Private equity funds face more competition than ever before – making finding high-quality investment opportunities (at reasonable valuations) an increasingly difficult challenge. To keep up, firms are both devoting more resources to deal origination and becoming more creative in identifying their next great investments.
However, placing more attention on these efforts raises a natural question – who is in charge of making sure these initiatives perform as planned? Increasingly, firms have been hiring business development professionals to bridge that gap.
This article will discuss the rise of the business development manager role in private equity, why it’s essential, and the common strategies used to increase deal flow.
Let’s dive right in.
The Rise of the Private Equity Business Development Role
Over the past few years, the demand for private equity business development professionals has skyrocketed. This is especially true in lower middle-market and middle-market private equity firms. But why is this happening? And why now?
Well, there are several reasons for the growing demand:
- More capital to deploy: An uptick in capital being raised by PE firms (According to Bain, by Q2 2023, buyout funds collectively had $1.1 trillion of undeployed equity capital)
- Increasing competition: both due to new and existing private equity firms becoming more active (firms are becoming more active after the high inflation and high-interest years of 2022 and 2023)
- More deal sources to cover: with a larger than ever number of venture capital firms, investment banks, corporate development teams, and proprietary deal activity
- Need for leverage: With bigger investment teams and more portfolio company work, senior management team members are increasingly stretched and lack the bandwidth to send that next follow-up email.
In the past, senior investment professionals typically handled the originating deal flow. However, the above shifts require firms to devote more time and resources to finding deals and strain what a partner or managing director can accomplish.
This applies to not only the initial deal sourcing effort itself but also the continuous improvement process of identifying missed opportunities, determining which sources give you the best return on investment, and other analyses that allow you to stay a step ahead of your competitors.
Having a dedicated business development team (or a full time director of business development) helps alleviate this strain and helps firms win an increasingly competitive marketplace. Yet, finding people to fill the role has become cumbersome.
Top Private Equity Business Development Strategies Used Today
Conferences and Tradeshow Coverage
One of the most popular tactics in a BD (Business Development) professional's arsenal is the "hand-shaking" approach that many private equity (PE) firms are used to. And this can still work wonders, especially since in-person relationship-building remains a cornerstone of effective business development.
Why Attend Conferences and Tradeshows?
These events provide a unique opportunity to network, establish rapport, and forge meaningful connections with potential clients, investors, and industry peers. The face-to-face interactions at conferences and tradeshows cannot be replicated through digital means alone, making them invaluable for private equity firms seeking to expand their reach.
Challenges and Considerations
However, it's essential to recognize that while attending these events can yield significant benefits, it can also be resource-consuming in terms of time and money. Moreover, many of these events are localized, requiring significant travel to achieve good coverage. For instance, vice presidents of business development commonly cross the United States to attend the next relevant conference, sometimes traveling to New York one week, Miami the next, and Omaha the following week.
Maximizing the Impact of Conferences and Tradeshows
To make the most of this strategy while minimizing resource expenditure, private equity firms should consider the following tips:
- Strategic Selection: Prioritize conferences and tradeshows that align with your firm's objectives and target audience.
- Preparation is Key: Before attending an event, have a clear plan in place. Define your goals, establish a list of contacts to meet, and prepare engaging pitches or presentations.
- Leverage Technology: Use event-specific apps and digital tools to help you schedule meetings, connect with attendees, and stay organized throughout the event.
- Consider Virtual Alternatives: In today's digital age, many conferences and tradeshows offer virtual attendance options. This can be a cost-effective way to participate and network without extensive travel.
In conclusion, attending conferences remains a good and effective business development strategy for private equity firms. While it may demand time and resources, the benefits of in-person relationship-building, networking, and exposure make it a valuable investment.
Another traditional approach (albeit done at differing levels of sophistication/effectiveness) is building a robust network of investment bankers and brokers to source referrals. The logic of doing so is straightforward – investment bankers are consistently growing their network to uncover potential clients that may be interested in being acquired (by you or somebody else).
However, meeting an intermediary isn’t enough to bring a steady flow of deals your way. Without active engagement, it’s easy to be treated like just another line in their Excel spreadsheet or CRM that they may or may not remember to reach out to when a relevant company emerges. Moreover, not all investment bankers and brokers are equally pertinent to your investment activity – for example, a boutique banker focused on healthcare companies is worth much less energy for an industrials-focused middle-market fund. As a result, identifying the bankers representing companies in the spaces you’re actively investing in and tiering them based on attractiveness can help you better focus resources and ensure the most relevant intermediaries get regular, consistent, and personalized attention.
Another increasingly common tactic is working with marketing resources to nurture existing relationships while creating opportunities for inbound deals. Similar to intermediary management, a firm can take differing levels of sophistication towards their marketing efforts.
One of the lowest effort, highest ROI methods is regular newsletter updates on the portfolio, deal activity, and the team – which enables you to stay top of mind with other industry participants. Some firms take this further by providing content and research their audience finds valuable. For some firms, it might be packaging some of their research and learnings about the industries they know well. For others, it might be specific challenges that management teams they engage with come across (e.g., site selection and real estate, key operational metrics, or staffing and hiring challenges).
The Firm’s Relationship Network
While the investment professionals may spend a bit less time on deal origination with a business development team member on board, they still have incredibly robust and relevant networks for deal sourcing.
If those relationships are directly related to deal origination (e.g., with an investment banker), those relationships may be handed off to the business development specialist. But many other connections of theirs may be multi-purpose – for example, a portfolio CEO that can be leveraged for due diligence and deal referrals.
There’s also a growing number of sponsor-to-sponsor transactions, which require relationships with other private equity funds (in order to have access to their portfolio companies when the time comes). Those relationships are likely owned by the firm’s senior management (similar to investor relations) but also have some sourcing benefits.
While the benefits of Partners and MDs ‘owning’ those relationships are clear, it’s often hard to uncover whether those relationships exist in the first place or how strong they are. Social networks and platforms like LinkedIn are certainly helpful in this regard, as are the emerging new class of relationship intelligence solutions.
Technology and Data Mining
Like every other portion of the economy, technology is fundamentally changing the private markets and capital markets. For business development practitioners, technology can both help streamline the workflow (and identify ways to improve sourcing efforts), and also uncover new businesses that might not otherwise have been on the radar.
To uncover and break into new companies, a combination of off-the-shelf software products is typically the highest ROI place to begin. Some examples include:
- Research databases (e.g., Pitchbook, Gain.pro)
- Company search tools (e.g., Sourcesrub, Grata, Synaptic)
- Sales engagement tools (e.g., Outreach, SalesLoft, Salesforce)
- Relationship intelligence tools (e.g., 4Degrees)
Some private equity firms have also invested in their proprietary internal technology stackand efforts to accelerate these efforts further.
Taking the best advantage of any of the above efforts also requires regular analysis and continuous improvement – understanding where your best deals are coming from and how to deploy your limited resources to get more that fit your strike zone. Technology can also be decisive here, typically through a CRM or deal flow management system.
Leveraged well, technology can be a powerful source of proprietary advantage – one that makes your firm’s fundraising story to LPs unique in addition to sourcing your next deal. If you’re curious about more ways to use technology to your advantage, we’ve written a fuller guide for the emerging categories of private equity software here.
The Key Business Development Skillsets
Since there’s no formal education or special “playbook” on business development in private equity, finding a great business development associate can be challenging. There’s no school or program you can pluck graduates from. Given the above strategies, what skills should funds search for to find the right person?
- Relationship building and management – because much of the role is engaging with people, your business development leader needs to be able to forge new relationships on behalf of the firm while growing existing ones. Depending on their prior roles, some business development professionals will also have a pre-existing Rolodex of relevant deal sources.
- Organization and time management – given the sheer number of companies, relationships, and sourcing channels to stay on top of, opportunities can easily fall through the cracks without a detail-oriented, organized person.
- Quantitative skills – while their primary role isn’t to perform deep quantitative due diligence, the ability to use numerical data to quickly determine if a company’s metrics pass the ‘sniff test’ helps ensure investment team time is spent on the right opportunities.
- Comfort with technology – as more software enters the category to help investors identify new potential investments or streamline their workflow, having BD professionals who are versed in how to use software to accomplish their goals has moved from optional to essential.
The Bottom Line
Competition in the private equity realm is continuing to grow. How you approach it going forward is crucial to your firm’s success. If you’re not considering using private equity business development experts to enhance deal flow and sourcing, then you could get left behind by the PE firms that are.
Now is the time to build a BD team and implement the tools to help them succeed. If you’re not already using software to collect and track prospects' data, check out our Private Equity CRM and Relationship Intelligence software today.