Authored by Dyana Baurley

If you’re a seasoned veteran in the private equity business development game, you know the drill – markets get tough, deal flow slows down, and suddenly, your investment committee (IC) is looking at you saying, “So, where are you going to find our next deal?”. Enter the “additional sourcing projects” – projects we all have on our hopeful to-do list, but rarely have the time or resources to allocate.

Why Take-Privates? And Why Now?

So – what is a take-private? Well, the name is literal – it’s when a public company is acquired and delisted from the stock exchange. Ideally, your take-private additional sourcing project is a monitored list of target companies in the public market that fit your firm’s investment criteria. A list you monitor for various dynamics that could make one of those companies an “actionable” opportunity when your traditional sourcing channels slow down.

One advantage to monitoring public company targets is the availability of data.  Private companies, as we all know, only give you a website (if you are lucky) and some basic info to work with – super challenging when you are trying to build buy-in with your IC. Contrast that with public companies, where you can find abundant financial data, strategy decks, market studies, and market commentary for upfront analysis. Digging deep into research and underwriting with publicly available data can help validate which target deserves a spot on your shortlist. From there, you have a foundation of information to build buy-in with IC.

Here is the catch… you can’t just dive in when times get tough. The work needs to be done consistently as a part of your sourcing strategy. Building special criteria and screening methodology for take-privates, while narrowing down your shortlist is really just the start. Next, and equally as important, is maintaining the list and keeping it fresh!

Getting Your Investment Team on Board

Now, here’s where it gets interesting (and challenging)… these off-market deals don’t follow the neat, structured process we’re all used to in traditional deal-making. There’s not a perfectly packaged CIM landing in your inbox, no predetermined bid dates, and no dedicated sell-side bankers to pick up your call. We are often super challenged to build momentum when we don’t have the traditional deal structure.

Investment Teams are most comfortable working within the auction process timeline. If you suddenly throw them into an ambiguous world where the usual “luxuries” don’t apply – there will be kicking and screaming… on both sides. Ownership and timeline are the biggest hurdles here. Without those familiar deadlines and structures, it’s hard to maintain momentum. And if you don’t have a dedicated “deal team staffed” on a target – forget about it.

What I have learned through trial and error: while capacity might be greatest at the mid-level – starting here might not lead to the most efficient use of time. Having IC shut down an enthusiastic VP or Director’s proposal on a take-private deal on slide one is incredibly defeating – especially on the first go around. Instead, try starting at the top. Have the IC approve criteria and the targets on the shortlist first, then work to “staff” each target with mid and junior-level resources. Again – more time is needed from IC on the front end but avoids investment teams spinning their wheels on assets that don’t align with the IC’s mandate.

From there you build a process the team is comfortable working within. We all know the members of our ICs – the deal killer, the one who looks at everything, the one who dives super deep on slide one, and the one who will always roll up their sleeves and get scrappy (or maybe, you can’t relate to a super colorful IC). Know your team to help make recommendations on which public company targets match their expertise most closely.

Starting at the top presents its challenges of time, attention, and resources, but guess what? In a down market, when IC is hungry for deals, everyone is on board for turning over more stones with a little more ambiguity.

Two Secret Weapons: Advisors and Conviction

First, every take-private target, deal, and process is unique, and having the RIGHT advisor is CRUCIAL. They’re not just another service provider; they’re your secret weapon in navigating complex waters.

When choosing an advisor, look for groups with strong relationships with your targets. Have they worked together before? How have they built trust with the targets? And do they have experience advising PE on take-private transactions? Trust me, the regulations, processes, and nuances can get extremely overwhelming. We learned that firsthand with our Stemmer Imaging deal. Navigating the different rules between the US and German markets was a huge challenge, and we relied heavily on our advisor’s expertise to get it done.

Second, it’s crucial to come into these processes with conviction and, most importantly, the outstanding items you need clarity on to solidify that conviction.  Public deals are (by nature) much more public than their private company counterparts – there are a lot of relationships and reputations at stake once you start engaging. If an advisor is going to bat for you with a public company board, putting their reputation and creditability on the line, you better have a strong level of conviction. Not a great look if you’re uninformed and just “sniffing around” with your target or your advisor.

Our Starrett sourcing story is one of my favorite examples of conviction and consistency. Starrett earned its spot on our public company target list before we even had a sign over the door at MiddleGround Capital. John Stewart, our Managing Partner, was SO committed that he sent letters to Starrett’s CEO, Doug Starrett, for YEARS (talk about playing the long game). When we secured a meeting with management, Doug showed up to the meeting with those letters in hand!

Taking Your BD Strategy from Good to GREAT

Listen, I consider having an intermediary coverage strategy, full conference calendar, market mapping initiatives, and even data-driven sourcing activities table stakes. All these components help make up a good sourcing strategy to help identify actionable deal flow.  As the market gets more efficient and inherently more crowded, simply having a sourcing team and strategy will no longer cut it.

This is where a well-executed additional sourcing project like a take-private strategy comes in. The biggest roadblock? Allocating time and resources. Every fund mandate is different, but if we are talking about a traditional middle-market buyout shop – I like the 70/30 split. Spending 70% of your time on traditional sourcing activities, while carving out 30% of your time to build and monitor your additional sourcing projects can create real momentum.

In a down market, you can expand that 30% to drive more off-market deals. If you’re getting slammed with deals through traditional sourcing processes (like 2021? Yes, PLEASE), you can scale back that 30% without dropping it to zero. We’ve been maintaining our take-private strategy in different iterations since 2020, and let me tell you, when market conditions shift, being able to act quickly because you’ve already done your homework is truly priceless.

In BD, playing the long game always wins. Start building that target list now, do your research, and be ready to move when the moment is right. Because in a down market, being prepared isn’t just an advantage – it’s everything.

If you have questions or want to chat more about take-private strategies, shoot me an email at dbaurley@middleground.com. I’m always happy to connect and share insights!