PE firm has critical need for HR diligence provider for target company
A middle market PE firm partner approached us with an immediate HR diligence need for a software-based portfolio company that they had under LOI. The PE firm wanted to take their typical HR diligence efforts to the next level and were looking for a group that could look at the available HR information in the target’s data room, summarize weaknesses and gaps, identify any existing employment issues, and more. There was no formal HR team currently in place, and the PE firm was eager to have a team not only dig around and make recommendations pre-close, but also be able to come in and fix the gaps they identified post-close.
BluWave identifies PE-grade diligence group specialized in software companies
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade HR diligence needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of providers that uniquely meet the private equity standard. We interviewed the PE firm to understand their specific key criteria, and then connected the client with the select BluWave-vetted specialized HR diligence providers from our invitation-only Intelligent Marketplace that fit their exacting needs.
Firm confidently engages with provider, gaining insight into target company
Within 48 hours of the request, we introduced the PE firm to an exact-fit service provider that specialized in performing HR diligence for PE firms evaluating software companies. The client quickly engaged the provider who was able to begin the diligence work within the next week. Thanks to their exact-fit background, the service provider was able to quickly gain meaningful insight into the company’s HR practices that gave the PE firm the information they needed to be confident in moving forward with the transaction.
Urgent data analysis needed to evaluate portfolio company
A LMM VP came to us with an urgent big data analytics need for a technology-focused portfolio company that they were evaluating. The PE firm recently retained access to some of the target’s transactional data sets and the size of them was overwhelming. They needed an expert with a strong analytics and B2B background that could take the data and create cohort analyses from it. With LOIs due in one week, they urgently needed a consultant that they could connect with pre-LOI so the consultant could then hit the ground running post-LOI.
BluWave has pre-vetted analytics consultant specialized in diligence
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade big data and analytics needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of analytics consultants that uniquely meet the private equity standard. We interviewed the PE firm to understand their specific key criteria, and then connected the client with the select pre-vetted specialized consultant from our invitation-only Business Builders’ Network that fit their exacting needs.
Firm engages exact-fit data analytics consultant to immediately start project
Within the same day of the request, the PE firm was introduced to an exact-fit provider that specializes in analytics consulting during diligence. The client was engaged and was able to start the project immediately post-LOI. The provider was able to dedicate their resources to create a systematic method of creating meaningful analyses from the data sets and ultimately provide the client with the exact insight they needed.
Every quarter our team analyzes the projects we work on with our 500+ PE firm clients to get a birdseye view of the market. You can request your copy here to view all of the trends that we have seen over the past quarter.
Key findings from Q2 include value creation remaining strong due to the record number of deals made at robust valuation multiples during 2021, inflation continuing to wreak havoc on global economies, and the recessionary pressures availing substantial opportunities for all of the best business builders.
Learn more about the insights we gleaned from the report by watching the video below.
BluWave has a unique vantage in the North American economy. While working with more than 500 of the world’s top business builders, we’re able to understand unique insights into how and why the best business builders in the world are assessing opportunities and building value in their portfolio companies. Here are some of the unique insights we generated during Q2 2022. The name of the game in the second quarter was value creation. Value creation accounted for 68% of all activity funneled through the BluWave engine. Value creation was so robust during this last quarter for a number of reasons. Number one, private equity firms invested in a large number of companies last year so they’re acting on those investments to begin transformation. Number two, deal flow is down. A lot of the best companies were sold last year. Other companies are pausing their ambitions as the economic cycle is softening and the results slow in kind. The other mega trend that is readily apparent in our data is the specter of inflation. The private equity industry is not resting on its laurels. It’s taking aggressive action to raise prices, reduce costs, and bring in the right people with the right skills for the current times. It’s our hope that the data and insights we’re sharing will help you build your business with more speed and certainty. If you’d like to learn more and get the full report, please contact any member of the BluWave team or follow a link below.
Commercial due diligence needed for growth strategy
A services company came to us with an urgent need for an individual or group that could perform commercial due diligence in order to help them better understand growth opportunities. With their eye on expanding into an adjacent market, the company was in need of a service provider that could help them better understand the size of the total addressable market, current penetration of the market, market trends, and more. In addition to understanding this information, they were looking for a provider that could help them put it into action and determine how to attack this new potential market.
BluWave leverages network to identify exact-fit diligence providers
The client reached out to BluWave and within several hours, we interviewed the company to understand the details & nuances of their need. BluWave utilizes technology, data, and human ingenuity to pre-map assess, monitor, and maintain deep pools of best-in-class commercial due diligence providers. Mapping the specifics of the company’s need to our network of third-party resources, we identified 3 exact-fit commercial due diligence providers for the client.
Client selected ideal provider to drive growth
Quickly after the initial scoping call, we introduced the company to the two exact-fit, pre-vetted service providers from our Business Builders’ Network that we had identified met their exacting criteria. The client selected their ideal choice and was able to quickly engage the provider to conduct the research they needed and start putting a well-developed growth strategy into place.
Local Voice of Customer research provider needed for acquisition evaluation
An IT staffing company came to us with a critical need for Voice of Customer research to be done on an add-on acquisition target they were evaluating. Looking to grow their company via this acquisition, they were interested in engaging a provider that could conduct interviews with 7 clients of the target add-on. The company needed a Voice of Customer provider that could work within their budget, complete the 7 interviews, and conduct the work in Toronto where the target add-on and their clients were located.
Client contacted BluWave to identify PE-grade provider
The client reached out to BluWave on a Wednesday morning and within several hours, we interviewed the company to understand the details & nuances of their need. BluWave utilizes technology, data, and human ingenuity to pre-map assess, monitor, and maintain deep pools of best-in-class Voice of Customer providers. Mapping the specifics of the company’s need to our marketplace of third-party resources, we identified 2 exact-fit Voice of Customer providers for the client.
Utilizing our extensive network, BluWave introduced two pre-vetted providers
On the same day that the company initially reached out, we introduced them to the two exact-fit, pre-vetted service providers that we had identified met their exacting criteria. The client selected their ideal choice and was able to quickly engage the provider to conduct the research they needed in order to determine whether or not to move forward with the add-on acquisition.
IT due diligence needed for business analytics company
A LMM Founding and Managing Partner came to us with a pressing need to perform IT Due Diligence on a company they were evaluating. The target was a business analytics company that ingests POS data from retailers, analyzes it, and then shares actionable insights with their clients. Given that the crux of the company was being able to ingest and then transform data, the managing partner was urgently looking to understand the tech stack and the internal-facing software. They needed a due diligence provider that could scrutinize data architecture, identify areas for improvement in the tech stack, and had experience evaluating inward-facing software.
BluWave connects client to pre-vetted technology advisory firms
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade IT due diligence needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of diligence consultancies that uniquely meet the private equity standard. We interviewed the PE firm to understand their specific key criteria, and then connected the client with the select pre-vetted technology advisory firms from our invitation-only Business Builders’ Network that fit their exact needs.
Client moves forward with top choice and gains needed IT insight
Within the same day, the PE firm was introduced to two select best-in-class technology advisory firms that specialized in IT due diligence for PE-backed companies. The client selected their preferred choice and started the project the next day. The PE firm was able to successfully engage the advisory firm and gain the IT information they needed in order to make an informed decision.
We recently spoke with Mark DeBlois and Rufus Clark, two of the Co-Founders and Managing Partners of Bunker Hill Capital, a private equity firm investing in entrepreneur and founder-owned lower middle market companies in North America. Bunker Hill has offices in Boston, MA and San Diego, CA.
The four partners at Bunker Hill have worked together for over 20 years as private equity investors with lower middle market companies. As lead investors, they actively work with portfolio companies leveraging their extensive board-level and strategic planning experience.
When I caught up with them on the journey of Bunker Hill Capital, it was refreshing to hear how, in a world consumed with change, nothing can quite replace years of dedicated experience, a focus on relationships, and a time-tested investment ethos.
Tell us about the founding of Bunker Hill Capital.
We were senior members of the buyout team at BancBoston Capital, one of the largest bank-affiliated investment companies in the US, and it became increasingly apparent that going it alone would allow us to control our own destiny. Having a private equity mindset is different from how a commercial bank approaches investing, and we wanted to manage the business without these inherent limitations. Also, being able to change our investment strategy and how we invested was just as important.
An example is our ability to work closely with a variety of value-added partners including operating professionals and strategy consultants. Our relationships with them are a cornerstone of how we invest, proactively create value, and build relationships across the marketplace. As part of establishing Bunker Hill Capital, we were able to develop relationships with a wide range of strategic partners that was not possible when part of a large institution.
So, we spun out to start our own firm, Bunker Hill Capital, just under two decades ago.
Since then, how has the market changed?
The transaction dynamics have changed with the growth in the alternative asset class. The amount of capital flowing into the asset class has increased dramatically as has the number of PE funds, pushing up multiples over time.
Our core market, the lower middle market, includes companies with revenues between $5 million and $100 million—of which there are approximately 360,000 in the United States today. Compare that to the next level up, where there are about 22,000 companies with revenue between $100 million and $500 million, so our opportunity pool is 16 times larger.
In our market, we can source deals either as one-off deals directly from owner-entrepreneurs as sellers, through intermediaries such as accountants and attorneys, or through limited auctions, where an investment bank brings together people they know who can close deals and who have years of experience in the lower middle market, such as ourselves.
So, it’s actually the market dynamics in this end of the lower middle market that have not changed as dramatically that allow us to continue to reap the benefits.
An area where we have seen change is increasing prices in each market segment. However, as much as they have all gone up, the relative delta between the lower and upper middle markets has remained constant. For example, hypothetically as the first PE owner we may pay between 6.5x and 7x on EBITDA for the companies we invest in (compared to 2003, which was 5-6x). We then sell these companies to strategic buyers or the next market level up—large PE funds that pay between 8x to 10x on EBITDA multiples. So when we sell our companies to these strategic buyers, we capitalize on this multiple arbitrage.
What differentiates Bunker Hill Capital?
Bunker Hill Capital is well-known in the lower middle market, having been in this market segment for over 20 years, which is very unusual.
We are unique in that we have the luxury of staying in the smaller end of the market. People tend to think bigger is better. We think we can have more impact strategically on these smaller companies over a shorter period of time, compared with the larger deals that are more like steamships: huge and take a lot longer to turn.
Our key criteria for buying companies is to be the first PE owner buying from founders and owner-entrepreneurs who either want to remain in the business or have identified their management team. This is 70 to 80 percent of our deals.
This is important because these founders are looking to crystalize the value of their sweat equity, and take some of their chips off the table for a variety of reasons. Finding a partner who will risk their own money to do this and take the company to the next level is key. The founder can then continue to enjoy the benefit of their minority capital stake, thereby continuing to increase their wealth by getting a “second bite of the apple.”
We do extensive strategy and infrastructure work at the companies we buy to allow them to scale. The larger funds, in the next level up, buy from folks like us as they can’t grow just organically; they need to grow through acquisition to get the kind of returns and exit multiples to satisfy their investors. Therefore, by definition, they must combine organic growth with acquisitions. And that’s where we come in.
How is Bunker Hill approaching the investment process to generate differentiated returns?
Early on from Fund I we refined our due diligence process, such as building relationships with our network of strategic partners. A lot of these refinements we did during Fund I, so the due diligence process we have now follows the same repeatable model. This has resulted in a time-tested methodology.
We believe the 20+ year evolution of our methodical investment process is world-class. Being a fiduciary to our limited partners, we are very hands-on in the businesses we invest in. We collaborate closely with our management teams and give them the tools they’ve never had before to better serve the business.
Post-close, we go through a 90- to 120-day strategic planning process to implement the findings from our detailed pre-sale due diligence and formalize the strategy into what we call a “Full Potential Roadmap.” This is coupled with a “Key Initiative Tracker,” which breaks down the Roadmap into an implementable plan, and is then tracked and monitored weekly and/or monthly with clear accountability and performance-based outcomes.
Finally, this plan is driven by the growth initiatives we are going after and how we want to scale the business’ revenue. But perhaps more rewarding is that after going through the process, most of the CEOs thank us for these invaluable tools that help them empower their own people, hold them accountable, and transform their business.
How is working with a Founder-Owned business unique?
Owner-entrepreneurs and founders can run the spectrum on experience and/or business sophistication, so identifying where along this spectrum the founder is and recognizing this is part of our due diligence process.
We place enormous emphasis on these founder relationships and if the chemistry is not quite right, we may decide not to proceed for the benefit of all parties. This is where the buck stops, especially if the owner is critical to the business.
Working with a wide variety of owners and CEOs is like working with any new person. We don’t delegate this relationship down to junior staff, as it is very personal at the managing partner level. You have to quickly figure out their strengths, growth opportunities, skills, and communication style, and we have to work with all of this while going through complex transactions – working through strategy, implementation, and everything else that goes along with the transaction.
Sometimes the owner is the CEO, and sometimes that’s not the case. The strongest CEOs are proactive and are on top of the Key Initiative Tracker. Some of the best CEOs we have worked with are self-aware enough to know where their highest value is in their role with the new company, including using the Key Initiative Tracker to mentor and track their direct reports, and then leading the charge on implementing these growth initiatives throughout the organization.
Can you talk about the role of ESG in Private Equity?:
ESG is a hot topic now. Most PE firms were doing a portion of this before it really got labeled. We were always doing environmental and social due diligence with potential investments.
Historically, we have intentionally looked at where the company could be more environmentally friendly and socially aware. Examples include increasing the recycling of waste materials, cutting down on energy consumption, and recruiting the most qualified candidates for roles.
Within our Key Initiative Tracker, we formalized this by putting in a group of ESG initiatives and being more explicit about it with our companies.
For example, we are being more proactive when we are sourcing overseas with a supplier code of conduct that includes detailed standards that our suppliers have to abide by.
On the social side, we have a strong bench of DEI candidates throughout our companies. DEI is built into our recruiting approach when hiring the most qualified person for the job.
For someone entering Private Equity in today’s landscape, what advice would you offer to them?
Find partners you can trust and work with. There are lots of ups and downs. You work hard and go through a lot— it can be very rewarding, but you need to have trusted partners over a long period of time.
You don’t know what you don’t know, and like everything else there is an evolution. There is no replacement for experience. It is complex enough doing what we do, and over the past couple of decades we have been able to cultivate relationships and refine our process along with the types of companies we invest in.
Also, don’t be afraid to surround yourself with smart people, not only inside the GP but also with your outside advisors. The relationships we have with our world-class executive network have been mutually beneficial. For example, our CEOs that are still assisting in our deals 20 years later is only something you can build over time. You can’t flip a switch and say, “I want that Day One.” It comes with being in the trenches together over a long period of time.
Interested in hearing what other PE experts have said in our interview series? Check them out here.
ACG InterGrowth 2022, known as the premier dealmaking conference, was conceptualized to build and strengthen relationships between private equity firms and investment banks. This annual conference allows PE industry leaders to gather and discuss key trends. Last week was filled with cybersecurity, DE&I, and supply chain thought leadership conversations, plus some Las Vegas style poolside networking.
As hundreds of private equity professionals and investment bankers filled the ARIA Resort & Casino from April 25-27, 2022, our team was able to re-connect with familiar faces as well as meet new ones.
“You could feel the eagerness to be back in person the moment you arrived. From founders to deal teams to business development professionals, the atmosphere was engulfed by ideation and excitement,” says Michael Mahan, BluWave Account Management Director.
Here are some of our team’s top takeaways from our largest conference back in person:
Quality Deal Flow Challenges
PE firms broadly shared that activity is slower compared to last year at this time. Our data confirms this as due diligence projects have declined YoY, from 28% of the BluWave Activity Index in Q1 2021 to now 22% in Q1 2022. While overall deal flows are beginning to increase, deal teams expressed that quality deals are hard to come by.
Lights, Deals, Action!
While ‘digital transformation’ remains a top buzzword, we know that top-performing, proactive PE firms and their portfolio companies are looking to transform their businesses, not just optimize them. Industries such as manufacturing and supply chain are dependent on new technologies to scale growth and meet the industry demand post-pandemic.
Market Differentiation
Building brand equity to differentiate your firm is important in today’s crowded landscape. With less quality deals in the market, it is mission critical for firms to remain top of mind with investment bankers. PE firms are finding creative ways to do this through utilizing specialized resources that can help them with their internal branding, & more.
ACG InterGrowth 2022 exceeded our expectations, and it was great to have the opportunity to connect with so many individuals in person. If you were unable to attend the conference, but are interested in connecting with us, contact us here.
BluWave Account Manager Morgan Murphy concludes, “This year’s conference was instrumental in continuing to build our relationships with PE firms face-to-face. Until next year!”
Michael Fieldstone is a Co-Founder and Partner at Aterian and has worked in private equity investing for more than twenty years. Prior to founding Aterian in 2009, he was a principal at both Sun Capital Partners and Apollo Management, and part of the Mergers & Acquisitions Investment banking group at Salomon Smith Barney. With regard to taking the entrepreneurial plunge with Aterian, he says: “We set out to build a firm that appreciates all the stakeholders of a company. To be collaborative in working with management teams. To create a transparent atmosphere in which we are dedicated to solving problems. Success to us is taking companies to new heights, and in doing so, creating value for employees, customers, vendors, the environment, underlying communities, and our investors.”
While his sentiments seem lofty, Fieldstone and his Co-Founders, Brandon Bethea and Christopher Thomas have seen numerous successes over the last decade-plus, and have ridden the waves of economic uncertainty with grit and fortitude. The result: growing already great family-founder companies in ways they didn’t think possible.
During our inaugural BluWave 2022 Top PE Innovator Awards, we recognized Aterian specifically for their innovative practices across proactive due diligence, transformative value creation, progressive PE firm operations, and ESG. Michael recently sat down with me to share some of his experiences and strategies for both creating value and supporting middle market companies during rapid growth.
Sean Mooney: How do you make sense of growth versus value investing in today’s marketplace?
Michael Fieldstone: This is a perplexing question for many investors. The multiples in private equity have changed so much over the past two decades. For example, at the turn of the 21st century, the average multiple was 7x; today, it is an average of 12x. This appreciation applies to both large LBOs as well as those in the middle market which we participate in. Additionally, the range of multiples can be extreme – as one can buy into an out of favor or cyclical industry such as oil and gas for less than 5x or invest in a high growth software or social media company for 20x+. The last time growth investing was so robust was in the late 1990s, and this phenomenon was driven by venture capital firms and tech companies themselves. Moreover, large non-tech companies had to follow suit and develop or acquire an internet or digital strategy to keep up. Many large companies such as GE, as we know, had a difficult time adopting startup practices organically. Other large companies such as Polaroid or Kodak became walking dinosaurs.
This time around, PE firms are also participating in high-growth – almost venture-like investing –as both an offensive and a defensive strategy. With technological disruption impacting most sectors (i.e. e-commerce, fintech, alternative energy, streaming/media distribution, cybersecurity, Medtech – and the list goes on), and with cheap and abundant capital, why not invest large amounts alongside mega trends even if at higher valuations? The alternative is to invest against mega trends – for example, into a large, non-omnichannel retail chain – which is like building a plane while it’s flying.
SM: On what side of that investor equation do you see Aterian?
MF: It may sound diplomatic, but our approach to market is a combination of value and growth investing. We typically invest in companies that are “mature” – certainly they already have sales and have typically been in existence for many decades. Then we look to accelerate their growth through investments both organically and through add-ons. We enhance their existing infrastructure and customer relationships in ways the management teams desire but may not have had the capital or organizational expertise to do so under previous ownership. We look to drive innovation, including through new products or services, with greater conveniences or capabilities to become more vital to customers. A great example is Aterian’s backing of a company called The Pace Companies, a leading commercial plumbing contractor in NYC. Three years ago, we partnered with its founder, Andru Coren, to help him achieve his vision of being the leader in all the subcontractor trade groups in NYC and surrounding areas, including HVAC, mechanical, electrical, and fire protection. While driving this strategy, we also identified the greater regulatory need to assist developers and building owners on reducing their carbon footprint through energy-efficient buildings. Flash forward to today, through the formation of holding company Eaglestone with shared services, we have executed on Andru’s vision by acquiring over a half dozen companies and becoming a leading infrastructure company in NYC and surrounding areas where we provide a full suite of services including plumbing, HVAC, fire protection, solar, and EV charging stations, all in the context of improved energy efficiency building standards.
SM: What are the key areas Aterian focuses on in its valuation creation plan, and what in that plan is the hardest to achieve?
MF: There are no corners to cut – at the root of any plan is extensive third-party customer and industry research to figure out where the company fits into its marketplace, its strengths and weaknesses, and how to improve its competitive advantages in partnership with management. Oftentimes, our due diligence prior to acquiring a company confirms management’s strategic plan and it is all about getting there faster with the appropriate resources, whether hard dollars or human capital. Additionally, often uncovered in our due diligence phase, we learn about untapped market opportunities, and after confirming their strategic viability, we develop a plan to penetrate such markets organically or through acquisitions.
Organizational development – retaining and recruiting top talent is typically the biggest challenge to achieving any plan. The breadth of the team required to grow a company, all while keeping an eye on existing strategy execution is most critical as well as our greatest challenge. Sometimes we bring in independent board members (who have been in similar positions) as another set of eyes to assure the organization is ready to embark on growth and transformation.
SM: How do you ensure seamless acquisitions/investments so that founders feel supported? What are some of the strategies/tactics you use?
MF: It took years for us to learn this, but the most important thing with founders is to listen to what they are looking for, both professionally and personally. Additionally, it is important to align expectations upfront. Some founders want to continue to run and grow their companies, while others want help on an immediate succession plan. We have successfully worked with founders in both situations.
Another critical component of ensuring a seamless process is open and robust communication. PE-owned companies are much different than family-founder businesses. Most founders have heard horror stories about partnering with a private equity fund, along the lines of PE saying, “it’s our way or the highway.” They are afraid they won’t have any influence over the company culture and direction, and this poses a big risk for founders who want to stay in the business. Our goal is always to keep the culture intact as much as possible during the transition, and we do our best to communicate to founders that we want to invest in their teams as well as their valuation plan. These founders want transparency and candor, they don’t want “razzle dazzle.”
We also offer founders the opportunity to speak with other family- or founder-owned companies we’ve partnered with. This open book approach helps ease some of their fears, when they can hear directly from references who have found success working with Aterian already.
SM: What does Aterian specifically do to win founder- or family-owned business trust “early and often”?
MF: The most important thing we can do to build trust is to say what we do and do what we say. We also need to discuss business goals and objectives in a small group at least a couple times a year. Actions speak heavily as well – supporting companies analytically or by providing other resources they may not have both help build the bridge that we are actually on the same team.
SM: What are Aterian’s internal company values, and how do those get operationalized (or actualized) across your investment portfolio?
MF: We have three core values, and from these fall every action with regard to both our internal and external operations. The first is transparency. With our management teams, our lenders, our investors, everyone. It is our belief that while good news should travel fast, bad news even faster. Without transparency building trust is nearly impossible; and, without trust, you can’t properly evaluate or make decisions.
The next core value is the concept of being collaborative, and hands-on. We expect this from our management teams, and we certainly aren’t sitting back as passive board members. Having said that, it’s important to strike a balance – when to tackle something head on and when to let go.
Lastly, we value long-term thinking. We typically hold onto companies for four to six years but make decisions as though we will own them forever. Warren Buffett has this great quip about the types of companies he wants to buy; he says they should be equivalent to a great piece of art that you would be proud to hang in a museum. In a sense, that’s how we see it. We are willing to put in the time, energy, and resources to make a company art museum worthy.
Interested in hearing what other PE experts have said in our interview series? Check them out here.
Every quarter our team analyzes the projects we work on with our 500+ PE firm clients to get a birdseye view of the market. You can request your copy here to view all of the trends that we have seen over the past quarter.
Key findings from Q1 included value creation at a historical high, deal flow reflecting 2019 versus 2021, & inflationary pressures impacting how firms thought about everything from pricing to talent.
Learn more about the insights we gleaned from the report by watching the video below.
BluWave has a unique vantage in the private equity industry, working with more than 500 of the world’s top private equity firms across thousands of projects in due diligence, value creation, and preparing for sale. From this activity, we’re able to discern unique insights regarding how and why the world works. The top insight of the first quarter of 2022 relates to value creation. A staggering all-time high record 78% of initiatives tracked in the BluWave Activity Index related to value creation. Here are a few other trends that you might find helpful. Human capital is becoming increasingly important in private equity. With the fallout from The Great Resignation still alive and well, firms are struggling to fill key roles, which has resulted in an increase in time and resources invested in human capital. Across the BluWave Activity Index, 42% is related to human capital, which is up from 36% in the previous quarter. Firms have been utilizing specialized HR resources to recruit A-level talent, retain key players, and bring in critical interim skill sets. One of the biggest trends we’re seeing in private equity and the broader global economy is inflation. We’re seeing PE take proactive measures using specialized third-parties to help them pass through rising input costs, defend against price increases, and hone the operational efficiency of their portfolio companies. For more unique private equity insights, request the BluWave Q1 Insights Report today by following the link below or by contacting us at info@BluWave.net.
2021 was a record-breaking year for private equity, with total deal value reaching $1.2 trillion according to Pitchbook, and it isn’t expected to slow down in 2022. With record amounts of dry powder in the market ($1.32 trillion as of September 2021), S&P Global states that the demand for deals is driving valuations up. Between the pressure to find the right deals in a market that is flooded with opportunity, and the high prices that have to be paid in order to win a deal, commercial due diligence is more important than ever in order to ensure funds are being spent wisely.
A process that was once reserved for large cap funds with extra capital to spend on assessing a company’s potential end market in order to determine the soundness of the investment, commercial due diligence is quickly becoming a necessary standard operating procedure for all proactive PE funds. With this evolution of who is utilizing commercial due diligence comes the evolution of how it’s performed– no longer is it an activity reserved for generalist consulting firms. Private equity firms have discovered that in order to drive alpha in a sea of beta, smaller, more specialized commercial due diligence providers can provide them with more unique insights quicker.
Going Deeper Faster
Any consultant can accomplish commercial due diligence’s goal of providing intelligence on a target’s total addressable market, prospects for growth, competitors, risks, and other vital information through initial industry research. But specialized consultants with pre-existing industry knowledge don’t have to waste their time scratching the surface trying to gain a sense for the industry. Instead, they can provide a heightened sense of value by using their base knowledge to dig deeper and therefore provide more in-depth insights in the same amount of time.
This is why it’s no surprise that over the past 3 years, commercial due diligence has remained the #1 Use Case in the BluWave Due Diligence Index. Firms have recognized the long-term value that lies in going outside of their normal providers to work with small shops and independent consultants that can provide deeper insights faster.
Providing a Head Start for Value Creation
Commercial due diligence isn’t just a process that helps PE funds make wise investments – it establishes a foundation for future growth. The average holding period for PE assets is five years, which is a sound reminder that funds are often interested in forging long-term relationships with the companies in their portfolio. This is why it’s essential for the commercial due diligence process to be more than a routine vetting exercise and a perfunctory look at a company’s market. It should help funds explore opportunities for growth and methods of adding value that can turn a company into something its leaders never imagined.
By providing deeper insights into the nuances of an industry and having experience within it, specialized commercial due diligence providers are uniquely equipped to identify various opportunities for a target’s growth. With multiples at a historic high, this head start on value creation initiatives ensures your team will be able to hit the ground running and provide quick returns on the investments.
Ensuring Available Capacity
In a market flush with M&A activity, we experienced deal surges in 2021 that led to provider scarcity, especially within the larger go-to commercial due diligence providers. A benefit of specialized commercial due diligence providers during these times is their more available bandwidth. Because they aren’t being run to with projects across 8 different industries, they have the capacity to take on the projects that fall directly within their sweet spot. Even when service provider constraints have strapped the market, BluWave has maintained a 100% fill rate with commercial due diligence requests.
Over the past year, we have seen many firms that have resorted to a smaller, more specialized provider in times of scarcity permanently switch their processes going forward to always using a specialized provider due to the valuable insights they gained. In times where other PE firms are struggling to get the insights they need on the timeline they need, equipping yourself with unique insights quickly will provide you with competitive edge.
Interested in seeing how we’ve helped PE firms by connecting them to the specialized commercial due diligence providers they need? Check out these case studies:
We’d be happy to get started on connecting you to the specialized commercial due diligence provider you need, just give us a shout or use the “Start a Project” button in the banner above.
