PE Pros Analyze Sell-Side Advisors –

Acquirers continue to carp about the auction-hungry practices of sell-side advisors, but buyout firms are still heavily utilizing the middlemen, according to a recent survey of Buyouts readers.

The survey was conducted via email last month, with a majority of respondents describing themselves as either the sole decision maker, or one of a few decision makers at their respective firms. Overall, 21.3% of buyout firms use sell-side advisors on every single M&A exit, while another 41.2% outsource portfolio company activity most of the time. Another 25.7% only use sell-side advisors on certain deals, while a lonely 11.8% rarely employ such services.

What is clear from the survey results, however, is that sell-side advisors still must compete hard for each and every deal. Only 4.4% of respondents report using the same group for every exit, while 51.1% hire on a deal-by-deal basis. This isn’t to say that firm reputation or existing relationships aren’t important, but rather that the deciding factors most often come down to deal-specific factors like industry expertise or particular financing capabilities. A slight minority of respondents also said that past experience with an advisor whether good or bad also could prompt a decision.

The issue of industry expertise also was cited numerous times when respondents were asked to share their biggest complaint about sell-side advisors. More specifically, certain buyout pros feel that advisors act like used foreign car dealers selling Chevy trucks. In other words, they talk a good game without really knowing what they’re talking about. Moreover, some respondents also objected to situations where the person with the most relevant industry experience passes the deal off to a less-savvy subordinate.

“The real problem is that I have no control after I hire them,” said one respondent, during a follow-up phone call. “If I hire Goldman Sachs to sell a consumer company, it may have largely been because a Goldman Sachs managing director is friends with the president of Procter & Gamble. I obviously want the managing director to make the phone call, but there really isn’t much I can do if he asks some vice president to place the call instead.”

Other complaints were far less conclusive, with certain pros saying that advisors show deals to too many prospective buyers (instead of focusing on likely buyers), while others suggested that certain advisors don’t open the process wide enough (i.e., just pitching it to buyers with whom it has existing relationships). And then there was this: “Sometimes the process is too efficient, and being a good guy and doing tons of work actually hurts you in the process.”

In general, few respondents seem to believe in the quid pro quo theory of sell-side advisors, whereby the employer gets a look at all of the employee’s future offerings. Approximately 37% of respondents said that a sell-side advisor is essentially obligated to share future deals from other sellers, although 20% knew of certain instances where such informal arrangements failed.

What should be more explicit, however, is a seller’s primary objective in hiring outside help. Everyone obviously wants to get the deal done, but how the deal is done can be just as important. It may be assumed that everyone is out for the highest price possible, but the M&A market is full of “best offers” that don’t get done. For example, 26% of survey respondents said that speed of execution was their primary objective, compared to 37.2% who mostly just wanted to get the most cash. Another 18.4% said they were most interested in quick and consistent access to the advisor team, while a similar percentage cited the necessity of fair fee structures.