As an executive recruiter I love being in the middle of great business ideas, investment capital and amazing leaders. In our search for amazing leaders on behalf of our PE and company clients we have identified several key trends in the “War for Talent” that in our judgment will impact which firms prosper in the hyper competitive deal business.
1) The Emergence of the Quant/Data Science Function: Like the rise of quants in the hedge fund world, deal sourcing in venture, growth equity and even buy-outs will employ more data science driven company screens and post investment value creation. Some of the more innovative venture firms have built data science functions to build massive company data sets pulling from paid and free data lists to distill the top of the deal funnel to 100-200 or so ideal targets based on firm investment criteria, industry focus and stage of growth.
2) The Continued Rise of Value Creation Experts / Operating Partners / Growth Accelerators: Too many deals are shopped and capital is so abundant that buying assets with meaningful fat to trim or easy revenue synergies to obtain is negated by escalating deal multiples. Enter what many PE firms generally call their business services / operating / consulting teams. Aligning a group of mid-level and senior level operators who can diligence assets, triage business models, and augment leadership gaps is what has allowed several prominent PE firms to distance themselves from the pack. Having a ready team (full-time or on a contract basis) of industry experts has helped a few select firms consistently win competitive processes and generate outsized returns. 30/60/90/180 day plans after close and rigorous focus on accountability is a key aspect of this value creation playbook.
3) Sector Specialization Continues: Increasingly harder and harder to be an above average investor as a pure generalist. We have seen virtually every investment firm establish industry or sector teams. Investment partners over time have built micro-networks with entrepreneurs and operators which serve as re-enforcing feedback loops around due diligence, the ability to move quickly from term sheet to definitive docs and advising management on execution issues. Some firms were prescient in organizing around key technology trends (software/SaaS come to mind) that proved to benefit from massive tail winds. If you think it was obvious to focus on investing in software/tech in 2000, you might find it interesting that the five biggest companies at the time were: General Motors, Wal-Mart, Exxon Mobil, Ford Motor, General Electric (IBM was #6). How times have changed!! What are the big macro trends that you can build a firm or practice around over the next 15 years??
4) The Contrarian Approach: One investment firm funded buys sub-scale, EBITDA challenged businesses that can be turned around into high cash flow businesses that they own forever. Family offices also offer the potential for permanent capital and a home for businesses that don’t meet the go-go growth requirements of venture or the 3-5 year exit plan of most PE firms.
Venture, growth, buy-out and activist firms are all organizing internal and external talent around how to best exploit these capabilities. What’s your edge?