Sutton Place Strategies: Piecing The M&A Middle-Market Together

Mar 3 2014 | 4:30am ET

Deal sourcing in the M&A middle market is fragmented. How fragmented? According to Nadim Malik of Sutton Place Strategies (SPS), the top 14 sell-side advisory firms together represented just 18.4% of total deal volume in 2013.

SPS, a deal-sourcing intelligence specialist, has just released proprietary industry rankings for the middle market (defined as deals between $10 million and $250 million).

“The deal source community—or what we call the sell-side advisors or intermediaries or brokers that are connecting buyers and sellers—is much more dispersed and fragmented than most people think,” Malik told FINalternatives during a recent phone interview. “[T]here were 670 different firms in the last year alone in the U.S. or Canada that closed at least one transaction, that represented a seller on a transaction...and 74% of them did three deals or less—these are often boutique, smaller advisors...[I]t is very challenging for an investor, a middle market private equity firm, to... capture deal flow from such a fragmented universe of deal sources.”

Malik founded SPS in 2009 to help clients—primarily private equity firms but also family offices, senior lenders and mezzanine firms—benchmark and improve their deal origination. The business grew organically from his own work experience: he'd been in both the financial services sector, helping build financial databases and other products; and the private equity sector, working with an active middle-market private equity firm with a focus on deal-sourcing and business development. This latter experience, he said, gave him a perspective on what data were missing in the middle market deal-sourcing space and led to the creation of SPS in 2009.

“We've worked with over 100 private equity funds—working with them to analyze that market, where their gaps are, their effectiveness—and what we've found is private equity firms on average see just 23% of their target market deal flow, and by that I mean sectors and geographies that are relevant for them,” said Malik.

“There's no other statistic out there, currently, that offers private equity firms that perspective. Not only are we sharing those statistics and the ability to benchmark, we're also then providing our clients the raw data behind the portion of their market that they're missing...so they can use that raw data to become more effective.” Raw data as granular as the names and phone numbers of relevant intermediaries, he explained.

Malik said SPS is able to provide the relevant data through its Deal Origination Analytics service because it has a team of analysts “focused purely on this” and a unique data collection method that involves technology and “proactive calling outreach.”

In a typical client engagement, he said, “We get a client, whether they're lower middle market, upper middle market, sector focused, generalist, distressed, whatever their criteria is. We carve out our data of 670 intermediaries that completed a deal in 2013, their transactions, and contact information, for their target market and we use that as a basis to compare against their dealflow and generate a series of analysis and reports that tells them what is their share.” 
 
“They spend a lot of time, money, effort on deal sourcing, it's a critical component of their business, what share of their market are they seeing? How's that been trending? Has it been going up? Has it been going down? Where do they stand in the industry? Are they average when it comes to their deal sourcing? Are they top quartile? So we generate all these reports and then we give them all the raw data in a very easy, customized digestible format.”

Malik said the fragmented nature of the middle market is a challenge for private equity firms, but also an opportunity:

“[W]hen there's so much opportunity out there and things are falling through the cracks from a deal sourcing perspective, a private equity firm that is pro-active and forward thinking and has a very good strategy in place when it comes to deal sourcing and is able to see those deals that others cannot...it's a competitive advantage they can give themselves.

“I heard one of our clients say it best...'You can manage what you can measure.'”

The SPS Deal Sourcing
Fragmentation Rankings: 2013

Firm

# of deals

% of total

Cumulative % of Total

Houlihan Lokey

41

1.9%

1.9%

Raymond James

41

1.9%

3.9%

Lincoln International

35

1.7%

5.6%

Jefferies & Co.

29

1.4%

6.9%

Evercore Partners

27

1.3%

8.2%

RBC Capital Markets

27

1.3%

9.5%

Sandler O'Neill & Partners

27

1.3%

10.8%

William Blair & Co.

27

1.3%

12.1%

Lazard

25

1.2%

13.2%

Robert W. Baird

25

1.2%

14.4%

Harris Williams

22

1.0%

15.5%

BMO Capital Markets

21

1.0%

16.5%

Moelis & Co.

21

1.0%

17.5%

Generational Equity

20

0.9%

18.4%

The Rest of The Market:

 

 

 

26 firms completing 10-19 deals

329

15.6%

34.0%

9 firms completing nine deals

81

3.8%

37.9%

12 firms completing eight deals

96

4.6%

42.5%

14 firms completing seven deals

98

4.7%

47.1%

14 firms completing six deals

84

4.0%

51.1%

26 firms completing five deals

130

6.2%

57.3%

50 firms completing four deals

200

9.5%

66.8%

57 firms completing three deals

171

8.1%

74.9%

114 firms completing two deals

228

10.8%

85.7%

301 firms completing one deal

301

14.3%

100.0%

Total**:

2,106

100%

 

*Based on private equity and M&A transactions completed in 2013 with deal values between $10 million and $250 million that had at least one sell-side advisor. **Total exceeds actual number of deals closed in 2013 due to multiple sell-side advisors on some transactions.

 


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