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Race to the Finish Line: Proprietary Deals in Today’s Hypercompetitive Market

By Carrie DiLauro, Hamilton Robinson Capital Partners

This weekend the Indy 500 will take place at the Brickyard in Indianapolis for its 103rd year. The race has grown to become the largest single-day sporting event in the world, drawing 300,000-400,000 spectators (to put this in perspective, the largest crowd to ever watch a Super Bowl live was Super Bowl XIV in 1980, drawing 103,985 spectators). The Brickyard has been owned by the same family since the end of World War II, so you might be wondering what in the world does this have to do with proprietary deals? Proprietary deal flow is the act of identifying companies that no other investor has engaged with in the hopes of actually closing a deal with better terms and a lower purchase price multiple, achieving a significant competitive advantage. There has been a lot of talk in the private equity sector recently about the decline of proprietary deal flow. Many even believe that proprietary deals no longer exist at all.

There are several “causes of death” of the proprietary deal. The American Investment Council reports allocations to private equity increased 8% from 2017 to 2018 topping out at $331 billion, and 47% of institutional investors intend to increase their exposure to private equity again this year.  While the increase in allocations to private equity is exciting, it also means that firms need to identify companies to purchase and deploy this growing pool of capital. Higher levels of competition have made identifying inefficiencies in the system and finding a discount or off-the-beaten-path opportunity virtually impossible. Now ratchet up the competition with the explosive growth of the independent broker-dealer, which is now at an all-time high due to the reversal of the DOL’s fiduciary rule, rising interest rates and the steady growth of the stock market. The Bain Global Private Equity Report estimates for every 100 potential targets that go into the top of the funnel, it is estimated that only 1-2 will actually result in a closed deal and Sutton Place Strategies reports private equity firms are only seeing a median of 17.2% of their target market deal flow.

Additionally, increased use of technology has considerably democratized deal flow, decreasing proprietary barriers and transferring the balance of power to the business owner. LexisNexis estimated back in 2011, only 57% of private equity firms were utilizing a CRM system. Today, a CRM is table stakes for an effective deal sourcing program. As transparency increases and market forces take over, the best products will attract the best buyers at the best prices in the shortest amount of time. Private equity firms have adapted by expanding technology usage back to the due diligence phase of courtship. By applying advanced analytics, firms can develop a faster more comprehensive assessment of which assets of a potential target are essential to support growth. Analytics are used to evaluate management and operating capabilities as well as develop better probability ranges around pricing the deal. In this hyper-competitive market, private equity firms are becoming more focused on “winning” deals at an acceptable price than on where deals are sourced from. With purchasing prices approaching all-time highs (GFData headlined a near-record valuation mark of 7.8x Trailing Twelve Months (TTM) adjusted EBITDA for the fourth quarter of 2018), as well as the decreasing cost and ability to easily implement many of the data analytics programs, private equity firms are again adapting and refining their strategies to seek out competitive advantages not just in deal sourcing, but in the ability to close a deal.

So how can private equity firms differentiate themselves and improve their odds in this hypercompetitive market? One strategy is to focus more on sourcing the right deals. Quality trumps quantity, and quality deals are sourced by adding a humanizing element to the process. Firms should develop a core identity around the collective skills and expertise of the people who work there. The ability to clearly articulate the types of businesses you would like to buy and having a unique angle on that deal will set you apart from others in a competitive process. In addition, deal sourcing should become a company-wide initiative, with professionals aligning themselves across industry verticals to foster better conversations and a more in-depth understanding of the unique financial and operational attributes in that industry. The ability to identify and expand a network of intermediaries, advisers and influencers in a particular vertical and foster “contacts” into “relationships” will give a private equity firms an edge in identifying new deal opportunities and perhaps a path to that elusive unicorn, a proprietary deal.

Back to the race. Over a hundred years ago, at the very first Indy 500 race in 1911, most cars used a co-pilot to warn the driver when he was being overtaken. The winner of the race that year, Ray Harroun, outfitted his car with a rear-view mirror instead of a co-pilot. At this year’s race, thanks to new “smart racing” technology, over 50 million data records will be recorded off the cars in an average 2-hour race. Spectators will be able to monitor a driver’s heartbeat and even the muscle movement in their forearms! While advances in technology have clearly changed the way that both drivers and fans experience the Indy 500, at the end of the day the driver is still an integral component of winning the race. So too, with private equity, relationships and professional expertise, in combination with advanced technology, is the formula that firms need to win the deal.


About the author:

Carrie joined HRCP in 2009 and brings over 25 years of experience in global manufacturing and finance. She is responsible for a wide scope of operations management for the firm including investment sourcing, investor relations, marketing, IT, facilities management, human resources, compliance and accounting. Prior to HRCP, Carrie spent 15 years overseeing worldwide textile production. Carrie received a BS from Cornell University and a Master of Finance from Harvard University.

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