This article was sponsored by Bertram Capital.
How has sourcing in your part of the PE market evolved over the past decade, and what does it take to be effective today?
David Hellier: Bertram Capital was founded in 2006 and our founding partner, Jeff Drazan, came out of the venture capital world, where almost every start-up needs your money and dealflow was no issue. I joined as an operating partner in 2007 after 21 years working in operations, when Jeff realized that dealflow was the lifeblood of the firm and asked me to build a business around sourcing opportunities for the deal team. We designed and built an origination platform to work for us.
Our business development function has never been a support function; it’s fully integrated into the deal team, front to back. As firms like ours built these dedicated, sophisticated platforms, LPs would share what we were doing with their other GPs and ask them to do the same. The market evolved from focused investment teams to virtually every middle market PE firm having a sourcing function. Over time, the origination role has broadened, but it has also become highly commoditized.
From day one, we decided to leverage technology to build a more efficient and productive model. We were one of the first PE firms to use Salesforce and we do a lot of data analytics. But we also said that relationships have to absolutely be at the forefront, so we set out to build deep, genuine relationships with our banking contacts.
My team’s job is to find the most relevant bankers to build those relationships with, and then facilitate building a Bertram relationship at multiple levels.
Ryan Craig: We want breadth in our sourcing, so we want to see everything in profile, but the only way to achieve that is with depth. We believe that is where a lot of firms fall short. We have put together a great team – we know we have to act faster, using technology, but you can’t forget this is a people business. We have succeeded in using technology to uncover opportunities, and then the depth comes with 15 years’ tenure of treating people right across the market.
How important is a differentiated strategy for deal sourcing and winning deals? How can firms differentiate in a competitive market?
RC: Clearly, we are in a hot market with a lot of money washing around, so we need to have conviction to win deals and know what we like before we see it. Even though we are a generalist firm, we have deep expertise, deep industry knowledge, and we have Bertram Labs, which is our in-house team of engineers, software developers, web designers and digital marketing specialists. All that allows us to say to intermediaries that we are a unique partner and lets us assess opportunities very quickly during due diligence.
On the consumer side, for example, right now almost every company is trying to work out what to do with its data. There are gems, provided you can quickly process information and know what you’re trying to derive from it. When we look at companies, we try to get a raw data extract of their e-commerce platform and then, typically within 48 hours, we can spin out 80 percent of what we would like to see during due diligence and get to conviction quickly.
DH: There are a lot of firms that say they are differentiated, but in this market that is challenging. Central to our approach to building businesses is that technology is the backbone of any company we invest in. Every company, at some level, is a software company and technology is an opportunity to drive top line growth and gross margin improvement. In 2010, we embarked on an effort to build an in-house technology team which has evolved into Bertram Labs, a 15-person team dedicated to our portfolio companies. Labs represents a comprehensive resource for our portfolio companies and helps distinguish us to remain top of mind with bankers.
How do you employ technology in the sourcing function at Bertram Capital? What are the pros and cons of more online sourcing?
DH: We have taken a very disciplined approach to our CRM, and we capture a lot of information around where a deal came from, who introduced us, how we proceeded, who eventually bought it and why we did what we did. We look at this information weekly and monthly to get signals: are we seeing the right deals in the market, are we seeing more deals in certain sectors, is there a downturn in what we’re seeing in certain sectors? That helps us keep the pulse of the marketplace and drive our planning.
“There are a lot of firms that say they are differentiated, but in this market that is challenging”
We see a lot of technology solutions, most of which aren’t overly exciting. We recently began to use Grata, which has built a smart search engine for deal sourcing that helps us home in on developing thesis areas and market mapping. That’s a tool we’re excited about.
RC: On the consumer side, at a high level we have tried to gather data about hundreds of targets and build a framework of understanding so that we can see quickly whether something is for us or not. We do that by isolating a couple of KPIs, like the lifetime value of a customer, for example. Using those sorts of specific data points, we can assess a company through its data in a matter of hours and then prioritize internal resources.
How has the pandemic impacted the attractiveness of certain sectors?
RC: First, we are all waiting to see what normal now looks like, because it’s very fluid. Our industry loves certainty and predictability, so assets that exhibit those characteristics are as valuable as ever. In tech-enabled business services, for example, it’s pretty simple to imagine that businesses are turning towards vendors that operate in the cloud and deliver cost savings, so if you have a target company that provides that, that’s awfully attractive. Those used to sell for 10x EBITDA and now sell for 20x.
“Our industry loves certainty and predictability, so assets that exhibit those characteristics are as valuable as ever”
The interesting question is, has the rest of the world changed? In industrials, we are not seeing a huge amount of change, and those assets that were attractive remain attractive.
In consumer, a general shift towards e-commerce and direct consumer brands has been going on for 12 years and is accelerating. But there was also a lot of retail therapy that went on during the pandemic and my hunch is that is going to wear off as we all return to school and work.
Finally, with covid having such a significant impact on travel and so much more interaction being done remotely, what will be the long-term impact on sourcing strategies?
DH: This question goes back to the depth of relationships. As someone with almost 3 million flight miles on Delta Airlines, it’s been great not to travel as much and Zoom has proved to be a meaningful productivity tool.
From a sourcing point of view, I talked to many bankers more frequently, with just as much meaning as in-person, during covid on Zoom than I did previously. If you knew someone well pre-covid, you didn’t miss a beat on Zoom, but when you’re trying to build your network, travel is essential. We will be more judicious in our physical travel now and will continue to leverage Zoom, so network events and face-to-face meetings will be much more strategic.
RC: If you ask anyone in our industry, they will say they are more effective and efficient working on Zoom for about 60 percent of what we do. For some elements of sourcing, we absolutely have to be face-to-face, but not all of it.
We will see whether competitive tension drives us all back to anywhere near the travel we used to be doing, but we feel happy it won’t go back to the levels it once was.
How should the deal origination function work with deal teams to achieve maximum effectiveness? What are the different approaches?
DH: We did a survey three years ago of about 50 investment bankers around their views on the business development function. The bankers’ responses broke down into three categories: deal collectors, deal ‘representatives,’ and then deal value-add, with the latter being the smallest segment. They said most business development functions are just there to ensure there’s a regular flow of deals into the firm. The deal ‘representatives’ do offer some value back to the bankers, helping pass opportunities to the right partners and facilitating conversations between bankers and deal teams. The deal ‘value add group’ represented business development professionals who have a true seat at the investment table, are integrated fully into the investment process and are highly involved in sell-side bank selection.
At Bertram, we take a holistic approach to an investment, and we have more involvement at the front end, stay engaged through the entire company-building process and then take a lead role when it comes to the sale. That’s a powerful position, because investment bankers know our business development team can move the needle for them.
If a banker from a mid-market bank is talking to one of my partners, it should feel no different than speaking to me. We have worked together long enough that we can talk about what the other is doing. We know each of our portfolio companies in depth. Because of that partnership approach, the banker feels like they are talking to a unified front and knows that we are working as hard for them as we hope they are working for us.