Sourcing deals is the very substance of private equity firms. However, according to one study, 70% of private equity firms in the United States close three deals or less per year.
Since sourcing deals should be the primary focus of a PE firm, it is essential to focus on the best practices that make a successful business development program for private equity firms.
Before taking a closer look at these best practices, let’s define private equity business development.
What is Private Equity business development?
Private equity, or PE, is a capital investment that is made into privately owned companies. It is a form of private financing, and private equity investors raise funds from their partners. The raised fund is called a private equity fund.
From the description alone, this is a tall task. Private equity investors must command the respect of their peers and the market. Otherwise, they can’t convince their limited partners to invest and be part of the process. Thus, business development is needed to give direction and ensure a constant flow of deals for PE firms.
To satisfy private equity’s insatiable appetite for deals, it has created a need for business development professionals within each firm. Business development directors or managers are always on the lookout for deals and the opportunity to initiate one if need be.
Because private equity firms now dedicate resources to putting together a business development team, this enables them to maintain relationships with management teams while holding a constant presence in the market.
Best Business Development Practices for Private Equity Firms
- Someone must “own” the firm and be in a position of accountability.
A private equity firm is not a one-person show, but there must be a clear hierarchy in the command chain. “We all own this company” does not cut it. If all are accountable for a strategic direction or strategy, then ultimately, no one is.
Of course, selecting someone to lead a PE firm doesn’t mean the other partners do not spend time on business development. However, it would be best if one person oversees market positioning and overall strategy, and tracks indicators of sourcing success.
- Maintain a candid and personable attitude especially with bankers.
Bankers often pitch sourcing opportunities to PE firms. Not every one of those opportunities is going to be a fit for your firm. In fact, you may have to pass on the majority of these opportunities. The key is to be specific and honest about why you are passing.
Be mindful in responding to these requests. Try to specify why a deal is not a fit for your firm. This way, you can provide them feedback, and they may give you deals that align better with your vision in the future.
- Fully embrace technology.
Consider technology as a friend and an ally. The influx of data collected during the deal process must be used properly. Emails, spreadsheets, and other archaic methods cannot keep up. The use of CRM or data management technology ensures that repetitive tasks are automated, every deal is tracked, and unstructured data is turned into a wealth of information.
Successful PE firms have a person of authority who’s responsible for overseeing business development. They also try to maintain good relationships with bankers, even if the deals brought to their attention do not fit with the firm’s strategy. Finally, PE firms could have a leg up in the competition by fully embracing technological progress. Adopting these best practices is essential for business development success in private equity firms.