Private Equity Firms Hot on Cold Calling

Establishing deal flow has never been an easy proposition. But in the current market, finding a competitive edge is a daunting task.

In response, private equity firms are employing every possible strategy. Some utilize corporate executives to source deals, others step out of their investment comfort zone and hire branding consultants to improve their image. Perhaps the most commonly used method of deal sourcing is one of the world’s most ancient selling tactics – cold calling.

To be sure, cold calling is nothing new. Firms like TA Associates, Summit Partners and Advent International have been cold calling companies for years. But in the last 12 to 18 months, industry pros say cold calling has become the norm for private equity shops.

“Given the current state of private equity, firms have to do something different to source their deals,” says Andy Fligor, managing director with AFT Partners. “Firms are going to have to put more resources into finding deals.”

Jay Jester, director of marketing with the Audax Group, says it’s a function of increased competition. Venture capitalists are doing buyouts, mid-market folk are looking at turnarounds, and firms are using equity to do mezzanine deals.

“Anytime you have a dislocation and oversupply, people look for a new niche,” Jester says. “Everyone needs to be looking for the unshopped goods.”

One reason private equity firms are taking the time to cold call is because they’ve heard the success stories. Consider the case of One Call Medical Inc., a Parsippany, N.J.-based medical diagnostics outsourcer. TA first called the company in 1996 and periodically kept in touch before consummating its seven-year courtship with a $115 million buyout of the company this past month (see PE Week, 9/15/03)

“For as long as I have been here we have done cold calling,” says Brian Conway, a managing director with TA. We originate two-thirds of the deals we close by cold calling. We get the other third from investment bankers and brokers.”

Fligor says that TA has 190,000 names in its cold calling database although Conway wouldn’t confirm. From associates to managing directors, cold calling is just as much a part of the TA culture as closing a deal is.

“A majority of our associates’ time and effort is put to finding companies that the senior people can follow up on,” says Conway.

However, as with One Call, it can sometimes take years before the efforts yield fruit.

TA is not alone. While Summit Partners would not comment for this story, Fligor says it has about 20 associates in the same capacity as TA. Bob Taylor, a partner with Advent International, says about half of Advent’s investment opportunities come from cold calling.

“It gives you a lot of exposure to different industries,” Taylor says. “Even during an auction process it gives you an advantage because you have valuable knowledge, which you can use to develop an investment thesis.”

Advent tends to hire investment bankers and consultants, assigns them to specific industry sectors and lets the dialing begin. Surprisingly, Taylor says most companies don’t mind the unsolicited phone call, especially if the firm calling them doesn’t take an all-or-nothing approach to majority control.

The level of sophistication in cold calling varies from firm to firm. At one end of the spectrum, firms are no more scientific than your typical late-night telemarketer, calling through any lists they can get their hands on. Experienced cold callers have a different approach. At Advent, for example, the caller has to know the sector of the company he or she is calling on.

“We’re very sector focused, and the associates are knowledgeable about the different industries and have done research for the companies they’re calling,” says Taylor.

At TA, the firm first decides which sectors it has interest in investing in, then TA’s employees head to trade shows and meetings. Eventually an organized list is generated for the associates to get to work on. Each call is significant, as each TA associate’s earnings are based on how many new deals are dug up.

Ted Clark, CEO of TASC Holdings LLC, a private equity firm that specializes in LBOs in the sealant and adhesives sectors, says that in a short time his firm has already worked itself up to a database of over 1,000 companies in this niche. They now have a whole team that calls, writes letters and sets up appointments. It is an active, ongoing and essential part of the business.

“It’s an important part of our strategy, and it’s been effective,” says Clark.

Despite its increasing popularity, some firms are still resistant to cold calling. Robert Manning, a partner with Baker Capital, says cold calling simply isn’t right for his firm.

“It really is not our style,” Manning says. “We like to have an angle on every deal we do. And we like to have a partner [at the firm] with operational experience involved.”

The question, really, is whether cold calling is an option or requirement in today’s competitive environment. Jester from Audax says that no matter a firm’s strategy, deal sourcing should be front of mind. That helps to explain why even firms like The Riverside Co., one of the most active in the small end of the middle market, recently hired four regional sourcing and origination directors to pursue intermediaries and deals.

“In this business, you get promoted by doing deals, but that doesn’t make you good at finding deals,” says Jester, who prefers starting with the Z names when tackling a lead list.

“If you are spending too much time closing deals the process of looking for them starts taking a back burner,” Jester adds. “Closing a deal can take six to nine months, and even then it could die. If you haven’t been able to line up another one, you wind up with a spotty track record.”

This story originally appeared in Buyouts, a related publication.