PROPRIETARY PRIVATE DEALS: How Valuable?
In an age of sophisticated fund managers and information overload, Deer Isle believes that the way to maximize sale, merger, or investment valuations and capital markets outcomes is for a company to run a proprietary capital markets process while engaging “as needed” preparation and closing support. The reason for this approach is that most capital providers want “proprietary deals”
“Deal sponsors say they buy more companies through proprietary transactions—purchases without a competitor—than they do auctioned deals.
On average, participants in the survey said that 39 percent of their closed deals came from a proprietary source. Another 36 percent of their deals came from limited auctions, while 25 percent came from broad-based auctions.
The results were similar for both small firms with less than $1 billion under management and for large firms with $1 billion or more under management. However, large firms do say they participate in more broad-based auctions on average compared with small firms—32 percent of the time vs. 21 percent.1″
Since most fiduciary Capital Providers, whether internal such as the investment arm of a family office or external (such as a fund) are judged by how many proprietary of limited auction transactions they close a year, they are generally very open to a “cold” approach which could give them a competitive edge in generating returns.
However, most Private Capital Providers are investing in a very small percentage of the deals that they see (harder to get capital than to get into the Ivy League!). Private Equity Capital Providers may invest into 6 to 12 investments per year while receiving hundreds of proposals. And, early stage Venture Capital Providers may be investing in up to 100 deals per year and receiving thousands of proposals. Capital Providers do not invest into more deals if they are larger – they invest into larger deals since they are limited in the number of deals into which they can invest by the size of their team.
Therefore, the question for a Capital Seeker is how to stand out and run an efficient process with the potential Capital Providers when the funnel to the Capital Provider is so narrow.
One of the most effective ways to get best outcomes is to understand that capital sourcing is a continuous process of investor relations and capital ask. Those companies with the best capital markets brand will obtain best valuations/most capital.
The most efficient way to build capital markets brand and virtual relationships is to use technology to turbocharge capital market messaging and touch points such that all potential Capital Providers who could be interested in a particular Capital Seeker are reached. And, then it is the Capital Seeker’s responsibility to continue to develop the touch points such that Capital Providers recognize the opportunity value proposition. It is like public companies where those with the most brand recognition and best investor relations usually obtain the highest valuations.
Investment Banks/intermediaries still have value-add in the capital sourcing process since both institutional preparation and closing is complex and time consuming. However, the value-add is not in institutional “relationship transfer” given the Capital Provider’s constraints, requirements, tight capital funnel and preference for proprietary deals.
Instead, the value-add is in helping prepare for an institutional capital raise since Investment Banks/intermediaries know the type of information that institutional Capital Providers want to see and how to prepare it. This preparation needs to be a combination of Investment Banking and Strategy Consulting. This mix of expertise (Strategic Capital ConsultingTM) combines capital markets knowledge with institutional positioning and modeling to tighten and support the investment proposition and valuation.
The value-add is also in knowing how to close interested parties. Closing a transaction is complex – there are many aspects to getting from Capital Provider interest to Capital Provider close. The steps from interest to close entail understanding human nature, transaction goals, capital markets, structuring techniques and due diligence processes. Usually, a Capital Seeker has a business to run and has only completed a handful of, if any, transactions in their career. Therefore, usually best outcomes are obtained when there is an experienced capital markets closing professional who can help ensure all the closing hurdles are safely crossed.
Consider using Deer Isle’s unbundled capital sourcing services, that are built upon D.I.G. Beacon, our Fintech solution which enables companies, on a white-label basis, to reach their Total Addressable Capital Market from a universe of over 10,000 US institutional (fiduciary) investing organizations. Beacon outcomes are enhanced by our Strategic Capital ConsultingTM services that help prepare for a capital raise as well as our Closing Advisory services that help ensure a successful closing, for capital raising success.
