Effective Deal Sourcing Strategies in a Competitive Market

DANIELLE FUGAZY (moderator): How do you characterize the dealmaking environment right now?

WILL DAVIS (RIVERSIDE COMPANY): We’ve been very active this year. On a day-to-day basis, it’s very similar in terms of number of deals presented to us compared to prior years, especially down in the smaller end of the market. But we haven’t taken as many books because we are disciplined about focusing our time on those situations where we have conviction as a result of our specialization. It’s a quality issue this year. A lot of A-plus assets were coming to market last year, and some that were less attractive didn’t get attention. They are not bad businesses, but they aren’t generating the same kind of enthusiasm as last year.

DON RITUCCI (OPPENHEIMER): From a healthcare M&A perspective, the market is very active. On the healthcare services side, the activity is probably as robust as we’ve seen. We haven’t seen recession fears and rising interest rates from an M&A perspective yet. On the life science side, we’re active too, but for a different reason. We spend a lot of time in biotech. Biotech is notoriously starved for capital, and private companies tap into the public markets through IPOs. That is completely shuttered. The valuations have been depressed in biotech for roughly a quarter now. Since the IPO market’s not open, we’re seeing a pick-up in reverse mergers. So private companies that need capital and a listing are merging into public company shells.

RICH GRANT (NORTHLANE CAPITAL): The current environment is requiring attention to detail because there are fewer quality assets compared to this time last year. You have to go hard for assets you like. This dealmaking environment requires strong relationships across all facets. You want the target companies to be well-aware of your experience and your capabilities, which means staying in touch, following up and staying close to the seller—so when the seller is ready to come to market, they know you are ready as well.

JASON CUNNINGHAM (ARGOSY PRIVATE EQUITY): The market is still very competitive for attractive assets. We’ve taken more books this year than we did over the same period last year. With the volume of opportunities we have reviewed, the biggest challenge has been sifting through them to find the right deals quickly. We can’t run hard at every deal that we review, so to Rich’s point, it’s about finding the situations where we feel like we have an angle. Are we going to be advantaged in this situation relative to others? Is this an industry where
we feel like we have some angle to grow the business and create value more effectively than another bidder? Do we have a good relationship with the advisor to the company? All these things are critical in the way that we think about what deals we’re going to spend time on.

JIM MCVEIGH (CYNDX): When you look back to 2020 when the pandemic first started, a lot of people who were considering buying Cyndx’s services were saying, “I have to hold off a little bit. I don’t know where things are going to go.” Now, we are seeing an explosion in sales. People are saying, “I need this service now. How do I get it?” They want a global perspective and real-time information, and they want tools that can help them cut through the clutter to better assess the market opportunity and identify the leading companies in any particular space. Bottom line, it’s very active for us, as firms are trying to be very selective and work with the right companies across their fund strategies.

FUGAZY: What are the biggest challenges you face when you look for quality deal flow?

GRANT: It’s managing my time. There are quality relationships, but the best relationships might not necessarily be the most prolific relationships. Identifying the best deals based on my deal team’s interest is very important to me. While I want to see everything out there, I admit my ears perk up when I hear about deals in certain subsectors because of our ongoing interest in certain subsectors. It’s really about where we spend our time to identify the best deal sources and make sure that the proper people inside of our firm are well-connected with those relationships—even if they’re not showing us 1,000 deals, but they are showing us quality deals that best fit our thesis.

CUNNINGHAM: I agree with Rich, the biggest challenge is cultivating and maintaining relationships with a limited amount of time. As a recovering investment banker, I feel like I have a unique perspective from spending most of my career on the other side of the table from private equity sponsors. The private equity firms who were top of mind as potential investors were the groups that I had recently met with or spoken to, whether they had stopped by the office, set up a call or I’d run into them at a conference.

That was 15 years ago. Today, the universe of intermediaries and trusted advisors has expanded so much that there’s just not enough time in the day to cover all the intermediaries that way. That said, we still have to find ways to cover these firms—even if they are just showing us a couple of deals a year—to make sure we are top of mind. That is a real challenge. We are now doing some of that through creating content that we push out through email or finding other ways to communicate with all of our potential deal sources regularly without being overbearing. We want to stay top of mind so that advisors are thinking about Argosy as one of their potential calls when it is time to launch a deal. We have been very focused on leveraging our CRM (customer relationship management) system, website and other tools that we have available to us to be more efficient because we just don’t have the time to talk to everyone we’d like to.

The current environment is requiring attention to detail because there are fewer quality assets compared to this time last year. You have to go hard for assets you like.

Rich Grant

Northlane Capital

DAVIS: Some of these processes are very crowded and on very tight timeframes. If we get to that point, we have to move quickly. At Riverside, our scale helps us move swiftly, as we can allocate additional people to work in parallel. That bandwidth is great. But we are also using all sorts of tools that help us shave time or touch more people in a short period of time, which is advantageous.

MCVEIGH: A lot of the smaller firms don’t have the resources to spend 100 hours building contacts and relationships. The fact that our tools help our clients identify opportunities well in advance of when they will happen allows them to selectively engage, save time and money, and increase their probability of success.

DAVIS: You want to be front of mind for intermediaries that align with your mandate. Various technology tools help you do that. There is an art to it.

GRANT: The mindfulness of time isn’t just internally. It is mindfulness of Don (Ritucci)’s time and his peers in banking. They want to share something with us because they believe that it fits what they have consistently seen from us. If we are moving off of that or if we have a different take on it for the current market, we make sure to articulate that quickly and not take up a spot in a process because we are curious.

DAVIS: We’re the same way. We narrow stuff down. We have industry experts that are zeroing in on certain spots. We try to get it as quickly as we can. We don’t want to be kicking tires or wasting anybody’s time.

RITUCCI: We actually have a dedicated business development person now. She is the mirror of a PE business development professional. She’s calling primarily on founder-owned companies. One of the challenges is: How do you identify private companies? Once you identify them, how do you make sure you have the right contact and contact information? Even if you jump through those hoops, you still don’t know if the timing is right. Are they looking to raise capital? Are they thinking about M&A? Maybe they’re not thinking about any transaction at all.

It comes back to our time as well. Here’s an example: We found a company in the home health space. It was a skilled home health business that was growing. The founder was all over the map in terms of what he wanted. When we first talked to him, he wanted a minority investment, then it changed to an outright sale and then he wanted an ESOP (employee stock ownership plan) for his employees. In the end he did a very small leverage recap. Obviously that’s not a conversation that we had over a couple of days. That’s a conversation we had over four months. The time spent can be challenging.

MCVEIGH: Time is so important and building relationships is critical given how competitive the PE market is.

The first part of the conversation is, I’m interested in your industry so you should talk to me about it. The next part of it is, I will call you on a regular frequency with something intelligent that’s going on in your industry so that you become a valuable source of information; increasingly, my target customer will begin to rely on the things that I’m providing to them. The last part of it is getting you in front of companies across an industry. At Cyndx, we developed a tool that enables our customers to identify companies that will likely need capital within the next six months. They haven’t told you that, but we know with 86% certainty that that is the case. That’s powerful. We can show you every deal that company has done and who the intermediary was, so that when you’re reaching out to that company, you know their exact history and you’re not wasting time. Dealmakers don’t want to be busy. They want to be focused on companies that are going to bring value to their fund. Most PE firms have enough opportunities coming over their transom; it’s about identifying the best opportunities, understanding their competitive advantages, and adding value.

FUGAZY: Does anyone use technology to source deals?

RITUCCI: We’ve ramped up on the LinkedIn side. We are also using Pitchbook, Zoom Info and SourceScrub. Ultimately, our BD person has a list of companies she’s trying to get contact information for. If we’re going out wide on something, getting the list is difficult because people turn over constantly. I told my team: Do not send me the list until someone has gone through each and every contact, which is a bit of an onerous task.

MCVEIGH: If you’re not (using technology), you won’t remain competitive over the long term. The market has become too competitive. We believe technology is critical for identifying and sourcing opportunities, due diligence, and helping grow investments after they have been completed. It’s not only a matter of telling you who to go to, but how to get there. We’ve integrated tools like LinkedIn, so people can see who they know or may have someone in common with before they reach out, and valuation tools, so people know what to pay. It’s all about adding value across every step of the deal life cycle.

Related content: Private Equity Takes a More Targeted Approach

GRANT: We are using technology right now with our deal sourcing—everything from tracking our interactions to getting insights into industries to getting insights into the board of directors. There’s a couple of different tools we use. We look at who has traded what asset in what space, and what our interactions look like with that banker or intermediary. It helps me figure out where to spend my time. When I talk to an investment banker, I can say with some accuracy the last time we had interaction, and know what they have been working on and what they may be looking for. As a BD leader, I have to be on top of that.

CUNNINGHAM: Technology has begun to level the playing field. But I look at it in two buckets. There are efficiency tools, and there are data and analytics tools. They both have their place in what we’re doing. The efficiency tools allow us to do things more effectively and faster. The data and analytics tools provide insight and intelligence, for example, into where our best deals come from, the intermediaries we should be covering, and who we should be building deeper relationships with. Argosy has been around for 32 years, and along the way we have made 125-plus platform investments and have reviewed a lot of deals to get there, so we have built a pretty robust data set that we can utilize to help us figure out where we should be spending time to maximize our probability of success. Technology and data help us support our decision-making process.

Technology will never replace what the people in this room do. Data is not going to really help you get conviction around a deal or negotiate final terms, but it can help you frame everything you do.

Jim McVeigh

Cyndx

RITUCCI: Back in the day when we launched an auction process, we would call our relationships at the private equity firms and give them a heads-up. And they’d say, “Send the NDA (nondisclosure agreement) over.” When I started doing this, there may have been 50 private equity funds that invest in healthcare. Now, there are thousands. It’s very rare that we’re going to call anyone. It’s not a blast email; it’s an individual email, but it’s not with a call. Do bankers ever call you anymore?

DAVIS: Since we have both a structured equity team and a special situations team, screening calls are very helpful, as they are often complex and dynamic situations that wouldn’t appear in a teaser. There’s more of a story to it, so they say, “I just sent you a teaser, the story wouldn’t come through. Let’s have a conversation, there are some things I want to walk you through that are not obvious, but I think will be interesting.” I love getting those calls because you get to peel back a couple layers of the onion. But part of the reason why we get those calls is because we’ve done some of those things we’ve talked about, like kept up the social media presence, communicated what we are looking for and stayed in touch.

GRANT: I get those calls and sometimes it’s just simple screeners. They want us to know they are preparing to bring something to market, and they ask if we think it fits our mandate because they don’t know for certain based on past interactions or current literature. But coming full circle, everything gets tracked as an interaction and touch point. Even that banker calling is a valuable touch point that I track.

CUNNINGHAM: I do love to get that phone call, though I have to admit, I do get a little nervous these days when the phone’s ringing instead of the ding of an emailed teaser. In all seriousness, though, that’s where the relationship element of deal sourcing comes in. If Don (Ritucci) or Jim (McVeigh) has time to make 20 calls on a deal that he’s shopping to 200 people, I want to be one of those phone calls to hear the story.

RITUCCI: It’s funny you say that. If we are sending 100 books out, we’re tracking PE activity as well. We track things like: Did they reach out to us to demonstrate how interested they are? Did they even check in with us to learn the background? Sometimes it’s hard to differentiate, so we’re looking for indications of interest as well.

FUGAZY: Are technology, data analytics and AI the future for finding the best deals?

DAVIS: These tools are clearly adding efficiency, but they’re not going to replace the bankers and trusted relationships we’ve built over the years. They can supplement some of the things we’re doing to make us a little bit sharper, including things like target identification and acceleration of research.

CUNNINGHAM: I think that’s right. This will always be a relationship business, but technology tools and data are going to be important—even as a tool to determine what relationships to invest in. For example, even something as simple as looking at the data that went into our CRM over the last 24 months and saying, “Here’s a list of bankers that we saw deals from and here’s how far we went in their processes” can provide insight. We can see what kind of success we’re having with whom and then make decisions. For example, should we be spending time with this firm because we get a lot of deals from them? Or with this other firm that we only see a few from, but most are a good fit?

Related content: The Future of AI-Driven Deal Origination

GRANT: There’s probably enhanced benefits in some of these tools. If you were to look at our CRM and the way that we process the things that are passes for us, especially when they’re a pass from a size perspective, we know that they’re going to mature. We should be paying attention to that. We can probably predict when it will be coming back around depending on who that buyer was.

CUNNINGHAM: I recently had a banker tell me for a sponsor-backed deal, by the time the book hits your desk, you’re already behind in that process because there are groups tracking that deal that have conviction in this space, that have been watching it and are ready to move. You’re going to be behind the eight ball.

McVEIGH: Technology will never replace what the people in this room do. Data is not going to really help you get conviction around a deal or negotiate final terms, but it can help you frame everything you do. We can help you understand what’s going on, on a global basis, that could impact that investment you’re about to make. It’s important to know things that are happening outside of the core area that will impact you. Maybe you weren’t thinking about it at the time, but all of a sudden, Google launches a new product that is going to impact you. You need to be aware of things outside of the sphere that you’re investing in and how that impacts it.

Additionally, there’s only so much capacity that any one human has. I do too many demos with people where we say, “Give us your best sector.” And we’ll wind up showing them five or six companies they’ve never heard of and they wish they had.

On the buyer’s side, people are tracking deals way in advance. You have to get in front of that company so that you can establish that relationship, so they don’t go to a process and don’t know you. It’s a lot more work in terms of identifying the companies and establishing relationships, but you’re going to be in a much better place, and you’re going to get better terms if you have done that work ahead of time.

About the Participants

JASON CUNNINGHAM is head of business development for Argosy Private Equity. Argosy is a Wayne, Pennsylvania-based lower middle-market private equity firm. The firm primarily invests in family, founder- or entrepreneur-led businesses with $3 million to $10 million of EBITDA, and between $10 million and $100 million of revenue. Argosy is currently investing out of its sixth private equity fund, which had a final close in July 2022 with $422 million.

WILL DAVIS is a senior originator at the Riverside Company, a lower middle-market private equity firm. Riverside employs about 350 people across four continents and nine different fund strategies. Davis works across all the different fund strategies finding new opportunities. The firm has $14 billion under management.

RICH GRANT is director of business development for Northlane Capital Partners. The Maryland-based firm is interested in deals with enterprise values of $50 million to $300 million with a minimum EBITDA of $5 million.

JIM MCVEIGH is the founder of Cyndx and CDX Advisors. CDX Advisors is a full-service broker-dealer that focuses on high-quality growth companies in the global digital economy. Cyndx is a truly dynamic, unsupervised, AI-driven search and discovery solution for dealmakers, investors, fundraisers and corporate development professionals that provides real-time predictions and trends for dealmakers. Cyndx uses AI to curate targeted private companies in all sectors and has information on more than 21 million companies globally. As a banker, McVeigh saw the need to develop high-value algorithms, which provide more relevant, accurate real-time intelligence than is possible with legacy solutions, and as a result founded Cyndx.

DON RITUCCI leads the healthcare M&A group at Oppenheimer, a full-service international investment bank. The healthcare group is based in New York and touts about 35 professionals. Over the past year, the firm’s M&A deal sizes ranged from $30 million to $1.1 billion, with most under $500 million.