Recently, we were meeting with a prospective private equity deal origination client who asked a poignant question – “When these engagements don’t produce the anticipated result, what is the cause of the underperformance?”.
This got me thinking, while we talk a lot about how well our process works (and it does!), we should spend a moment addressing use examples where the outcome is less than desirable.
Below are a few of the most common contributors to deal origination campaign underperformance:
Our Private Equity clients are busy professionals. When we run broader, high volume origination campaigns it can require more responsiveness from our clients than they may be able to volunteer. This leads to a bottleneck of leads that do not get the timely responses they deserve. As we like to say, it is our job to bring the horse to water, and our clients’ job to make the horse drink. While having too much interest from too many target companies can be a good thing, it can also be a mixed blessing.
While we like to curate tight criteria sets when building target lists for our clients, there is a point where constrictive criteria negatively impacts our efforts. We are happy to work with clients playing in very small markets but both parties should enter these engagements knowing that if there are dozens instead of hundreds of good prospects, our process and result will have to be augmented. Generally, we like to reach out to a few hundred new target companies for each Private Equity client on a monthly basis – if your mandate doesn’t support this we may want to consider a different approach.
Building a quality origination pipeline takes a little time and often involves long-term follow-ups with hundreds of target companies. Because of this we always encourage our clients to think long-term. We can and do absolutely generate deal flow on a short-term basis, but the most successful engagements are based on a combination of diligently adding new targets to the pipeline while keeping in touch with, and managing relationships for as many well fitting prospects long-term.
Deal origination campaigns work best when both parties are engaged and properly aligned. If you have the mechanism to vet consistent inbound deal flow and have search criteria that lend itself to a constant mid to long-term effort we can be a great partner in your firm’s success.