Gartner has reported that 93% of B2B purchases take place in the context of organisational change. In our experience, capital and senior hiring work the same way. A fund’s investment period starts to run out, a chief executive leaves, a company changes hands, a contract comes up for renewal. By the time anyone briefs an adviser, the change behind the brief has usually already happened, so we watch for the change itself.
Capital: where a fund is in its life
A private equity fund has a fixed period in which to invest, and where it sits in that period changes how it behaves. Arcot, Fluck, Gaspar and Hege (2015) measured ‘pressure’ partly by how close funds were to the end of their investment period and how much capital they still had to deploy. In secondary buyouts, where one private equity fund buys from another, buyers under pressure paid higher multiples, used less leverage and syndicated less, which the authors read as a motive to put equity to work, and funds that invested under pressure went on to underperform.
Degeorge, Martin and Phalippou (2016) looked at what those deals returned. Secondary buyouts made once the buying fund was more than two and a half years old returned, net of fees, about $0.88 for every $1 that the stock market would have returned. Those made earlier did as well as other buyouts.
For anyone dealing with private equity, this is worth knowing. A fund that has just closed can afford to be patient. One late in its investment period, with capital still to deploy, is under different pressures, and the evidence suggests those deals tend to do worse for its investors. Knowing which kind of fund you are dealing with helps both sides set expectations.
Family offices run on different clocks, usually set by a liquidity event, a new generation taking over or the decision to set up an office in the first place.
Talent: a new leader
New leaders change things, and research on chief executives gives a sense of when. Pan, Wang and Weisbach (2016) found that disinvestment is most common in a chief executive’s first years, and that the investment rate runs about six percentage points lower in the first three years than later on. Earlier, Weisbach (1995) had found that companies are more likely to sell a loss-making acquisition around the time the chief executive changes.
In practice, a new leader reopens decisions that looked settled. A new finance director may look again at the bank, the auditors and the systems. For suppliers, advisers and candidates alike, the first months of an appointment are usually the best time to get in touch.
Dealflow: tenders, launches and shortfalls
Commercial signals are usually operational, and some are published. Schools in the US that use the federal E-Rate programme for broadband and Wi-Fi must normally post an FCC Form 470 and wait at least 28 days before choosing a provider or signing a contract, which gives any supplier a public, dated window to watch. Public purchases can be read in a similar way. When the School District of Manatee County was buying 1,510 Wi-Fi 7 access points and needed a company that could install them without disrupting classes or testing, we confirmed the purchase was still open and introduced DGR Systems.
Other signals are less formal but just as easy to date. Baffin was preparing to launch its Terrain collection with two events in Ontario and needed a production team, and Tetra Films already made commercials for outdoor brands. When a Texas healthcare network could not get enough of several medications, it was ready to talk to a second wholesaler within 24 hours, and Advanced Medical Sales met its requirements.
Noise
Most of what looks like a signal isn’t. A company in the right sector with no reason to buy is not a signal, and neither is a press mention, a conference stand or a general interest in a category.
Our test is short. Is there a need? Does it have a date? Is there someone who can act on it? If the answer to any of them is no, we wait. Applying it means turning down names that look good on paper, which is the hard part. It is a lighter version of the four checks we make before an introduction.
RESPILON is a good example of a list that needed cutting down. Its nanofibre technology has uses in filtration, protective materials, health and industrial research, so a great many companies look relevant. We filtered on category fit, industrial relevance and innovation activity, and introduced only where a pilot, a technical evaluation, a supply agreement or a partnership was realistic. Three qualified demand-side introductions followed in about 43 days.
Why we watch all three
A signal in one lane often means activity in the others. A fund close leads to acquisitions; acquisitions bring new leaders and a review of suppliers; a leadership change can come before a raise.
Granovetter (1973) found that useful information, about jobs in his case, often reaches people through acquaintances rather than close friends. Burt (2004) found that people whose networks bridge separate groups see options others miss. We watch capital, talent and dealflow together so that each signal is read for all the needs it implies.
Putting it to use
Keep a short list of the signals that matter to your business, with a date next to each. If you raise or sell, that means fund closes and investment periods. If you sell services or look for roles, leadership changes. If you supply, tenders and launches. When something appears on the list, ask the three questions before you act.
References
- Arcot, S., Fluck, Z., Gaspar, J.-M. and Hege, U. (2015) ‘Fund managers under pressure: rationale and determinants of secondary buyouts’, Journal of Financial Economics, 115(1), pp. 102-135.
- Burt, R.S. (2004) ‘Structural holes and good ideas’, American Journal of Sociology, 110(2), pp. 349-399.
- Degeorge, F., Martin, J. and Phalippou, L. (2016) ‘On secondary buyouts’, Journal of Financial Economics, 120(1), pp. 124-145.
- Gartner (2020) ‘Gartner says B2B CMOs should employ three strategies to reduce buyers’ uncertainty and unlock purchase decisions during the COVID-19 pandemic’, press release, 23 June. gartner.com (opens in a new tab).
- Granovetter, M.S. (1973) ‘The strength of weak ties’, American Journal of Sociology, 78(6), pp. 1360-1380.
- Pan, Y., Wang, T.Y. and Weisbach, M.S. (2016) ‘CEO investment cycles’, Review of Financial Studies, 29(11), pp. 2955-2999.
- Universal Service Administrative Company, ‘E-Rate: 28-day waiting period’. usac.org (opens in a new tab).
- Weisbach, M.S. (1995) ‘CEO turnover and the firm’s investment decisions’, Journal of Financial Economics, 37(2), pp. 159-188.
Client examples are from engagements run in partnership with myoProcess.
General commentary only, not investment, legal or tax advice.