Can GPs find great deals online?

When Intralinks acquired Merger ID and PE-Nexus in April, it created what it says is the largest global deal marketplace and network for M&A professionals. 

Such platforms (also known as online deal flow exchanges) promise to make deal origination easier by moving the task of sourcing online – thus automating what has traditionally been a highly involved and labor-intensive process. And they are getting more popular, particularly in the US. According to Intralinks, there are $91 billion of live opportunities posted across Merger ID and PE-Nexus right now. 

Deal marketplaces operate essentially like the investment version of an online dating site, matching those with assets they want to offload with buyers looking to invest. Each party can upload a summary of the opportunity they have or are seeking – down to sector type, geography and scale – and receive notifications of potential matches. Everything is sensitive to the confidentiality required by the industry: there’s no browsing facility, simply a computer-led matching of interests, and the user can decide how much information they wish to disclose, even choosing who is able to view the opportunities and when.

“Merger ID and PE-Nexus boast a high quality of deal,” says Anthony Hill, founder of PE-Nexus and now the director of deal exchange at Intralinks. “Both platforms are very vigilant about the deals that go on offer – nothing is stale, and they include opportunities from all industries, all sizes and all geographies. And there is the option to share as openly or as discreetly as you wish.”

NEW AVENUES

The online deal sourcing platform is a concept that was originally pioneered in the US in 2007 by Cathedral Partners followed soon after by Merger ID in Europe and then PE-Nexus in the US. All three companies were established by former investment bankers keen to exploit developing technology to make finding deals easier. 

Stephen Findlay of Baker Tilly is a deal adviser who uses Merger ID as part of his deal origination strategy. He says it’s most useful for less typical avenues, given that the ‘usual suspect’ funds will already be well-known to the company. “Merger ID is best for us to unlock the buyers we wouldn’t normally think of,” he says. “Perhaps it’s a new entrant to the market, or there may simply be no precedent for that business being relevant to our area of interest.” 

Findlay says he was once working on behalf of a software company, and was made aware of a large listed security firm that was interested in buying it. “We would never have expected that company to be interested in this kind of opportunity,” he says. “It was too small and the wrong geography for them, so it didn’t come up on our radar. But it turns out they happened to be looking to diversify. And we only found that out via Merger ID.”

RELATIONSHIPS BUSINESS

The online method clearly has its advantages. It’s particularly useful on the buy side: identifying suitable targets who are selling an asset you want to buy is often harder than finding buyers for your own asset. Competition for good value high-quality deals is clearly intense in the current climate. There’s also the convenience factor. 

Nonetheless, many in the private equity sphere remain skeptical about these platforms taking off – particularly in markets like the UK, where the intermediary network is so well established and is better able to capitalize on the value of human interaction. 

“I don’t see a rapid uptake of the technology here in the UK,” says Andrew Ferguson of Baird Capital Partners, who stands by the ‘shoe leather method’. “We have a very well-defined intermediary base in this country and these are talented folk, experienced at working with clients at finding the right buyer. For us it’s all about doing research, bringing companies to the awareness of intermediaries and working with them on buy-and-build programs.”

Human relationships remain key in private equity; unlike buying a product from the internet, there are so many ‘soft’ factors at play in determining the success of a potential deal. Ferguson suggests that while there’s always room for technology to augment these real-world interactions, the existing method functions perfectly well. To go back to the online dating comparison: it’s hard to imagine people flocking to the internet to find a partner when they already have a little black book full of phone numbers.

“There’s no substitute for a disciplined, intermediary-led marketing program,” says Ferguson. “We run a continuous program of access with meetings, events, PR, phone calls and seminars. And we try to be proactive with the intermediary base, informing them that we have a target on their patch, and asking whether it’s worth us working together to unlock an opportunity. As well as the intermediary route we use data sites to build target lists of corporates that fit the sectors we’re in – those that are the right size, the right ownership structure, etc. There’s no rocket science there. It’s just discipline.”

AN EDUCATION PROCESS

Hill acknowledges that the uptake in the UK may be slower than in the US, admitting there is “more to be done to evangelize the value proposition” of online deal sourcing. But he’s not fazed by the task. “We speak to clients in the UK who have gravitated to Merger ID and they felt it did give them a competitive advantage in sourcing and marketing deals,” he says. “That’s a real validation point for us. It’s an education process – telling people that they’re not an early adopter, and that it’s not risky or a waste of time. And that their peers are starting to augment their processes in this way.”

That goes beyond just sourcing deals. Now that it boasts several platforms under one roof, Intralinks’ Dealspace is offering to take people through the entire lifecycle of a deal – from preparation, marketing and sourcing, to due diligence, execution and archiving – in order to close deals faster.

Again, this may be a tough sell, even for deal sourcing platform converts. “We use a variety of providers, the things that work best in each area,” says Findlay. “We have everything from Merger ID to Zephyr and MS Office, but we don’t use any one company providing a package that brings it all together. If you find one like that you may find they’re really good at one area of it but not so good at the rest.” So more ‘evangelizing the value proposition’ will be required here, too.

Perhaps the key point, however, is that deal sourcing is an incredibly important part of what private equity firms do – however they choose to do it. “As an entry point, why not use the internet?” says Ferguson. “Whether you’re a large or small private equity house, your origination activities need to yield sufficient deal inflow. But so much can go wrong in the process, so you need to attach dedicated resources to the task all the way through.”

If deal sourcing platforms can facilitate the origination process in any way, there’s clearly a role for them. But having dedicated human resource will always be vital too.