Title basically says it all - why do pe firms hire buyside advisors? Isn’t there job supposed to be to know the transaction process? Do they split the IC work? Staffed on my first buyside and not sure what to expect from the process.
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Mainly market intel and work around exit multiples. Probably a much smaller fee than a strategic would pay. You can try to outsource some Ic deck sections too but you’ll find the roi low. You have to scrub the bankers’ numbers, make sure the analysis is insightful, and be able to answer any and every question related to it. At that point might as well do it yourself
Makes sense - around the process, I’m on the first round of bids due and we did the IC for the MM/UMM fund. How intense is it going to get if they get to the round from an IB perspective
Great question that I asked when I was a summer analyst. Wait until you see how much admin/process work you end up doing and you'll see why they're hiring you instead of doing it in house. The extra capacity hiring a bank frees up is worth it to many sponsors. Access to buyers from your senior level team is a big part of it too.
To do the bitch work the sponsor doesn't want to do, i.e. running diligence, parallel "gut check" analysis, research mining, etc.
Wow all this time and I never thought to use bankers to do the shitty admin parts of running diligence
Like what aspect? When I asked my associate he gave me a very vague answer so want to know what to expect
They will dump some massive data files on you and have you benchmark over the weekend in 2nd round. Have fun
if the deal turns into a shit-show after 5-7y, it is easier (for a PE firm) to deflect some blame to the buyside advisors - after all you will need to explain to your investor why you invested into this deal.
Not really - it‘s the PE firm that screwed up, doesn‘t matter who the advisor is / was
I think you should reread what i wrote
I agree on this. For a PE saying: we had GS advising it would be better than saying we had a no name boutique advising - since some of the investors could ask why you closed a deal with no advisor or with a small boutique doing the advisory...
No offense to both of you but as someone with GP & LP experience, this is NOT a reason to hire a buyside advisor. Picturing a partner explaining a bad investment to an LP or prospective LP and including any reference to the buyside advisor would be highly inappropriate. You’d get immediately shit on and lose a TON of trust/credibility. Thats just not how world works. If you buy your parents a house then accidentally set it on fire, does it make sense to blame the realtor? Your LPs and carry dollars don’t care about (poorly) deflecting blame to advisors. That’s a very weak move. As others have noted, buyside advisors are used for extra capacity and a sanity check.
Three major reasons:
1) the pace of processes has increased in recent years and the amount of noise sponsors have to filter through is frequently unmanageable in accelerated processes. By hiring bankers, you're basically just creating valuable leverage that extends your team's resources; it's like having another set of associates to carve up the data room, try to validate or invalidate trends, and just generally get another set of eyes on things. As the sponsor, you likely are leveraging (at least a few) of the pages the bankers create, but you likely are not using their analyses or recommendations to make decisions; interpreting the data they put in front of you is still done at the deal team / IC level.
2) you need to validate / sense-check your upside exit scenarios. This is only a situation-by-situation need / reason to hire bankers, but not infrequently sponsors are betting on increased strategic interest in the target's market over the next few years, and while they can't typically build that into their base case returns forecast, it's a balancing "upside" consideration that can help rationalize paying a winning price. Bankers are talking to strategics about their 3, 5, and 10 year visions consistently, which sponsors are likely doing minimally, if at all; getting a sense for whether or not acquisitive strategics might ever prioritize the target is an area strong senior bankers can really help in.
3) the biggest reason of them all: you are throwing the bankers a bone. Bankers help sponsors a ton - quarterly calls to discuss the pipeline, areas of focus, targets to add to the sponsor radar, deal dynamics you won't be able to find anywhere else, warm introductions to potential targets, one-off market analyses the sponsors don't want to do, etc. are all a part of the relationship between bankers and sponsors. But for all the value this relationship provides, none of it is explicitly fee generating for the banker. As a sponsor, you want to be one of the 2-5 firms that gets the call when the banker hears about some midwest widgets distributor that's grown every year since inception with 30% EBITDA margins and an aging founder looking for liquidity - so to make sure you stay in this prioritized rotation, you find an excuse to pay the bankers a fee and add a tombstone to their marketing pages. Doesn't have to be a lot, but it keeps the tap open and lets the bankers know you appreciate them, even if you don't ask them to do much.
This. Especially #3.
#3 is very true. I'm on a buyside that we only have because we have provided so much free work to the sponsor over the last couple of years that they just feel like they owe us.
Agreed with all this. Not uncommon to see a buyside fee for little work besides comps if someone wants to keep a banker happy. Worthwhile investment if you get preferential treatment when they're selling something...
Correct on all. I'd add, on PE syndicated deals, the bankers can help the deal-driving PE to get the synd. aligned and checked.
This guy right here knows what hes talkin about. As echoed especially the big número 3.
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