and evaluate competition and operational complexities specific to the industry, and use these observances to establish credibility that makes much of their dealflow proprietary in nature.

Unlike generalist firms, which lead conversations with their experience with similar deals, exit strategy, or management structure, specialist firms should emphasize their industry knowledge first. The same goes for generalist firms who are tasked with finding a highly specialized deal alongside their general mandate. They must become market experts and communicate their investment interests aggressively for that period of time in order to get noticed.

Invest in Marketing

A firm’s online presence can be just as or more important than its presence at conferences and events. According to an Axial survey of 750 deal professionals, the first step for 92% of professionals looking up a new contact is to go online.

“Specialist firms that take the time to document their interests online are being discovered regularly by boutique investment banks and generalist brokers alike,” said Kerri Sperling, a business development consultant at Axial focusing on private equity clients. “Specialists have an easily identifiable value-add, which is their more narrow focus.”