Weighing the intangibles

Beyond returns, a talent for deals is hard to quantify. “Key man” provisions imply certain GPs have skills that can’t be duplicated by firm culture. What if a firm could trace the steps that led to a winning deal?
Not simply the due diligence materials, but the email correspondence, the meetings and referrals that won an auction, or moreover, generated a profitable exit?
Some software providers and in-house CIOs are pursuing this already, with offerings to substantiate performance reviews and discern best practices. Market pressures are driving up prices and driving down due diligence time so many feel the sooner they can shift dealmaking from an art to a science, the better. How much any technology can accomplish this remains up for debate, though these tools can foster real rigor, so long as the executives use them on a daily basis.
What most of these software programs deliver is, in essence, a tool to record and search data on front office activities. The current offerings vary widely in terms of the range of activities they monitor, from Lexis/Nexis InterAction, which centralizes the firm’s contact data for smarter outreach, to DealDynamo, which tracks everything from the deal pipeline to a partner’s workload. Others, such as Vantage Reporting provides a tech solution that’s tailored to bridge the gap between a particular firm’s current capabilities and its aspirations.

InterAction: Friendster for GPs
Lexis/Nexis, the information management company, purports to offer a contact database solution called InterAction that mimics social networking sites like MySpace and Facebook that are currently fetching so much attention from media moguls. The difference is that while private equity firms want to leverage their collective relationships, they also want to leverage them confidentially. InterAction is said to be geared towards creating “proprietary social networks” and markets to professional services firms in general, not just private equity. However, with its scope limited to contact management, that’s not a liability.
The program provides three distinct functions: interlocking the firm’s collective relationships, tracking exchanges with contacts and mapping links between disparate parties. The investment banker that brought a deal to the firm two years ago may also sit on the board of directors for a current target. InterAction would find that link. “We provide relationship maps,” says John MacDonnell, vice president and general manager of the company.
In short, InterAction acts as a central repository for everyone’s contact information. Contact data from the various executives are uploaded into InterAction from their original sources in MS Word, Excel or Access.
The central database can be tailored to the firm’s specific needs and requirements, with functions created for such specific data as “co-investments” for LPs, or “union affiliations” if a given industry focus warrants that. At this phase, it is valuable for the firm’s administrative staff in charge of the project to explore loading biographies of lawyers, investment bankers or industry CEOs when applicable, and verifying data. In some cases, temps are hired for data entry, while staff ensures the quality of the content being loaded.
InterAction says its product is compatible with email programs. Once the categories are defined and the data is uploaded, the application’s tools appears through the MS Outlook or Lotus Notes window on an executive’s screen as additional buttons to add info as time goes on.
For example, by using these buttons, email messages, contact details, or changes in contact data can be stored in InterAction’s central depository to be searched for and used at a later date. One IT consultant working for a firm using InterAction find that executives feel they have discovered a new function within an existing program, rather than a new software program, complete with learning curve and lost time.
By working through Outlook, appointments and email exchanges can be easily included in the profile of a given contact. GPs are then able to trace the meetings they had with an LP, or the tenor of correspondence during a due diligence process. By centralizing this information, the relationship intelligence of any given executive becomes the firm’s collective knowledge, that can be mined well after the executive’s departure. Sifting through email exchanges may not insure a rapport with those contacts, but they can provide insights into an LP’s sensitivities or a banker’s personal preferences, informing outreach efforts.
Compiling data with this rigor in a single place creates those “relationship maps” that illuminate the buried connections within a firm’s collective contact pool. Including biographies of individuals can often reveal shared alma maters and former employers. When sourcing new deals, being able to highlight those connections can flip contacts into referrals.
How much this relationship mapping will change the deal process remains to be seen, but 3i, the UK private equity juggernaut, employs Microsoft SharePoint for similar purposes with some success (see page 28).
Going forward, InterAction is capitalizing on its affiliation with Lexis/Nexis by offering company information from its parent company’s vast information source. General information such as board memberships and market capitalization will then be available through InterAction without the firm providing those details.

DealDynamo: tracking deals and dealmakers
Netage’s DealDynamo operates similarly to InterAction, using Outlook as the route to access its functionality, but the product is designed exclusively for private equity’s front office. That focus offers a versatility to address multiple aspects of the partners’ responsibilities. “GPs want to track processes with sufficient rigor to discover what their best practices are,” says Krassen Draganov, CEO of Netage.
The application deals with a trio of front office activities: deal pipeline management, productivity reviews, and investor relationship management. Like InterAction, the application centralizes data to allow for efficient searching, but then produces specific reports, not simply a list of relevant contact info. DealDynamo appears as a series of folders in Outlook, not simply buttons, but remains an extension of a program GPs already use daily.
In tracking the deal pipeline, all correspondence and materials pertaining to a transaction are saved into file to produce a “Monday morning deal report,” detailing any progress that occurred in the past week. As these weekly reports are shared with other members of the team, partners become conscientious about filing data in the DealDynamo folder. A slim report can imply all the wrong things about a deal, or a deal’s shepherd.
The ability to revisit such weekly minutiae turns even the abandoned bids and lost auctions into learning experiences. Over time, when the assets GPs walked away from become hits for a rival’s track record, they can revisit the rationales they made for not lodging a higher bid. Likewise, when a portfolio company goes bust, there’s a paper trail to find where the blind spots might have been. “Any manager will look at hundreds, sometimes thousands of prospective deals, which has an intrinsic value to build up a repository of deal intelligence,” says Greg Woolf, CEO of Vantage Reporting, a software solutions provider that lists Bain Capital and Atlas Venture among its clients.
DealDynamo can use this data for a second purpose: measuring the performance of team members and referral sources. Draganov explains, “Our clients frequently use our program to gauge the deal quality and activity of a firm’s professional. How many calls did they make? How many meetings did they attend? All of this is compiled to measure the effort the executives are making. Then they can review their degree of involvement in a given success or loss and judge the quality of their work. This adds real substance to the performance review.” Most service providers cite that given the speed some firms are bulking up these days, GPs covet anything that can gather performance metrics efficiently.
DealDynamo also links deal referrals with deal closings to identify the most lucrative sources of deal flow among the firm’s contacts. Being able to track which investment bankers are actually facilitating transactions can inform the decision of which bank to tap in the event of an IPO or other realization route. In this fashion, networking becomes something other than an intangible cost of doing business. Plenty of partners can foster friendly bonds with relevant parties, but the best will translate them into actual assets over time.
Finally, there is “investor relationship management.” GPs can employ DealDynamo for sending capital calls, distribution notices, and other investor reports. “Dynamo has allowed many of our clients to go entirely paperless,” says Draganov. Most firms already use some variation of web based reporting to interact with their LPs, so this can be a redundancy for Netage clients.

Vantage Reporting: the art of adaptation

Many firms forego so comprehensive an offering, choosing to create their own front-office tracking solution. The GPs exploring these options tend to be more established, with their own CIO or in-house tech expert who can build the function from current offerings. Even in this scenario, there’s a service provider waiting in the wings to facilitate the process.
Vantage Reporting creates software modules that layer on top of existing proprietary or third party products like InterAction, and funnel data into the same screens that GPs are already using. If a firm is tracking contacts already, but not the deal pipeline, Vantage can help bring that capability without adding an entirely new system. One of the vendor’s chief selling points is its close collaboration with clients to strike a solution that minimizes any disruption to an executive’s habits. Yet, all these offerings do require a genuine cultural buy-in to use all this efficiently gathered data. Partners have to bring up the weekly deal reports in meetings. The performance reviews have to be tied to compensation.
Quantifying relationships is only worthwhile if they change networking initiatives. And most of all, deal makers will have be willing to see their “instincts” evolve into tangible strategies. But choosing which strategy is worth repeating takes a savvy reading of the data, a task that at the end of the day, involves some intangible talents.