A European growth equity firm is continuously seeking new investment opportunities across the continent. Between finding new platforms and pushing deals forward, overlooking operations and exit planning, as the portfolio grows, there is no resources left to effectively carry out a successful “buy-and-build” strategy that is at the core of its existing business model.
In order to make “buy-and-build” strategy work, it is essential for the firm to have a steady flow of add-on acquisition opportunities for a number of portfolio companies. And while the new platform investment ideas are originated and well-handled by partners themselves, they recognize that in order to make “buy-and-build” strategy work, add-on acquisition sourcing cannot be done sporadically or on an opportunistic basis.
They understand that searching for add-on acquisitions requires a continuous, systematic and very narrowly-focused approach for each of the portfolio companies separately, and that they need to allocate dedicated resources to handle this challenge.
Before getting in contact with us, they considered different solutions:
Delegating origination and business development to portfolio companies’ executives
Very quickly it can become apparent that this is not a feasible option. Even though it would make sense to delegate the job to executives because of their deep knowledge of the industry, there are far more constraints associated to it. The most obvious problems are the lack of resources that any executive have who has to focus on operations of the business, lack of experience in direct deal origination, absence of a well-tuned process, and lastly, even though each executive knows its industry in detail, it cannot be translated in full to other geographies.
Hiring an M&A advisor
This option is also disregarded right from the start, as not appropriate for a continuous support service required and a high cost in the form of a success fee.
Expanding firm’s in-house team
Hiring a “business development” or “deal origination” professional is definitely a recent trend within the bigger PE groups and it is considered by our client as a worthwhile choice. Still, being a smaller firm, hiring a senior member of the team is, at the moment, unjustifiably expensive.
Other option is hiring a junior analyst or a team of interns which is a viable cheaper alternative, but it comes with its own particular set of problems, as the managing partners are realizing that a lot of effort would have to be put into a hiring process, necessary training and then leading the team while juggling other parts of the business at the same time. Another negative element identified is that optimizing costs of deal origination as the workload fluctuates, becomes impossible.
Outsourcing to a search firm
Even before our service have been introduced to the client, the client has already been experimenting with different outside service providers and was in general not happy with the results. Since we got into contact, the client was interested in what we have to say, but with an obvious dose of skepticism, referring to the sub-optimal results delivered by previous providers. We made an effort to clearly define specific client’s needs that others failed to address, performed a trial project to demonstrate ability to deliver and were finally chosen as the best option to handle the add-on acquisition sourcing.
GOALS AND NEEDS
The client was fully aware of problems and limitations he was facing and was able to concisely define his needs, so our job here was simplified by not having to do the needs analysis. Put simply for the purpose of this study, client mandated us to receive five to ten new acquisition ideas per week and make an introduction with selected targets. It is essential that identified targets fit a very specific geographic, size and product/service offer criteria to eliminate the noise and make clients decision making process as easy as possible.
To be able to deliver best results we use a tried and tested process when performing target identification. With each new client we start by getting to know all the details of client’s investment strategy and everything we can about portfolio company and its market environment as a starting point. After the client provided us with some criteria guidelines we started a targeted search with the promise to deliver the first results in one week.
Our deliverable is in the form of a proprietary custom database application that allows multiple user to screen targets as they are being added. We put up a multitude of data mined from a wide array of paid and free services including contact data, website stats, social networks information and key financial figures including analysis and simple valuation estimates. We provide a ranking tool based on our proprietary algorithm that captures hundreds of hard and soft datapoints, allowing the user to quickly shortlist, analyze and assess candidates by its attractiveness, relevancy and probability to execute a deal, thus making it easier to make a decision. We pride ourselves for having a deeply analytical approach, creative methods to collect data, and being able to provide clients with unparalleled insights.
After the client selects candidates to solicit, we start creating custom promotional content and messaging for each target, leading ourselves by the belief that first impression when engaging a target is crucial and has a great impact on the success of converting a lead into an investment opportunity. Even though we aim for quantity, there is no substitute for genuine and quality communication. Building relationships with entrepreneurs can be a long and intensive work, and sometimes requires months to establish a contact and get a response. However, we do not give up. We might reduce the frequency of attempts to connect, but until we get a clear “not interested” response, we consider a lead as a possible live opportunity.
After we get a response from an interesting party, we work to set up a meeting between them and our client, while at the same time providing them with needed information, communicating clients plans and vision so as to, by the time of the meeting, the biggest hurdles are already overcome.