The Deal Whisperers

Some PE firms have upped the ante on deal sourcing by adding a head of business development to foster relationships. Three of these professionals from Kohlberg & Co., Moelis Capital Partners, and Sentinel Capital Partners discuss their roles and the importance of differentiation of firms.

Business Development Trend Grows

In the past 10 years, more private equity firms have added the role of head of business development as they try to bolster deal sourcing efforts.

“At its simplest level, we’re in charge of sourcing investment opportunities,” says Lex Leeming, principal and head of business development at Moelis Capital Partners. “But really, the role comprises the opportunity to be sort of an ambassador for the firm.”

The role also encompasses relationship management and trying to identify deal flow, along with making sure the firm is relevant to the intermediary universe.

“I look at my role as sort of architecting and playing air traffic control…in terms of all of the third-party intermediary relationships out there which are flowing us deals on a regular basis,” says Luke Johnson, senior managing director and head of business development for Sentinel Capital Partners.

While the position is effectively a sales force for firms, with relationship management thrown in, Andrew Bonanno of Kohlberg & Co. says they view it differently.

“I work with our operating partners and a deal partner to develop a thesis around a subsector within the five industries that we cover, and then try to proactively originate opportunities that are intermediated or proprietary,” Bonanno says.

Differentiation Is Key

With so many middle-market private equity firms, it’s important for intermediaries to see unique capabilities—something different or special.

“Being able to differentiate yourself in what is now a very efficient, very transparent market is absolutely critical,” Leeming says. “There’s so much money coming into the asset class. There’s so much money chasing very few really attractive deals.”

The track record for partnering with management teams is the differentiator that Sentinel Capital tries to impress on prospective targets.

“In those situations, a lot of the time, we’re bringing more than just that capital to bear,” says Johnson. “We’re bringing our operational expertise, our ability to put in place the right systems and processes to help scale companies.”

Bonanno says that Kohlberg goes through a process of writing proprietary white papers to “elevate the IQ of the partnership…develop our angle. And then, when we go out and speak with specific industry bankers, we say, ‘This is what we’re looking for.’”

In the end, the business development professionals at a PE firm are not
there to take the place of deal partners but to complement them and manage relationships.

“We’re responsible for institutionalizing those relationships and making sure that this air traffic control, the right and left hand, are communicating and coordinated,” Johnson says.

Deal Sourcing Style Matters

As the PE deal market has become more transparent and efficient, limited partners have started caring more about how a general partner sources its deals.

If you have a fantastic fund, “LPs want to know that you have the mechanisms in place to re-create that deal flow,” says Moelis Capital’s Leeming, “that it’s not just a one-hit wonder.”

While there may be a perception among LPs that proprietary deals exist, that isn’t necessarily the case.

“I personally have never seen a proprietary deal, and I’ve been doing this for 14 years,” says Sentinel’s Johnson. “In such a competitive environment today, a seller really has a fiduciary responsibility to at least talk to two people.”

Tapping into connections from college or elsewhere may no longer work to source deals.

Kohlberg’s Bonanno says that he thinks about his business as 80 percent of the deal flow coming through intermediated channels, with the other 20 percent coming from the firm’s white-paper initiative. “I believe that leads to a lot more of these one-off conversations, limited processes, and as we’ve tracked it, we’re seeing results,” he says.

Traveling the country talking to bankers, visiting conferences and trade shows, helps Johnson develop intelligence and information that he uses to create a thesis and drive some deal opportunities as a result.

“Not only are we the ambassador externally, selling our firms and our value propositions,” Johnson says, “but it’s incumbent upon us to also sell internally to our deal partners.”

“I don’t think we need a lot of talent coming into the country. What we need is more technology; we need companies with expertise.”