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Private Equity Specialization = Better Deal Flow
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Private Equity Specialization = Better Deal Flow

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Our CEO Peter Lehrman spoke at the AMAA’s Fall Conference in NY and presented attendees with some interesting private data and recommendations regarding deal sourcing pros and cons to being a private …

Our CEO Peter Lehrman spoke at the AMAA’s Fall Conference in NY and presented attendees with some interesting private data and recommendations regarding deal sourcing pros and cons to being a private equity generalist vs private equity specialist.

The data indicates that selection bias is a key contributor to the advantage specialist private equity firms have over generalists in sourcing more relevant deals and generating better returns. “Standing out among so many funds is critical for private equity buyers, and articulating clear, industry-specific investment strategies is an important way to develop influence and credibility with sellers,” Peter told the audience.

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  • 1. Specialization in Private Equity: Findings from the AxialMarket Network Peter Lehrman www.axialmarket.com Twitter: @axialmarket
  • 2. Agenda1.  The Specialist vs Generalist debate in Private Equity2.  Data and Methodology supporting Recommendation3.  How Deal Flow is Impacted4.  The Raw Data5.  Conclusion 2
  • 3. 3
  • 4. 4,600 Member Companies and growing...Middle Market M&A Advisors & ConsultantsPublic and Private CompaniesPE / VC & Family OfficesPrivate Lenders 4
  • 5. The Data is Real-Time… 5
  • 6. How Do Folks Use AxialMarket?1.  Create Pitch Materials for growth equity, mezz, private M&A2.  Deal Sourcing & Deal Marketing tools3.  Manage Communication and Information w/ investors 6
  • 7. Members build “Network Pro les”… 7
  • 8. Produce Pitch Materials… 8
  • 9. Correspond On Relevant Deals… 9
  • 10. Research & Approve Buyers…. 10
  • 11. Buyers Pursue Relevant Deals… 11
  • 12. Now, for the Meat of the Discussion… 12
  • 13. The Generalist vs Specialist Debate•  Generalist Pros –  Ultimate Opportunist – can look at anything –  No LP-based restrictions –  Can leverage diverse expertise –  Scope of expertise advances capacity for creative value-add•  Specialist Pros –  More focused territory easier to cover and become a “player” –  Lack of specialization impairs credibility with sellers –  Lack of specialization hurts deal flow from the best sellers in a space –  Lack of specialization limits ability to truly help portfolio companies 13
  • 14. Cressy, Munari, Malipiero… •  122 private companies examined in 3 groups: –  Specialist PE-backed –  Generalist PE-backed –  Non-buyout 14
  • 15. Main Finding: Specialists have better margins 11.0% 10.2% 8.3% 6.6% 5.5% 4.7% 2.8% Specialist Generalist Non-buyout 0% Specialist Generalist Control Operating Profitability
  • 16. Big Issues With Cressy study…•  Doesn’t address deal flow quality or selection bias•  Doesn’t address ROIC•  Outdated? (1995-2002)•  Study done in the UK, not the US 16
  • 17. Selection bias plays a *BIG* role•  Analyzed 800 buyer profiles and 1,100 deals•  Classified each profile as generalist or specialist based on Industry•  Response measured in “Pursuits”•  Opportunities sent to specialist Transaction Profiles, on average, EBITDA was 85% larger. 17
  • 18. 12%More Deal Flow On the AxialMarket Network, the (Generalist) Specialists are22% Winning…More Pursuits (Specialist) 18
  • 19. 43%Advisors are 43% more likely to get a response froma specialist buyer on the AxialMarket network. •  Generalists Pursue 14% of received opportunities •  Specialists Pursue 20% of received opportunities
  • 20. 50.0% Advisors that selectively deliver opportunities to buyers see as much as a 40.0% 4x increased response rate per sent buyer. 30.0%Pursuit Rate 20.0% 10.0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 80% 90% 100% % Buyers Sent
  • 21. In conclusion…. 21
  • 22. For Buyers 1.  Specialized Transaction Pro les receive better deal ow from the network. 2.  Generalist pro les result in more time reviewing irrelevant deals.For Advisors •  Targeting buyers based on their network pro le drives a higher response rate. 22
  • 23. Thanks for listening! peter@axialmarket.com 23

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