How do Private Equity Firms find deals?
How do private equity firms find deals?
The question should be: “How do private equity firms find good deals”.
I run a private equity firm, and I get calls all the time from investment bankers and brokers, saying, “Steve, we have the perfect deal for you!” and they try to convince me (on the phone) that this deal is just for me. But, I know that the second they hang up the phone with me, they’re calling Bill, they’re calling Jeff, and they’re calling Susan with the exact same deal.
These are not good deals; these are just……deals. Private equity firms need to find good deals through proprietary deal flow. Proprietary deal flow is obtained (for the most part) through connections.
Private equity firms need to get to know lawyers and accountants who could know when their clients are about to sell, allowing them to tell the firms in advance.
Private equity firms need to make a lot of connections in an industry, so that when the executives/owners of those companies want to sell, they tell the private equity firm before they market the deal to other companies.
Private equity firms should also make connections with other private equity firms. If a private equity firm has a deal, and it doesn’t have the capital to do the entire deal themselves, the firm might call on another private equity firm to be part of a syndicate. To get deals you need to get out there – get out of that office.
Finally, you need to market your private equity firm really well. If you market effectively,entrepreneurs will know to come to you.
In summary, if you’re a private equity firm, you need to find good deals. Stop taking calls from those bankers, stop taking calls from those brokers, get out of your office and get proprietary deal flow.
In 2014, the yogurt company Chobani needed $750 million. Before the market found out, Chobani was already in talks with TPG. Why? The co-founder of TPG, David Bonderman, knew a prominent businessman in Turkey, Cuneyd Zapsu, who in turn knew the CEO of Chobani, Hamdi Ulukaya. Remember, proprietary deal flow is all about working the connections you have. After all, this $750 million deal happened because a guy knew a guy who knew a guy.