Robert W. Baird, a prominent figure in the investment banking industry, once revealed that 60% of his company's deals originated from relationships nurtured over several years. In today's world, where private equity continues to become a prominent owner of companies across all industries and a growing number of countries, building relationships with private equity funds is essential.
In investment banking, building long-term relationships with private equity funds is called "sponsor coverage", in reference to financial sponsors of companies. At its origins, private equity was all about leveraging the buyout of a company, i.e. using large amounts of debt to finance the purchase price of a company. Today sponsors have widened their business models from pure financial engineering to build-ups of companies through M&A deal flow. So sponsors require M&A expertise at multiple levels, on the buy and sell side. Ultimately, every private equity and venture capital
fund has a 10-year lifespan, and a lot of acquisitions and divestitures or exits will happen in that time frame. Private equity funds
look for support:
- On the buy side when they are looking to make a new investment
- On the buy-side when they are helping their portfolio companies to grow inorganically throughout their holding period
- On the sell-side when they sell their portfolio companies to other funds or strategic acquirers, usually 4-7 years after their original investment
The continuously increasing volume of M&A coming from financial sponsors has meant that sponsor coverage is now a function in every larger investment bank. Ther are teams dedicated to "Financial Sponsor Coverage" who develop and maintain relationships with private equity firms over the long term, from helping funds find acquisitions (sourcing deals for them) to helping them with exits (selling portfolio companies, assisting with IPOs, etc.).
In essence, sponsors are working closely with investment banks throughout the lifecycle of their investments.
Therefore sponsor coverage programs are a critical component of a successful M&A advisory business, particularly in sustaining a high-quality M&A deal flow. By building relationships with sponsors, investment banks can position themselves to win mandates and secure a steady stream of high-quality M&A deal flow.
The key to a successful sponsor coverage program is building genuine, meaningful relationships. This means going beyond transactional interactions and engaging with sponsors in a way that reflects shared visions and synergistic values. By doing so, investment banks can establish themselves as trusted partners and gain access to a broad network of potential deals.
A critical component of any sponsor coverage program is obviously staying up-to-date on industry trends and developments. By maintaining a deep understanding of the market, investment banks position themselves to identify emerging opportunities for their potential clients, on the buy or the sell side, further enhancing their M&A deal flow.
For all of this, it's essential to have a disciplined, data-driven approach to sponsor coverage. Leveraging the right tools to track and analyze sponsor interactions, identify opportunities, and measure progress - can be a game-changer in managing and optimizing M&A deal flow.
That is where it is highly beneficial to use a CRM that can help manage any sponsor coverage program. It's essential to choose the right CRM, one that offers robust sponsor coverage features, such as tracking all sponsor interactions, analyzing historic interactions across all projects whether a sponsor was a client or a counterparty, but also tracking all affiliate interactions with portfolio companies.