Press Release
Capstone Partners President and Managing Partner Authors Article on New Deal Collaboration Techniques
Private Equity Groups and Investment Bankers are Finding New Harmony
John Ferrara, President and Managing Partner, Capstone Partners
Boston, MA - March 16, 2004 - The capital market frenzy that typified the late 1980’s and 1990’s has subsided, making way for a new generation of seasoned transaction professionals who have adopted a more holistic, collaborative approach to deal making.
Gordon Gekko wannabe antics, from investment bankers, investors and acquirers alike, have taken a back seat to industry specific, intelligence-driven deal making focused on delivering efficient win-win transaction solutions.
The clash of opposing sell-side and buy-side mentalities between investment bankers and private equity groups, or PEGs, (i.e., “I have quality deal flow you want” and “I have capital your client needs”) is fading in favor of a deeper relationship based approach.
This shift in deal making has been prominent in the ever maturing private M&A and financing markets. Many private equity groups and investment banking firms have already begun to institutionalize various approaches to “deal manufacturing” in order to better align interests, maximize economics and limit the scraps or minimize wasted resources.
As both PEGs and investment bankers look to drive market efficiencies to see more, higher quality assets, the private capital markets have become increasingly more driven by specialization and real-time market information. Consequently, these commonalities are expanding the ways in which these parties are working together in new harmony.
For starters, PEGs seem to be more open to inviting specialized investment banking firms into their portfolio to help them assess market conditions and potential exit strategies. Instead of looking to be the PEGs’ deal mercenaries, investment banks are delivering strategic value. For example, a well developed Market Liquidity Thesis can provide investors with focused recommendations on deal activity, market timing, asset positioning, anticipated pricing and the likely universe of on-strategy acquirers.
In addition, the same expertise can be applied to review entire asset categories, focusing on macroeconomic growth trends and anticipated transaction activity over the next 12 to 18 months. By taking this approach, PEGs can gain valuable validation from professionals active in liquidity market-making on a daily basis and use that information when considering portfolio or industry niche strategies.
Then there is the ever critical deal flow optimization issue. Several highly focused models are currently being deployed on a selective basis where PEGs and investment banks share the same industry coverage. With more frequency, they are collaborating on co-sponsoring business development initiatives. By doing so, they are finding that they collectively gain more credibility in the market with business owners and can generate quality opportunities for each other.
In terms of efficiency, several firms have teamed up, informally or otherwise, to provide rapid asset qualification and preemptive screening. Under this approach, investment bankers receive a buy-side critique to help qualify prospective clients and conduct a confidential pre-marketing process. On the other side, the PEGs are granted early warning signs on deal prospects and can move to strike early should the opportunity warrant.
Lastly, there are other progressive partnerships that can be formed between PEGs and investment bankers that focus on capturing incremental economics and teaming in co-investment opportunities. Most PEGs have built sophisticated outbound groups dedicated to deal origination.
These specialized groups often see an enormous amount of companies that do not fit their specific criteria, but whose owners have expressed an interest in pursuing liquidity or financing options. PEGs that are harnessing this surplus in partnership with investment banks are able to generate enhanced economics for their limited partners.
From a capital and risk sharing perspective, a number of middle market investment banks, albeit not many, possess principal investment capabilities. These firms are seeing increased opportunities to stand behind the clients they represent and co-invest along side the PEGs.
Will an escalating collaboration between progressive PEGs and investment banks change the fundamental dynamics of a competitive auction process? Probably not across the private markets as a whole, but the impact is already being felt on a firm by firm basis.
Ultimately, PEGs will always try to arrive on the scene first and investment bankers will always be driven to achieve maximum valuations. However, these emerging strategies can create opportunities where the business objectives of both parties are met with a higher degree of efficiency, enhanced economics, more controlled risk exposure (for the companies) and better strategic and cultural fits for all parties involved.