Comment: Redefining the off-market deal

Michael Gray, Grant Thornton
15 October 2015

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With more private equity firms chasing fewer genuinely attractive investments, deal origination has become the market’s hottest topic, writes Grant Thornton's Michael Gray

In 2000, approximately 50 private equity firms active in the UK mid-market completed 208 buyout and buy-in transactions, with an average value of £25.6m. In 2014 there were more than 500 mid-market funds actively investing in the UK economy completing 149 transactions with an average value of £42.2m. This year, deal activity is unlikely to surpass historic peaks, with only 72 transactions completed to date in 2015.

The increased competition has created a market with much diversity. Swathes of GPs offer differentiated approaches, including buy-and-build strategies, turnarounds, blended equity and debt packages or more aggressive auction bids.

This market dynamic is compounded further by the introduction of alternative sources of capital ranging from high-net-worth individuals and family offices to overseas private equity and debt funds, all with different return models and realisation horizons, but fundamentally looking for opportunities in the same market.

New media
The old model of networking conferences, marketing campaigns and warm leads has morphed into myriad online and offline publications, multiple high-growth, high-profit, high-achiever, "one-to-watch" lists, non-transactional research focused analysts, and client-facing origination executives employed by banks, law firms, advisory firms and equity funds.

Mo Merali, head of private equity at Grant Thornton confirms this view: "For funds with millions to deploy, the off-market transaction is becoming increasingly difficult to achieve; it is now a case of doing it better than the competition. Investors must focus on what they do well, building on their track record and on a smaller number of prospective deal targets. Focus and genuine differentiation will significantly improve the odds of winning a transaction by building long-standing relationships with key stakeholders in a business."

To drive this, investors must continue the professionalisation of their origination efforts through hiring client-facing specialists. They need to have a close-knit network of chairpersons and executives to support origination as expertise and experience will elevate a firm's credibility in a vendor's eyes. Having a clear investment thesis and looking at all angles to unlock the right deal is becoming increasingly prevalent. The importance of strong, trusted relationships with advisers is also vital. The ultimate aim should be to work in a collaborative manner with the objective of supporting businesses to unlock their potential and realise shareholder ambitions.

While it's not impossible to complete off-market deals, it is becoming ever more difficult. Deal origination is transitioning from untapped greenfield markets to high-quality, information-rich relationships where investors position themselves as management's preferred bidder. A distinct identity and professional origination will increase the chance of a successful bid, or the prospective investor risks paying over the odds in the almost inevitable sales process.