executives currently working in an advisory capacity? Are there influential industry bloggers?
Networking at industry events. Make an effort to go to industry conferences and trade fairs to meet people working in the sector. Are there industry experts or company executives that you might be interested in meeting?
Expert networks and headhunters. This strategy will require a budget from your fund; however, it will allow you to conduct a bespoke and precise search. You will be able to identify a number of industry experts, current or retired company executives as well as any other participants of the industry's value chain, such as customers, suppliers or regulators.
Other intermediaries. Experienced accountants, lawyers, consultants and bankers generally have sector expertise and sometimes develop truly deep and unique insights into the industry, albeit shaped by the perspective of their profession. If they already work with your firm on other transactions, they should be willing to engage in a thoughtful dialogue with you and potentially introduce you to more people in the industry.
This brings us to a sensitive and a potentially awkward subject. As you are working on enhancing your connectivity in the sector, it is very important to keep in mind what may motivate the people you meet to spend their time with you. Sometimes your relationship will be very clear as some industry participants will work with you only on a retained basis and get an hourly or daily rate for their services. At other times, however, some experts may be talking to you as a gesture of goodwill. Why? Some of them might simply want recognition as a sector authority and an industry spokesperson. Others might be genuinely interested in your work and will, from an investor's point of view, find your insights educational. Finally, there will be some people who will hope to monetize their relationship with your fund in the future, either as retained advisers or members of an executive management team in a target company.
I was advised by my senior colleagues early in my career to approach industry and deal networking with caution and develop relationships as a two-way street. Even though I might be dealing with senior industry executives who know a lot more about the sector than I, I may still be able to provide them with something valuable—such as an important introduction, access to my network or our firm's take on the industry, provided that our insights are non-confidential. Sharing articles, exchanging views, organizing industry dinners or thematic away days at my firm have proven to be productive ways to keep in touch and ensure that my network remained active.
However, my colleagues maintained that I stay cautious throughout all of this. Why? Because it is important that my intentions remained completely transparent to the people assisting our fund. I needed to discern genuine goodwill from an expectation of immediate or future fees, especially those that had not been agreed upon or earned. In my personal experience (and in that of my peers), the only way to avoid a misunderstanding of this nature was to have an upfront conversation about how our fund worked with outside parties and enter into any written agreements fairly early in the project.
Finally, it is important to recognize that apart from getting truly valuable insights, your new network might provide you with information that is biased, speculative or outdated. Some industry participants may offer a perspective that is too narrow and rigid, driven by their subjective experience in the sector. Others may be so focused on their own visibility in the industry, talking to the press and other matters of personal prestige that they might lose sight of the fact that their sector views have long since become stale. For this reason, I recommend that you establish the credibility of your new contacts early on and verify some of their views with a couple of alternative sources of information. This is a good way to ensure that people entering your network are knowledgeable, thoughtful and can serve as trustworthy sources in your quest to develop proprietary insights into an industry.
5. Establish a long list of potential deal targets and initiate coverage of these companies
The real action starts now! It is time to revisit the market map of the key players in the industry you created in step three. What companies on this list could be viable deal targets? Are you aware of any deal catalysts that could facilitate a private equity transaction? As I mentioned before, some companies will be on your list for benchmarking purposes only because they may be too large, publicly listed or already subject to recent private equity activity. Your objective at this stage is to review the market map thoughtfully and create a list of possible deal targets, some of which might consider a private equity investment in fairly short order and some of which will need to be converted into transactions over a period of time. It is a great idea to keep this inventory of deal ideas confidential and not mention any of the companies to anyone outside your firm in order to avoid leaking your proprietary ideas to the competition.
Now is a good time to become more familiar with the companies on your list. The only problem is that they don't yet know that you are looking at them, so you will have to initiate an in-depth coverage of these companies from your desk. Set up alerts that capture valuable information, such as financial reporting, regulatory filings, public statements, press releases, interviews and comments in business and trade journals. Analyze the presence of these companies on the internet and on social media platforms, especially if they operate in a consumer-facing sector. There are data analytics tools that can help you monitor and systematize vast amounts of data, such as the number of posts, quality ratings and customer reviews. If you need help in this domain, there are specialized firms who can provide social media monitoring and who will alert you of any meaningful spikes in traffic.
What are you looking for exactly? You need to stay abreast of any latest corporate developments and watch out for what Teten and Farmer (2010) aptly define as “deal signals.” These are trigger events that might make the company more receptive to accepting an investment from a private equity firm. They include any signs of instability affecting the corporation in the following areas:
Shareholders: parent company in distress, fighting off a takeover approach, private equity owner seeking an exit, large enterprises selling non-core divisions and any subsequent events following “death, disease, divorce,” especially in family-owned businesses.
Leadership: changes in strategic direction, succession battles, resignations and new appointments in the top management team or at board level.
Company performance: rapid growth that cannot be sustained with internal cash generation, production bottlenecks, large capital expenditure needs, persistent underperformance, excessive leverage or limited access to debt sources, or inability to exploit growth opportunities without additional capital.
Industry developments and pronounced structural shifts: industry consolidation or disruption, increasing rivalry among key competitors, new sources of pressure from customers or suppliers and any significant macro shifts creating the pockets of “economic turbulence” discussed earlier.
6. Rank the companies by attractiveness and approach two or three potential deal targets at a time
The time has come to start reaching out to the most promising prospects. By now you have hopefully spent enough time on desktop research of the companies on your deal target list and learned many noteworthy up-to-date facts about them. What's the best way to begin outreach? First of all, you will need to rank all companies in your deal inventory list: your top targets will be those businesses that feature the most obvious deal catalysts and represent the best fit with your investment thesis.
