Top Banner
Best Practices of Private Equity Funds in Originating Investments Where Are the Deals?! Cold Calling?from http://www.flickr.com/photos/23439761@N03/3258313816/sizes/l/ David Teten Partner, ff Venture Capital ffvc.com blog: teten.com New York, NY [email protected] , @dteten July 12, 2011
58

Best Practices by Private Equity Funds in Deal Origination

Aug 17, 2014

Download

Economy & Finance

Best Practices by Private Equity Funds in Deal Origination

by David Teten

How to Find Great Investments in Private Companies
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: Best Practices by Private Equity Funds in Deal Origination

Best Practices of Private Equity Funds in Originating Investments

Where Are the Deals?!

“Cold Calling?” from http://www.flickr.com/photos/23439761@N03/3258313816/sizes/l/

David Teten Partner, ff Venture Capital ffvc.com blog: teten.com New York, NY [email protected] , @dteten July 12, 2011

Page 2: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

We have presented our research to many investor conferences, private equity funds, and investment banks. •  Association for Corporate Growth (ACG) Intergrowth, and Capital Connection Chicago •  Alliance of Merger & Acquisition Advisors •  CFA Society of Los Angeles •  Columbia Business School Alumni Club of New York •  Financial Executives Networking Group •  Golden Seeds (US angel group) •  Harvard Business School Club of London •  Harvard Business School Association of Southern California •  Kauffman Fellows program participants •  Keiretsu Forum •  Wharton Alumni Club of Northern California •  Yale Club of Singapore •  Singapore Venture Capital and Private Equity Association •  CFA Singapore •  Women’s Association of Venture & Equity •  Leading investment banks, private equity funds, venture capitalist funds, and hedge funds

Page 3: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

Background

David Teten recently completed the first-ever research project on “Best Practices in Private Equity and Venture Capital Deal Origination”. His coauthor for some of the research is Chris Farmer, Venture Partner, General Catalyst, and formerly Vice President, Bessemer Venture Partners.

David and Chris have published their findings in the Journal of Private Equity (Winter 2010); Mergers & Acquisitions (December 2010); Institutional Investor (October 2010); and Harvard Business Review (June 2010). These slides provide some of the learnings and underlying data from the research study.

Evalueserve, a global research firm and the acquirer of David’s former company (Circle of Experts), provided supporting research and analytics in the initial phases of this study. We also thank Yujin Chung (Andreessen Horowitz) and Neha Kumar (Anklesaria Group), our research associates who provided invaluable support, and interns Corentin Roux dit Buisson, Dan Clark, Nitin Gupta, and Nikhil Iyer .

Page 4: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

David Teten Biography (teten.com) •  Partner, ff Venture Capital, early-stage technology venture capital fund. Over 150

investments in over 55 companies. •  Founder and Chairman, Harvard Business School Alumni Angels of Greater New York •  Founder and Chairman, Navon Partners, startup focused on sourcing deals for private

equity funds •  Managing Director, Evalueserve, through September 2008. 2,500-person finance-focused

research and analytics firm. •  Founder and CEO, Circle of Experts (investment research firm), sold to Evalueserve •  Founder and CEO, Teten Executive Recruiting, sold to Accolo, #42 on 2007 Inc. 500 •  Founder and CEO, GoldNames, domain name investment bank, based in Israel •  Technology/Defense Investment Banking, Bear Stearns (#1 group

at Bear investment banking by revenues) •  Lead author, The Virtual Handshake: Opening Doors and

Closing Deals Online (TheVirtualHandshake.com) •  Harvard MBA 1998, Yale BA, both with honors. •  Contact: [email protected]

Page 5: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

•  Introduction

•  Organizational Structure

•  Traditional Deal Origination

•  Social Media

•  Signals of a Potential Investment

•  Growing Your Corporate Network

•  Next Steps

Agenda

Page 6: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

Navon Partners (NavonPartners.com) We help investors to identify investment opportunities in illiquid assets.

We obtain our data from: •  major data vendors; •  licensing from niche data vendors; •  non-traditional sources, e.g., web scraping from the ‘dark web’; and •  our data-based financial extrapolation, e.g., estimating revenues based on

headcount. Our initial target market is helping private equity funds to identify proprietary deals which are predictably attractive long-term investments. Our rigorous, data-driven algorithmic process is modeled on the datasets and process used by quantitative hedge funds.

Page 7: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

We interviewed over 150 private equity and venture capital funds globally for this study.

David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar

Analysis of Private Equity and Venture Capital Funds in Study

Page 8: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

Minimal outbound origination programs targeted outside of Venture Centers

Firms in venture centers (Boston/NY/Silicon Valley) outperform with investments outside venture centers. Performance gap is larger for late stage (20.7% vs. 15.7%) vs. early stage (15.1% vs. 11.3%)*.

Origination programs targeted outside of Venture Centers

Leading Late-Stage Tech Investors Portfolio by Geography, 2000-1Q2010

Success rate shown is defined as % of VC portfolio which leads to IPO. Results are similar when success is defined as investment either leading to IPO or acquisition. Only IT & related sectors. Battery & Sequoia data is only late stage/growth equity deals. *“Buy Local? The Geography of Successful and Unsuccessful VC Expansion”, Chen,Gompers,Kovner,Lerner

These funds are typically top-quartile performers; almost all have raised funds equal or larger than their preceding

fund in the challenging 2007-10 period.

Page 9: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

Case study: Castle Harlan, $3b PE fund, studied correlation between different sourcing strategies and returns.

Castle Harlan

•  Castle Harlan completed an internal study in 2009 of the sources and returns of all their completed transactions (68 deals, 38 exited).

•  Firm management asked the deal team on each transaction to rate the importance of seven proprietary strategies to winning each deal, on a scale of 0-10 (10=maximum).

•  For example, "finder" and "industry expertise" were two of the strategies. "Finder" was score-weighted in a binary way, with either a 0 for no finder involved or a 10 for a finder playing a key role in sourcing the transaction.

•  Across all deals, the mean total "proprietariness" score was 21.2 out of a maximum possible of 70, and 44 of the deals (65%) scored above 25. Most of these 44 deals fully exploited (i.e., 10 out of 10) at least two proprietary strategies, and benefited from some other strategies as well.

Page 10: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

Castle Harlan

•  The most proprietary deals (“proprietariness” scores of 31+) had a somewhat higher return than non-proprietary deals, while at the same time the firm tended to pay on average a premium for these proprietary deals.

• Includes: Deals sourced through affiliated investors; through relationships with current management; and/or through relationships with non-incumbent management.

• This implies that these companies were higher quality than non-proprietary deals; Castle Harlan perceived a lower uncertainty risk; and/or the fund was able to add more value to these transactions after a transaction closed.

•  By contrast, deals characterized as being sourced through finders were associated with lower entry multiples, but also relatively less attractive realized outcomes.

• Only 9 investments (13% of the total) had a "Finder" score of 5 or more.

Castle Harlan origination study shows higher multiples for proprietary deals.

Page 11: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

Acquirer/ Investor

Angel groups using Angelsoft

(2010)[i]

First Round Capital (2009)[ii]

Blackford Capital (2009)

TA Associates (2006)[iii]

Highland Capital

(2008)[iv] AlliedSignal (1996-97)[v]

Investing focus startups startups lower-middle-market

growth companies

growth companies

synergistic businesses

Profiled initially 20,850 2,500 1,394 NA NA 550 Target Selected 1,315 500 261 8,000 10,000 [vi] 190 Met 1,047 NA 20 750 1,000 NA Negotiated with NA NA 14 NA NA 28 Detailed due diligence

577 100 20 NA NA 17

Acquired/ invested

541 20 3 10 to 12 10-20 10

Deals as % targeted companies

33.5% (2.1% of

submissions)

4.0% 1.1% 0.1%-0.2% 0.1%-0.2% 5.3%

[i] Available at http://angelsoft.net/a/venture-valuation , as of twelve months ending March 17, 2010. [ii] Aktihanoglu , Murat. “NYC Entrepreneur Week Events Take-aways.” May 3, 2009. http://centrl.com/blog/?p=53 .

[iii] Rudd, Amber. “A Kind of Magic.” Corporate Financier, October 2006. [iv] Economist, Global Heroes: A Report on Entrepreneurship, March 14, 2009., p. 9. “Targets selected” figure indicates number of business plans received.

[v] Bruner, Robert F., Applied Mergers and Acquisitions. New York: John Wiley & Sons, 2004., p. 183. [vi] Number of business plans received.

Closing one deal requires sourcing 80-100 deals. Investment Search Process (# Companies)

Page 12: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar

VCs have to filter 9% more deals than PE funds to close one deal. Median Pipeline Size Necessary to Close One Deal

Page 13: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar

Three investment professionals need 1 year to close 1 deal.

Median Annual Pipeline Size per One Investment Professional

Page 14: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

•  Introduction

•  Organizational Structure

•  Traditional Deal Origination

•  Social Media

•  Signals of a Potential Investment

•  Growing Your Corporate Network

•  Next Steps

Agenda

Page 15: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

Deal Sourcing Strategies: Please describe if your sourcing strategy has changed, how it has changed,

and how you expect it to change in the next 3 years.

The most common sourcing strategy is to combine in-house/direct with sell-side intermediary. 40% of firms plan to move towards more in-house/direct in next 3 years.

<10%

10%-19%

20%-29%

40%-49% 50%-59%

30%-39%

* “Other” includes broken auctions, tangential relationships and well connected individuals. Parthenon Group

In-House/Direct

Less

Same

More

3 yrs from Now Currently

<10%

10%-19%

30%-39%

40%-49%

50%-59%

60%-69%

70%-79% 80%-89%

90%-100%

20%-29%

<10%

3 yrs ago

80%-89%

70%-79%

60%-69%

50%-59%

40%-49%

20%-29%

30%-39%

10%-19%

90%-100%

Buy-side Intermediary

Currently 3 yrs ago

<10%

10%-19%

20%-29%

30%-39% 40%-49% 50%-59%

3 yrs from Now

Less

Same

More

Sell-side Intermediary

Currently

90%-100% 80%-89%

60%-69%

50%-59%

40%-49%

30%-39%

20%-29%

10%-19%

<10%

3 yrs ago

80%-89%

70%-79%

20%-29%

10%-19%

<10%

90%-100%

60%-69%

50%-59%

40%-49%

30%-39%

3 yrs from Now

Less

Same

More

80%

60%

40%

20%

0%

Perc

ent o

f Res

pond

ents

100% Other

3 yrs ago

<10%

3 yrs from Now

Same

More

20%-29%

30%-39%

Currently

<10%

10%-19%

20%-29%

30%-39%

10%-19%

Page 16: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

Only 10% of deal origination is outsourced, on average.

80%

60%

40%

20%

0%

Aver

age O

utsou

rcing

%

100% 95% 93%

88%

55% 52% 50%

38%

30% 24%

16% 15% 10%

5% 2% 2%

Envir

onme

ntal

Due D

iligen

ce

Lega

l Du

e Dilig

ence

Acco

untin

g Du

e Dilig

ence

Ta

x Pr

epar

ation

Infor

matio

n Te

chno

logy

Marke

t Du

e Dilig

ence

Le

gal/

Comp

lianc

e

Acco

untin

g

Marke

ting a

nd

comm

unica

tions

Huma

n Re

sour

ces

Finan

cing

Fund

s Ad

minis

tratio

n Re

portin

g De

al So

urcin

g

Inves

tor

Relat

ions

Offic

e Ma

nage

ment

Portf

olio

Mana

geme

nt

3 years from now Currently

10%

Average Outsourcing Level by Function

Parthenon Group

Page 17: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

Over 50% of funds plan to change/improve processes for sourcing, fundraising, and portfolio management.

Percent of Private Equity Funds That Plan To Change/Improve Processes In The Next 3 Years

37% Investment exit planning

40% Investment committee decisions

45%

52% Portfolio management

53% Fundraising

55% Sourcing

Parthenon Group

Increased competition makes firms focus on these processes now

80% believe these processes are important

and already have them in place

Only 25% believe this process is important

Due diligence

Page 18: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar

An increasing percentage of fund employees are specialist originators.

Investment Team Distribution by Job Function

Page 19: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar Responses for Don’t Know/Cant say is excluded from the analysis. Percentages may not add up to 100 due to rounding off.

% of Funds With At Least One Person Tasked Specifically and Primarily with Deal Origination

Specialist originators are more common in more developed markets.

Page 20: Best Practices by Private Equity Funds in Deal Origination

Intro Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Tradition Org Chart

•  Persistence, or "hanging around the hoop" •  Personality •  Business judgment •  Adequate financial sophistication •  Seniority and appropriate title •  Internal power •  Creativity

The best originators are aggressive, indefatigable, and personable.

http://www.flickr.com/photos/randysonofrobert/2552298739/

Attributes of Top Originators (descending order of importance)

Page 21: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

•  Introduction

•  Organizational Structure

•  Traditional Deal Origination

•  Social Media

•  Signals of a Potential Investment

•  Growing Your Corporate Network

•  Next Steps

Agenda

Page 22: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Intermediaries refer deals to funds primarily in the hopes of future revenues.

•  Possibility of future revenue •  Integrity •  High certainty to close •  Speed of response •  “Fair” treatment of sellers •  Experience with the industry

or owner type •  Friendship •  Feedback •  Maintaining a single point of contact

http://www.flickr.com/photos/extranoise/3382930813/

Top Reasons Intermediaries Refer Deals to Funds (descending order of importance)

Page 23: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Companies favor a particular investor for the same reasons as an intermediary (see prior page), plus a range of other factors.

•  Economics •  Added Value •  Brand •  No extra costs, i.e.,

no portfolio company fees •  Fair treatment of employees

post-transaction •  Long hold periods •  Investor location

http://www.biztimes.com/news/2007/8/3/choose-the-right-private-equity-firm, http://www.growthbusiness.co.uk/news/fundraising-deals/27442/part_2/private-equity-finding-a-match.thtml , http://www.flickr.com/photos/billselak/461062697/

Top Reasons Companies Select a Given Investor (in descending order of importance)

Page 24: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

The right type of specialization boosts returns.

Lossen, Ulrich, “The Performance of Private Equity Funds: Does Diversification Matter?” Munich School of Management, Institute for Innovation Research, Technology Management and Entrepreneurship. June, 2006. Ernst & Young. "How Do Private Equity Investors Create Value? A Study of 2006 Exits in the US and Western Europe". New York, NY/London. 2006.

•  The rate of return of PE funds declines with diversification across financing stages…

•  but increases with diversification across industries. •  Diversification across countries has no systematic effect on performance. •  In an Ernst & Young study of the largest PE deals of 2006, US investors

reported that sector focus was an advantage in 2/3 of their deals, establishing credibility with management and helping to evaluate the growth potential of the target.

•  In Europe, investors reported that sector focus was an advantage in 25% of deals.

•  In both regions, these sector-focused deals performed above average.

Page 25: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Differentiation makes origination more efficient. Selected Highly Differentiated Investing Strategies

Strategy Example(s) Co-investments with corporates Blackstone Group, Castle Harlan, Clayton

Dubilier & Rice Executive-led transactions Frontenac Company, GTCR, Housatonic

Partners Intellectual property Intellectual Ventures Spinning out processes from within Fortune 500 companies and setting them up as independent ventures

Exigen Capital

Deep focus from early to late stage in narrow vertical Andreessen Horowitz, Healthpoint Capital Minority-owned businesses AP Capital, ICV Capital Partners

Women-owned businesses Hypatia Capital

Family-owned businesses Heritage Partners Film financing Relativity Media Buying Western companies and outsourcing operations to China Crimson Ventures Distressed Searchlight Capital

Page 26: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

•  Build personal relationships with journalists

•  Have a clear point of view and area of expertise

•  Develop and publicize quotable white papers and other thought leadership pieces

The best reason for deals to come to you is reputation. However, the bad news is: of 109 journalists surveyed, zero rated private equity firms “excellent” in communication.

Haynes, Bill. “Making Media Count”. PrivateEquityOnline, April 7, 2009.

Recommendations: Journalists’ Evaluation of PE Funds’ Communication Skills

Page 27: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

30-50% of mid-market deals are typically club deals. Private Equity Club Deals as % of Total Number of Deals, by Deal Size (US)

Pitchbook.com data through May 2010

Page 28: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Fund

Com

mitm

ent

Free Agent expenses+upside

Rejected Executives

Senior Advisor / Deal Executive expenses+upside

Executive/Entrepreneur in Residence retainer+upside

Portfolio Company / NewCo Management salary+upside

Executive’s Income

Expert Network / Interim Executive hourly comp

Operating Partner salary+carry

PE Fund Structural Options in Working with Operating Executives

Private equity funds have a wide range of options in working with executives, many of which have no fixed cost.

Page 29: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

based on table from Jon Weber, Anchorage Advisors LLC

Senior Advisor Network vs. Traditional Talent Sources

Senior Advisor networks offer a low-fixed-cost, high-return talent pool option.

Experts and Consultants Senior Advisor Network Executive Recruitment Relationship Owner

Expert network / consultancy Fund Recruiting firm, then handed over to fund

Duration 1–2 hours to 3 months 6 months–2 years+ Permanent job and board positions

Sample Service Providers

Gerson Lehrman, McKinsey, Evalueserve

Navon Partners Heidrick & Struggles, Russell Reynolds, Ignition Search Partners

Illustrative Cost $1,000/hr for expert networks $300–700/hr for consultants

Sometimes retainer, sometimes paid like investment banker

1/3 compensation

Driver of Exec Compensation

Length of consultation Value creation and continued involvement with client companies

Winning full-time employment

Confidentiality NDA possibly. Consultant may “shop” ideas.

Signed, enforceable NDA NDA unusual

Page 30: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

U.S. Funds That Typically Partner with Executives to Execute a Transaction and Bring in New Management Upon Investing

Data based on firm websites. Frontenac AUM based on last two funds. # Investments/Year based on mean activity level over firm’s existence, with some adjustment for growth of fund over time.

Partnering with operating executives is a successful strategy which is a focus for only a small number of funds.

Private Equity Fund Founded AUM ($m)

Cum. # Investments

# Deals/ Year (est.)

GTCR 1980 $8,000 100 7 Wind Point Partners 1984 $2,000 80 5 Frontenac Company 1971 $875 200 5 Housatonic Partners 1997 $1,000 50 4 Prospect Partners 1998 $270 35 3 Red Diamond Capital 2002 $150 8 1 Post Capital Partners 2004 $100 7 1

Page 31: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

We expect an increase in executive-led transactions in 2010-2025. Many motivated sellers •  Wave of baby boomers who must sell their businesses. >$10 trillion enterprise value of

businesses to change hands in next 10 years. •  High pent-up demand to divest by corporates.*

Highly inefficient and undercovered market •  Current players in Executive-Led Transactions niche small and financially

unsophisticated.

Easier to execute executive-led transactions •  Large pool of senior executives who are un/underemployed, some of whom want to be

owner-operators with PE backing. These executives are difficult to reach through conventional means.

•  Recent decision re: John Q. Hammons Hotels enables noncontrolling management to consummate MBO without searching judicial inquiry.**

* PEP Digest, http://www.pepdigest.com/index.php?option=com_content&view=article&id=2990:better-deal-flow-in-2010-as-corporates-to-increase-divestitures&catid=34:news-to-know&Itemid=24 ** “Decision May Help Revive Management Buyouts”, Steven Davidoff, NY Times, http://dealbook.blogs.nytimes.com/2009/10/19/decision-may-help-revive-management-buyouts/

Page 32: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

David Teten, Chris Farmer, Evalueserve, Y. Chung, N. Kumar. Ernst & Young. "How Do Private Equity Investors Create Value? A Study of 2006 Exits in the US and Western Europe". NY/London. 2006

In-house relationships are the #1 source of transactions. Unsurprisingly, PE investors rely on intermediaries far more than VCs.

Primary Sources of Investments

Similarly, Ernst & Young found that ¾ of the largest PE investments in 2006 resulted from proactive deal origination strategies; only 11% of the deals resulted from PE investors starting work during the formal sale process. "Better preparation, strength of relationship with target management, and sector focus were the most important factors cited in winning a deal."

Page 33: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Private equity funds use expert networks to originate deals in three main ways:

Based on interview with Michael Duran, Gerson Lehrman Group, and other sources

•  Facilitate top-down, “rainmaker” sourcing strategies. Connect to senior industry executives.

•  Support bottom-up, “boil the ocean” sourcing strategies. An investment team can exhaustively call experts to identify all the companies in a target sector or geography.

•  Enable thematic sourcing strategies. Identify experts and consultants to help develop investment themes, map target markets, and engage market-leading firms.

Page 34: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Acquisition search firms are significant resources for private equity funds, but must be managed carefully.

Advantages vs. Disadvantages of Acquisition Search Firms

Advantages Disadvantages Value-Add Increased flow of deals

and investment opportunities

Typically do not provide advice on valuation/structuring/negotiation, unlike a traditional investment banker

Costs No fixed cost, other than (sometimes) retainer

Additional layer of costs (typically 1% to 2% of the enterprise value)

Focus Can be highly focused Can deluge a fund with inappropriate deals unless used in a focused way

Database Large database in which to fish

Accused by some funds of exploiting the buyer’s name to grow their own database

Motivation Highly motivated Typically motivated only to close a deal, not by the quality of the deal

Page 35: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

We expect transaction volume and value in the secondaries market to increase. For unregistered securities in private companies, secondary transaction volume declined approximately 57% to $2.4 billion in 2009 vs. $5.7 billion in 2008.

•  Approach a fund directly, particularly one that is in distress.

•  Look on the markets for secondary interests, such as SecondMarket, NYPPEX, and the PORTAL Alliance.

•  Approach investment banks specializing in secondary interests, such as Cogent Partners, Probitas, and Triago.

Where to Buy Secondaries

NYPPEX Private Markets, "2009 Secondary Private Market Review and 2010 Outlook". New York, NY, January 8, 2010.

Page 36: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

We recommend also using traditional marketing techniques.

Westshore Capital Partners; Weinbach Group

•  Use physical collateral. The best collateral has a long life, is creative, and has a tie to your funds’ model or portfolio.

•  Choose targeted names. e.g., iFund, GreenTech (KPCB), FbFund, MailRoom Fund (Accel), and FTV Capital (FinTech)

•  Leverage existing brands, e.g., recruit prominent leaders to your fund: Kleiner Perkins (Ray Lane and Al Gore), Maveron (Howard Schutz), and Polaris (Bob Metcalfe).

Page 37: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Funds with cold-calling programs are consistently top-quartile performers.

http://www.flickr.com/photos/23439761@N03/3258313816/sizes/l/

•  Focus on geographies/sectors that are undercovered by peer firms. •  Maintain clear criteria and metrics to ensure that the relationships being

developed have a reasonable likelihood of yielding investments, and stick with them.

•  Institute a formal CRM system, tied to a formal deal tracking program. •  Directly tie compensation to developing and maintaining the database;

volume of flow; and quality of flow. •  Require regular follow-up with priority companies. •  Organize scheduled reviews with partners and sector teams. •  Maintain consistent dialogue with key prospects and sources. •  Use multiple outreach methods: phone, email, fax, overnight mail, etc., in

order to get the attention of the person you’re targeting.

Key Steps for a Successful Cold Calling Program

Page 38: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Warm – Lukewarm – Ice

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Sample Market Mapping Approach Market mapping is a powerful way to identify competitive white space.

# Stage Example 1 Choose industries and geographies of initial interest Global growth equity fund with focus on North American and

Japan. 2 Define your proprietary point of view. Thesis: Population in developed countries is aging rapidly. 3 Translate into investment theme for specific industries

and/or geographies of interest. We expect growth of financial services providers with low-risk investing products.

4 List major players in target industries/geographies, and how each will be impacted by investment themes.

Asset managers with expertise in annuities and fixed income products will likely benefit.

5 Iteratively improve market map based on feedback from industry

Publish elements of the market map to key sector players through industry forums and mass media.

6 Determine which activities along the value chain offer the highest return (typically the proprietary ones).

Develop deep ties in the brokerage community that distribute low risk financial products.

7 Identify areas of future growth. Fund researches bolt-on acquisitions while diligencing its primary target.

8 Assess fit with Fund’s strategy. Local geographic leader that would benefit from Fund’s global reach.

9 Regularly update the market map based on market feedback and lessons from investment prospects.

Maintain internal wiki or database regularly updated with key market data and insights.

Page 39: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

•  Introduction

•  Organizational Structure

•  Traditional Deal Origination

•  Social Media

•  Signals of a Potential Investment

•  Growing Your Corporate Network

•  Next Steps

Agenda

Page 40: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

“Social media is a communications

medium that relies on its audience to create, modify, or

distribute the medium’s content

- Nick Gonzalez, SocialMedia.com

http://www.flickr.com/photos/briansolis/2735401175/sizes/l/, http://blog.socialmedia.com/how-should-we-define-social-media/. /

Social Media Company Map

Page 41: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Social media technologies are pertinent throughout the investing cycle.

Investing Cycle Use of Social Media Raise capital •  Identify value-added potential investors & find a path to them

•  Solicit past investors in both your prior and comparable funds

Originate investments

•  Identify and reach out to relevant people & companies •  Become a magnet for investment opportunities

Due diligence •  Review professional and personal lives of management •  Talk with firm’s network: customers, competitors, suppliers

Negotiate Deal •  Gain insight into counterparty’s negotiating style, motivations

Improve operations

•  Recruit “A” performers •  Accelerate sales and marketing

Exit investment •  Identify and more effectively negotiate with strategic acquirers

How Investors Are Using Social Media

Page 42: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

•  Introduction

•  Organizational Structure

•  Traditional Deal Origination

•  Social Media

•  Signals of a Potential Investment

•  Growing Your Corporate Network

•  Next Steps

Agenda

Page 43: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Effective use of social media and other research tools allows you to filter for companies who are flashing signals that they are interested in your capital.

http://flickr.com/photos/krikit/2745563123/sizes/o/

Page 44: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Signals from the Status of Major Equity Owner

•  Private equity firm in need of exit •  Corporation in distress / seeking to divest assets •  Short-term tax incentive •  Succession battle •  Death, Disease, Divorce (“the Three D’s”)

Page 45: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

•  Introduction

•  Organizational Structure

•  Traditional Deal Origination

•  Social Media

•  Signals of a Potential Investment

•  Growing Your Corporate Network

•  Next Steps

Agenda

Page 46: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

David Teten and Scott Allen, The Virtual Handshake: Opening Doors and Closing Deals Online (www.TheVirtualHandshake.com)

Ch = Character Co = Your Firm’s Competence R = Relevance of the contact S = Strength of your relationship I = Information N = Number of people D = Diversity

= D * ∑ (Chn*Con *Rn* Sn*In) N

n=1

Corporate Network Valuation Formula

Page 47: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

•  CogMap •  Glassdoor •  TheFunded •  TheOfficialBoard •  Tracked

Corporate Analysis Software provides an insider view of the org chart, compensation, and customer views of a company.

Leading Providers of Corporate Analysis Data

Page 48: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

David Teten and Scott Allen, The Virtual Handshake: Opening Doors and Closing Deals Online (www.TheVirtualHandshake.com)

• Daniel Zumino, founder of BCG Paris and angel investor, had made a small investment in a startup

• November 1999: He sent email to Stanford GSB alumni list seeking capital for the startup

• March 2000: Raised $8m through referral from alumni, via this listserv

Case study: A set of angel investors sourced a transaction and invested $8m via an alumni email list.

Page 49: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Private equity funds are mostly unsophisticated in their use of the internet.

• $750m fund focused on the musculoskeletal sector — specifically orthopedics and dental

• Send weekly email to 14,000 people

• Publish a small percentage of content that their 5-person research team generates

• Agenda: “make our website into the virtual Silicon Valley for our industry.”

Healthpoint Capital Blog, a Rare Private Equity Blog

Page 50: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

CRM Applications Used by Private Equity Funds

EquityTouch. ACG Events Survey Analysis, 2009. Available at www.touchahead.com/news.html

36% of PE Funds are using Microsoft applications for CRM which are not designed for CRM (primarily Excel and Outlook).

Page 51: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Well managed pipelines allow for use of a wide range of analytics to track dealflow.

•  Activity Measures: # Phone calls made; # Phone connects with management/board members; # Meetings; # Deals brought to Monday morning meeting; # Memos with approved budget for due diligence; # Indications of Interest; # Letters of Intent sent; #Letters of Intent signed; # closed transactions

•  Deal flow by source •  Pipeline analytics: Conversion ratios (from each stage of the pipeline to

the next); Proprietary vs. non-proprietary deals; Response time •  Industry benchmarking measures: Percentage of deals seen completed

by any firm; % of all deals consummated across the industry that fund would have considered which the fund saw

Selected Dealflow Analytics

Page 52: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Effective deal originators are data hounds.

Tools for Assimilating Data into Your CRM System

Data source Selected technology for inserting data into CRM system

Business Cards

Cardscan, IRIScan, Neatco, Plustek

Emails Contact Capture, eGrabber, Gwabbit

Cloud Plaxo

Page 53: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Originators use blog and web readers to filter the data deluge.

•  RSS Readers (e.g., Google Reader)

•  Alacra •  Connotate •  DigitalTrowel •  InfoNGEN •  FirstRain •  Skygrid

Leading Web Analysis and Filtering Tools

Page 54: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

PE funds should use creative ways to maintain ongoing visibility and relationships, e.g., fantasy football.

•  Case study: Thompson Street Capital Partners uses an online football pool to keep in front of almost 1,000 deal sourcers at a cost of $2,000/year.

Page 55: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Senior executives prefer to interact online behind barriers to lower-level personnel, just as they do within traditional networks.

•  IERGOnline.com

•  Executive-Forum.org

•  INMobile.org

•  Some LinkedIn groups

Sample Gated Communities for Executives

Page 56: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Investors can also connect with one another via online gated communities.

Private Capital Public Markets ACG.org FTAlphaville.FT.com/longroom Angelsoft.net SumZero.com Finemrespice.com/subrosa ValueInvestorsClub.com Village.Albourne.com Village.Albourne.com

Sample Gated Communities for Investors

Page 57: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

•  Introduction

•  Organizational Structure

•  Traditional Deal Origination

•  Social Media

•  Signals of a Potential Investment

•  Growing Your Corporate Network

•  Next Steps

Agenda

Page 58: Best Practices by Private Equity Funds in Deal Origination

Social Signals Network Next Steps

© 2011 David Teten. More at teten.com.

Intro Tradition Org Chart

Any questions ?

Download slides at navonpartners.com

Free book download at TheVirtualHandshake.com