Many years ago, a venture capitalist starting a meeting with a very direct question: “What’s your special sauce?” he demanded. Hold that thought.
Last week I got an email from recently formed private equity firm, actively searching for new investments. In short, they are looking to acquire small to middle-market companies with a focus on profitable businesses in high-growth industries. Their industry focus is “general, including manufacturing / industrials, healthcare, technology, education, media / entertainmentn, and consumer goods.”
While not explicitly stated, I suspected they are also looking for recurring revenue models, outstanding management teams and opportunities to acquire these businesses at modest valuation multiples. I suspected this because I hear this at least once a week from one of many private equity firms looking for new investments.
So I emailed back to ask how they are different from other private equity firms that are constantly calling me in search of the same lower-middle market deals. The associate called me, so I was hopeful of getting a real answer.
Instead he reiterated their interests and trumpeted their first deal that has already closed. So I pressed him again on the phone about differentiation – what is different about your firm from many other P.E. firms that are calling on me? In other words, what’s your special sauce? The deals he described – profitable companies, high EBITDA margins, growth industries, recurring revenues with strong management, sound like companies that couldn’t screw themselves up even if you tried. These companies are the easiest to sell by far, and the P.E. universe is very crowded with firms chasing them.
His reply was disappointing – they have “operating partners” who will get “more involved” with the companies they acquire to “help management” (who we already know must be outstanding and already generating high growth and high profit margins – what exactly is the help they need?) more than other firms who might only attend quarterly board meetings. Really? With such a generalist industry focus, what is the likelihood that much of this time is spent catching up on an understanding of what drives the business, creating more intrusion than help for management?
While that may be a reflection of their style, I need a much better reason to move this firm to the head of the pack before sending the very best deals their way.
To stand out in the lower-middle market today, private equity firms need a Special Sauce.