by Brian DeChesare Comments (58)

From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 3 – The Dotted Line

How a Private Equity Investment Happens“She thinks $60 million is a discounted price? Can someone shoot her with an animal tranquilizer gun until she snaps out of it?” John says, looking around in disbelief at all the other Partners.

David turns to you and his eyes light up as a new idea percolates to the top of his head, and then sputters out of his mouth.

“You do know about the special analyst bonus, right?”

Everyone else in the room laughs, as you contemplate whether or not they really want you to tranquilize the CEO.

$60 million would be 6x EBITDA – a reasonable price for a larger company – but significantly higher than what you’d pay for a small, Founder-dominated business in a niche market.

David speaks up once again as the laughter subsides.

“And let’s not forget about her other demands: she wants to roll over 20% of her ownership and put aside 5% in an options pool for the management team.”

“So we’re paying for an overpriced business and then giving up 25% for no apparent reason. This sounds like a better investment than finding Google in 1998,” John replies while rolling his eyes.

Everyone else sits there in silence as you weigh your options before speaking up.

“Well,” you say, “On a positive note, I think I could call in a few chips to get the financing in place.”

“What bank would even look at this? It’s too small for any of the usual suspects,” David points out.

“Right now everyone’s desperate for business – in normal times they’d say no, but beggars can’t be choosers.”

Calling in the Chips

You crawl back to your office and wonder if you can pull off the financing for this deal – your line to all the Partners was a desperate bluff, and you don’t actually have much to offer bankers.

Plus, you’ll have to hear even more tales of $1500 bottle service bills now that you’re going back to the usual suspects to ask for help.

“This is definitely below the bar,” says your banker friend after you finish outlining the deal.

“I realize $30 million of debt is on the low side, but with the way the market is -” you respond as he cuts you off.

“Look, even if this were the apocalypse and banks were failing left and right, we still wouldn’t look at this – the fees are just too low and it’s not worth our time.”

“We’ve sent you guys a lot of business in the past few years – probably more than any other firm…”

“Yes, and they were all small deals. I appreciate the effort, but the MDs want us to pursue the big game from now on.”

You’ve left your door open for this call, so your favorite unannounced visitor happens to be walking by, overhears your conversation, and steps into your room.

David motions for you to step away and then puts the call on speakerphone.

“We’re willing to give you all future business from our firm over the next year, including refinancings and all sell-side mandates. No competition at all for you,” he promises without hesitation.

“Can you… actually guarantee that?” the banker asks with a rising tone.

You fold your arms and squint at David, wondering what he’s gotten himself into this time.

“We’re planning to flip it in a year or two, and possibly do a refinancing before that – should be at least $10 million in fees for you altogether,” he states without so much as a blink.

“OK then. I’ll run this up the chain and see what they think. Thanks for the offer,” the banker replies.

You turn off the speakerphone, spin your Aeron chair around to face David, and wait for him to explain what just happened.

“Don’t worry,” he reassures you, “They’re bankers – they’ll all be fired or will be at another firm in another year or two anyway. No harm done, and now this deal goes through if we can work out the price and rollover.”

Setting Expectations

“Sorry, but we just can’t get our heads around $60 million,” John says to Nancy, who’s sitting at the head of the table in your conference room in front of all the Partners.

“We could get to $50 million max, but even that’s pushing it. Nothing personal, but the numbers just don’t work out in that range.”

Nancy continues staring at the slide presentation in front of her and attempts to make sense of the returns analysis, but it might as well be Martian to her.

“Understood, but $60 really is the bottom of my range here. With the margins we have, I could just keep running this business for years and make more money than what you’re offering. And unless I can retain at least 20% ownership, my incentive just isn’t strong enough.”

Both sides of the table stare at each other for a few seconds before John breaks the silence.

“We’ll be in touch if anything changes.”

Nancy stands up and walks out of the room, waving goodbye to everyone before closing the door behind her.

“It’s 100% posturing,” David points out, “There’s no way she seriously expects to get $60 million for the business and keep 20% for herself. And we know she wants to leave anyway, so it’s not as if she’s seriously considering running it for another 5 years.”

“That may be true,” says John, “But the numbers really don’twork at those levels – there’s so much uncertainty around the exit that this only makes sense at $50 million max. So we either convince her or we don’t do this deal.”

It’s time to don your Captain Obvious Hat and point out what everyone else is missing.

“What if we just flip it after a year or two? It’s much easier to get to a solid return over a short time period, and that way we can even tell her that she can leave the company after a certain period – once it’s no longer owned by us,” you propose.

David sits back in his chair and puts his hand on his chin as he contemplates your idea.

“That’s true – I doubt she’ll even understand why we’d offer that. And she won’t understand the risk to her if she does leave, so it might just work if we pitch it the right way.”

He cleverly fails to mention how the bankers doing the financing are already expecting you to flip it quickly – hearing that might cause John to toss him out the window.

“OK,” John agrees, “Go back to her and propose $50 million with a 20% rollover and say that in exchange for the lower price, we won’t make her stay beyond 2 years or sign a non-compete.”

Limited Partners = Limited Support?

“And we see this as an exciting way to start investing in the technology space – without all the risk that a bigger investment would entail.”

John is presenting IonX and a few other investments they’re looking at – all of which are much further away – and hoping that the LPs remain confident enough to keep investing in future funds.

Most of them produce nothing but poker faces as John goes through all his slides.

“We’re getting this at a discounted price, and we think it could be a quick-flip for a 20% return in less than a year.”

One of the LPs at the end of the table immediately stands up, slams his binder of materials shut, and scurries toward the door.

“Is… something wrong, Paul?” John asks while folding his hands in front of him.

About to open the door and leap away from the meeting, Paul turns around, drops his binder on the table, and grabs the door knob before speaking up.

“Yeah, you. You and your firm.”

Everyone else turns around to face him as whispers fill the crowded room.

“You raised $750 million for your new fund from all of us, claiming that you had all these great opportunities – and what do you do? You sit on that cash without doing anything for a year, and then you finally bring us a piece of dog crap, put a ribbon on top, and try to call it a gift.”

John raises both hand, blinks, and motions for Paul not to leave the room quite yet.

“I understand why you might be upset, but with the way the market’s been lately…”

Paul cuts him off before he can finish, turning around and removing his hand from the doorknob. “Then why are our other private equity funds still doing real deals? I can’t veto this or tell you not to do it, but I’m not happy about it.”

John walks toward him, binder in hand. “Look, I understand why you might not like IonX, but we have plenty of other…”

Paul opens the door, storms out, and slams it shut.

Back at the Office…

You and David are reviewing the loan documentation from the bank and are looking at different financing options for the deal.

“With the margins they have we should just pick the cheapest option – I’m more concerned with broken covenants than with interest payments,” David points out.

You turn toward your monitor and look at an LBO model with the different financing options built in before swiveling around in your chair and responding.

“That’s true, but we still don’t even know if Nancy is going along with this. I’m not convinced she’s gonna take the bait.”

Just as David leans back and prepares to respond, your phone rings. Time for the speakerphone.

“Hi, it’s Nancy,” the voice announces. “I’ve considered your offer and I’m prepared to move forward as long as you don’t make me sign a non-compete.”

You and David look at each other with your eyes widened and mouths gaping open. But there must be a catch – what would it be?

“But,” she continues, “Some of my managers have figured out what’s going on, and they’re not about to accept a new owner. They know me and like me, and they’re nervous about what will change.”

David puts his hands down on your desk and responds, “We’re not going to change a thing. You will still be running everything; it’s just that you’ll have all of our firm’s resources at your disposal…”

“That may be true, but I think they’d be more confident if all of you came to meet them in-person,” Nancy retorts.

“That would be a great idea,” David says while rolling his eyes and searching for your stress relief ball. “We’re all looking forward to flying out and meeting you.”

“I’ll be in touch with some dates,” she responds, “And please make sure it’s everyone – we should plan for at least a week so they can get to know your team.”

As she hangs up, you and David sit there looking at each other and David turns his gaze toward your window.

“Think they’ll have any beaches there?”

One Door Over…

John is cycling through the call history on his phone and looks down at the 15 unreturned calls he’s made to Paul in the past week. Limited Partners might be “limited,” but that doesn’t prevent them from being passive-aggressive and ignoring contact when it suits them.

He walks over to his whiteboard and looks at the pipeline of potential investments, noting that everything else is at least 6-9 months away.

His phone rings and he slides back to his desk to answer it.

“So, John, ready for some more news on IonX?” David announces.

“Can you start with the good news first?” John replies.

“No good news this time. Do you have a free week in your schedule anytime soon? They want us to fly out and meet their team.”

John glances back at his whiteboard and then the call log on his phone. “Whatever it takes – talk to Suzanne about my schedule,” he says before hanging up.

Leaning back in his chair, he dials the main line, finally resigning himself to his “Plan C” option.

“Get me the new guy, Martin.”

A minute later, Martin shows up at John’s door and attempts to open it three times before finally gathering enough strength to push it open on his fourth try.

“You… wanted to see me, sir?” he stutters while wobbling into the room.

John laughs, stands up, and walks across the room to Martin, standing an inch away from him as he recites his speech.

“There’s no need for formalities. I’ve heard good things about your family. I’d like you to tell me more.”

He smiles and stares Martin straight in the eye, waiting for his response.

Field Trip?

It’s the next week, and all the Partners have flown out to meet IonX in-person. Apparently “everyone” means “everyone except for the person who’s actually doing the work.”

But the office is quiet again, and no one is checking your calling logs now that you and Martin are the only ones there. You’ve been handing off all the grunt work to him – anytime a banker or lawyer has a question, he’s the one in charge.

David has been updating you the whole time, and it looks like the management team is growing more confident that nothing will change post-transaction.

And you’ve been forwarding the in-progress definitive agreement that the legal team has been drafting.

“You should have seen these guys when they saw us,” David says at the tail-end of one of his update calls.

“It’s like they had never seen people dressed in suits before. They were waiting for us to morph into Gekko or Bateman and start murdering people.”

“Sounds like a fun trip,” you say, putting the call on speakerphone and standing up before moving over to your window. “Is it going to close?”

“90% certain now,” David reassures you, “And since bonus season is only a few weeks away, you can bet that we’ll remember everything you’ve done here.”

Your eyes light up as you peer out the window and see a BMW parking right next to your usual spot.

“That’s great,” you say, “So are there any beaches there?”

Pension Power Play

Paul strolls into the entrance of the Ritz Carlton, going on about another investment on his phone and simultaneously typing like a fiend on his Blackberry.

He’s met by a tall, lanky man walking in with a grey suit and a binder of printouts in his hands. He walks over to Paul but gets rebuffed as Paul points to his phone and rolls his eyes.

Finally the call ends, Paul turns toward him and shakes his hand, and they walk toward the interior of the restaurant.

“I was surprised when you called,” Paul says in a cheery voice. “I didn’t think I would see you again after what happened on the Fincher account.”

“Let’s let bygones be bygones,” says the other man. “We’d both do much better as allies rather than enemies.”

They sit down and order medium-rare steak along with a $1000 bottle of 1982 Haut-Brion.

“So why did you really call me, Simon?” Paul asks as he sips his wine and arranges his napkin on his lap.

“I wanted to tell you about a few new investments we’re looking at. In this market no one’s doing any deals except for the distressed funds, which are a huge part of our portfolio.”

“So you’ve just mysteriously decided to extend the olive branch and give me access to all these funds that are actually beating the market?”

Simon turns to the bottle and pours himself a glass, holding it up and reading off the label.

“This is the 1982. Have you tried the ’72 before? I hear it’s even better.”

Paul rolls his eyes, puts down his glass, and then reaches over and takes the wine bottle out of Simon’s hands and places it down on the table.

“Cut the crap. I know you’re not just giving me this gift out of the kindness of your heart, so what do you want in exchange?”

“I want you to look the other way on John and his firm’s performance over the past year. And when they raise another fund, I want you to invest – and I want you to let me into the deal as well.”

Paul starts laughing so hard that he snorts, with red wine nearly bursting out of his nostrils.

“So John put you up to this. Ignore his horrible investments, and you’ll give me a piece of these distressed funds.”

“I didn’t even hear about this from John,” Simon says, “But word of your… displeasure… has spread. They’ve had great performance in the past, and I want to get in on their next fund. The only way that’s gonna happen is if you continue to support them, and then bring me in as well.”

Paul stops laughing for a second, glances up at the chandeliers on the ceiling, and then over at Simon once again.

“Even if I were stupid enough to do this, what could you give me in return? No fund is up more than 10% this year…”

Simon opens up his binder, takes out a few documents, and tosses them across the table to Paul before he cuts him off with his response.

“Those 3 are up 50% year-to-date. They’re closed to new investors, but I can get you in – if you look the other way and keep investing in John’s fund.”

Paul stares at the fund performance documents before tossing them aside and looking up at Simon once again and smirking.

“This just seems too good to be true. And I don’t know why you’re offering me this deal. You’re sure your son isn’t working for John or something?”

The Dotted Line… and Your Bonus?

You stand outside John’s door, waiting for him to summon you in. It’s bonus season, and everyone in the office is acting like 10-year old kids on Christmas morning.

He opens the door and greets you in a cheery voice.

“Congrats!” he shouts, “We did it. The funds were just wired the other day, the loans are in place, and Nancy hasn’t even run off to a tropical island and abandoned everyone. Yet.”

He waves around the signed definitive agreement while leaning back in his chair and pointing to the dotted line on the page.

“So, about your bonus. We realize how much you contributed to the IonX deal, and we really want to reward you for your performance.”

This better be good – anything less than a 20% raise over last year might cause you to jump out your window after what you’ve been through getting this deal done.

He hands you a slip of paper, and you stare at it in disbelief as your mouth drops open and stays there until you look up to face him once again.

“This is down 10% over last year – I brought in the IonX deal and got it done. Without me, you’d have 0 closed deals this year.”

“We know that. But look at what happened to the market – it’s a train wreck everywhere. Everyone else’s bonus was down 30%. And let’s be fair, David also helped get this deal done. You know we can’t just give juniors arbitrary pay.”

An image of David sitting around on the beach while “getting to know” Nancy and her team pops into your head.

“And if it weren’t for Martin, we wouldn’t have had LP support. He did terrific work for a new guy!”

Up until now, you hadn’t even known that Martin contributed anything aside from confusion and answers to random due diligence questions.

“His family’s very well-connected. But I’m sure you understand that, right? You really have to be a team player to succeed as an investor.”

You thank John, turn around, and leave the room, trying your hardest not to slam the door behind you.

You walk back to your office, slump down in your chair, and pick up the phone to call your friend at a larger fund and learn what bonuses at normal places were like this year.

But as you place the call, you decide that there’s something else you’re more curious about first.

“Hey there,” you say, “Just wanted to find out about bonuses this year. But before we get to that, I just wanted to know – are you guys hiring?

The Full Series

In case you missed parts 1 and 2, you can get them right here:

Coming Up Next: The Web Series

I’m excited to announce that we are turning this 3-part short story into a 6-episode web series that loosely follows the storyline here, but is significantly different – “different” as in better.

I (Brian) am writing the series and financing it, and my good friend Goldie will be producing.

There were a few suggestions to write a novel, but I am much more interested in turning this into a series. And if you follow me on Twitter, you also know that I am borderline obsessed with serialized TV shows and films.

We are aiming to film and edit this by the end of 2011, and then release it in early 2012.

There will be a trailer, and if you’re good you might even get to read the script for the first episode.

Stay tuned!

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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by Brian DeChesare Comments (55)

From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 2 – The Deal?

From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 2 – The Deal?“No, no, and no again,” shouts John, the Founding Partner.

“This is a crap deal in a tiny market with a Founder who wants to leave in 12 months? She stays, or we don’t even take another look at this. This business is worth $0 without her.”

David jumps in before you can say anything.

“We don’t know how serious she is about leaving. And don’t you think the LPs might like seeing a new industry that we haven’t invested in before?”

“Are you crazy?” John blurts out, “The problem is that she doesn’t know what she’s doing, which is much riskier than if we knew for sure, either way. And there’s no way the new Limited Partners will get behind this – they know jack about technology and don’t feel comfortable with the industry.”

“You realize she’s willing to sell at a 50% discount, right? We could still get a solid return.”

“50% of $0 is $0.”

Everyone turns to David, waiting to see what his next retort will be.

But he comes up with nothing and sits there with his hand to his chin, tapping his index finger on the table and waiting for another response from John.

“If no one has any other business, this meeting is over. Back to work.”

As everyone else shuffles out of the conference room, you sit behind and wait for David to leave first. He rolls his eyes at you and leaves without saying another word.

Meanwhile, on a Yacht…

Nancy, CEO of IonX Solutions, stands silently on the deck looking up as James, her new business partner, shouts orders at the crew below.

“So, James,” she says, “I’ve been thinking of what role I could take on at your next company. I’m happy to continue as CEO, of course, but I’m open to other…”

James cuts her off before she can finish.

“Yeah, I’m not so sure about that anymore. It was just an idea, I didn’t think you’d take it seriously.”

Nancy opens her eyes wide. “What? But you know I’m selling IonX to go do this with you, right?”

James chuckles and fires back, “Oh, really? So who’s the buyer? No other company would buy it, and no investor in their right mind would buy it if you left. They’d make you stay or they’d never invest.”

Nancy turns her back to him and gazes at the ocean. Still facing away from James, she speaks up once again.

“They’ve agreed to let me leave in exchange for a lower price. So I’m moving on and joining you as soon as the sale is done.”

James laughs and casts a smirk across his face before he replies.

“Yeah, I’ll believe that when I see the money in your bank account,” he challenges, “Besides – even if I wanted to give you a position here, fundraising is taking forever in this market and investors don’t seem interested.”

“Then I can invest with the proceeds I’ll get from the sale of IonX. I’ll move this forward even if no one else wants to.”

James looks down at his Blackberry, dashing off a few quick messages and pretending not to hear her. Then he looks up and walks over to Nancy, gently resting his arm on her shoulder.

“If anything changes, we’ll be in touch.”

Back to the Grind?

You’re about to start cold-calling once again, when the phone rings and you hear a familiar female voice.

“Hi, it’s Nancy from IonX,” she says meekly, “I just wanted to call you back and let you know that I’ve decided to stay on as CEO. And I still want to sell, so could you let me know what information I need to send you guys?”

Due Diligence

News of this reversal has spread around the office, and others are wondering why you’re spending so much time on a clunker of a deal when there are so many… promising companies to cold call.

But as long as no one else is putting in the hours, they’re not telling you to stop.

You’re requesting everything imaginable from Nancy and her management team: historical financial statements, customer data, sample customer contracts, and a lengthy list of IP for the lawyers to sort through.

And you’ve made some discoveries that might just get this deal done – if someone at your firm will listen to what you’ve found.

Just as you’re about to get started creating 5-year projections for the company, David once again walks into your office unannounced.

“So what have you got for me?”

“Well,” you say, “It’s around 70% recurring revenue, so even if Nancy gets hit by a bus and all their sales reps jump off cliffs, revenue only falls by 30%.”

“That’s great,” he replies, “So there’s a significant chance of the company losing 30% of its value. Good to know for the investment committee.”

“They’d love 70% recurring revenue with any other company.”

“Yeah, except no other company has a Founder with more mood swings than a teenage girl.”

“Her mood could also swing us into a big discount.”

David sighs, puts his hands in his pockets, and walks over to gaze out the window in your office, facing away from you as he responds.

“Some people here are… starting to have doubts about what you’re doing. They wonder why you’re pursuing this. And with the new fund in place, we’re also bringing a new associate on-board so we have more… resources.”

Your eyes widen as you respond, “So now we’re getting a new associate after we no longer need the extra help?”

“I hear he’s very well-connected,” David explains, “And that his father travels in the same circles as some of the new LPs.”

“Is this a warning?” you reply, standing up and facing David as he turns around and meets your eyes with his gaze.

“Not at all,” he denies while smiling at your sweaty hands, “Just a courtesy call. And do make sure you say hi to Martin when he starts here next week. I think that’s his name, anyway.”

Partner Approval?

The Partners are assembled around the table, and you’re standing in front of them navigating through all the slides you’ve created for IonX. The lights are dim and you wonder if anyone will doze off before you reach the climax of your presentation.

“Even with conservative assumptions,” you reassure them, “We can get a 25% 5-year IRR because the margins are so high. And if she sells at a higher discount, we might get closer to 30% returns.”

You pause on your returns analysis slide while everyone else squints and stares at your work, looking for the hole that will sink your investment recommendation.

“You’re assuming a 10% growth rate each year, how can you possibly call that conservative?” John, the Founding Partner, questions.

“They’ve been growing at 15% the past few years and have 70% recurring revenue from long-term contracts with customers. So it’s not as if they need to go out and sell to completely new customers each year… and the market is only around 25% saturated at the moment, so there’s plenty of room to grow.”

“What happens when that growth rate drops to 5%, though?”

“We could still get 15% returns even with that, if you look at this sensitivity…”

David cuts you off before you can say anything else.

“Forget about these imaginary growth rates, let’s talk about your exit assumptions. Who do you think will even buy the company in the first place, and why would they pay 7-8x EBITDA for this business?”

You flip to your next slide and start to go through recent software M&A deals, pointing out that some multiples have been above even 10x – but that doesn’t satisfy David.

“How can you call those deals ‘comparable’? They’re all much larger companies with at least $100 million revenue in broad markets. That’s like saying a date with your buck-toothed sister is the same as hooking up with Scarlett Johansson.”

Now you’re starting to regret introducing your family to everyone at the last holiday party. But a personal attack deserves a rebuttal.

“Even if you lower the exit multiple to 5x we could still get a 15% return – and higher if we get that discounted price.”

Everyone turns to David and he and John glance at each other, waiting for the other one to speak up first.

“The numbers look decent and it’s not the worst deal I’ve ever seen, but we need to understand the market and the potential buyers better,” John concludes.

Deal or No Deal?

Back in your office, you flip between your YouTube window, your inbox, and the spreadsheet of companies you need to follow-up with.

You hear your door crack open and you get ready to feign stress in case your favorite visitor walks in once again, but it turns out to be someone else scurrying by.

In the clear, you call Nancy back.

“Hi there,” you start out, “Good news for you: the Partners here are much more interested now, and we’re ready to move forward if we can get some more information from you.”

“That’s good,” she replies in a monotone voice.

“Is something wrong?”

“You’ve been asking us for lots of information, and it’s a huge distraction for my managers. They’re starting to wonder what’s going on and if the company is being sold, and I haven’t even told them anything yet.”

You slide open your desk drawer and pull out your stress relief ball, squeezing it a few times before you start to toss it up and down.

“I understand,” you answer, “But that’s just how our business works – we can’t invest in or buy a company without doing our due diligence first. I realize it’s a distraction, but when you work with private equity firms…”

“Just tell me what else you need. Let’s get this over with.”

“We need to know more about the market and what other companies have been acquiring lately – we’re new to this industry and haven’t been able to find much data…”

“Isn’t it your job to find data? What else do you do all day in those spreadsheets?”

You toss the ball across the room, hitting the window with the full force of your throw.

“Sorry about the noise, someone just walked in,” you lie. “Yes, we do have data. But you’ve been in this market 10 years, so you probably have more data.”

“OK,” she says after a long pause, “But I’m getting less and less confident about this deal and I’m not sure how much longer I can keep my managers in the dark. I hope this doesn’t fall apart because of you.”

“Limited” Partners?

Meanwhile, the LPs are growing more disillusioned by the day. The Partners had gone around raising a new $750 million fund a year ago because they claimed to have found so many new opportunities.

But since then, the market has taken a nose dive and no one wants to do deals – and the LPs are wondering why your firm is letting so much cash sit there unused.

Technically, the LPs don’t have any say in the management or operations of your firm (hence the “Limited”), but they still look at your investments and may choose not to invest again if they don’t like what they see.

John calls David into his office for a quick chat.

“They want to see something from us soon,” he offers up, “And I want to see something from you soon.”

No closed deals and no exits in 3 years – if that wasn’t a slump, what was?

David pulls out his list of prospects and runs down it from the top, explaining why each one might be a great investment.

“That’s nice,” says John with a smirk, “But you know as well as I do that all of those are at least 9 months away, even if we jump into due diligence right now. You could get pregnant and have a baby in that amount of time.”

David wipes a bead of sweat off his forehead and continues looking down at his list before placing his hand on his chin and looking up at John.

“Then the only other option is IonX,” he admits. “Not exactly the bombshell we want, but at least it will show we’ve made some progress and aren’t just resting on our laurels.”

“Who’s the buyer? And how do we convince the pension funds to go along with this?”

“There are more buyers than I can count,” David retorts, “All we do is flip it to another firm and pitch it as an add-on acquisition – here’s a list of all the funds that have been active with consolidation.”

John puts on his reading glasses and looks at the list, and then lets his eyes wander over to the missed call list on his phone from the eager LPs.

“And I suppose you have a magical list of better comps in the space as well?” he lets out with a laugh.

“Right here,” David replies, presenting the data to John as if he were awarding him the Nobel Prize.

John looks through the stats and pauses for a few seconds at the bottom of the list before looking up at David once again.

“Good data,” he says, “But I wonder: how did you get this on short notice, and why are you now suddenly in favor of this deal?”

Say What?

As you’re poring through the data Nancy has sent over and double-checking all your assumptions in the model, David walks into your office for his 3rd unannounced visit in the past week.

“Good news,” he chimes, pulling out your chair and sitting down with his arms propped up on your desk.

“John’s behind this now, and so are the rest of the Partners. We’re going ahead with the deal and will start bringing in the accountants and lawyers and negotiating the agreement.”

Your mouth drops open as you squint at him for a few seconds, searching for the proper words.

“So… um… what exactly changed? They seemed not to like the market or the potential buyers…”

David cuts you off, waving his hand in your face.

“It’s not an issue – we have enough data on the market and everyone’s comfortable with the numbers.”

“So you just happened to conjure up the right data to convince John that this is a solid idea?”

“Of course not,” David says, leaning back in his chair and folding his arms against his chest.

“I called Nancy myself and told her that all the Partners were committed to the deal now. She just needed someone a little more… senior. And some… reassurances. Once she had that, she was happy to hand over all the data.”

You look down at your desk drawer, searching for your new Eggshell with Romalian type business cards. In case David whips out his Bone with Silian Rail set, you have an ace up your sleeve.

“Well, that’s great news,” you lie, faking a smile and sipping from the Red Bull can on your desk. “Just let me know what else I can do to help.”

David stands up and walks toward the door, and then turns his head around to face you once again before leaving.

“Oh, I will. We’re bringing in all the troops now, so you’ll have to coordinate that. And by the way, performance reviews and bonuses are coming up in a few weeks – hopefully you’ll do better than the new guy! You have said hi to Martin, right?”

The Rest of the Series:

Check out parts 1 and 3 below in case you missed them:

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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by Brian DeChesare Comments (84)

From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 1 – The Idea

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.”

Performance Review?

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.”

Cold Calling

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.

Got Fundraising?

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.”

Pitch Anything

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.

Control Freak?

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:

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

Break Into Investment Banking

Free Exclusive Report: 57-page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews

We respect your privacy. Please refer to our full privacy policy.