Rise of the Private Equity BD Professional

“Business Development” — it’s a function that has taken on new meaning and significance in the private equity industry in the last few years. What does it actually mean?  And why should you pay attention to it?

While some PE firms seem to see the role as an expensive redundancy, the merits of a dedicated business development (BD) professional have become increasingly undeniable. As Wayne Sills — Founder of Sills Associates Executive Search Consulting, which provides executive selection assistance to private equity funds — explained, “BD professionals are proving to be critical assets to PE funds. Once they get on the street, [firms] should see a noticeable change in actionable deal flow within a couple of months.”

The Rise of the Private Equity BD Professional

According to Sills, a private equity BD professional is, “someone whose primary activities are generating access to investment opportunities and keeping the deal pipeline full.”

The job function has become increasingly valuable as a focused role in today’s PE world. Increasing competition for prime PE target companies has caused many GPs to re-evaluate their sourcing strategies and look to BD professionals to increase deal flow. “The standard model has been to have senior management and members of the deal team source deal opportunities, but based on what I’ve seen and heard I think it is clear that one dedicated person doing BD 100% of the time will be much more productive than 4 people doing it 20% of their time,” explained Sills.

He continued, “A good analogy is commercial banking 25 years ago. Before the 1980s, a banker was responsible for finding customers, analyzing, negotiating structuring and closing the loan and then maintaining the relationship with the borrower– it was a very holistic approach. However, a shift occurred in which financial institutions began taking those better at BD and putting them in exclusively BD roles, and not asking them to also own underwriting. I see a similar development occurring in PE now.”

And it is not only the big firms that are adopting the strategy. In a recent survey, Sills learned that BD professionals exist in funds of all sizes: sub-$200 million, $200 million – $500 million, $500 million – $1 billion, and $1 billion+.

While Sills expected the role to be present in larger firms — since they have to balance different funds, portfolio companies, exits, etc —  he was surprised by the number of BD professionals in smaller firms. 19% of survey respondents are working at sub-$200M funds.

Identifying a Good BD Professional

As with any professional role, not all BD professionals are created equal. “I believe that a truly talented PE deal generation specialist is a rare commodity,” said Sills. “Succeeding in the position over the long haul requires a unique combination of skills and attributes. The best BD professionals are typically independent, problem solvers, highly organized, personable, high-energy, with both CRM and financial know-how — to name a few critical attributes.”

One of the most crucial skills, however, is process-oriented thinking. Since “constant deal flow is more likely to be the result of developing a process,” having a focus on process will make for a better BD professional. Sills added, “One of the errors that I see PE funds make when staffing the position is trying to hire people like them — transaction-oriented people. They need to be looking for people who have some of their attributes, but are much more process-focused.”

In addition to looking for these skills, Sills also encourages looking for experience. By hiring a BD professional with a few years on the job, you will be able to reap greater benefits faster — they already have referral relationships, and they know that they want to be in the role,” explained Sills.  He continued, “Be wary of someone looking to use the BD role solely as a transition into PE, but has no desire to stay in the role long term.”

Compensate Accordingly

When hiring their first BD professional, many PE firms do not compensate accordingly. “Very often when we would be contacted to do a search for the position I found that private equity firms did not have realistic expectations about what to pay for the position,” explained Sills. As it turns out, qualified BD deal professionals are often making salaries well north of 200K.

Since many firms are not aware of the compensation standards, they “hire an Analyst or Associate from an investment bank or sponsor finance group and pay them a five figure salary and some success bonus.”

While such a strategy can yield a quick hire, “hiring an inexperienced person represents a risk which can be way more expensive than the risk of overpaying someone who has the right stuff for the job,” mentioned Sills.

Sills also discouraged compensation for BD professionals based on successful transactions. He explained, “The business development professional usually has no control over deal processing and no ability to control extraneous factors so their comp plan needs to focus on factors they can control. (i.e., their performance).”

The Road Ahead

The demand for valuable BD professionals is likely to only grow with time. As competition between firms prioritizes innovation, creativity, and unique resource allocation, the firms that are able to think outside the box will be able to realize better deal flow and LP support. Hiring a BD professional is a great way to convey that creativity

“I am told that LPs are putting a lot of emphasis in their due diligence on understanding how a prospective fund differentiates their deal sourcing,” said Sills. “They want to see that the fund has a process for sourcing investments that doesn’t correlate to the other funds they’re looking at or invested in.”

Axial CEO Peter Lehrman has also identified the growth of the BD role. He explained, “I think it’s an incredibly favorable development for the private equity industry to establish the business development role as a specific area of excellence within each firm.  All organizations need a way to predictably generate a high quality pipeline of opportunities; it doesn’t matter whether it’s a sales pipeline or a deal pipeline.” He continued, “The business development professional’s rise in prominence in private equity acknowledges that fact.”

The biggest hurdle thus far to bringing a BD professional into a firm has been logistical. According to Sills, “I think timing is a factor in hiring a BD professional. I see firms struggling to figure out how to bring in a high priced BD specialist if they are halfway through investing a fund. While they see the value of having a deal sourcing specialist, they have a hard time dividing up economics midway through the investment period so often they target hiring a BD professional for when they are getting close to closing on their next fund.” But, as firms close their existing funds, the wave of new funds will yield the perfect opportunity for creative firms to seek out the burgeoning BD professional.