Why do PE firms hire banks for M&A transactions and not advise themselves?
Obviously with the recruiting pipeline and almost everyone having an IB background, they could likely do it themselves and save the money given they have the expertise.
Sellside processes seems understandable as they do not want to do the work of marketing and selling their portcos, but for buyside, I don't get why they spend millions paying banks to advise. I'm sure its helpful to have a third party / sanity check on assumptions, but they often spend a lot on M&A fees annually.
Maybe there is legal implications or they need to banks to market and underwrite the debt for buyside, but open to hearing others' thoughts.
Most buyside fees to banks are driven by financings. In the context of a larger deal where a financing bank also provided some extra advisory services, they might be given an extra fee in the form of m&a and receive m&a credit. But in most instances it’s financing driven
Throw banks a small advisory fee to get them to lean in on financing. Pay them back if they developed an angle for you, were super helpful in lining up the deal and had been ideating with you on it before it came to market. Sometimes we’ll engage even just for some exit analysis help and pair of hands in which case it’s understood that it’s going to be a min fee and then it’s understood they’ll work for free for the company as their banker for the next 5 years if we win in a very high utilization capacity. Finally maybe they sold the biz last time lost rfp this time but have good differentiated knowledge. Could be more reasons
Interesting angles, thanks for input
Feel like most of my MDs we're never teaching the PE principals something they didn't already know but I wasn't in on all the conversations
Like others have said usually buyside M&A for PE firms is kind of BS for advisory only. It’s either high level valuation stuff (here’s our proprietary comp set, we’ll have an analyst run a million cap iq screens) or process advice (we assume X buyer is going to be involved here, so and so is going to probably bid $y, etc).
The bank gets a million+ for doing very little work but the PE firm gets some goodwill, which is important for early looks at deals coming to market soon or asking for a bunch of free work post acquisition. Contrary to what banks will say, if a PE firm needs actual market knowledge they’ll just hire consultants.
On a $B+ deal, a $2M bank fee is literally a rounding error, so PE firms basically use this to just grease the wheels
Bump
In take-private deals you can't really avoid having a financial advisor engaged given all the hoops you have to jump through. It can also be useful as a back-channel during the negotiation process.
The most common way a PE firm uses an IB is to run a sell side process. I know there are many other use cases but this is the most ubiquitous across LMM all the way to MF. After having led a couple of exits for my firm, I can’t even imagine trying to do that without an IB. In a lot of ways, the bankers’ skill sets overlaps with mine, but in other ways it doesn’t. I don’t know who is a good buyer these days for XYZ asset, who is for real, who was runner up in the last few auctions but is looking for a business like this, who is going to waste my time. I don’t know exactly what are the best ways to position my asset - I may have a vague idea based on what I like - but without being constantly in the flow of talking to other buyers (strategics and sponsors), which isn’t my job, I don’t have a good grasp on the buyer universe. This in itself is a huge reason alone to hire bankers.
Besides this, a sell side process is extremely time intensive for both the sponsor and especially the mgmt team. Have a solid group of bankers that can help with much of the heavy lifting is not only helpful but frankly critical to a successful outcome. Most PE firms are relatively lean. Also the negotiating aspect and managing buyers is really important during a process. A good banker will protect their client by having the necessary and often-difficult conversations with potential buyers. A really good banker will be a master of behavioural science and be able to read which guy has more bullets to spent on their bid, which could get there if we showcase ABC, which seems a bit skiddish at the moment, etc.
Bankers more in tune with other buyers and able into help significantly with strategics. IE if you’re in consumer and want to sell to P&G, they will know their m&a team. Adds up to a much faster and more efficient process where they can run a true auction and potentially help you get a ridiculous multiple. Now that I think about it, all of my friends that have had exits with crazy multiples were run by an IB.
As someone who works in MM PE, 100% echo what the above up-voted poster said - personally I couldn’t imagine doing a purchase or sale without using an IB. Not because I necessarily couldn’t do it without them, but rather due to the following (mostly echoing what the above post details) -
- Lean teams - PE teams are generally very lean. In most cases as an Associate I was pretty much doing all the modelling, deal analysis etc (sometimes there’s an analyst below me to help out), with just a Principal above me and then a partner (who is only involved in high-level/strategic stuff really).
So the more I can outsource to an IB the better - basic but important stuff like running a bake-off for lawyers, accountants etc. Also screening buyers. Even setting up a data room and uploading docs is a real hassle. And as a senior associate in PE I don’t want to be wasting my time scheduling calendar invites for external meetings with lawyers, accountants etc (perfect job for an IB analyst to pick up - doesn’t sound like much but it’s a big value-add to me in terms of time saving).
- IB value-add - as the above poster mentioned, banks do actually add some value beyond just grunt-work. A great VP or Director is worth his or her weight in gold - they will know the sector and counterparties really well, and from experience on previous deals be able to anticipate various snags that could come up (whether on the deal itself, financing, legal etc). That saves me an enormous amount of time and stress. Of course you do get some VPs who are just going through the motion and are hardly better than postboxes (forwarding on all my stuff to the buyers/sellers) but thankfully they’re not the majority.
On a deal we always build/use our own models of course, but having an IB build their own separately can be a great sanity check. Plus the most important thing about a model is the assumptions used - so an experienced banker can tell me if my assumptions are reasonable or not.
- CYA - using an IB means you have a team of bankers who can pick up points in deal docs/points you might have otherwise missed for instance (eg a sector specific issue that you might not be aware of). If you go it alone you don’t have this protection - and trust me, the relatively small amount you might save on deal fees by not using an IB is nothing compared to the cost of a major league f*ck up.
- Low cost - relatively speaking that is. Eg if you’re doing a $1bn acquisition with a great IRR/money multiple, paying a few million in fees to a bank isn’t a huge deal (for smaller acquisitions you’d likely use a boutique or smaller advisory shop I imagine). Also BBs will frequently heavily discount their advisory fees if they’re the ones who get to provide financing - so if their financing is pretty competitive anyway, you’ve had all that advice/support for almost nothing essentially.
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