In any environment, finding the right opportunities is key to investing on a timely basis and maximizing return to investors. But is the "traditional" model-- of partners and senior team members' sourcing opportunities while also processing and/or managing acquisitions -- the optimal model in the current environment? Most investment groups experience transaction flow cycles, struggling to maintain a steady pipeline of investment opportunities. In order to stay competitive and to invest committed capital in a timely manner, a dedicated origination manager has become a critical part of the team for many private equity funds.

A recent search
I recently completed a search assignment for a well established equity sponsor to select an individual solely dedicated to identifying and developing investment opportunities. This individual is not going to execute acquisitions or sit on boards of portfolio companies, but rather will dedicate his full-time effort to developing and managing relationships with intermediaries, other referral sources and business owners. He will also manage the mechanics of the transaction origination function.

This equity sponsor has been in existence for more than 10 years and recently raised a new fund. The combination of managing existing investments, evaluating add-on acquisitions for current portfolio companies, making new platform acquisitions and exiting earlier investments dictated, to their way of thinking, the need for an individual to manage the investment sourcing process exclusively. The management team realized that having a dedicated professional relieves the execution team of the need to juggle evaluating opportunities, structuring and executing acquisitions, due diligence, managing and exiting investments and sourcing investment opportunities.
In the case of this search, the selected Vice President, Marketing's responsibilities include:

• generating and maintaining a flow of new investment opportunities,
• reviewing proposed transactions and preparing executive summaries for the investment management team to review,
• information management and reporting,
• documentation and file management and
• market analysis.

In order to maximize his efforts the selected individual

• maintains external contacts and relationships,
• records and tracks all contacts and investment opportunities,
• maintains and manages the marketing database,
• writes and disseminates marketing letters targeted to specific sources,
• evaluates all referrals to determine how closely they fit the firm's investment criteria,
• executes non-disclosure and fee agreements,
• develops relationships with owners and sellers' advisors and
• manages the investment process up to the point of LOI.

With this individual actively managing the investment origination process senior team members continue to maintain their contacts with long term referral sources and entrepreneurs. The manager provides the resource to ensure that those relationships (and all others) are tickled on a regular basis with up-to-date information regarding the firm's current holdings and interests.

Referral Sources
When raising capital a fund manager is usually asked to describe their methodology for identifying investment opportunities. This demonstrates that investors know how important the subject is. Anyone can call intermediaries and get on their distribution list. Doing that takes little effort and no talent. What potential investors want to know is how do you differentiate yourselves to the referral community? How do you access transactions that get done through other channels? How do you develop proprietary opportunities?
In some markets, M&A advisors or sell side investment bankers are the way opportunities get to the market. In some geographic and industry sectors, companies get to the market by referral sources such as attorneys, accountants, turnaround managers, business brokers and other advisers. Clearly, working with seller paid intermediaries is important, but it isn't nearly enough to ensure that you invest committed capital on a timely basis. Everyone has other referral sources, but no one can cover every potential referral source. The equation is simple. The more time the investment team spends structuring and managing acquisitions, the less time they will spend keeping the firm in front of referral sources. The more acquisitions one needs to make to structure a properly diversified portfolio, the greater this issue becomes. As a result of this time management conflict, a dedicated investment origination function is an emerging trend in the private equity investment community.

Compensation
In speaking with private equity fund managers who are considering hiring someone in this role the first question offered is, "How much does a person for this role expect to be compensated?" The answer depends on your expectations and selection criteria. Individuals who possess the financial training to discuss M&A or LBO opportunities with business owners are readily available. However, not all individuals with transaction knowledge possess the sales and marketing skills required to originate a transaction. Further complicating the task is the need to identify those really rare individuals who possess the technical training, sales and marketing talent and the desire to be developing new business rather than executing transactions. It isn't that difficult to locate individuals who have some of the attributes. It may not be difficult to find someone who has most of the attributes. It is definitely difficult locating someone who has all of these attributes and wants to focus primarily on origination transactions.

Because individuals with the above attributes are hard to find it is important that you structure their compensation appropriately. Someone who is an established producer in an investment bank, other intermediary or PE fund should be earning a lot of money. They are worth a lot of money. In investment banking the salary range for a proven producer is in the $150k to $200k range (for base salary). From there the numbers can go up quickly, really quickly. An established investment banker who has a transaction roster of sell side engagements easily earns multiples of this when bonus is added.

The alternatives can be many and costs much less if you are willing to invest a little time in developing an individual. The next most expensive alternative is probably an originator from a mezzanine or second lien financing source, then a senior debt originator from an equity sponsor coverage group. Further down the cost spectrum are 'marketers' in the Big 4 firm's valuations or corporate finance groups or originators in the leveraged finance groups within commercial banks.

In terms of how to pay someone in this role, here are some observations. If you are contemplating, or have decided to create this role in your fund, you have likely raised a second or later vintage fund, which means you have a successful investment record. If the person you bring into this role finds one investment for your next fund that you can buy for one turn or a half turn less than you would have paid at auction, he or she could be worth more than his weight in gold. Unless you're a family office or other single investor fund you cannot pay them a referral fee as you would pay to an outside agent so you need to utilize a formula that will reward them appropriately. Generally this means bringing them into a piece of the carry on in the specific investment or in the fund. The formula will depend on the size of your fund, the number of principals or partners in your firm, transaction size and your expectations for this individual.

Selection criteria
What type of person do you want to hire? You can seek someone with a transaction roster of sell-side engagements from an investment bank or you can seek someone with slightly less credentials but who possesses certain critical attributes. As you would expect, the more experience and accomplishments, the higher the price. Of the criteria mentioned above (M&A and/or LBO knowledge and sales talent) the most important by far is sales talent. Just as every football coach knows that you can't teach speed, every sales manager knows that you can't teach sales talent. Great salesmen are not made, they are born. Through my 25 years of experience in executive search, I have seen more unsuccessful hires made by someone paying more attention to technical knowledge and hiring in their own image than to sales talent, sales drive, and creativity. I have told many clients, "If you want someone to sell then hire a sales person. Don't hire a subject matter expert and expect him or her to be able to sell." Not everyone agrees, but based on my experience and observations I believe this is true.

"Sales gods" do not necessarily think the same way that everyone else thinks (That is why they are sales gods). They process information differently from sales mortals. They hear things that others do not hear, and they make connections that others do not. For these individuals the sales process is a combination of analysis and creativity. The ability to determine quickly what someone wants to buy (and why) is their special talent. In your world they need to understand that to a business owner looking to cash out all or part of their holdings, the equity sponsor is both a buyer and a seller. You may be buying that owner's company (or recapitalizing it), but you are also selling the owner on accepting your bid, sometimes against higher competing bids. Hence the owner is also buying you. Selling him on accepting your bid requires insight and inferences that the "sales god" can identify.

You most definitely want a sales god in this role. The individual may or may not have subject matter expertise (at first), but the truth is that they do not need a high degree of subject matter expertise to start with. They will need the presentation skills to credibly represent your organization (i.e., C-level presentation skills) and the ability to learn very quickly. However, more important than knowing everything about a leveraged buy-out is the ability and willingness to methodically execute a creative marketing and selling process that puts them and your firm in contact with the right people at the right time. They will also need to have (or quickly develop) a referral network of attorneys, accountants and other trusted advisors. Beyond that they will need to recognize which opportunities are worth devoting time and resources to and which are not.

Anyone you hire into this role will need to spend time with senior members of the investment team to assimilate into your culture and understand your value proposition. A less experienced individual might take a bit longer in the culture-sharing and learning phase, but depending on the resources internally available to this individual, that time and timing factor may not be an issue.

Does it matter how developed this individual's referral network is? That also depends on your firm's particular circumstances. You might want to pay more for an individual with all the attributes and perfect referral network already in place, but people move, relationships change and any effective referral network will be evolving. Thus, you might should wish to spend more time in the interview process learning how the individual develops and manages referral relationships and examining the depth of their existing referral relationships to understand how he or she will perform.

The best team on the field
If your fund does not currently have a dedicated investment sourcing specialist, the decision to take this approach will depend on your philosophy, culture and team structure. Should you take this approach? Many believe that to find deals you must be a deal-doer. My experience in conducting searches for originators in a variety of sectors indicates otherwise. Asset-based lenders have long separated the originator role from the transactor role. Investment bankers have "rainmakers" who don't actually process the transaction. Commercial banks, consulting firms and Big 4 public accounting firms have been using business developers who are not the constructors or practitioners for many years. This model works well if you have the right people in the right roles. Selecting them is everything.

For private equity funds the economic case can be compelling. If this person finds you one proprietary investment or identifies the hot buttons that enable you to win over one seller with less than the high bid, his or her value can be substantially greater than the cost. The math is simple. If this person uncovers one opportunity that your competition (or investment bankers) didn't get to first, for which you pay 7 times instead of 8 on $5mm EBITDA, the payback is $5mm. In addition, by keeping you connected to the market all the time, he can enable you to invest committed capital more quickly. The competition is fierce. Do you have the best team on the field?