I'm at a MBB and always wondered how PE fund picked their advisors (so for me commercial). Don't want to go into any detail ofc but I realized that we had a constant pipeline with a lot of large-cap funds but also like literally zero with another broad range of funds (well I am not at Bain ...).
Some points I realized:
- Big angle is if you have done something in/with the target (e.g., the VDD/exit planning, even though there are strong guardrails which are also enforced)
Another thing I saw is when we have something proprietary for the industry (totally PE unrelated), e.g. a strong energy practice with a specific market-view/model
With regards to Bain I've heard that some funds during peak seasions have literally blocked them through for months (like have standing teams available at all times). But what about the other consultancies? So when do you go to McK vs. a BCG? Or even a tier lower ... I always assume it is specialty but is price also an issue?
Price / Quality / Experience / Capacity all come into play. Smaller firms / funds are likely more price sensitive, but it also depends on the nature of the deal. If commercial topics are key areas in diligence, then we’d be more willing to shell out money for a comprehensive buyside report. Getting Bain, BCG, McKinsey to do commercial work (for example) on the commercial landscaping market in the US is likely a waste of money.
For larger cap funds it's mostly based on experience w/ the asset or industry (e.g., you diligenced it the last time an asset was in the market) b/c most CDD consultants will get to a similar answer given enough time but they should get to 2nd order insights faster if they already have baseline understanding of the asset or have been tracking it for a while. The one thing MBB talked about a lot internally but doesn't actually matter that much is relationships.
Could you elaborate on why relationships don't matter for larger cap funds? Ultimately don't partners gravitate towards consultants they've brought on in the past?
Yeah they probably wouldn't work with a CDD firm they've never worked with before but funds typically already have relationships with each of MBB/Tier 2 and if another MBB knows the asset better than you do, I don't really care if you've been the relationship owner for my fund
I'd echo above and add a few (all for CDD):
You basically just have a few calls with contenders, hear them out and make a judgement based on: who sounds like they know what they’re talking about, who’s had the most relevant experience/reps/recency, who outlines a scope of work most consistent with what you have in mind (ie they get it), and maybe on the margin who had something else insightful to flag that maybe you didn’t think of (unlikely).
This is the way
I won't rehash the reasons others listed as they've pretty much nailed it. I'll just add that fund relationship was an important reason for me. Obv it's a positive reference if they've worked with my fund in the past and done good work, but also if they have recurring work with my fund I know that they will likely do a good job on my deal because they are less likely to want to jeopardize the overall firm relationship.
On a related note, if they have multiple engagements with our firm, I can often negotiate down price (either at the beginning or end of the deal) depending on what the vendor was doing - e.g. my negotiations with our lawyers was different from the CDD consultants.
So you pick the guys you’ve worked with the most, even if the target company is focused on a sub-sector not in their wheelhouse? Seems odd.
Do VC firms hire management consultants to do market work? Doesn’t the market not exist yet?
Sector specialty / focus is obviously very important too, but it was mentioned elsewhere so I didn't rehash it in my post. Was prev in PE so my comments pertain to that. Don't really hire management consultants in VC unless it's later stage growth (fwiw during peak ZIRP Tiger was offloading all their DD to Bain lol)
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