how in the world does a typical PE firm find new investments
i get that there are confidential databases and large public websites to source your next best deal, but are PE firms finding acquisition targets mainly through WOM and other PE firms? TLDR: how to get my 40 year old company on the PE radar?
How to do sourcing is an interesting question. I'll recycle something I'd written before. Sourcing comes from your personal network established over years in an industry. You have to be a mensche, make sure people who bring you deals get appropriately rewarded, and build up your street cred by helping connect people even if there's nothing in it for you. It helps also to pick and develop and industry niche, and get known for your expertise in that industry. If you're sitting at your desk, you're probably not sourcing. You have to be out meeting people and generating inflow.
For example, I was working at a PE fund focused on China healthcare. We established an industry niche and were focused on this narrow but lucrative area, so we were able to build a reputation and relationhips in the sector. My MD got to know one of the CEOs of a big pharma company. The MD called on this guy every other month for a year and visited with him every time he was in town. He listened to the CEO bitch about how his stock should be higher. A number of other PE shops had visiting the CEO suggesting he take the company private but he never pulled the trigger. My MD finally was able to convince him to go private, and that we should be the one to do it. He had our team fully underwrite the deal, do a f-ton of analysis, and show him how much it would be worth as a private company - that could then go public later. Then we flew in our big LP backer to convince the CEO that we could use the LP's money as a co-investor to fully fund the take-private. The CEO gave us the mandate, and we built the syndicate and did the deal. We did 5x in 4 years on that deal, taking the company public later after breaking it up into divisions and taking them public as several different companies. No ibank would show you a deal like that, and if they did, pricing would be awful. It was the relationship that the MD built and the focus on an industry, and the reputation we built up in that industry that made the deal possible.
Example 2 (from a prior firm, which was a generalist PE shop): One of our associates saw a growth company as a case study in his part-time MBA class. It was a well-known family-owned/run high-end appliance and furniture company. It was a good brand, but behind the curtain, the family members were not getting along. He pitched the company on the idea of us coming in as growth capital and helping professionalize how the company was run. Bringing in outsiders as C-level executives - as opposed to letting family members be all the C-levels. That got the family members to not have to be involved, and stop gumming up the gears. The company accelerated its growth and we took it public. The associate got a bump to ED and shortly thereafter, MD. Again it was the relationship that helped make the deal happen, and getting out there in the real world and making connections which opened up a deal opportunity.
excellent, solid pointers and case studies about sourcing PE deals. In the case of a MBA furniture company or a big pharma, how would you cold approach them? I get establishing relationships but it is sort of catch 22. We've tried linkedin but obviously the response rate was meager. Would you say getting referred by a friend in a casual dinner setting is the best way to get introduced?
Cold approach is very difficult. I'm not sure it is a good way to go at all really. I'm more familiar with seeing leads come in from industry referrals. Usually you build up a reputation in an industry, speak at conferences (or at least attend them), reach out to fellow attendees, network with ibankers and financial advisors that focus on that industry, etc. In healthcare for example you might get leads fellow investment firms in the space (VCs that want you to take follow-on rounds as their portfolio companies mature or peer PE firms that want you on their syndicate), or you might get to know key opinion leaders - like leading professors or physicians in the space. In real estate you'd want to focus on big-shot commercial brokers as well as C-levels in developers.
I think cold emails will get ignored, but if you did want to try to build a network from scratch then Linkedin is your friend, and use referrals and Zoom calls, and then bring value to the table. What deals can you show them? What info can you give them?
In the case of the case studies above, the MD was introduced to the CEO thru speaking on a penal together at a conference, and then going from there. In the case of the MBA student, he gave our firm's card to the CEO after the school visit to the company (but to be honest, an associate landing a deal like that is rare and unexpected).
I don't think dinner is necessary. How is your friend going to get a busy CEO to take dinner with you? You want a friend to introduce you to the CEO via email and then take it forward by showing value. Maybe if you're lucky one day the guy will let you drop in for 10 minutes to say hello.
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