The Private Equity Toolkit. Tamara Sakovska

Porter (1985) provides a thorough analysis of all original elements of the industry structure (“Porter's Five Forces”), while Grant (2002) offers an extended framework to suit more contemporary sectors. Please refer to Chapter 2 References for complete citations.

      4 4 For ideas about how to get started on a private survey, you may find it helpful to read Chapter 13 of Valentine (2011). Please refer to Chapter 2 References for a complete citation.

      5 5 Kevin Landry, the CEO of TA Associates, gave an interview in 2013 that appeared in the Private Debt Investor's article titled “Cold Call Captain.” He explained his firm's cold calling philosophy and provided a couple of interesting facts: at that time, his firm worked through a database of 280,000 companies and his team made unsolicited calls to over 8,000 businesses a year.

3 Opportunistic Deal Sourcing

      Key Topics in Chapter 3:

       Develop an edge in opportunistic deal sourcing with the DATABASE Roadmap™

       No luck required: why having a clear focus pays off in an opportunistic deal search

       Actions you can take now to get the most out of your professional network

       How active brand management can help your fund stay top of mind

       Creative ways to supplement your opportunistic deal ideas

       How to manage your deal origination workflows effectively and effortlessly

       Does a dedicated business development function work for everyone?

Developing an Edge in Opportunistic Deal Sourcing

      Do you know what sourcing strategy is used by private equity professionals most often? I believe an overwhelming majority of all private equity transactions executed each year around the world are opportunistic. No matter what geography you look into, you are likely to observe a similar theme: private equity funds are expected to network with intermediaries, analyze pitchbooks and investment memoranda, attend company meetings and write numerous offer letters—all in hopes of executing a good deal. Some funds might develop a “deal angle,” and some funds might not even do that—private equity professionals are under immense pressure to stay open-minded in an opportunistic environment.

      Many funds choose to maximize their options by increasing the total number of investment opportunities they review every year. There is nothing wrong with this approach, provided you have enough time and bandwidth. Think about what takes up your resources: an average deal professional with a couple of years of private equity experience might amass over 1,000 industry-related connections. A good investment banker active in private equity transactions for at least a decade will probably have enough contacts to fill a large cruise ship. The people you meet professionally often seek to be in touch, send investment ideas, request meetings and, through various means, gently bombard you with vast amounts of information, only a small proportion of which might be relevant to your fund. Generally speaking, everyone in the private equity industry is reasonably well-connected, keen to get deals done and competing in a market with diminishing knowledge barriers. This makes the job of a private equity investor very difficult because the market is definitely overcrowded and information is overabundant.

How can you possibly gain an edge over your competition in this environment? How can you make sure that your opportunistic deal search is not just busy work, but a productive process with a good chance of uncovering a gem of an investment? Having spent considerable time thinking about it, I have settled on the two key factors that matter most. First, staying top of mind with your most relevant contacts, and second, getting the most out of your time by reviewing only relevant deals.

      If you experience severe time constraints and are not able to dedicate resources at present to developing a systematic approach for finding opportunistic deals, you will vastly improve the quality of your opportunistic deal search by focusing on just these two areas. Spending time on relevant deals with relevant people should function as a powerful antidote to the intrinsic randomness of opportunistic transactions. Focus on these two things and see what happens. My guess is that you will cut through the noise in order to isolate only those deals that represent the best fit with your investment mandate.

      And yet it is hard to see what can surpass a systematic deal sourcing approach if you are looking to build value for your franchise in the long term. Once you set the objective of generating a sustainable flow of high-quality opportunistic ideas, you have to invest some initial time and resources in order to lay a solid foundation.

DATABASE Roadmap™¹ for Opportunistic Deal Sourcing

      So, how do you go about laying this foundation?

It depends on your starting point and your ambition. You are most likely to stick to the process that works for you in your specific circumstances and feels relatively effortless once it is set up. If you are looking for a general guide, consider the detailed framework below that I developed for an opportunistic deal search. I put this checklist together because I dislike chaos and frequently try to create order out of disarray. Below is my tried and tested recipe for taming the unpredictable force of opportunistic deal sourcing and improving deal search outcomes.

Opportunistic Deal Sourcing: DATABASE Roadmap™

      Similar to the Thematic Deal Sourcing ICEBERG Roadmap™, this framework also has an acrostic name to help remember each step better: it is called an Opportunistic Deal Sourcing DATABASE Roadmap™. The steps are as follows:

      1 Develop a clear point of view about the kind of deals your fund wants to target.

      2 Articulate a concise and memorable message about your mandate.

      3 Team up with intermediaries who consistently add value.

      4 Add new relevant connections to your network.

      5 Build a strong brand.

      6 Apply creative thinking to supplement your opportunistic deal flow.

      7 Set-up a dedicated tech-enabled platform to manage your deal origination workflows.

      8 Establish a business development team fully devoted to deal sourcing.

This is not a prescriptive list. My objective is to provide you with just enough inspiration to create your own framework that incorporates your investment mandate and the inner workings of your firm. Let's start by going through each step in greater depth.

1. Develop a clear point of view about what kind of deals your fund wants to target

      Opportunistic deal sourcing features an interesting paradox: in order to find more high-quality deals, you need to focus on fewer segments of the market. Cast your net wide, and you risk sinking in deal entropy of random sectors, business models, endless meetings and follow-ups.

      When I started working in private equity, most large firms had a broad mandate that could roughly be described as follows: “We are sector agnostic investors looking to back market-leading companies with recurring revenue streams and sustainable margins led by experienced