Inefficiency Within The Private Equity Mid Market

Private Equity is associated with a number of things - illiquidity, excess remuneration, high returns and high risk, exclusivity, entrepreneurship, Facebook, and the list goes on depending whom one asks.  The asset class has been around long enough to be firmly established as a leader in the investment arena, producing higher long-term performance than any other asset class.  As such, it is no surprise that current market conditions characterised by increased volatility, struggle to reach return targets, falling valuations and lowest interest rates seen for decades are creating a strong demand for private equity investments and opportunities despite the illiquid nature of such investments.  On the other hand, supply of investment opportunities is on the rise, given tremendous technological breakthroughs leading to the redefinitions of value chains in many industries, hence creating opportunities for new entrants and for consolidation alike.

We can be encouraged by “penetration-to-growth” ratios in various industries, such as digital media, technology, and consumer goods.  With faster internet connections, growing penetration of smart phones and PCs, and increased online connectivity.  There is a huge unexplored opportunity for consumer companies to reach out to consumers and create growth.  While large firms will use this to try and retain large market shares and margins, the biggest opportunities are amongst smaller, innovative, mostly private companies which are suddenly finding themselves capable to compete with large firms, and those companies enabling this change and providing solutions that are changing the value chains of many industries.  Never in history were companies able to move so fast from an idea to a large multinational company with hundreds of millions or billions of revenues and profits as they are today. 

As a consequence, investors and those seeking capital have more and more specific ideas where they want to invest or whom they would like to have as an investor.  Here it gets difficult to rely only on your private network and that is where platforms like DealMarket help finding, but also benchmarking existing interesting deals and market participants.

So where is the money coming from and where is it going to?  The most sought after investors are family offices, angel investors (private individuals), venture and private equity funds, pension and insurance funds, asset management firms and banks.  This list has changed quite a bit over the past few decades, with emergence of family offices (according to various sources there are over 3’000 globally), increased number of venture funds (in particular early stage ones) and last but not least increased role of pension and insurance funds which focus primarily on investments into funds rather than direct opportunities.  At the same time, each one of these market participants is faced with hundreds of proposals being submitted per year – such as entrepreneurs for their latest start-ups, growth capital opportunities, buyouts, new funds seeking capital, and increasingly secondary interests in direct deals as well as funds.

Taking all this into consideration, and given the highly illiquid nature of the private equity investments where investors or limited partners can not simply assume selling is always possible whilst often they need to obtain liquidity, we are convinced that private equity model will undergo tremendous change over the next couple of years, in particular when it comes to its liquidity and marketplaces enabling it.  Resolving the inefficiencies of the private equity industry will need regulatory blessing, but we are seeing some encouraging signs, latest of which is the recently passed Senate bill related to crowd source financing in the US.

One of the major inefficiencies today is simply that many institutions newly seek to invest in Private Equity but don’t know how to best source deals.  Benchmarking deals is hard.  Firms like DealMarket however gives the opportunity to search for contacts based on their deal experience, meaning if you want to invest in solar energy in Morocco but don’t know the market you can find someone who did something similar in the past (analogue to LinkedIn where your search people filtering them by CVs).

Another inefficiency is the lack of a software to cope with the increasing deal flow. Even banks still work with excel and explorer folders.  Typically a company screens 300-500 deals a year and yet still relies on its analysts individual filtering system.  Similar to companies working without a CRM system before, you now can loose all data if an analyst leaves your company.  DealMarket offers a deal flow management tool that is easy to use and since based on cloud computing can be accessed from anywhere helping companies to focus more on content rather then administrative processes.  Our aim is to standardize the way investment firms and investors source, store, manage and share deal flow.

Service Providers like data rooms, accountants, lawyers, consultants etc. discover the Private Equity market and try to penetrate it.  In doing so they join global industry specific networks like Geneva Group International, attend Private Equity conferences or events and also advertise their services on global Private Equity platforms such as DealMarket.

Private equity is the industry that has embraced the technology the least, while it forsters it the most with the vast amounts of money it is investing in the companies in the field.  That said, it is inevitable that over the next 5 years we will see automation of many processes in the private equity industry - in particular creation of platforms for trading and auctioning the secondary as well as primary opportunities and deals (limited partners and direct deals) - the field in which DealMarket will play a leading role globally.

There are most certainly many new solutions coming through to stream-line the industry but we must appreciate dramatic changes do not happen over night.  Private equity firms however are now noticing what needs to be done and are analysing and, at times, implementing more efficient processes.  Those who have shown resistance are noticing other adopters of technology receiving notable dividends and such experiences will inevitably lead to a shift in perspective.  DealMarket remains committed to fostering innovation, and bringing efficiency to the private equity marketplace which should benefit all parties and market participants.

DealMarket is the brainchild of a small group of successful private equity professionals who fully understand the daily frustrations of running a multi family office and an asset management company.  All our experience tells us that the industry is ready for a more efficient and accessible private equity marketplace, in just the same way as real estate portals have taken much of the hassle out of the search for property.  And it is not just about making it easier to find the right deal or investor - DealMarket saves time by putting you in touch with the right advisors too.

With MyOffice@DealMarket we have found a solution to another of our frustrations, a user friendly and efficient way to store, manage and benchmark all your deal flow data.  We believe that the early stages of the dealmaking process, bringing buyers, sellers and advisors together, should be a whole lot simpler and easier than it is at the moment.  DealMarket is at the forefront of this cultural shift. We are open for suggestions and always looking for innovative ideas and talent.

Céline Fillistorf is the CEO and co-founder of DealMarket.

Céline originally is from the French part of Switzerland and grew up in Zurich.  She graduated from The University of St. Gallen in 1999 with a degree in Business Administration.  She started her career by working for 5 years in management consulting at The Boston Consulting Group and A.T. Kearney.  Following 2 years in sales development at UBS she set up her own consulting business Fillistorf Consulting in 2007 working with clients in the financial sector.  Céline is married has two boys and lives with her family in Zurich, Switzerland.

Céline can be contacted at celine@dealmarket.com