Private Equity Investing in 2018: Sourcing Deals and Creating Value in a Sellers’ Market
2017 was another record setting fundraising year and 2018 is shaping up to exceed that benchmark. With this bullish market, GP managers are looking for new ways to create value for their investors and set themselves apart from the rest of the pack. At EisnerAmper’s third annual Alternative Investment Summit, panelists with backgrounds in private equity, venture capital and investment banking gathered to discuss this “frothy” market and the current environment relative to capital raise, deal sourcing, and creating value.
General partners continue to raise more and more capital every year, with 2017 being the strongest year in a decade for fundraising. For many funds, especially those established shops on fund three and beyond, the LPs may remain relatively consistent, but the expectations have changed. While there has been a lot of conversation around the amount of capital being raised, PE and VC funds must continue to effectively articulate their investment strategy and competitive advantage, namely how specifically they will drive value with their platform investments given the current multiples. It is important to note the increased demand from LPs to co-investments along with GPs.
There’s been an influx of different types of capital providers into the industry. On the early stage, the rise of crowdfunding and the general availability of seed capital – whether from corporate LPs seeking to tap into innovating companies or otherwise – has created a challenging exit dynamic as we are now seeing many early-stage companies that have raised seed capital but have not raised a Series A or Series B.
Institutional LPs have shown that they will invest with first-time fund managers as long as the management team has significant industry experience and a positive, consistent track record. LPs also have a strong desire to invest with teams who have worked together successfully in the past and, even better, can show successful results through varied economic cycles, meaning that if a team has been together since 2008 or before and demonstrated positive results they are more likely to receive first-time fund capital.
Deal Sourcing and Value Creation
Since the market is uber competitive, it’s critical that GPs are proactive in deal sourcing. Many funds continue to leverage relationships primarily though their deal and operating partners to find sole-sourced opportunities. It is certainly harder to find these opportunities than in years past, yet this remains the desire and goal of most middle market and lower middle market funds. Deep industry experience provided by GP operating partners has become critical relative to differentiation in the deal-sourcing cycle. There is also a significant rise in family offices seeking control positions with portfolio companies and no longer investing alongside private equity groups as a passive LP. Many family offices have built the infrastructure and brought experienced investment industry human capital to lead these efforts and have indeed become a force to be reckoned with. Investment bankers have also specialized and must demonstrate that they have a deep industry knowledge and a bench of potential buyers or sellers in specific industry sectors who have the ability to close deals and mitigate risk.
Given the frothy valuations, more deals are being driven by relationships that are being cultivated well before a transaction occurs. Investment banks are evaluating deals from a risk-value perspective; what buyer is most likely to close? Which group makes the most sense given their investment thesis and do they have the operational knowhow to effectively drive value? It’s not always the highest bid that wins. Even more so on the venture capital side, early stage investors are in the business of tracking talent and, in many cases, need to be in front of the opportunity before there’s even a cash flow positive business.
EisnerAmper would like to thank the panelists for their time and insights:
Patrick Crocker, Co-Founder & Managing Director, MHT Partners
Donald J. McDonough, Managing Director & Head of Business Development, JLL Partners
Will Porteous, General Partner & Chief Operating Officer, RRE Ventures
Scott VanHoy, Managing Director, Leeds Equity Partners
To check out our blog series from each panel from the EisnerAmper 3rd Annual Alternative Investment Summit, please click below.