The 7 Habits of Highly Effective People by Dr. Stephen Covey is an all-time classic for a reason. A critical part of Dr. Covey’s message (see Habit 5: Seek First to Understand, Then to be Understood) is that people form opinions based on their own experiences.
Dr. Covey likely didn’t write this book with private equity investors in mind, but his insights are tailor-made to empower funds to stand out in a highly competitive market.
It’s common knowledge that finding good private equity deals right now is hand-to-hand combat. One needs to act quickly in order to stand out. Gone are simpler times when bankers and target companies were hoping to impress, a firm showed-up and did their due diligence, and then cruised to strong returns after divesting several years later.
Today’s market continues to deliver eye-popping bids bolstered by record setting capital inflows. This environment requires differentiation through impressively deep knowledge of not only the industry, but also the target company in detail. With this in mind, there are myriad benefits to using experienced advisors.
In this post, we’ll explain why deep understanding is so important, unpack how to stand out in the acquisition process, and provide a path to get you started.
What is Deep Understanding and Why Does it Matter?
Deep understanding goes far beyond a factual knowledge of an industry or target company. To have truly deep understanding is to be able to assemble the pieces and use your understanding to solve problems and activate new ideas. This is exactly what appeals to target companies in an ultra-dynamic, seller-centric environment.
With dry powder breaking the $1 trillion mark firms must find ways to stand out. Demonstrating deep understanding sets buy side firms apart and establishes them as impactful partners primed to thrive post-acquisition.
Taking a primarily data-driven approach (while a solid foundation) is still only skimming the surface. As the Chinese proverb states, ‘You only catch small fish at the surface therefore think deep.’
How to Build Deep Understanding
According to Harvard learning theorist David Perkins, deep understanding requires not only possessing knowledge, but also being able to think about, explain, and apply it beyond the theoretical. So how does this play out in the private equity context?
Many funds have built expertise in specific industries, even niches within industries, and amassed a wealth of experience in their chosen areas. Yet the challenge of getting to deep understanding persists. Practically and tactically operating companies in industry is a much deeper knowledge builder. Industry operators live and breathe their space. They don’t just know their company, competitors, industry trends, etc. -- they have internalized it intimately.
Why not build deep relationships (that get you to deep understanding) with these people? Yes, you can have limited, one way, access to an expert network group or try to self-source advice on LinkedIn. It’s quite another experience to connect directly with advisors who can give your firm the deep understanding you need to stand out to your targets. Even Operating Partners can benefit by extending their network and building a deep bench of active, industry advisors who they can interact with directly as needed.
With so much money chasing a limited set of deals, private equity investors need to significantly stand out. In this seller-favorable market, companies take a strong bid for granted and are looking for more from their suitors. Those who demonstrate a deep understanding of the industry and target company while arranging the pieces to solve problems and activate new ideas are the firms these companies desperately want to work with. Building and engaging an advisor bench, your advisor bench, is the best way to gain deep understanding.
InquireOf puts you in control of building your advisor bench. We’ve removed the intermediaries and gate keepers to directly connect you with the right advisors. Sign up for a 30 day trial and stand out by fostering the relationships that build deep understanding.