Private Equity Calls Me Directly, So Why Do I Need a M&A Advisor?
By Samantha Lincoln, Managing Director – Paragon Ventures
Goodness, if I had $1 for every time I heard this, I’d have my own private equity fund. In my experience, these calls typically fall into one of two camps… and increasingly the latter.
- The first camp is the actual private equity fund analyst. He or she is newly hired, or in between deals, and put on a task to ‘dial for deals’. The fund has a broad mandate to invest in, for example, healthcare services, and they will call every company in the phone book to see what they can dig up. They don’t know your size, your revenue, your profitability, your history, your management, or your motivations, but they’ll suggest they’re very impressed, based on what little they can determine on your website.
These investors do have actual funds in hand for investment, and they do need to put them to work. But you don’t want to be in the business of teaching them about your industry and your business, so they can develop their thesis, to maybe go find a more attractive prospect. It’s a long lead, low probability conversation.
- The second scenario is the ‘search fund’, often in disguise as an actual private equity fund. These firms typically have one page websites, with just one (or no) team members listed. In researching the principal, they may well have loads of investment banking or private equity experience, but as employees, not principals. This is their first go at buying a company, and they too are dialing for deals, yet they don’t actually have dollars in hand. They do generally have a long list of wealthy individuals who have said they’d back them in an investment, but without any commitment. This too is a long lead, low probability conversation.
So why hire an advisor? We see these two scenarios a mile away, and better apply our resources and time to much higher likelihood suitors:
- PE backed strategic acquirors,
- PE funds with specific interest and prior investments in same or very similar industries, and
- Public strategic acquirors
All of the suitors will have growth mandates, already know the ins and outs of your industry, and have readily available capital and credit facilities. At our firm, we keep a deep and detailed database of private equity firms and the large acquisitive operating companies in our sectors, so we can parse the universe fairly quickly.
You have limited time when you’re running a business, and running a transaction process is a business in and of itself, often involving dozens of prospective buyers on a tight timeline. It’s a full-time job to do it well. Hiring an experienced advisor who can pre-qualify buyers will save you loads of time, and ultimately get you the best outcome with the most qualified buyers.
All that said, there are some great search fund managers who will close transactions and grow great companies into really great companies. In fact, I spent 9 years running M&A for one of the most successful search fund investments of all time. So anything is possible!
For more information on this article, contact Samantha Lincoln
