In a market flooded with cheap debt, it takes more than merely “cutting a check” to generate market leading returns as a private equity investor these days. Bidding for high quality deals has gotten fierce in recent years, particularly for companies with resilient business models and strong growth potential.
So how do you solve this challenge?
For one company, Lincolnshire Management, the answer starts with building your own proprietary deal flow, reaching out to establish a presence in the right circles so you get called first. Their management was kind enough to share some perspective on how they use effective deal sourcing to accelerate value creation within their portfolio.
Founded in 1986, Lincolnshire Management is a New York based private equity firm that invests across a wide range of industries. They have invested in over 55 companies across four separate funds. Most of this capital was invested in middle market companies, where the firm takes an active role in guiding operational improvement and value creation programs.
The Value of Scale: Everything Counts in Large Amounts
Lincolnshire Management looks at between 700 and 1000 opportunities per year. This exposes their investing team to a steady stream of perspective on the overall market that helps their team spot patterns. In addition to allowing you to compare business models across industries, this kind of volume gives you the ability to start ranking opportunities and seller motivations within a market.
This volume also helps build insight on the softer sides of an opportunity, such as their assessment of a company’s management team and strategic position. It’s easier to assess management when you’re talking with many other managers in the same industry. What issues are they focused on? Who has unique insight on the market? Who is the first to implement a new technology? These are powerful indicators of the ability of a leadership team to serve as your champions of change after a deal has been consummated.
This also serves as a trip-wire for industry changes and adverse trends. For example, if you’ve been networking within an industry for a while and suddenly notice that many companies are being put up for sale, that often signals that things have changed. Pricing and seller behavior is another powerful cue: if you notice that industry executives are willing to aggressively drop prices to get a deal closed, there’s likely a trend that many outsiders haven’t spotted yet. Instruct the due diligence team to dig deeper.
One final advantage to having a high volume deal flow: the freedom to choose bets carefully. You’ve got the ability to pass on a marginal deal or questionable seller, secure in the knowledge that tomorrow will bring a fresh opportunity to your doorstep. This selectivity plays a critical role in the firm’s performance, enabling them to focus their efforts on the best opportunities and management teams.
Focus on the Management
Lincolnshire places a high premium on backing the right management teams. This is a key advantage of their direct sourcing model, where they reach out to prospective firms to build relationships in advance of the business coming to market. The direct sourcing approach gives Lincolnshire plenty of time to get to know a company’s management team and understand their capabilities and values.
This goes beyond merely screening deals. Operational improvement is a key element of Lincolnshire’s investment strategy, so they’re seeking portfolio company management teams who are a good fit with that model. Lincolnshire’s president Michael Lyons commented on how the firm puts this into practice:
“A key challenge in building a constructive relationship with your portfolio companies is that you want to connect with the business beyond merely being a capital provider. This is a two way street. As an investor, we’re looking for management teams with deep expertise in their industries, who know how to build a plan and stick with it. From our side, we have experienced operating executives on our team who serve as our ambassadors to management. They can connect with operating management on a peer-to-peer basis, sharing perspective from outside the industry and helping champion new ideas.”
Build Local and Relevant Presence
The other key to building a high volume deal flow? You need to fish where the fish are.
Culture is a key factor in this process. Each group of potential sellers has a unique point of view on the type of buyer they are interested in working with. Building trust and local relationships are essential. The prospect of “taking a deal to New York” can actually be a deterrent to certain sellers, who prefer to work within their own peers. Lincolnshire invests the time to connect with each set of sellers on their terms.
. This provides an inexpensive way to remain visible to prospective sellers and build trust with intermediaries and service providers. Many regional opportunities move through local and national networks and industry conferences making being present a competitive advantage in delivering deal flow.
Build the Right Reputation
Finally, you need to build a reputation for creatively partnering with sellers to solve business problems. Private equity investments may start on spreadsheets, but they are driven to closure by human needs. There’s a reason every business is placed on the market.
You’re rarely just buying a company. Every seller has needs: speed, discretion, preserving a reputation, simplification, building a legacy, or securing financial assistance to preserve the business. The better you understand these needs and work to meet them, the easier it will be to attract high quality sellers.
Lincolnshire’s regional reach and focus on investing in good managers makes them an ideal partner to fulfill these needs.
