For CEOs: Getting Traction with Private Equity Firms - Don’t be Another Bozo on the Bus

PE firms are busy and have limited time. There are too many executives and too little time. Even having the best of intentions, executive introductions start to blend together. Thinking that you are more special or different or shine brighter than the next guy has literally the opposite effect because most candidates think that about themselves. The cold hard facts are, you are special and unique, but to a PE guy or gal, you are just another person asking them to give you a chunk of their time when they have a million other competing priorities that almost always take precedence. They see most candidates as yet another executive, unless you come bearing gifts in hand.

While no one expects every CEO to walk in with a deal in hand, deals are the lifeblood of PE, so if you really want to get noticed, you have to offer something so compelling that it would bring the PE closer to a deal. And not just your expertise on due diligence, but your insight, expertise, relationships and willingness to spend your valuable time coming up with ideas for deals. You don’t have to bring a fully formed investment thesis, but you definitely should have some thoughts on areas you think worth investigation, including who the players are, what the inefficiency is, and why you think it’s worth investigating. If you make an investment of your time to develop ideas along these lines, you will exponentially increase your odds of landing a productive discussion.

We have been having this conversation with CEOs every week for the last nine years which equates to thousands of executives. It is almost always the exact same conversation, usually starting with an expressed interest in meeting private equity firms to offer their services, or to state an interest in becoming an operating partner. The CEO sees it as a logical next step in his or her career and would like us to set them up with some introductions. Well, in my experience, the number of times an executive has been hired as an operating partner after simply introducing the PE to the executive is exactly never. It almost never unfolds like that. PEs don’t hire operating partners cold off the street. Most often, operating partner candidates are introduced through peers, through the PE network itself, or their reputation in the industry precedes them; and more often than not, they are engaged on some project first so everyone can get to know each other. So aiming in that direction out of the gate is less than the best use of your time. Better to differentiate yourself and add value up front. Risky? Yes, but certainly with better upside.

So, how do you differentiate yourself? It’s actually much easier than it might seem. First of all, come up with your target list of PEs who are actively investing in your subsectors. Scour Google, pour over the PEHub.com daily wire, read Pitchbook News daily, check out the attendance lists of conferences relevant to your industry, and build a list of PEs you should know. Make sure you get to know each one’s portfolio to ensure they are actively investing in your subsector(s). Note, their interest most often lies in the companies they have acquired in the last 18 months to two years. Once you have your list, there are two proven ways to get attention.

One is to develop three-to-five investment theses geared toward the areas of your expertise. They don’t have to be fully formed; they can be rough drafts and at 30,000 feet. But they do need to make sense and they can’t be what everyone else is doing. They should not be start ups. PEs want to acquire a platform company with at least $50MM of revenue (for many it’s $100MM+) and significant EBITDA (positive cash flow for debt service). They also want platforms that can then go out and acquire a number of other businesses, aka, bolt-on opportunities. The bolt-ons often do not have to be huge so long as they are accretive in value. So, think through areas you think worth investigating. Make sure it’s in your realm of expertise so you have credibility. Maybe even go so far as to identify a couple of potential platform companies. Once you have this mapped out, you are worth gold to a PE and can almost guarantee you will get meetings. The key is to get the meeting, because once you are in there speaking with them, all kinds of other opportunities come up regarding actual deals they are looking at, due diligence they need done, or issues one of their portfolio companies is facing that you might be able to address. It opens the door.

Alternatively, if you can’t come up with any investment theses, another possibility, is to identify potential bolt-on opportunities for one or more of their portfolio companies, or some new market they could serve – and oh, it just happens that you can introduce them to a key player in that new market. As mentioned, the bolt-on opportunities do not have to be sizeable but they do need to add value, whether IP, technology, new market access, etc. It’s a more risky approach because each portco already has an investment strategy in place and you are not privy to it, so your ideas could be well off the mark. But, if you are good at it, it can get you noticed. The key is to get that door open so you get them talking about their focuses and see where you might be able to add value yourself.

So, once you have your investment theses, or bolt-ons identified, how do you reach them. They all have email and believe it or not, they all read it. The key is reaching out to the right person, not blindly approaching them. You can figure out who focuses on what areas by looking at which boards each partner and principal sit on. Target the right person who is focused where you are looking. Your email will be far more interesting to them than the next guy who focuses on another industry altogether. They do not have a lot of time to refer you to their colleagues. You have to do the work for them.

So then, once you get the meeting, how much do you share? This is always the delicate dance. PEs would listen to you talk about your industry or deal ideas all day long on a gratis basis. And you would like to get paid the first time you share any market intelligence. Somewhere in the middle lies the balance. In reality, before you get known, they hold the leverage. You must share some valuable information in order to develop your credibility. They also must be willing to put their money where their mouth is at some point if they take these relationships seriously. You will never get rich from this part of the relationship vs. the investing part – but you also do not want to work for free without any limitations. Hence, you must find the PEs who have a model that works for you.

My friend Donna used to subscribe to the three date rule before she would pass on a guy. I now subscribe to the three meeting rule – at the first meeting, you meet, get to know each other, develop some credibility, share some thoughts on both of your focuses. You go into meeting two with three high level investment theses you have developed in your overlapping areas of interest. During that meeting, you narrow it down to one or two. Or you go in a different direction and agree on a new investment thesis. Between meeting two and three, you go away and do some heavy lifting to dig into the agreed upon theses. You come back to meeting three with a plan around the thesis you want to develop. You have identified some potential targets and a road map for how best to go about an investigation of it. At that point, I believe the PE should engage you, even if for only a modest amount, it’s a show of good faith that they believe your time is valuable. You engage, probably for 90 days, and work on this idea exclusively for them to see if it has any legs (although you are not yet exclusive to them as a PE, so you could be doing this for three PEs at any time so long as you are working on different ideas). At the end of that time, you may want to reengage to continue investigating, or you may want to move on. Either way, you will have gotten to know each other and will have had ample opportunity to determine if it’s a fit. And worth mentioning, so much of this is about timing and catching the PE when their investment profile aligns with your expertise. If they are not receptive to your investment theses or ideas, keep in touch, but move on. It may not be the right timing and there are lots of other fish in the sea.

PEs and CEOs need each other. It’s an inefficient market which is why our industry exists. You can increase your odds at getting on PEs' radars by setting yourself apart from the herd. You don’t want to set yourself up as a patsy, but you must prove some value up front. If you illustrate your value in the way mapped out above, I feel quite sure that you will find a home with the PE that best suits you and your strengths.

Hilary Adorno