Five keys to navigating deal sourcing in the mid-market

The business development function is more important than ever…

The business development role has matured significantly from the time it was first conceived as a part of a private markets strategy. The influx of capital in the private markets over the years is driving the need for business development professionals, according to Erin Carroll, a partner at executive search firm BraddockMatthews.

Fundraising cycles have shortened and, in turn, increased the velocity of deployment. “They [firms] need a pipeline of deals,” she says.

The percentage of PE firms with at least one full-time business development professional rose to 64 percent in 2020, up from 47 percent in 2017, according to Sutton Place Strategies.

“Velocity is the reason this is happening,” says Mario Masrieh from Trivest. “It’s the desire for GPs to deploy capital fast and get more platforms cycling through the funds.”

Dan Ryan at MidOcean says the business development function “has evolved significantly” since he first took on the role in 2009.

“At that time, there were far fewer private equity firms, fewer intermediaries, and investment professionals tended to rely on a dozen or so close relationships for sourcing high-quality opportunities,” he says. “The business development function, where it existed at all, was typically more of a marketing or book-collecting role.

“Today, as sponsors seek to develop functional areas of expertise to support investment activity and value creation, the role of dedicated business development has become a critical function and a partner track at many mid-market firms.”

… especially when it’s integrated into the broader investment strategy

Along with the rising importance of business development leads is the sharing of business development responsibilities across the investment team.

“Dedicated business development teams are not new, but what’s new is having more people dedicated to that effort,” says Jeffrey Stevenson at VSS.

Heather Faust says that at her firm, Argand Partners, “the whole team is charged with developing investment themes and sourcing new opportunities.”

“We aim to avoid having any silos, so everyone is empowered to source, both directly and through intermediaries,” she says. “However, we have found that having an investment team partner responsible for business development and lead generation, alongside deal management activity, enhances momentum and dealflow.”

There’s less syndication in mid-market co-investments than is typical of large-cap deals

Kevin Nickelberry at GCM Grosvenor says that in larger deals, “co-investments tend to be more broadly syndicated. The sponsors are going out to a lot of co-investors, sometimes after the closing, so the process dynamics are quite different.”

In the mid-market, however, co-investors “are often contacted early in the sale process when a sponsor realizes that the deal is compelling, but they need additional equity capital,” he says. “It is a much more engaged process that frequently requires scale, a thoughtful approach to due diligence, and an experienced investment team.”

Nickelberry’s colleague Jason Metakis says that “for larger and mega buyout funds, they will often have an investor relations or capital markets team that can run a broad co-investment syndication process. In the mid-market, that responsibility often falls on the shoulders of the lead deal partner, who is also busy completing due diligence while sorting out deal financing and negotiating definitive documentation with a seller.”

From a geographic perspective, there are upsides of going wide

“As sponsors seek to develop functional areas of expertise to support investment activity and value creation, the role of dedicated business development has become a critical function and a partner track at many mid-market firms”

Argand Partners’ Joyce Schnaedl explains that “having a global operating footprint, while potentially more complicated to manage, can really benefit” a firm’s investments. “It provides downside protection, with diversification and resilience across market cycles on the sales side, and flexibility and the opportunity to share best practice on the operational side. Being global also offers an enhanced upside, by virtue of having access to expanded markets, diverse talent pools and low-cost resources,” she says.

Technology and data management are crucial elements of the deal-sourcing process for many firms in the mid-market today. This has become especially necessary over the past 19 months. Virtual meetings became the norm for the early stages of deal diligence, and data management platforms are starting to gain popularity.

Mid-market deal sourcing today requires the right blend of personal touch and technology/data strategy

“All of this technology will persist,” says Matthew Minnaugh, director of business development at Century Park Capital Partners. “Prior to the pandemic, firms were probably still a little resistant and slow to adopt these technologies. But now they have to use them, it’s par for the course.

“It’s a small world, there may be thousands of private equity firms, but it doesn’t take your competition long to catch on to the tools you’re using.”

Having a strong tech platform is only half the battle. Christen Paras at MiddleGround says the firm’s team “constantly evaluate[s] new technology,” but at the same time, she says, “we think about our team’s bandwidth, because the technology is only effective if we have the resources to manage it.”

Additional reporting by Eamon Murphy, Becky Pritchard, Claire Coe Smith and Karishma Vanjan