In a world of ever-present cheap money spurred by QE to infinity, investment in the public and private domain become ever tenuous. Combine today’s cheap capital with higher individual real estate values, the lowest unemployment in a decade and you have a good combination for asset competition. Storing capital in low to virtually no interest-bearing accounts means anywhere yield can be had, competition will be fierce. This Red Ocean of competition further takes asset valuations through the roof. Even cryptocurrency, with its promises of moon shot returns has recently lost some of its own luster. Never will the adage of “you make your money on the buy” cease to be the norm. As we assess the various investor options, nothing will be more important over the coming months of low yield than chasing off-market deals, particularly as it relates to buy-side transaction business development.
The big opportunity in private equity was the private component, but overtime as competition among hundreds and even thousands of private equity groups has become more and more fierce, private off-market deals have become more of the minority exception rather than the rule. No, few deals truly remain illiquid and private. In fact, many of today’s truly stellar mid-market M&A opportunities are heavily shopped and auctioned to the highest bidder–something most private equity groups can’t stand and which some completely avoid altogether. Combine the fierce competition with the greater number of available investment bankers to facilitate the deals and compete for the business of would-be sellers and deal valuations shoot through the roof. It’s a perfect storm if your a seller and his/her intermediary:
–Low interest rates
–Larger amounts of capital looking at many of the same deals
–Large numbers of buyers
On the flip side, buyers need to up their game on sourcing and finding would-be sellers. Here are my high-level suggestions on making a more effective impact on the buy-side.
First, get smart on the data. In today’s “big data” world those that win have better access to more relevant data. Many smaller private companies, even many of those with pretty solid earnings and earnings growth may not even be on Pitchbook, Privco or CapitalIQ. Many of their CEOs are not on Linkedin (they don’t need to network, they already have a successful business) or even Facebook (it’s likely not their demographic or where they spend their time). Some of the best off-market mid-market deals I have seen recently did not have the online and social footprint one would expect.
Second, track your outreach, feedback and results. Having a quality deal CRM, spreadsheet or whatever works for your organization is critical. Using it and tracking all the relevant notes of a would-be seller is helpful as well. Even things as mundane as where their kids go to college or who their favorite NFL team is. Rapport like that is helpful in your next meeting and helps you build brand recognition when you call back and they are that much closer to actually wanting to sell.
Third, follow-up. The money is in the follow-up folks. A company, a real estate investment property or any other large asset may not be for sale today, but that does not mean it will not be at some time in the future. That future could be five months from now or five years from now. Sometimes getting the proprietary Letter of Intent (LOI) signed is a matter of being top of mind and known by the seller.
As everyone continues to chase yield, buyers will need to get more creative on how they approach the market for sourcing and locking-up proprietary deals at good valuations. The difference between the most successful buyers and those who are constantly pursuing the risky (and often fruitless strategy) of sell-side auctions is executing outreach, sourcing and closing with a good internal team and internal strategy that does not lend itself to much public exposure or fanfare. Chasing yield is a tough business, especially when everyone is doing it.