We worked with businesses of all sizes and across all industries. I got to focus on marketing technology, semiconductors, IT services, and fintech. Often times the businesses we worked with had never gone through a sale process nor built a company operating model to the level a private equity investor would require. As a result, as an analyst, I worked directly with management teams throughout the process (often being the first person they would call if anything came up and even worked at their offices over multiple days to finish certain deliverables), built company operating models from scratch, analyzed messy raw data to calculate various KPIs (cohort, LTV, CAC, retention, etc), and traveled around the nation to meet with prospective investors and host management presentations.Through this experience, I was able to build relationships with founders, meet and learn about various private equity firms who were bidding for our clients, and really get a feel for what private equity was all about before deciding to recruit. I saw what a good management team looked like, the hundred-page diligence packs associates would put together, the various third-party advisor’s PE firms would hire to do financial, market, or IT diligence, and how each firm was trying to sell its unique platform to the management team.It just so happened that a megafund invested in one of our clients where I was the analyst on the deal. I was amazed by their level of diligence, thoughtfulness, and platform resources. I had no doubt our client was going to be a great investment but combining them with the resources of this fund was going to take them to the next level (sure enough, the business went public a few years later resulting in one of the best returns in firm history).
Soon after the deal closed, I reached out to my Managing Director on the deal and told him about my interest in working for the fund that invested in our client. He has happy to make a referral and let them know of my interest in the team. He even went ahead and sent my resume to other private equity firms he had close relationships with and soon enough I was participating in off-cycle PE recruitment in the middle of November. Given I had already been at the bank for two years and was planning on staying through my third year, the heads of the group were very willing to support analyst recruitment.
The process with the megafund was quick. One video conference, an hour LBO model test, and an in-person Superday all within a week.
Firm Strategy Change
Since joining the PE firm two years ago, there has been a tremendous amount of change. As you can imagine at a megafund, there is a lot going on at once. Different funds and industry groups have different strategies. Sometimes different funds at the same firm bid on the same asset (on accident!) and the messaging to the public get confusing. Over the last year, the firm decided to verticalize all of its industry groups regardless of the fund, allowing us to move faster and be more agile throughout deal processes. Now associates are able to work on $50 million to multi-billion equity check deals throughout the year providing a wide spectrum of investment experience.
We’ve seen a ton of deals come to market and with COVID stopping a lot of travel, it’s never been easier to host back-to-back-to-back management presentations over Zoom in a day (Zoom fatigue is real). What’s crazy is that I don’t see the pace slowing down even as the world recovers from the pandemic which leads me to my next point about deal dynamics.
Deal Dynamics
Deals are being signed faster than ever oftentimes with parties trying to pre-empt processes. What used to be 3-4 week processes has now turned to 10-14 day processes (including weekends!) Bankers are now running “power processes” with a select group of PE firms to give parties a “fair shot” at the asset resulting in us oftentimes trying to sign deals by the bid date because everyone else was doing the same thing! On top of it all, valuations have only gone up over the last 5 years. Just three years ago, the most expensive deal the firm had done was about ~23x EBITDA whereas in today’s market we would have to push north of 30x EBITDA to be competitive for a high-quality software asset! With so much dry powder in the market, it is extremely difficult to win deals in today’s environment.
source for image above: https://www.saas-capital.com/blog-posts/2021-private-saas-company-valuations/
Moreover, management teams are now asking what we bring to the table. It is no longer good enough to be the highest bidder! The right partner with the right resources can often compel a management team to vouch for another party.
Mindset
Seeing all this transpire over the last four years has changed my perspective on the whole banking and private equity landscape. Honestly, it’s a great time to be a banker. There is a ton of dry powder in the market, valuations are high, and companies are eager to exit. Staying in banking is a great alternative today.
On the flip side, private equity firms (and more so traditional buyout firms) are changing their strategy to focus more on “growth” so that they can invest in assets earlier to avoid paying huge multiples down the line! It’s going to get tougher and tougher as they move down the market and compete with VC’s and only time will tell who will prevail!
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