Category: Deal & Pipeline Management

In the world of alternatives, which acronym reigns supreme when it comes to demonstrating strong fund performance in private equity reporting: ROI, IRR, EBITDA, DPI? All these metrics serve as guiding stars for private equity investors navigating the complex landscape of successful investment management. However, the private equity landscape appears to be undergoing a transformation, emphasizing investments that not only forecast the highest returns but also demonstrate immediate cash distributions. So, what’s the better metric for firms to measure their investment success? Let’s delve into this evolving debate and uncover the potential shift from traditional IRR metrics to the rising prominence of DPI when attracting new investors.

Understanding DPI and IRR

First, let’s clarify what DPI and IRR represent:

• Distributed to Paid-In Capital (DPI) measures the ratio of distributions received by investors to the amount of capital they initially invested. In simple terms, it gauges how much of an investor’s capital has been returned to them through distributions after they have made an investment.
• Internal Rate of Return (IRR) measures the annualized rate of return earned on an investment over a specific period of time. It’s a metric that forecasts an investment’s profitability by considering the time value of money by setting the net present value of cash flows at zero.

The Pros and Cons to IRR

IRR has traditionally been the primary metric for evaluating investment success due to its ability to measure the annualized rate of return on invested capital, reflecting the efficiency and profitability of an investment over time. IRR helps investors compare the potential returns of different investments and assess whether they meet their required rate of return. 

However, IRR does not account for the scale of the investment, cash flow timing, or the reinvestment of interim cash flows at the same rate. It can be misleading in scenarios involving multiple capital inflows and outflows or when comparing projects with significantly different durations. Its shortcomings include the potential for multiple IRRs in non-conventional cash flow patterns and its assumption that interim cash flows are reinvested at the same rate, which may not be realistic. 

Given these limitations, the rising prominence of metrics such as DPI have become popular when doing a comprehensive analysis on performance. 

The Rising Prominence of DPI

While IRR is a crucial metric for assessing the overall forecasted performance of an investment, DPI provides a different perspective by focusing on the actual return to investors. A high IRR projection is undoubtedly attractive to investors, but having a strong DPI demonstrates true investment performance, which can significantly boost investor satisfaction. In a world where LPs are pressuring GPs to find creative ways to achieve liquidity, DPI becomes a vital measure for capital efficiency.

Moreover, DPI offers investors a more tangible view of their investment’s progress. Unlike IRR, which can fluctuate significantly over time, DPI provides a clear picture of how much capital has been recouped. This transparency can be especially valuable in volatile markets or during economic downturns when investors prioritize preserving capital.

Another factor driving the prominence of DPI is the evolving nature of investment strategies. As investors increasingly focus on risk-adjusted returns and capital preservation, DPI emerges as a relevant metric for evaluating performance. In contrast to IRR, which may not fully account for the timing and magnitude of cash flows, DPI offers a straightforward measure of cash return relative to invested capital.

Understanding DPI Limitations in Investment Performance Evaluation

The shift from traditional IRR metrics to the rising prominence of DPI highlights a significant transformation in the private equity landscape. As investors seek more tangible and transparent measures of performance, DPI provides a clear and reliable metric of capital efficiency. 

All of this said, it’s essential to recognize that DPI is not without its limitations. For instance, it may not fully capture the opportunity cost of capital or account for the time value of money, aspects that IRR addresses more comprehensively. Additionally, DPI does not consider unrealized gains or losses, which can impact overall investment performance.

All to say, while DPI presents a compelling perspective on investment success, it is not necessarily a replacement for IRR. Instead, it serves as a complementary metric, particularly in the realm of alternative investments where cash flow and capital preservation are paramount. 

Embracing Technology for Data-Driven Decisions

A transformative trend in private equity is leveraging modern technology to inform investment decisions. Deal teams are increasingly relying on advanced technology to uncover patterns and trends that could significantly impact potential outcomes. The demand for solutions offering predictive analytics that can accurately forecast cash flows, even amidst fluctuating market conditions, is on the rise. Additionally, deal teams seek deeper insights into customer behavior and market dynamics to identify the best exit strategies and value creation opportunities within portfolio companies.

In the past, having a robust data analytics infrastructure was a differentiating factor for firms. Today, it has become essential for demonstrating fund performance to investors. This technological pivot is empowering Private Equity firms to:

• Make Timely Decisions: With having the right data infrastructure in place that aggregates performance metrics systematically, firms can make strategic decisions faster.
• Identify Operational Efficiencies: Advanced analytics tools enable firms to pinpoint shortcomings within portfolio companies, driving improvements and value creation.
• Proactively Manage Risks: Predictive analytics allow firms to anticipate and share anticipated investment performance with LPs in a more transparent and wholistic fashion.

The adoption of these technologies aligns perfectly with the growing importance of DPI as it allows firms to optimize their cash flows and enhance their capital distribution strategies. By leveraging a technology and data-first mindset, firms can identify the most promising opportunities and mitigate risks more effectively, helping to create a steady and predictable return of capital to investors.

So What Does This All Mean?

As investors continue to navigate evolving market dynamics and pursue diverse strategies, understanding the nuances of both DPI and IRR will be crucial for evaluating performance and making informed investment decisions.

Coupled with the adoption of advanced technologies, firms need to be better equipped to make informed, data-driven decisions that not only maximize returns but also ensure timely distributions to investors. This dual focus on technological innovation and robust performance metrics positions private equity firms to thrive in an increasingly competitive and dynamic market. 

Interested in learning how your firm can leverage Altvia’s private equity data platform to measure and make data-driven investment decisions? Talk to one of our industry experts: altvia.com/book-a-meeting

Introduction

The recently concluded Association for Corporate Growth (ACG) St. Louis DealSource event shed light on the ever-evolving dynamics of the private market landscape, offering valuable insights into market trends, fundraising challenges, and the overall outlook for the Private Equity and Venture Capital industries. In this blog, we’ll delve into key findings from the event, providing a snapshot of the current state of affairs in the world of private capital markets.

Risk-Aversion

There seemed to be a common theme amongst attendees and speakers recommending the avoidance of risky bets in unconventional industries for your business. The prevailing sentiment was to stick to more established and stable sectors, reflecting a cautious approach to investment.

Exploring New Financial Partnerships 

While there is caution in exploring new industries, the same sentiment does not rain true for industry players seeking new resources to find new deals, and this extends to banking relationships. For example, pursuing new banking relationships is indicative of a broader strategy to diversify and fortify financial partnerships. In fact, founders are now choosing to solicit bankers earlier in the investment process, signaling a more strategic and collaborative partnership approach. 

Fundraising 

As we all know, raising capital continues to be a challenge for fund managers. Investors are scrutinizing opportunities more thoroughly, emphasizing the need for a compelling and well-defined value proposition. And as LPs have been displaying more skepticism and caution in committing capital, fundraising has become a more gradual process with a focus on strategic and steadfast GP-LP relationships. This demonstrates the importance of building trust and establishing credibility, especially for emerging fund managers seeking investment. 

Portfolio Pressures 

Interestingly, most attendees were in agreement that there is no extreme pressure to sell existing assets. In fact, there is a discernible shift in focus towards growing the current portfolio. LPs are encouraging GPs to deploy capital strategically and maximize returns within their existing investment pool.

Conclusion:

Overall, despite the challenges, there is a positive outlook in terms of deal flow. Attendees expressed optimism about the increasing opportunities in the market. The rise in deal flow is seen as a promising sign, indicating potential growth and prosperity in the coming months. This is just further evidence of the underlined dynamic nature of the investment landscape. Adaptability and strategic decision-making are key as industry players navigate challenges in the market. Luckily, Altvia is here to help your firm evolve and stay informed to achieve differentiated success. Talk to one of our experts to learn more about our deal flow software solutions: https://altvia.com/book-a-meeting/

You don’t need us to tell you that creating value is essential. In Private Equity, value creation doesn’t stop short once a deal is reached. The value created throughout and beyond the deal often matters most. 

However, planning for value creation early, and tracking it consistently, can be easier said than done–especially when it feels disruptive to your current deal flow. It’s no wonder why only 34% of PEs surveyed said value creation was a priority for them on day one. But, if presented with the opportunity to go back and do the deal again, 61% admitted value creation would be a top priority from the get-go, attributing its ROI as a deciding factor.

While it can seem like a drastic change at first, when PEs shift their priorities to adding value over volume, it pays off. 88% of deals with a value creation plan in place reported moderate or significant returns. That’s nearly a 20% increase over those without a plan. 

So how can you shift your firm’s focus to prioritize adding value throughout the deal cycle? It starts with having a solid value creation plan as early in the relationship as possible. To realize the true ROI potential, PEs can begin by focusing on boosting value across revenue enhancement, strategic clarity embedded early on, having a closer eye on talent retention and culture that can drive value, and a formal exit plan. Keep reading as we dive into the specifics so you can keep pace and differentiate your firm from the fierce competition in today’s fast-paced deal market.

Four Ways PEs Can Boost Value Creation

1. Maximize Revenue Growth

Through greater alignment between buyer and seller and shifting focus to multiple expansions, portfolio companies, and financial investors can meet on the same page to maximize revenue growth together. After all, investors are well positioned to realize the drivers of multiple expansions and can help make significant changes and unveil new growth opportunities. In turn, PEs can spend more time strategizing their exit from the deal inception, leading to more predictable growth and returns. 

2. Plan Early and Track Vigorously 

Once a plan and process are in place as early on in the deal cycle, systematic tracking of the value creation plan throughout each phase becomes crucial to demonstrate the value growth achieved and value potential ahead. Whatsmore, by tracking progress against a clear roadmap, all stakeholders can align and see the path to value.

3. Put Culture and Talent at the Center

Failing to focus on hiring and retaining top talent, and fostering a positive culture, can be a value destroyer. Successful dealmakers can quickly identify leaders, innovators, and the talent that will help the company maximize its portfolio’s potential. 

Talent and operational stability go hand-in-hand. By forging a cultural bridge between the buyer and port-co, PEs can keep people at the heart of dealmaking, creating the engagement and incentives that drive long-term retention and motivation, which is crucial in value creation across all stakeholders.  

4. Think About the Business from the Bidder’s Perspective

Good exit planning means considering the business as a bidder and planning for their potential questions and concerns. By opportunistically having a value creation plan in place, PEs can better predict the unique value they can add to each investment and structure accordingly before the acquisition. This kind of preparation is invaluable when it comes time to strategize an exit.

The Future of Value Creation in a Fast-Paced Deal Market

For PEs, now is the time to focus on strategizing how to attract and retain the best people, using digital operating models and automation, and outsourcing functions. While traditional levers, such as solid cost management and lean manufacturing, will continue delivering value for firms, that may not be enough. 

To keep pace and differentiate your firm from the fierce competition in today’s fast-paced deal market, firms need industry-specific software to seamlessly drive and monitor value throughout the deal cycle. By adopting leading technology, PEs can differentiate themselves despite fierce asset competition and narrowing time frames in today’s fast-paced deal market.  

To learn how Altvia’s industry-specific software can help you strategize, execute, monitor, and optimize your firm’s value creation plans, start a conversation with our team.

Throughout the year, mid-sized VC firms source and screen anywhere from 200 to 1,000 potential deals. With this kind of volume, PEs/VCs need every tool they can get to screen the markets and develop portfolio companies. 

It’s no longer enough to look at the usual factors (market position, historical performance, industry trends, cash flows, and capital expenditures). To improve and streamline all areas of the business and keep your firm operating at peak performance, PE/VCs must take steps to digitize their deal flows or risk being left behind by the competition. 

Why Digitize Your Deal Flow?

Digitization often requires additional capital, but the benefits of the investment pay off quickly. As more and more firms undergo a digital transformation, CRM software revenues are expected to reach +$80 billion by 2025, and, based on findings from The PwC 2016 Global Industry 4.0 Survey, it’s clear why.

Companies that have implemented a full digitization strategy are projected to increase revenue by an average of 2.9 percent within the next five years while reducing costs by an average of 3.6 percent per year. But that’s just the start. 

Firm digitization benefits have a cascading effect across every functional department, from R&D through to IT. By implementing a digital strategy, paired with visionary C-Suite leaders focused on driving the changes digitization brings, portfolio companies can be armed with the right approaches to increase revenue and growth and justify higher valuations. 

Support R&D and Innovation

When it comes to R&D and innovation, change and distribution are rapid, but a company with the right strategies to quickly adapt and address those changes will be most successful in lowering costs and increasing sales. 

Collecting and analyzing different data quickly is a common challenge most companies face, but with a PE-designed tool like Altvia, firms can arm portfolio companies with visual reports on a combination of industry, traditional, and nontraditional data to quickly identify problems, industry trends, and drive changes and decisions. 

Streamline Purchasing and Production

While the upfront costs of digitization can be high, the investment pays off quickly as operating expenses decrease and outputs and earnings increase. By integrating automation into purchasing and production, companies can continually monitor offers and suppliers to ensure costs stay low asproduction outputs grow.

Leveraging data and analytics in sourcing and operations management also allows for continuous monitoring and prediction of processes, which can then be quickly optimized. As an example, through the monitoring of equipment and performance, companies can use predictive maintenance, which allows for equipment maintenance to be automatically scheduled, essentially solving problems before they even happen. 

Optimize Supply Chains and Logistics

Digital capabilities can be used in every link of the supply chain, leading to big gains in efficiency, maximizing integrations, and optimizing inventory levels. Through cloud-based platforms, companies can plan in real-time and benefit from end-to-end collaboration with suppliers and customers. 

Additionally, data-driven analytics and communication enabled by digitization supports improved forecasts and performance throughout the supply chain, allowing companies to track and trace supplies and identify problems in real-time. 

Empower Marketing, Sales, and Customer Service

To close digital marketing, sales, and service gaps and add value quickly, PEs need to be focusing on digitization. Companies with omnichannel marketing strategies focused on B2P – reaching people – are more effective in reaching a new generation of digital natives.

With a digital sales interface complete with customer reviews, custom product configurations, and algorithms that integrate and analyze data from supply and demand, companies gain the ability to not only automatically match things like competitor pricing but can also enhance the customer experience. 

For example, through gathering data about the customer experience – i.e., search trends, social media, transactions – brands can improve marketing, sales, and customer service by tailoring each and every experience to specific consumer profiles and behaviors. 

Better Enable Enabling Functions (HR, IT, finance)

Human resources, information technology, and finance departments that take advantage of digitization potential will not only support a company’s transformation but also run their own teams more efficiently.

HR can use technology to attract and retain better talent; IT can fully integrate collaboration and knowledge management tools with all business applications and ensure stronger cybersecurity; finance can access and analyze data to drive decisions across every area of the business. Through digital operations, teams can cut the time spent on critical reporting and regulatory functions, freeing up resources and sharpening the company’s insights. 

Five Steps to Digitize Your Deal Flow

The benefits of digitization across all business functions are clear, but it can be a challenge to get started. By breaking it down into a six-step framework, firms can quickly get started and make the most of their digitization efforts:

1. Develop a Digital Strategy

   Hire the right people to lead the strategy, with an end goal to digitally connect your entire organization, including portfolio companies.

2. Upgrade Your FIrm’s Digital Capabilities

   Determine the right tools to help level up your digital capabilities. With an all-in-one CRM designed specifically for PE/VCs, firms can leverage technology to streamline areas like operational efficiencies and investor communications.

3. Embed Digital Capabilities in Deal Sourcing

   By utilizing data and analytics in deal sourcing, firms can find more qualified opportunities faster, get a full-picture view on how they stack up to the competition and make a stronger offer that will guarantee an acceptable return.

4. Employ Digital Capabilities to Help Manage, Optimize, and/or Merge Portfolio Companies

   The ultimate goal for your digitization efforts should be an interlinked system that feeds into all of your portfolio companies. All-in-one platforms like Altvia make this otherwise time-intensive project a breeze and empowers firms to access the data and information needed to maximize portfolio performance.
   
   

5. Develop a Talent Strategy

   To maintain and continually optimize your digitalization, you’ll need a team with strong digital and analytical skills in place. Train your current team, and hire new talent if needed to ensure you have the right digital expertise in-house to keep up with ongoing trends and innovations in digital. 

Digitize Your Deal Flow with Altvia

For private equity firms, digitization offers many ways to create value within portfolio companies by

improving their processes, as well as upgrading and expanding their product and service portfolios

As innovation in PE/VC continues to accelerate, PE/VCs must take steps to go digital to scale with the market – and Altvia can help. To learn more about Altvia’s solutions for digitizing your deal flow, start a conversation with our team.

In general terms, due diligence is putting an appropriate amount of effort into assessing or confirming the details about something. People perform due diligence in various situations, including when buying a car or a home, for example.

The amount of assessment necessary varies based on the item or issue being considered. When purchasing a car, looking it over and going for a quick test drive may be all you need to do.

If you’re buying a house, it’s appropriate to visit it multiple times, check out similar homes, review the “comps” in the area, and have a professional do a thorough inspection. When there’s a significant amount of money on the line, thorough due diligence is a must.

Why Due Diligence Matters

Not surprisingly, this is essential for investors. By one estimate, those who do at least 20 hours of it see a 500% increase in the likelihood of earning a return.

That’s because most investment opportunities look promising on the surface. If they didn’t, they wouldn’t be offered. In most cases, it’s not until you finish reviewing the high-level information and dig deeper that you encounter issues that may raise concerns.

Consequently, it’s vital to set aside ample time for your due diligence. Rushing through it to meet a deadline is a recipe for disaster.

It’s also crucial to have a checklist. Performing due diligence is a little like casually surfing the internet. There are “rabbit holes” everywhere, making it easy to get lost in all the information and forget to check on key aspects of the investment. But with a clearly defined methodology, you can avoid those traps and stay focused on the job at hand. 

8 Essential Elements

The specific items on the checklist will vary depending on the investment. However, there are eight types of review that investors should conduct:

1. Financial. Here you’re looking at things like cash flow, assets, debts, and projections.
2. Workforce. Is the company adequately staffed? What’s being paid to employees in salaries, benefits, etc.?
3. Intellectual property (IP). IP is a significant asset for some companies. Here you’re reviewing its patents, trademarks, copyrights, and brand in general.
4. Market and operational. What is the company’s market share? Is there room for growth? Also, what are the company’s primary business risks and opportunities?
5. Legal. Does the company have any legal liabilities that might affect your investment decision? Are there any licensing agreements or partnerships you should be aware of?
6. Tax. In this area, you’re reviewing the company’s record on tax compliance and evaluating its tax returns.
7. Regulatory. If the company is in a highly regulated industry, this type of due diligence is very important.
8. Technological. What’s the status of the company’s IT infrastructure, cybersecurity, etc.?

Accelerating Your Due Diligence Checklist With the Right Platform 

Your due diligence checklist is the “roadmap” you follow to reach your decision about an investment. However, having a purpose-built solution for everything from organizing and sharing information to tracking interactions with stakeholders can make the process much more efficient and effective.

Altvia has three layers—data management and automation, intelligence, and secure engagement—that enable rapid, well-informed decisions. When leveraged in tandem with a detailed checklist, it gives users a significant competitive edge.

Contact us today to request a demo.

Measuring ESG Benefits to Companies, Communities, and Funds

At Altvia, we believe that running our business in a responsible, beneficial manner requires serving the needs of all our stakeholders—including clients, partners, employees, and the communities where we operate.

While the “impact investing” movement has long recognized the positive effects that investment projects can have on society, the private equity industry as a whole is growing increasingly focused on concepts like environmental, social, and governance (ESG) and corporate responsibility.

ESG Investing: Doing Good Is Good Business

Following sustainable management trends that began in Europe, and the example of leaders like Patagonia founder Yvon Chouinard, American businesses are recognizing that “doing good” is good business. They’re also discovering that companies that aspire to be socially beneficial usually are.

Structuring investments under the guidance of ESG principles creates true win-win situations. While firms always conduct a risk management analysis and consider whether a deal is going to provide long-term ESG benefits for a community and its environment, increasingly, funds and institutional investors are including ESG  characteristics in how they evaluate investments at both the company and fund levels.

But there are lingering questions: How do we characterize those guidelines and how do we quantify being responsible?

The True Measure of Success with ESG

The goal for ESG investing isn’t avoiding controversial sectors like firearm manufacturers or strip-mining operations. Instead, it’s being able to demonstrate the beneficial impact that a fund’s investments have on the larger community while being profitable for direct stakeholders.

Measuring these results requires new metrics and analytics. But smaller companies, historically, are unaccustomed to recording and tracking these figures. That’s typically because they lack the resources, time, or knowledge to do so.

Even if a company has ESG investing data, there’s no standard to serve as a reliable yardstick for success. There’s also no format in place to report ESG stats efficiently. That’s something the industry is working on and a challenge where advanced private equity technologies such as Altvia’s can play a crucial reporting and communications role.

European funds and asset managers have already made great progress in these fields. Today, it’s clear that ESG investing is here to stay.

It’s no secret – to remain relevant in today’s market, businesses need to think about, and take action toward, how they’re making an impact on the planet. After all, sustainability is the new aspiration for companies, and the key to achieving it is developing enhanced ways to measure ESG initiatives, performance, and overall impact.

However, measuring ESG performance is easier said than done. So how can PE/VCs ensure they’re on the right track? It starts by determining how to measure the relative value of any given ESG metric and understanding the pitfalls to avoid misleading investors along the way. 

Understanding ESG Performance

At its core, ESG performance is a measurement that shows how a company is performing against set criteria of ESG (environmental, social, and governance) values. This measurement is used by investors to fuel decision-making and compare brands against competitors. ESG performance is also a leading factor consumers and employees use to determine if a brand is aligned with their values before deciding to do business with or work for them. 

When it comes to comparing ESG ratings, three main approaches are used by investors: 

1. Comparing ratings to peers managing comparable portfolios
2. Leveraging a standard industry benchmark index
3. The investor’s history and internal data

However, each approach comes with caveats. The appropriateness of each depends on an investor’s particular situation, including the risk profile of the portfolio, the composition of stakeholders, and any fiduciary obligations. 

Comparing ESG performance is not an apples-to-apples game, though. When comparing specific ESG performance indicators, investors are often misled, given how much ratings can vary by industry, company, and value point.

Measures that Mislead Investors

Because one of the biggest challenges in measuring ESG performance has been the lack of consistency surrounding industry benchmarks and performance measurement metrics, investors face challenges when evaluating performance. This becomes increasingly tricky when comparing the performance of one company to another, including competitors. 

Whatsmore, most ESG data available is often self-reported by companies, which means there are significant gaps in data availability, not to mention somewhat biased information. 

Measurement also often fails to provide insight into messy underlying processes. For example, data shows that adding women to executive teams will produce better outcomes. However, that data point doesn’t take specific outcomes into account, such as decision-making that reflects diverse perspectives. This is why investors must look beyond the numbers to learn how, why, and under what circumstances the decisions came about. 

Performance Pitfalls to Avoid

It’s recommended that firms follow a “zoom in, zoom out” approach. This means “zooming in” to focus on better integrating ESG factors and their values within the portfolio while also being sensitive to issues of concentration, tracking errors, and risk. By “zooming in,” firms can create risk frameworks that pinpoint ESG threats and failures. By “zooming out,” they can better understand issues and underlying processes while gaining insight into bigger-picture strategies and opportunities. Without a broad and narrow look at investments, PE/VCs risk missing opportunities to improve performance. 

Finally, it’s imperative to maintain a single source of truth for ESG benchmarks and metrics. A trusted, reliable data source that arms management teams with confidence in their numbers and transparent reports for investors is critical to effectively measure ESG performance.  

Track and Measure Your ESG Performance with Altvia

To track and measure ESG performance with confidence, your firm needs to rely on the right tools to effectively transform your ESG commitments and data into transparent reports for your stakeholders. 

To turn your goals into an operational ESG strategy and effectively measure your progress along the way, a tool like Altvia can help. From evaluating risks, to monitoring competitor insight and internal performance, Altvia’s software can arm your firm with transparent, quantified metrics on the impact of your ESG initiatives. 

To see how Altvia can supercharge your firm’s ESG initiatives and performance tracking, contact a member of our team to start a conversation.

Nothing is a surprise after 2020. With all of the tumult that happened during the pandemic, including decimation to global economies, it seems that venture capital held strong and is performing better than ever when it comes to your deal team. 

After a record year, 2021 started off strong and Q1 showed an increase in investment, exit, and fundraising activity over the prior year’s first quarter. According to the Q1 Venture Monitor PitchBook report, $69 billion was invested into VC-backed companies, a 92.6 percent increase over 2020 Q1. Most of that capital was poured into late-stage investments yet angel/seed and early-stage investments remained robust.

Where did this record-high deal volume come from?

Speed of Diligence

The pandemic changed the way that companies do business worldwide, including private equity and venture capital. With the wide acceptance of working from home, lack of travel, and normalization of video meetings, some of the deal bottlenecks were removed, resulting in faster-paced deals. 

Decisions that used to take weeks or months are now decided in a matter of days. Making a deal is no longer dependent on coordinating busy schedules and flight plans. It seems that deal team diligence processes have become streamlined and the lags that would normally stall a deal have been removed. 

High Amounts of Dry Powder

Over the past year and a half, we’ve also seen an increase in marketable securities that are low-risk and highly liquid. The beginning of 2020 saw unprecedented sums of dry powder with more than $1.5 trillion available to fund managers worldwide.

Dry powder funds, kept in reserve in case of emergencies, continue to be strong. With a high amount of dry powder at their disposal, firms were able to invest in opportunities as they arose and quickly fuel growth for portfolio companies.

Good Performance

The performance acceleration achieved by active venture capital funds recently is part of a longer trend that we’ve seen over the past decade. VC funds have been breaking record after record, an evolution that mirrors the progression of the valuation of listed tech companies. 

While the returns have multiplied, it’s definitely not a sure thing. Risk has gotten riskier. Institutional Investor found the difference in performance from those deals at the top and those at the bottom reached a record high with the total value paid in (TVPI) spread peaking at 1.98x. This divergence from previous patterns could be an indicator of more challenging market conditions in which some firms thrive and others increasingly struggle.

Even with risk remaining a factor, the possibility of handsome rewards has had a hand in increasing deals. Megadeals, deals at or over $100 million, are on a hot streak, and 2021 is already delivering multi-billion dollar exits. 

How Your Deal Team Can Adapt

With the new fast-paced speed of diligence, unprecedented amounts of dry powder, and record-breaking performances rocking the US market, it’s more important than ever to have the right tools in place to support your deal team. Teams don’t have time to guess what investors are thinking. The opportunities are great and those who are able to take action fast and provide top-notch investor relations will come out ahead. 

Industry-specific solutions, like Altvia, allow the deal team to have great visibility, match the speed of deals, gain insight into investor interests, and prioritize deals that will yield the best performance. 

Looking for an industry-specific solution to help your firm manage the deal process? Request a demo of Altvia.

Perhaps more so than in any other industry, decision-making is critical to success in private equity and venture capital. Make the right deal flow decisions and you can achieve outstanding results. Make the wrong ones and the losses can be just as significant.

But how do you arrive at “right” and avoid “wrong”?

When it comes to deal flow and deal management, it is critical that you have the infrastructure and resources in place to make well-informed decisions.

Deal Management: Addressing the Key Components

Effective deal management requires that you have certain key elements to guide your strategy. First, you need to have current and accurate data. Without it, you are essentially operating blindfolded.

And while the data you uncover through your own efforts is very valuable, it is vital that you also have a way to obtain supplemental data and bring it into your deliberations. Tools like Pitchbook, DataFox, and SourceScrub can be extremely useful in this regard.

You also need to have firm-wide visibility into your pipeline. If everyone in your organization is simply assuming that deals are progressing as expected, with no easy way to confirm or challenge that assumption, that is a recipe for failure.

In addition, pipeline visibility is crucial when it comes to the timeliness of task completion. If a particularly important action isn’t taken when it should be because the right people did not “have eyes on” the flow, that failure can hurt your chances of closing a deal or, even if you do close the deal, keep you from maximizing the value of it.

Deal Flow and the Tech Stack: The Majority of Firms Are Looking to Improve

Blue Future Partners conducted a survey of early-stage venture capital funds about deal management technology and got insightful—if not entirely unexpected—results. They found that nearly 60% of respondents are motivated to update their technology stack in order to find more deals and improve their execution as they pursue those opportunities.

There are multiple reasons that this number is not surprising. For one thing, competition in the industry has gotten increasingly fierce as more firms come into an already crowded space.

This has forced firms to find new ways to differentiate themselves and their services.

How can they do that?

First and foremost, firms strive to increase their “intellectual capital” by hiring the industry’s best and brightest. But, of course, with new firms entering the market every day, the availability of top-notch talent has become much more limited.

Fortunately, second in importance only to industry expertise is advanced technology designed specifically to support deal management and related activities. Any firm can implement solutions like Altvia’s platform and other systems to dramatically improve its operations. And those systems are both intuitive and economical, especially in light of what they deliver.

The Capabilities Firms Are Looking for to Support Deal Management

Firms looking to gain or maintain a competitive advantage are typically seeking four important capabilities in the technology they implement:

• Real-time, secure access to a centralized database. When data is maintained in an outdated computer system—or worse yet, in spreadsheets stored somewhere on a network—accessing it can be anywhere from difficult to impossible. And that scenario greatly increases the chances that deal management decisions will be made either without looking at key pieces of information or only after too much effort has to be expended and, in some cases, a competitor with better technology has beat the firm to the punch.

• Prioritization of deal sources based on returns. Every firm has limited resources, and successful ones know that focusing those resources in certain areas pays the biggest dividends. But which deal sources are those? The right technology can help firms identify them and prioritize the time spent on them.

• Visibility into networking and communication efforts. Providing all the stakeholders in a firm with the ability to check on deal progress is very important. In addition to the reasons noted above, enhanced visibility enables firms to better leverage the insights of the people who can now check on deal flows. How many deals are lost in part because a firm’s full experience and expertise are not brought to bear on its challenges and opportunities?

• Supplemental data. There was a time when firms managed deals using only what they knew internally. That time is long gone. Firms today need to leverage every relevant scrap of data they can get their hands on to improve their odds of success. But, of course, simply opening the data floodgates is not useful. You need the data streams but also the deal management technology that enables you to ingest that information in an orderly manner and make sense of it.

With these components in place, your firm can be competitive in any situation.

Deal Management: It’s About Both Accelerating and Controlling Deal Flow

In the end, effective deal management is all about accelerating effective deals while still controlling the process.

At Altvia, we understand the role balance plays in achieving better returns. Consequently, we continually update and enhance our systems based on conversations with users and the insights they provide on how technology helps their firm perform better.

We also provide enlightening demonstrations of our systems so that firms understand how our product suite:

• Functions as a hub for internal and external stakeholders
• Enables better management of complex relationships
• Offers many integration opportunities that make connected systems more effective
• Incorporates insights from our team of industry veterans

In less than 30 minutes of talking with our experts, demo participants see the value of having the right deal management technology.

Best practices for your private equity deal sourcing strategy.

Deal sourcing is the lifeblood of your private equity firm. And yet, research has shown that nearly 70% of PE firms in the United States close 3 deals or less in a year.

Deal sourcing activities must be the focus of your firm’s growth strategy.

Here are 4 best practices proven to improve private equity deal sourcing.

1. Hire Business Development Professionals
2. Leverage Data Analytics Technology
3. Stay Top of Mind
4. Segment Deals By Tiers

#1: Hire Business Development Professionals

Professional business development representatives are proven to improve the number of deals sourced for firms.

If you’re a smaller firm and don’t currently have a business development team, it’s best to hire your first one to three with experience and proven results. These people can help create business development processes, KPIs, and initial ROI. They will then be invaluable resources when your firm is ready to build a bigger deal team.

Business development professionals help streamline the deal sourcing process and put consistency into deal sourcing numbers.

They use a mixture of research, email, and even calls to build lists and contact new potential deals.

It’s best to have a Private Equity CRM in place for business development reps, so they have a place to keep track of deal flow management.

#2: Leverage Private Equity Data Analytics

Your firm must embrace technology for private equity firms’ to properly use the data that is being collected and created throughout the deal sourcing and closing process. There are four main benefits to using data management technology for deal sourcing:

1. Integration of disparate data: Many PE firms are still using relatively archaic tools to retain data—mainly spreadsheets, calendars, and emails. This makes it extremely difficult to answer critical questions about the efficacy of data sourcing, pipeline velocity, and closing processes.

2. Automating processes:  Follow-up emails, tasks, and reminders are just a few processes that can be automated. Leveraging automation helps ensure that your deal team leaves no stone unturned when it comes to deal sourcing activities.

3. Tracking every deal: Using CRM technology to track deals from the first touchpoint to win/loss provides your team with invaluable deal sourcing information for the future, like who’s our top-performing deal source by returns to the fund? What is our conversion rate at each stage of the deal pipeline and where do deals stall? It also helps the firm determine the ROI for business development investments to improve processes.

4. Turns data into information: Using technology means your firm can determine information such as what good vs. poor quality deals look like, what KPIs should be tracked (and how business developers are measuring up to them), etc.

#3: Stay Top of Mind 

Not all deals sourced are going to be ready to close in the next 30 – 90 days… in fact, most won’t. But an experienced business development rep knows that doesn’t mean the deal is dead.

That’s why keeping top of mind with contacts associated with deals is critical. Once an organization is ready to come back to the table to talk about a deal, they’ll remember who you are, what you’re about, and (hopefully) have a good impression of your firm.

Running investor relation campaigns to stay top of mind can be as easy as setting up a weekly and/or monthly newsletter, calling to “touch base” on an extended schedule, doing site visits, and meeting up at tradeshows or other events.

This is another area that using a CRM solution built for the needs of PE firms can be very helpful to make sure that high-value contacts are still hearing from your firm, even if they aren’t quite ready to make a move—yet.

#4: Segment Deals By Tiers

Once your deal team has a good idea of deal quality characteristics, pipeline velocity, etc. you should begin to segment deal sourcing activities into tiers from most valuable to least. For most firms, 2 to 3 tiers are more than enough.

Segmenting deals in this way helps business development reps focus their time on the most valuable deal opportunities while backfilling their time with other opportunities. It’s a more effective and efficient way to allocate time and resources.

There is a lot of churn in the private equity industry. If your firm intends to survive and thrive, deal sourcing must be the primary focus of your organization. Using these four simple best practices, your firm can improve the number and quality of new deals sourced for both near and long-term growth.

Is your deal team prepared to increase their goals? Read our Winning Deals in a Hyper-Competitive Market to learn how firms win more deals.