The old days, today, what’s coming next in deal origination

When J.P. Morgan established U.S. Steel in 1901, he completed perhaps the first private equity deal in U.S. history, and anticipated many of the features of the asset class today. 

  •   He began with an investment thesis:  a combination of Carnegie Steel, Federal Steel and National Steel would dominate the U.S. market, create a favorable pricing environment for his products and squeeze out competition.
  •   He utilized seller financing, making payment to Carnegie in the form of 5 percent, 50-year gold-backed bonds.  
  •   He created the roll-up strategy, purchasing National Steel and Federal Steel simultaneously with Carnegie, and subsequently making numerous add-on acquisitions to bolster the U.S. Steel platform. 

When Morgan initially made inquiry to Carnegie as to the latter’s interest in selling, through their mutual friend Charles Schwab, he also established the notion of proprietary sourcing. Through the mid-1990s, buyers and sellers found each other quietly, if inefficiently, and buyers generally had the upper hand.

As a rookie dealmaker with Citicorp in the late 1980s, through the early days of my career with Blue Point Capital, I was completely unfamiliar with the notion of dedicating significant human resources to the task of finding deals. Sellers found us; we had little need to spend much time looking for companies to buy.

By 2000, this had reversed. The rise of the sell-side M&A adviser coincided with the flood of investor assets into the private equity class, and the formation of ultimately thousands of discrete private equity firms. Soon, advisers were seeking out potential sellers, showing them the hundreds of PE firms that would be interested in buying their businesses, establishing auction processes for selling those companies and driving up valuations.  

To play in this new world of buying and selling companies, private equity firms needed to actively seek out opportunities, and the business development role was established. Today, it’s not uncommon to see firms with multiple people in these roles. We are charged with finding deal opportunities that are on point with our investment preferences and keeping the deal funnel filled with opportunities. Fierce competition for deals, driven by the sheer number of firms competing for deal flow, demand nothing less.

Technology plays an increasingly important role in our work. CRMs help us keep in regular contact with deal sources. Cellphones enable us to be more responsive, laptops enable us to work and track deals no matter where in the world we are. These have turned into highly evolved tools for deal sourcing, and apparently more technology is on the horizon.

AlphaSense is one of a number of companies using AI to help PE firms sort through the estimated 3 zettabytes (that’s a trillion gigabytes) of data in the world, winnowing out those bits of data that relate to private companies, and organize that data into useable information. While it’s not likely that the personal relationships that drive business development will be replaced by this new capability, it is highly likely that mainstream PE firms, and not just early adapters, will be using these techniques routinely, and soon.

Jim Marra is Director of Business Development at Blue Point Capital Partners