If you asked the private equity community to define business development, you would largely hear the same response: business development is all about deal flow.
As a banner year for fundraising comes to a close and a significant amount of dry powder accumulates, having a comprehensive plan for consistently deploying capital is top of mind for every GP and is increasingly being scrutinized by the LPs that invest in them. In this increasingly competitive environment, many firms are asking: how do we evolve our strategy?
With this question at the forefront of firms’ 2015 planning discussions, a roadmap for best-in-class business development is emerging. Whether it’s deciding what conferences to attend, developing a first rate digital presence, or announcing every closed deal to the press, firms that are ahead of the curve are organizing these activities in a strategic and quantifiable way by tackling three key questions.
Who is responsible for business development?
Historically, private equity firms have said that every investment professional is responsible for business development. Now, a trend among the most progressive firms is to invest in a dedicated business development team. These professionals lead all outward-facing efforts of the firm, originate the majority of its pipeline, serve as the go-to team in cultivating and managing intermediary relationships, and lead the differentiation and marketing strategy for the overall organization. In addition to being the primary funnel into the organization for new relationships and investment opportunities, the business development team is accountable for tracking deal flow and measuring the success of related activities and tactics.
How do they go about it?
While private equity shops may not think about “building brand”, every time they update their investment mandate, publicize a deal or talk macro at an industry conference, they are doing just that. Recent regulation has also given firms the option to market fundraising and deal sourcing activities more conspicuously. What is critical is utilizing the right venues and vehicles to do so.
Outbound channels, such as email campaigns, phone calls, and in-person meetings with prospects, are the most practiced methods in delivering a firm’s marketing content. However, inbound channels, can be just as, if not more, effective. Many of today’s most effective inbound channels are digital. From blog posts, to video, to social networks, any tools that make it easy for prospective sellers to find a firm online, understand their investment thesis and get a sense for their reputation, can create a powerful flow of relevant relationships that can be converted into deals. Research shows that a discoverable digital presence is a firm’s first line of defense – 89 percent of business owners and intermediaries start online when researching a private equity firm before making contact about a deal.
The best friend of a sound business development strategy (and professional) is a reliable customer relationship management system. The days of tracking leads in Excel are numbered. Instead, CRM systems like Salesforce, deal platforms, and professional networks like LinkedIn are being used to track the path of a potential deal from the time it enters a firm’s funnel to the time it closes or the firm decides to pass.
How do they measure success?
Because almost every activity a deal professional undertakes has some link to deal sourcing, applying a return-on-investment perspective is key when taking a comprehensive business development approach. The best example of where such a framework can be applied is travel.
Private equity firms spend millions each year sending their investment professionals to visit portfolio companies, attend industry events, make introductions, and conduct due diligence. Particularly for firms that specialize in an industry or region, it’s likely they achieve all of this with one round trip ticket. Separating out costs of doing business from costs of finding new business is the first way to attribute what’s being spent to get new deals in the door.
CRM systems help by tracking the path each deal takes to move through the pipeline to close, allowing a firm to evaluate the resources used and assign cost to each step of the process, with a goal of tightening that funnel from start to finish.
The private equity community has survived on a haphazard approach to business development for decades – putting responsibility in the hands of all, but strategy in the hands of none. As private equity has gone from cottage industry to big business, that strategy has broken down.
Before 2015 is here, GPs should think carefully about how they will approach business development to win in their niche. With new entrants on the buyside, growing fragmentation and dispersion on the sellside, and limited partners stepping up accountability, having a focused and committed business development strategy is becoming table stakes for those who aim for the top quintile.
Peter Lehrman is chief executive and founder of Axial (www.axial.net), an online business development platform connecting deal professionals, investment bankers, and business owners around actionable and relevant transactions.
Photo courtesy of Axial.