How to Stand Out in the Crowded World of Middle Market Private Equity

Having spent more than 20 years as an investment banker working in the middle and lower middle markets, I continue to encounter private equity firms that express frustration with their ability to generate quality deal flow. Competition certainly plays a part; that “perfect deal” that you’re seeking has a lot more suitors these days. New funds pop up all the time and you’re also competing against sources that weren’t as prevalent ten years ago — family offices; savvy, well-connected fundless sponsors; and even lenders offering terms that make a control deal unnecessary.

Just like in other areas of life, everyone is always searching for a magic bullet to solve their problems. However, just like in life, sometimes the best answers are the most obvious ones. So based on my experience, here are seven common-sense measures to help PE firms measurably improve their deal flow in the market we work in today.

1. Be Clear

In all of your meetings, in all of your marketing materials, and in all of your interactions with potential referral sources, you need to constantly and consistently stress what your “perfect deal” looks like. In particular, be very explicit about targeted industries, your EBITDA ranges, and preferred check size. If you neglect this important step, you risk not getting put into the banker’s CRM system properly (if they use one), and not being put on the right buyer lists. It is also very important to know, and to articulate, what types of deals you do not want to see. A message that most investment bankers find unhelpful is “Please just show us everything and let us decide.” Most banks don’t view their deal flow as an “all-you-can-eat” buffet, and this approach is likely to produce the opposite of the intended effect.

2. Be Proactive

While the occasional email and phone call are great for keeping existing relationships alive, nothing gains you mindshare better than an in-person visit. Taking the time to drop by and to introduce yourself to your counterparts in person lets them know that their business is important to you, and allows the advisor to put a face with a name. Unlike the advisory business, committed funds have a fee stream that allows them to fund the investment in a travel and business development budget. Finally, if you’re reading this in Boston or New York, remember that most lower middle market deals aren’t in Manhattan. Get out of the office.

3. Be Persistent

Once you get relationships established, follow up on a regular basis. A visit might generate a deal, but someone who calls or visits on a regular basis over time (and reiterates the advice contained in bullet point #1) is much more likely to get the attention of a potential deal source in a way that generates consistent deal flow over a long period of time.

4. Be Responsive

You’ve invested the time and money to create consistent inbound deal flow. Now, don’t ruin all those efforts by falling down in the responsiveness department. In my career, I’ve noticed that typically 20-30% of the PE firms we reach out to will fail to get back to us on new deals. After this happens a couple of times, most bankers decide that you’re not worth contacting any more. Be organized, and utilize your CRM to make sure potential leads don’t fall through the cracks. This point was highlighted for me several years ago when a former boss in investment banking joined a PE firm. When I spoke to him, he said that a primary part of his new firm’s competitive strategy was simply “responsiveness” — knowing that such a stance would quickly distinguish them from the crowd. It did, and it does.

5. Be Competitive

If you have done all of the above and finally see a deal that you really like, don’t blow it all up by submitting a low and potentially embarrassing bid. If you are not sure your bid will be competitive or well received, call the banker to ask. Bankers usually feel obligated to share any offers with their client, and no one likes to be told they have an “ugly baby.” If you are in doubt, call first. You may be surprised what the banker will tell you. A pattern of bottom-fishing will quickly destroy all of your carefully-crafted business development efforts.

6. Be Professional

You only get a limited amount of time to make a good impression. Make sure your marketing materials and website are helpful and up to date. Can I easily look through your current and active deals? Can I tell when you bought your portfolio companies? Can I tell what partners are involved on which deals? Both bankers and their clients are going to do background research on you as part of any process. Make sure your website and materials say what you want them to say. Do your homework before any meetings and always try to be on time.

7. Be Likable

In this crowded market, bankers and sellers are often in a position where they have the luxury of being able to choose between many good options. The old adage “People usually want to do business with people they like” still rings true. I find that likability is the world’s best tiebreaker — if it’s between you and another firm, and they like you more, you’ll be the one getting the call. This may be the most commonsense of the seven tips, but may also be the most important in this hyper-competitive environment. While likability is hard to teach, I can certainly help you avoid being unlikable. Based on my experience, here are a few things to avoid:

• Don’t completely re-write my NDA – If you have a change or two that is important to you that is fine, but don’t send it over to your big law firm for a total re-write.
• Don’t order a bunch of really expensive wine at a management dinner — and then forget to offer to pick up the tab.
• Don’t tell us you’re sending an offer letter, then change your mind without calling us to let us know.
• Don’t complain about messing up your Gucci loafers on a factory tour that you requested as part of the meeting (yes, this has happened).

And finally, use your common sense and try to always remember who your audience is for the meeting.

While I don’t think you need to do all of these to be successful, falling short on more than one or two will just make it easier for the advisor to call one of your peers instead of you. Just like in life, doing most of the small things well will get you a long way toward your goal.