From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 1 – The Idea
Your office door creaks open, and you close your YouTube window in a knee-jerk response.
David – the Partner you work with most closely – walks in and glances from side to side, pretending not to notice you at first.
This must be something important if he hasn’t started talking yet.
You tap away on your keyboard while staring at the screen, pretending that you’re writing that important email that you should have sent out yesterday.
Finally, he opens his mouth.
“We need to talk about your performance.”
Your performance? It’s his performance that he should be worried about – 3 years without a solid exit, and nothing promising on the horizon, either.
“We need you to do more sourcing here – I saw that you only called 10 companies last week, which is just not enough to support good deal flow here.”
Ah, the cold call logbooks. People only review them when deal flow slows down, and now it was your turn to take the blame for his poor performance.
“The bottom-line,” he said, “is that you need to call more companies. Get out there and generate more investment ideas. And start tomorrow.”
You started working in private equity a year ago, and you still haven’t closed a single deal – disappointing, but not uncommon.
And with this upcoming cold call routine, your chances aren’t getting any higher.
But orders are orders, and at a small fund like this, you’re responsible for everything from calling CEOs to doing deals.
So you put your nose to the grindstone and comb through lists of companies your firm has spoken with before – warms leads are more promising than the legions of firms that have never heard of you.
But the responses you get aren’t too encouraging:
- “Not right now… we’re 100% focused on organic growth.”
- “Why would I want your firm to invest in my company? PE adds no value.”
- “If you call me again, I’m going to get a restraining order.”
A few weeks later, David once again waltzes into your office unannounced, and catches you in the middle of a call.
While you’re on the phone asking for an update on the company’s performance, he shuffles around the papers on your desk, sits down in front of you, taps his foot repeatedly, and leans over on your desk.
Your call finishes and he smirks at you, gently claps his hands for a few seconds, and then jumps up and leaves without saying anything.
Banker to the Rescue?
After a month of calling companies both known and unknown with no results to speak of, you’re getting desperate.
Normally you avoid investment bankers for fear of becoming Patrick Bateman’s next victim, but you’re out of ideas – so you start calling your friends on the sell-side to see if they can point you to the next Google.
“Yeah, so I got stuck with that $1500 bill from too many bottles – and then I got cock-blocked by the blonde fashion designer chick’s friend before I figured out that the number she gave me was fake. Should have called her before I left, but I was soooo wasted…”
Ah, bankers. Pathetic creatures – but then if you had to spend all day cranking out pitch books and fixing punctuation, $1500 bottle service and gold-digger chicks would be your only salvation.
“Sounds like a fun night, wish I could have been there,” you say while rolling your eyes and gazing out the window, “But have you heard of any good companies looking to sell or raise capital lately?”
The banker pauses for 10 seconds before responding.
“There was this one small one out in the middle of nowhere – below the bar for us but I heard they had like 50% EBITDA margins and were growing fast. I forget the name right now, but I can ask around and get back to you on that.”
You’ve either saved yourself, or been duped by a banker still recovering from his hangover.
Is This a Real Company?
Your first 10 cold emails and 5 cold calls get ignored, but you’re used to that by now.
On your 6th call, you finally get through and speak with Nancy, the CEO of Ion X Solutions, who thinks she’s now a movie star because she’s chatting with one of those legendary “private equity firms.”
You find out the following from a 30-minute conversation with her:
- It’s a Founder-owned and operated business.
- It has revenue of around $20 million with EBITDA margins of 50% and revenue growth of 15%.
- They have those margins because it’s a software business in a niche market – high-end design software for engineering firms. They don’t have to spend much on research & development because the product is mature and the competition is minimal.
- She’s thought about selling before, but has never found the “right fit” with buyers.
It’s on the small side – your firm only invests in businesses with at least $10 million in revenue, but they prefer to see more like $50 million.
And the market will count against you, since your firm has never invested in a software company, let alone one as niche as Ion X.
But hey, at least now you might be able to stop David from walking into your office unannounced next time.
As you’re cold calling like a pro, the Partners at your firm have been scurrying around to raise their next fund.
The $750 million fund they raised 5 years ago is almost exhausted, and they’re working up a list of Limited Partners – both new and existing – to approach for investment in this new fund.
Then there’s the business of pitching all these investors, deciding what type of message they want to convey, and figuring out who will help with the fundraising.
At the next Monday Morning Partners’ Meeting, they spend the entire time talking about this fundraising and don’t even ask the juniors for updates on deals.
But then John, the Founding Partner of the firm, steps in at the end with a request.
“I appreciate everyone’s help with our fundraising. But we also need to focus on our existing fund and exit our investments. Let’s get an update on all current deals and possible exits there.”
All the Partners chime in, with news ranging from, “No updates for now” to “We just got an LOI (Letter of Intent) from an acquirer.”
You’re sitting at the corner of the table, close to the door so you can leave in a hurry if need be – you planned your escape route well in advance.
Normally junior associates don’t say anything at these meetings, but this time you’re not so lucky – as the Partners finish, John turns to you and says, “We’d like to get you more involved in these meetings – anything promising you’ve found lately?”
Everyone’s head turns toward you in unison, and you freeze, unsure of what to say. David is sitting to your right and starts tapping his pen on the table while revealing a faint smirk on his face.
After clearing your throat, you speak up.
“Nothing definitive yet, but I’m working a few interesting leads right now.”
As you sprint outside after the meeting, David approaches you once again.
“So, do you have anything real?” he says, “Or was that just for show?”
Announcing your discovery to the Partners without knowing more would have been suicide, but you need to say something now or you’ll never get him off your back.
“I have something – it’s a software company doing around $20 million in revenue, growing at 15%, with 50% EBITDA margins,” you respond.
“And you didn’t think it was a good idea to mention that?” he retorts.
“The stats sound good, but there are a bunch of other problems – we’ve never done a software investment, it’s very owner-dependent since the CEO founded the company 10 years ago and still runs everything, and there may not even be a buyer 5 years from now,” you explain.
He squints at you, looks up at the ceiling, taps his fingers on his cheek, and then looks back at you before responding.
“I’d have to look at it in detail, but it doesn’t sound like a good one to me. Probably a good call to leave it out. Good work finding it though.”
You trod back to your office and start calling more bankers, poring through research, and Googling random markets.
It’s time for even more cold calling.
A few days later, Nancy, the CEO, calls back and tells you she’s had a change of heart as well.
“I’m no longer interested in selling – I don’t think the managers here will come along if someone besides me owns the company. They’ve worked with me for years and I don’t think they’d like a new owner,” she explains.
A good call to leave it out, indeed.
“I’m also not sure about private equity – I heard they buy companies just to fire everyone so they can earn more profit,” she continues.
Yes, another CEO whose entire knowledge of the finance industry is based on Wall Street.
“No worries,” you say while swiveling around in circles on your Aeron chair, “Thanks for getting back to me. And let me know if anything changes in the future.”
If you were in a better mood, you might have fought back and pointed out how your firm could actually help this company – but the Partners would never get behind this one anyway.
Back to the Grind
Over the next year, the Partners shift their focus and move into fundraising mode, pulling you off a few other deals you were working on and getting you to help with all their marketing materials.
Just one of the joys of working at a firm with only 10 people and only 1 other associate.
Most of the new Limited Partners they’re attracting have no interest in technology, so your deal is looking even less likely now.
And you’ve gotten busy with the fundraising, reviewing portfolio companies’ numbers, and looking at possible acquisitions for them.
Meanwhile, David is getting his own “performance review” and learns from the more senior Partners there that he needs to get a deal done or get an exit in the next year or he’s out.
He walks down the hallway and once again strolls into your office unannounced, sits down, and leans over on your desk.
“So,” he says, “How are those calls coming?”
Your Offer, If You Choose to Accept It
Left with no choice, you now have to juggle even more cold calls on top of everything you’re already doing – fundraising, market research, and reviewing quarterly results from all your firm’s portfolio companies.
You pick up the phone and think about calling your banker contacts again, but then realize that you’ll be forced to listen to more tales of models and bottles in the process.
So you put the phone down and get back to combing through lists of companies and seeing which ones you haven’t called yet.
Just as you do that, the phone rings and you hear Nancy’s voice once again.
“Great news,” she says, “I changed my mind and now I want to sell.”
“I see,” you say, wondering what the real story was, “So what changed your mind?”
“Well,” she replies, “One of my contacts is starting his own business next year and he’s offered me the CEO role there. And I’ve been running this company long enough, so I’m looking to move on and do something different.”
“But I need to start quickly,” she says, “So I’m willing to sell now, at a reduced price, if you let me leave the company within 12 months.”
The Rest of the Series:
Hey, if a trilogy worked for Lord of the Rings it will work here:
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