Skip to main content
An elevated view of the London skyline at sunrise

17 Oct 2024

Deal originators roundtable: Calling the shots

Following two years of flat dealmaking, the outlook for 2024 is brightening as borrowing costs come down and the macroeconomic backdrop improves. Real Deals brings together a panel of industry experts to discuss the deal origination environment and outline what it takes to source deals in an increasingly competitive and sophisticated market.

Panel at the secondaries roundtable

Speakers

Agu Aarna - Partner, Intium Tech
Jonathan Caswell - Origination Director, LDC
Amber Dupont-Liot - Partner, European Head of Origination Private Equity, EY
Luis García - Principal, All Seas Capital
Kate Gribbon - Head of financial sponsor coverage and origination, Investec
Suzanne Pike - Partner and head of origination, ECI Partners
Max Rae - VP, head of product, Preqin
Fraser Robson - Chief commercial officer,  WovenLight
Henri Songeur - Investment manager, Puma Private Equity

Hosted by
Nicholas Neveling on behalf of Real Deals

Photo credit: Real Deals, Phil Bourne photography

 

Before we go into detail on origination strategies, where is the deal market placed at the moment? What are the expectations for deal pipelines in the coming months?

Max Rae: It has been a very challenging market for the last couple of years now, but the outlook is improving from quarter to quarter. If you look at the first half of this year, European deal value is around double that of the levels recorded in H1 2023. As interest rates start to come down there are positive signs that Dealflow will continue to rally. We are not out of the woods yet, but deal activity is trending in the right direction again.

Amber Dupont-Liot: Dealflow has slowed during the last 24 months, prompting sponsors to focus more on portfolio management, value creation and operational improvement. “The outlook is improving and there is significant pent-up demand to deploy capital and secure realisations. We have been seeing more transactions complete, and sponsors remain focused on operational improvement to ensure that assets are in the best shape possible when the opportunity to transact does emerge.

Suzanne Pike: There has been so much complexity for businesses and investors to handle during the last five or six years and that has led to volatility in deal activity. In one quarter you will see double the number of deals that is typical, and in the next quarter there will only be a handful of transactions. That can be distracting, and it has had an impact on competitive behaviour. There is still so much capital in the market, and even though we are in a tough environment, there is still incredibly intense competition for transactions.

Henri Songeur: We operate at the growth end of the market and we are sector generalists, so deal dynamics have been slightly different for us. We have a bit more f lexibility so that when specific sectors face headwinds, we can pivot into other areas. Even though last year was one of the weakest for the private equity industry for a number of years, we made eight new investments. This year has been quieter. It is a tricky market in which you have to be f lexible and adaptable.

 

What have these dynamics meant for how managers and advisers are thinking about origination?

Jonathan Caswell: We are in a challenging market, but the fundamentals of good origination apply irrespective of where you are in the cycle. Our pipeline combines identifying opportunities early, and nurturing enduring relationships with management teams that we’ve known for many years, whilst maintaining strong advisory relationships.

If I look at the current pipeline for my team, which covers the Thames Valley and the south of the UK, we’re in exclusivity on three opportunities at the moment. These are all individuals and companies that we have known and developed our relationships with for at least three years. There are definitely still deals to be done, but you have to put the work in over a number of years to be in a position to secure these deals.

Luis García: For us, our investment strategy and offer to management teams is integral to how we originate transactions. We offer a hybrid capital product that can include equity, but will look more like credit. We structure investments so that there is a preferred return to provide some downside protection, and in exchange the structure is less dilutive for founders and management teams.

Vendors see that sales processes are breaking, this causes problems in the medium- to long-term because it is much harder to maximise value when there has been a failed process. But the best companies still require capital to pursue acquisitions, institutionalise or grow internationally, so there is demand for an intermittent capital solution. That is where we have focused our origination effort and our pipeline has been quite stable.

Kate Gribbon: In a very competitive market, sponsors have to evidence their credentials, show that they have a plan to grow a business, and invest in building relationships with all key stakeholders over a number of years. We regularly see situations where we have been tracking a potential sell-side mandate for a number of years and it is evident that several private equity houses have been in there for all that time too.

The attention to detail is remarkable and the pitch process has become so nuanced. It is not just about finding a seller at the best price, it is also about f inding the perfect home for the business, where it can grow and thrive. Processes are much more curated. The days of sending out an information memorandum to all and sundry are over. Understanding nuances and cultural fit requires time, and most sponsors are now opting out of processes where they don’t already know an asset and haven’t done the work on a deal upfront.

Fraser Robson: As the macroeconomic backdrop improves and deal activity rallies, people have recognised that data, machine learning and AI will become an increasingly important part of the origination and value creation toolbox. This interest has been bubbling for a while and addressing this interest is what WovenLight has been set up to do. The business was started by one of the founders of QuantumBlack, a data analytics firm that was sold to McKinsey. We partner with private equity firms and underwrite deals together. The sponsor will hold the majority position, and we will hold a minority stake and focus on delivering value creation strategy using data analytics and AI.

The market has become more competitive; you have to make the right pitch to management teams and be able to present an exciting value creation plan. We partner with private equity firms to bring that data capability to the table, in order to present management with a plan to harness data and drive value creation.

Dupont-Liot: That is something that we have noticed too. Sponsors, portfolio companies and deal targets are all seeking insight into how data, AI and generative AI can drive growth and profitability, whether through the supply chain, the cost base or the sales function. Where can a business achieve the greatest impact if it invests in AI or data analytics? That is something we are helping clients to work through. The role that technology is now playing in the dealmaking process is interesting. How are managers and advisers using technology to aid deal origination efforts?

Agu Aarna: There are a handful of larger f irms with scale and resources that have digitalised their origination processes. That is very appealing, but my sense is that for most managers the main priority is to f ind ways to use technology to move GPs up the learning curve faster, building more insight into a target company, as well as demonstrating knowledge to a management team to establish a better relationship. Technology is not replacing core origination skills; it is supporting them.

Rae: We are picking up very similar themes. The question that clients ask us every day is: ‘How can technology save me time on rudimentary processes?’ Dealmakers will constantly be pulling together spreadsheets and databases, capturing notes on clients. How can technology help to pull that all together quicker and in a way that enables deal principals to pull out coherent insights? One of our main focus areas is the use of data analytics and machine learning to identify when assets might be coming to market. That information will continue to flow down through personal networks and informal discussions, but you can complement that insight with a data-driven approach that tracks markers like holding periods and distributed to paid-in capital.

Gribbon: A data-driven approach is something that has become central to how we will originate mandates. If you run analysis of fund vintages, pace of capital deployment and fundraising, you can build a picture of when portfolio assets will trade. We can then use that data to go and present a solution to a private equity client ahead of formal exit planning. It allows us to go in on the front foot and add value by shaping a solution and presenting options early on.

Robson: We work with firms from the mega-cap to the lower midmarket, using an origination tool that we can use to identify targets. But, in most circumstances managers will know the assets they are targeting. What we spend more time on is using technology to manage the shape of the deal funnel. Technology can narrow the shape of the deal pipeline and allow the sponsor to focus earlier on a smaller set of opportunities where there is high conviction. In a world where sponsors are having to come up with more detailed, considered value creation plans, spending more time on a narrow set of selected assets should ultimately drive a better investment outcome.

Dupont-Liot: I am excited about the opportunity that AI presents. We are developing applications for greater efficiency in the way we operate and the way we support our private equity clients, but I would also strike a note of caution; safe and secure innovation is a priority.

Kate Gribbon
Kate Gribbon, Head of financial sponsor coverage and origination, Investec

Understanding nuance and cultural fit requires time, and most sponsors are now opting out of processes where they don’t already know an asset and haven’t done work on a deal upfront

How, then, do the origination levers available today compare to origination methods from 20 years ago?

Caswell: As I mentioned earlier, the fundamentals haven’t actually changed that much, but the process has. At the beginning of my career the key focus for deal doers was advisory relationships, with origination supplementing a pipeline from cold targets. You would literally pick up a copy of the yellow pages, a telephone and start making the connections. You still have to make the personal connection, but it has become more efficient to research and identify deal opportunities through technology that is now available. It is much easier now to make that first contact.

Back then, you used to sit in a car and drive all day to get to an appointment that might end up being cancelled. Now, if your approach is thought through, relevant, polite and properly structured, most chief executives will be happy to take a video call for 30 minutes to make that first connection. That makes the first level of the filtering process quicker and more efficient, freeing up time and resources to develop the relationships that you are mutually the most excited about.

 

Would it be fair to say, then, that the origination function has become much more technology-led?

Pike: We are certainly on that trajectory. Around four or five years ago we started thinking about how we could use machine learning to accelerate and improve lead sourcing. You want lead sourcing to be a machine, so that all of the focus can be on relationships and building conviction. We wanted technology that could identify relevant companies four or five years ahead of a process. That was our goal. We used our Salesforce data as a starting point, and we were very fortunate because we’ve always had one team, one strategy, one fund, and everyone engages. So, we had high-quality Salesforce data to train the model using various data points and keywords.

The platform is constantly evolving, and we have added functionality that builds instant automated profiles of any company in Europe. That has been very successful; the amount of time our origination team has had to spend on profiling businesses manually has reduced by around 80%. This saves time, but it also means our deal doers are equipped to have a much better conversation with management and advisors.

Songeur: There are two main ways that we have been using technology. The first is market mapping, and you require a market intelligence source to do that. Like other managers, we have a specific set of characteristics we are looking for in target companies and we have a market map of around 8,000 companies. Technology helps us to manage that core pipeline, and every year a bank of companies will move up that list, others will drop out, and new companies will move in. We have technology in place that ensures the deal team regularly follows up on certain companies which match our mandate. It sounds quite simple, but when you have 8,000 companies in your funnel you have to keep the cogs moving to keep track of everything.

Technology also addresses the challenge of knowledge sharing across our investment team. We are not a huge team, but it is still difficult to integrate knowledge homogeneously. During the last couple of years, we have put systems and APIs in place to collate and permeate knowledge, in order to gain insight from all the information and expertise we have in-house across the team.

García: The structure of our product means that we are not as specific around sector or geography as we are around the situation a company is in. Given the broader outlook we take on the sector, data tools have really helped us to build up knowledge of a sector at pace, which is helpful when you meet with a founder. That is so valuable. The bespoke information that is now available on business information platforms has helped to make our meetings with management teams much more efficient.

Aarna: Some firms are already using technology to aggregate internal data and create deal profiles that can be catalogued with searchable variables, but many firms are not there yet. Even when you reach that point, you still have to find ways to enrich internal data with external commercial and financial data. Correlating these multiple streams of information has to happen inside the firm, because every manager has a distinctive investment strategy and will be leveraging data in different ways. It will be interesting to see how managers address that.

From my perspective, I see managers using third-party tools to pull in external data and then either access that data using an API, or simply visually, and then translating that into a spreadsheet. So, while origination is becoming more technology-led, there is no standard way of using technology. There is still a way to go for private equity on this journey.

Fraser Robson, Chief commercial officer, WovenLight
Fraser Robson, Chief commercial officer, WovenLight

People have recognised that data, machine learning and AI will become an increasingly important part of the origination and value creation toolbox

Finally, I wanted to ask each of you what characterises good origination? What do successful originators do well?

Caswell: At LDC, origination is all about identifying and building strong and enduring relationships with the teams you want to invest in; using all the technology and tools you have at your disposal to initiate, nurture and grow those relationships. Building mutual conviction takes time. The best originators often build those relationships years before an investment is made, and use that time to allow trust and conviction to develop on both sides.

Dupont-Liot: Technology is a valuable tool, but it is no replacement for the human overlay. It all comes down to actionability. You can look at charts on a dashboard and read about opportunities in the media, but without tangible connections to the opportunity it is less interesting to invest in from an adviser standpoint. “One of the things we spend time on is trying to understand the real picture in the market, and that involves good, old fashioned relationships and conversations, so that you can separate the noise from what is really happening. The human side is crucial. It is not going away.

Pike: I would say it is about having a conversion mindset from day one. It sounds obvious, but the aim of the exercise is to deploy capital in good assets and that starts with your investment hypothesis. Where do you want to hang your hat? Then you have to understand what could undermine that hypothesis. From there, every interaction you are having, every relationship you are building and every bit of intelligence that is coming in, should be checked against the hypothesis to move it forward and build it out. That is how to refine your focus and build conviction on businesses that you really want to back; that is a conversion mindset.

Aarna: Good originators recognise that technology is not there to replace human relationships. It is there to free up time to focus on relationships, as well as provide the information you require to build a relationship from the very first encounter. On a specific technology point, best practice involves having finesse in your approach, rather than churning through large amounts of data to make quick decisions.

Songeur: The challenge is how to optimise the approach to relationship building. How do you find that balance between looking at as many opportunities as you can and investing in relationships? The key is filtering opportunities as quickly as possible and then investing time in relationships with the best companies. There also needs to be good integration within your own team. The person who makes the first introduction may not be the same person that leads on deal execution. From day one, you need to be able to trust each other to take and pass on relationships – sometimes lasting five to seven years – in a way that represents your firm with the highest standard.

Rae: There are so many opportunities to assess, and you do not necessarily know which one is going to be that big win. As a data provider, our job is to help that manager remove the noise and shortlist the deals that you really want to focus on next. For a manager, if you are actually going to speak to the management team of a potential deal target, you need to understand what they are doing, what their goals are, and how you can work with them to achieve what their mission is. That is the foundation of what we’re trying to provide.

Gribbon: The key on origination – from the side of both the sponsor and advisor – is focus and prepare using technology tools to help you market map and shrink the pool that you’re going after. Once you have done that, it is then approaching that target with the right language and the right empathy for the situation. It’s also pinpointing the right people to approach. It won’t always be the chief executive or the chief financial officer. Good originators have all bases covered and don’t go after marginal targets. They go after ones where they have deep conviction and have earned the right to be in the room. Finally, you have to have consistency. You have got to follow up, and do so regularly. If you don’t follow up the next person is going to be in there.

García: There are three things I would put on my checklist. One is deep thinking and understanding the themes that you want to invest behind, so as not to waste time. The second is having a differentiated value proposition with a reputation and track record of delivering on that. The final point is using technology to compliment all these things, where it works and where it matters. That requires thought. Make sure that what you are using in terms of technology is actually adding value and not creating noise.

Robson: You always have to answer that question: ‘Why are you the best form of capital to take a business forward over the next five years or so?’ If you stay on strategy and build relationships, you can answer that question with confidence. Finally, I think it has become essential to have a value creation plan for an asset well before transacting, as well as being able to articulate that to management teams and company founders.

Luis García, Principal, All Seas Capital
Luis García, Principal, All Seas Capital

The bespoke information that is now available on business information platforms has helped to make our meetings with management teams much more efficient

Lets start a conversation

Lets start a conversation

Kate Gribbon
Kate Gribbon

Kate Gribbon

Head of Financial Sponsor Coverage & Origination

More insight from Investec