There is a “global superabundance of capital” in today’s private equity landscape, as Bain Capital described in its 2015 annual outlook. The Wall Street Journal reported that private equity groups were sitting on a record $1.3 trillion of dry powder heading into 2016. With sky-high valuations, investors are looking for creative ways to put capital to work and close deals. Against the backdrop of an increasingly competitive market, four driving trends continue to characterize M&A in the middle market and inform the need for a dedicated business development strategy to optimize your market coverage.
Trend: A Fragmented Market
Nearly 8,000 baby boomers in the United States are turning 65 every day — heralding the potential for a sharp uptick in middle market business sales. As more capital enters the PE landscape, an increasing number of boutique firms are looking to play a role in the marketplace. As the number of intermediaries proliferates, capital providers’ BD strategies must adapt.
Most traditional BD strategies are currently geared toward reinforcing relationships with these higher-volume bankers — for good reason. But with competition increasing, it’s crucial to establish relationships across all three groups of intermediaries.
Trend: Relationships Start Online
It has always been important to identify and articulate an accurate and unified message about your firm and objectives. Now, firms must articulate this message effectively online as well as in person.
Thanks to technology, today’s sellers are increasingly savvy about the realities of market trends, valuation, potential partners, and other key components of the transaction process. An Axial survey found that 89 percent of CEOs and bankers research potential partners online before taking any other action. This means potential clients are already having conversations about if it makes sense to do business with you, prior to ever reaching out or allowing you to be a part of the discussion.
Trend: Connections Close Deals
The internet isn’t just about visibility — it’s also, more than ever, about connections. Connections have always been crucial to closed deals. The difference in today’s tech-enabled world is that potential connections proliferate online and well as offline, and can extend beyond your immediate geographic region or social network.
Today, most deal professionals cover around 20 percent of the market through personal and professional networks. By working to increase your connections and tapping into that additional 80 percent of the market, you can dramatically increase the top of the funnel, often resulting in an increase in closed deals.
Specialization can help capital providers differentiate themselves in today’s competitive market and add value to business owners. With so many new firms and banks joining the market, CEOs now have the luxury of choice and can proactively seek partners and advisors who have proven experience relevant to their needs.
This trend is further amplified by the fact that many middle market businesses coming up for sale in today’s market are family operations. These sellers are looking not only to achieve the right multiple, but to find the right buyer — someone who understands their priorities and will take good care of a company they have nurtured for generations.
Not every investor needs to be a specialist. But in today’s competitive market, generalist firms must be equipped to communicate their unique value-add to business owners and intermediaries.
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