Having a solid deal sourcing strategy has never been more pivotal for dealmakers. After a brief post-election respite, dealmakers everywhere are entering yet another wave of market uncertainty spurred by Trump’s historic tariffs, massive DOGE cuts, and tensions in the Middle East.
Meanwhile, private equity dry powder continues to hover around $2.5 trillion, with approximately $500 billion nearing the end of its investment window this year. Dealmakers are under an excruciating amount of pressure to deploy this capital and drive liquidity. At the same time, many companies are struggling to perform, driving competition for A+ assets (and their valuations) through the roof.
With so much to lose and even more to gain, we asked four seasoned dealmakers from across the M&A landscape to share their insights on what business development teams can do to source and win the right deals in today’s volatile market. Read on for four strategic highlights from the session, and watch the full Private Equity Career News webinar on demand below.
Despite ongoing market uncertainty, our panelists all agree pockets of growth continue to persist, particularly in recession- and tariff-resistant spaces like B2B software, healthcare IT, CFO services, and AI and data analytics. According to Heather Madland, Managing Director and Head of Business Development for Novacap, these A+ assets share three key traits: “Predictable, sustainable, recurring cash flow.” And firms are willing to pay a massive premium, creating one of the most fiercely competitive markets our panelists have ever seen.
How can dealmakers avoid skyrocketing multiples while increasing their chances of winning these highly coveted deals? “You just really have to understand where you’re going to compete,” says Jonathan Babcock, Senior Associate of Business Development at Compass Group Equity Partners. “There are a ton of opportunities that come across our desk that look like great businesses, but if it’s not within a thesis, we’re pretty resilient on staying focused, which I think has definitely paid off for us in the long run.”
Heather agrees with this deep thematic approach. “We’re building a sourcing engine that prioritizes sectors and themes across all of our strategies,” she says. “The bar is higher now for PE firms in general. You need a point of view on the sector and you need to know what you’re looking for and what your messaging is.”
Who doesn’t love a simple, A+ deal? Unfortunately, not every company can check every box — but if you ask Justin Loeb, Managing Director at Clearsight Advisors, these are still worthwhile opportunities. “Grading businesses that way is a little bit too simplistic,” he says.
He continues, “The way I think about it is complexity or lack of complexity. When there’s more complexity, investors have to underwrite that, and it could result in lower valuations, fewer bids, and less competition. You don’t actually have to check every single box as long as you’re growing, the margin profile makes sense, you don’t have a ton of customer concentration — chances are, there’s going to be a lot of interest.”
“Something people aren’t talking about is that PE bankruptcy is at an all time high right now,” adds Jonathan. “The next 15 years of PE are going back to the old model. Our job is to professionalize these businesses, and not everything is going to check every single box. But those deals are definitely getting done, especially with how much dry capital is out there. You need to roll up your sleeves and find ways to still dig in on those opportunities.”
So much competition means even so-called “B-list” companies have more interest and options than ever before. Dealmakers must think outside the box and explore strategic alternatives to stand out and get deals done. “Continuation vehicles are becoming more common,” shares Kate Troendle, Managing Director at KippsDeSanto & Co. Transformational add-ons and cross-fund transactions also came up during the discussion.
Jonathan suggests venturing outside your firm’s usual conferences and trade shows to get in front of fresh opportunities. “If you go to the same conferences, you’re going to see the same deals, so you have to get out in the market and have a strategic approach,” he says.
Heather and her team at Novacap have implemented a number of new strategies to ensure they get there first and put their best foot forward in such a volatile environment. These include tripling the size of their operations team, relying on in-house sector experts versus buy-side firms, and implementing a robust tracking and “watch list system” for top targets.
According to a soon-to-be-released Sourcescrub survey report, 10% of dealmakers still don’t use any AI-powered technology. One of the top reasons remains regulatory and compliance roadblocks. And while some of our panelists are in this same boat, those whose firms have found a way to safely embrace AI and all it has to offer have seen major efficiency gains.
“We hired a CTO about two years ago, and I cannot impress upon you all how game changing it was,” shares Heather. “He’s built a safe space for us to use AI in a way that protects us and our information from being public.” The firm has since deployed 175 bots and AI agents, and Heather has her own deal screening bot, aptly named “Deela” by none other than ChatGPT. Thanks to Deela and her automated message summaries, company assessments, and email response drafts, Heather is now able to respond to all investment inquiries within 24 hours!
The team has worked diligently to build and maintain a single source of truth for all data to better leverage AI and automation. The firm is currently working on building predictive sourcing models and the ability to query data from across Sourcescrub’s database, its CRM platform, and other key sources.
These are just a few of the highlights from our recent webinar, hosted by Private Equity Career News. To hear more from our panelists, including additional areas of promising deal flow and where they believe the market is headed next, watch the full session on demand below.
Transcription:
Mike Waite (MW): Welcome, everybody. Appreciate you joining us today for our webinar deal Sourcing Strategies for Volatile Markets. It's brought to you by the leaders in private equity education, Private Equity Career News and PE Professional. I’m Mike Waite. I’m the CMO at Sourcescrub. We are a deal sourcing platform for dealmakers who are looking to find, research and connect with, the best private market opportunities out there.
And I'm, I'm grateful this morning to David Toll for inviting me to host. Really looking forward to the conversation. Based on the response, the number of people we have signed up, this is a super popular topic. I think everybody is trying to find their way through another period of uncertainty and hearing from our from our peers and learning from their experiences is a really helpful, helpful thing.
So I'm grateful for our panel. We've got a great panel to and appreciate them agreeing to join us today. Just a couple of housekeeping things before we get started. A friendly matter if we have a friendly reminder, if we have any reporters on the phone, that we are off the record. And so I would ask that you please contact our panelists or David or myself directly if you would like introductions or, any statements or, any comments about the content we're about to discuss on the record.
Second, we have provided, in the download section of the, of the of the platform, a copy of results from a 2023 survey of professionals. A lot of valuable information in there on industry practices and business development. You can just go to the handout section, of the Go-To platform, which has a little paperclip, and you'll find the content in there.
We will be sharing a recording of this with everyone who registered, whether you attended or not. So no need to be taking furious notes. We will provide that recording for you. For your for your convenience. And finally, when many of you registered, we invite you to share questions. We've taken note of those, and we'll be, including a lot of them during our panel conversation today.
But for, questions along the way, I encourage you to use the question panel that's on the Go-To platform. We'll be keeping an eye on it. We'll be introducing those questions throughout the, throughout the session today. As we go through today's conversation, we're planning about 75 minutes. We'll see how it goes. I have a feeling with the number of topics we want to cover and four panelists that we will take advantage of all of that time.
So hopefully you'll be able to stick with us, for, for the entirety. So, as I said, very grateful for the panel we have joining us today, Jonathan Babcock, Senior Associate Business Development at Compass Group Equity Partners. Justin Loeb managing director at Clear Sight Advisors. Heather Madeleine, managing director and head of BD at Nova Cap, and Kate Trundle, the managing director at Kip's DeSanto and Company.
So, why don't I give you guys a chance to elaborate a little bit more, introduce yourselves, maybe give us a little bit of professional background on you and your role, and maybe tell us just a little bit about your firm and where you focus? Why don't we just kind of go through it in that order that we started with?
John, why don't we start with you?
Jonathan Babcock (JB): Yeah, this is Jonathan Babcock with Compass Group Equity Partners, located here in good old St. Louis, Missouri. Lower middle market focus focused on partnering with family-led businesses. Call it 2 to 15 EBITDAs of institutional capital in. But we take a thesis-driven approach to the market where we tend to deep dive in overarching sectors, niche manufacturing, value distribution, business and consumer services that then find interesting niches and spend as much time as we can in those to get strategic.
MW: Thanks, John. Justin, how about you?
Justin Loeb (JL): Absolutely. Thanks so much, Mike. This is Justin Loeb, managing director at Clearsight Advisors, and I also lead our financial sponsor coverage function. So, Clearsight is a 50-person M&A advisory firm exclusively focused on working with businesses in the knowledge economy. So think white collar professional services, IT services, marketing services, as well as some tech-enabled services and software businesses.
We are based right outside Washington, DC, with a satellite office in New York City. And we are primarily providing sell-side M&A advisory to founder-owned businesses, as well as private equity-owned and other institutionally backed companies in the knowledge economy. I started my career right out of undergrad in M&A advisory at Harris Williams, and then joined Clearsight about 11 years ago and launched the sponsor coverage group about four years ago.
MW: All right. Thank you for that. Heather, why don't we move on to you.
Heather Madland (HM): Happy to be here. Heather Madland, managing director at Novacap. Most of you have seen me when I was at Huron Capital for 11 years. So I recently joined Novacap about six months ago. I have spent my entire 25-year career in and around the middle market M&A ecosystem, starting in leveraged finance and moving over to private equity about 15 years ago.
Novacap is a four decade old private equity firm based in Montreal. We are a multi strategy, sector focused middle market firm. We have just under 10 billion of AUM. 130 of us are spread across offices in Montreal, Toronto, and New York. We have a really heavy focus on thematic investing and driving operational value creation.
We invest across four disparate strategies, each with its own sector focus and its own committed pool of capital. So it's a little bit longer of an intro because of that. But based on our AUM Technol, our largest strategy is technology. We're targeting buyouts of North American companies, B2B software with at least 20 of of EBITDA. Our three remaining strategies include industries, which is our only strategy that invests exclusively in Canada today.
Digital infrastructure and financial services round out the rest, and they target businesses with EBITDA between 5 and 25 million. Portant differentiator for us because most people ask how the heck do you run BD for basically, for private equity firms, and our sourcing differentiator is that we really go to market with dedicated sector coverage within each of our strategies via the investment team, which we call our sector leads.
So we build ecosystems of referral sources, executives, and prospects. Driving thought leadership, early conviction. So that we have more certainty to close when we see the deal we want to do. Thanks for having me.
MW: That's great. Thanks, Heather. And that kind of focus is certainly an important part of being successful. Right now. So look forward to diving into a little bit more about how that works for you guys.
And, Kate, if you don't. Sorry for bringing up the end here. But, Kate, why don't you tell us a little bit about your role at KippsDeSanto and Co. Yeah, I was going to say Kate and Heather. We're not seeing you guys, but.
Kate Troendle (KT): That was weird. I'm not sure how that happened, but. Okay. We're back.
Good to see you. Good to see you. Well, thank you, Mike and David, for including me today. Super excited to be on the panel. And talk about the kind of crazy market we've had over the last few months. A little about me. As Mike said, Kate Troendle and managing director with KippsDeSanto.
I've been with the firm for ten years, and prior to that was at other investment banks that focused in the government space. Today, KippsDeSeanto continues to be the largest and most active investment banking group that's focused on the government services market. We actually focus on federal government technology and solutions businesses, which is where I focus my time.
I co-lead that practice along with a colleague, and we have two other practice areas. One is aerospace and defense manufacturing, and the other is enterprise technology. More of a commercial focus area. I mentioned that we're the largest, and that's by the number of professionals that focus on our sector. We've got about 40 investment bankers and nine managing directors.
And most active, we're doing anywhere between 20 and 30 transactions a year. And our average transaction size is around 150 million of enterprise value. So we really do play in the middle market. As I mentioned, I was at two competing firms prior to joining KippsDeSanto ten years ago. So, been doing investment banking in the government space for almost 20 years now.
And CapitalOne actually acquired us six years ago. So you may if you've heard of KippsDeSanto, you may have heard of that, which has been fantastic to have a partner and owner, look at CapitalOne. And then, on my side hustle when I'm not executing deals, I lead our private equity coverage strategy, not necessarily coverage relationships.
We share that across all the managing directors. But I kind of spearhead our thought process around coverage for private equity. So excited to talk about the kind of private equity market today.
MW: Excellent. Excellent. So in case it wasn't obvious to everyone in the audience, we've got kind of a balanced panel here representing private equity firms and advisors.
So I think we're going to have a really broad take on what's going on, what's going on out there. And so why don't we why don't we jump in? After what felt like a really, really brief respite, it feels like uncertainty is back and bigger than ever. And I know, based on our sort of pre-session conversation, that you guys are all feeling that I'm interested to hear a little bit more specifically about how the current environment is affecting deal flow and the sectors that y'all are focused on.
And, Kate, with your focus on government-related businesses and services, I'm guessing you're definitely feeling some kind of an impact for what's going on out there. So why don't why don't we let you why don't you like why don't you why don't we let you get started with the topic.
KT: Yeah. And I could talk for hours on kind of what we've been seeing so I'll try to be concise, but you're absolutely right. As I mentioned, our firm focuses very heavily on the government space. And I personally, along with several of my colleagues, focus exclusively on federal government services and technology businesses. And that is an area that has gotten unbelievably affected by the current administration and DOGE.
We did not launch very many deals, if any, kind of between the late January to early February until very recently. And we have been very thoughtful about how to enter the market given the overhang of what DOGE has already accomplished and what is continuing to be focused on as well as new administration priorities. And I would say that pause that I mentioned, you know, roughly a 3 to 4 month pause on M&A activity, which was felt across the entire sector.
Interestingly enough, in the spaces where I focus, we actually have seen decent deal closings year to date. However, there's been a lot fewer new launches and a lot of those actually closures that you may have heard about were hangovers from last year. So there has been a meaningful delay in kind of new starts for M&A processes and new deals being brought to market.
As well as having a big impact on the size of deals that have been brought to market. So in the government services in tech space, in any given year, over the last five years, there's been roughly 115 transactions happen, each year and roughly about call it 40% of those transactions, 30, 30%, 30 to 40% have been, companies that were over 100 million.
This year. To date, there's been less than 50 transactions that have closed and less than ten in more than 100 million of enterprise value. So it's definitely have an impact on the quality, size, and characteristics of deals that are getting done. That said, I think, you know, June, July have been and are going, expected to be pretty pivotal months as well as helping return the market to maybe the new norm.
I don't know if we'll go back to where we were fall of last year, but it seems as though the M&A, appetite is starting, starting to pick up, a little bit. So we are thinking very, selectively and strategically about launching new businesses. And I believe some of our peers are as well. It seems as though deal activity is picking up.
The positives have been, you know, Elon Musk has moved out of Doge, which has not stopped DOGE’s activities, but it has adjusted and altered their focus areas. And maybe the urgency in which they've been making cuts, as well as Trump releasing a skinny budget and the expectation that that should hopefully get passed, over the next several months, which at least if nothing else shows, sort of, or lends some, insight into who the losers and winners may be and where the government may be spending going forward.
And the last trend that's been positive has been that some of the public companies in the space have seen some price improvement, which is helping overall kind of certainty and kind of de-risking the environment.
MW: Yeah. It's interesting. Seems like the companies out there that are showing a lot of promise and potential, right?
Those, those, those gems, the valuations, the activity is crazy. Right. So it's this interesting sort of two-sided coin we have going on.
JB: Yeah, I was just going to build on I completely agree with what Kate I got the opportunity here. Josh, our chief investment officer for Brammer, spoke last week, and he talked about uncertainty and then nightmare uncertainty, where it's impossible to figure out what's going on.
Like the last six months. That was the scenario we were in. PitchBook had some really interesting data. Any presidential election cycle, 12 months leading up until usually a deal activity slows down. So if you look back to last year, I think that was pretty accurate. And then usually after we come to a head on the election, it picks back up and people are pretty optimistic going into the new year, and then yeah.
I think, 120 executives and all these changes in tariffs. I think there's been 50 plus changes. So nobody can figure out what's going on. And, you know, that impacts a certain and of the market. But if you look at and the government services, it definitely has an impact. But broader market.
Wall Street Journal had a recent report where they said, you know, 45% of business owners said they were impacted negatively, whether it was directly from overseas sourcing. They were impacted, right? And what does that do to the supply of deal flow? You know, it takes a lot of deals off-market. I heard from a number of groups just over the last three months that try to launch a process that out, you know, maybe a month into the process, decided, hey, let's pause this.
Let's figure out, you know, once tariffs come to a head. And so I think you're at a stage, especially in the lower middle market right now, where hearing from a lot of investment banks, if you're a business owner and you know, shares even if they have an impact, but you want to get a deal done in 2025, now's the time to start launching those processes.
So I would say the last month we've definitely seen a pickup in activity.
MW: I got to get more nimble with that mute button. General market sentiment certainly seems to reflect a little bit of sort of rebounding optimism. But, I mean, Heather, I'm kind of curious from where you sit, how you're seeing things.
HM: I don't know, I, I'm a little bit more cautious for Q2 than I was in Q1.
I think overall our deal flow is holding. We obviously cover a lot of ground between geography and sectors. I'm keeping an eye out for signs of softening. With some of the tariff disruptions announced in April, we certainly see our quarterly end-of-quarter pick up in deal flow happened in March. We'll see if that happens in June.
Again, we're up about 3% overall LTM in May. But really seeing more, stronger growth, single to lower double digit growth, in tech and financial services, which makes sense. Those don't tend to be as impacted by tariffs and maybe some of the recession peers as well. They're definitely showing more resilience. I would say quality of deal flow.
Look A+ assets are still strong. We see a lot of those. However, we are starting to see more B assets coming to market, which is good because we like those, a lot more founder-owned. We have a founder-owner focus and preference. So, definitely seeing more of that. It feels a little quality for founders who are more capital-constrained or their lower lower-growth businesses.
You know, they're aging. But in Covid, we saw people just say, well, screw this. I'm sick of I'm sick of the last ten years now, Covid. Well, I think we're seeing kind of that trend happen again. Like other sponsors that I talked to. Discipline is back. I think it's been here for a while, but I would say it's even stronger around the investment committee tables that I am part of more disciplined underwriting, for sure.
Focused on, you know, recession resilient businesses, margin stable sectors, a lot of healthcare. We love asset life, financial services, B2B software, like I said before, and infrastructure are certainly benefiting from some of that recession resilience. We're walking away from good but not great deals. Especially when evaluation guidance is aggressive, which we're going to talk about processes.
But I think some of the types of processes that are being run are definitely driving up valuation. Good for you guys, Justin and Kate. And so I would say overall, my outlook for 2025 is I think Q2 is going to slow, frankly, I think unless we have more clarity with regard to the tariffs and recession chatter.
You know, I think it's already starting to have an impact. We'll see if an H2 rebound is possible. If you know the macro environment stabilizes, but look, what's always been consistent and certain is that there's over $1 trillion of dry powder sitting in sponsors' pockets. And so the pressure remains to, you know, to deploy capital for sure.
So that's a little bit about what we're seeing now.
KT: And I maybe just jump in on that. I think you raised an interesting point. Which is around, you know, when we'll see that pickup, right? M&A, from where bankers sit, is a bit of a lagging indicator because we start processes about six months before a deal gets done, right?
And so as I mentioned earlier, we're just now starting to think about starting those processes with the expectation. Again, I'm focused on government services more than other sectors, with the expectation to what Heather was just saying, not necessarily that folks are ready to close maybe next month or the following month, but that hopefully by the end of the year in Q4, if we're getting deals in market now, you know, hopefully if the trends continue, there could be a good window kind of end of Q3 and Q4 to start to see that M&A activity start to pick back up.
MW: And, Justin, I think you guys focus quite a bit on business and tech-related services. I'm kind of curious to get your take on the industries you cover in what you're seeing.
JL: Absolutely. Yeah. I echo a lot of what fellow panelists have already spoken about. And maybe I, for the industries where we're covering and as a reminder for the audience, it's white collar professional services, IT services, marketing services, and kind of tech enabled and software assets when we call broadly the knowledge economy and what what we have seen over the last few quarters, maybe to boil down and summarize some of what my fellow panelists have just talked about is if you're growing consistently, if you don't have a ton of customer concentration, if your margin profiles work should be or above market standards, you're checking a lot of boxes for potential investors and strategic buyers.
It's a really interesting time to explore strategic alternatives, because there is a massive imbalance in the amount of supply of actionable, interesting targets out there, and the demand from both private equity investors as well as larger corporates.
One of the things that's maybe, I can't really comment on other industries, but for our industries, one of the things that's really interesting over the last call it 6 or 7 years especially, is the sophistication and growth of the M&A and corporate development teams at some of the most active strategic buyers in the knowledge economy.
And that's happened at the same time. All the trends that we just talked about with the private equity community has happened. And so there's a ton of dry powder, a ton of private equity firms that are excited about these businesses. But there's also more sophistication, more action, and more investment from the M&A and corporate development teams of some of the larger strategic strategic is out there, which only adds to increased competition for some of these assets.
And so it's, we've found that our processes this year have been very competitive. Valuations have been pretty robust. Not, to Heather's point, I think earlier, not, you know, 2021 to 2022 levels, but pretty robust and certainly materially percentage premiums to, you know, pre-COVID valuations for a lot of these end markets. And you know there's a lot of folks rolling up their sleeves and digging in and and you know that they've gone really well.
And so it's definitely an interesting market. And for all of us, regardless of industry, the more certainty and conviction we can have macro-economically and geopolitically, the better. But it actually is if you check a number of boxes, it's a pretty interesting time to explore strategic alternatives for would-be sellers.
MW: Yeah. Yeah. So business fundamentals obviously always going to be really important.
And certainly environment affects everything right? So obviously a couple things we really want to keep an eye on. But Kate and Justin, I'm interested to get your take with your broader perspective on industries where you are seeing promising deal flow, where you are seeing deals advance.
JL: Sure. Kate, you want me to start?
KT: Sure!
JL: So in our world, I would say, you know, you can, you can, this is a bit of a general overgeneralization, probably for our practice areas, but it's probably helpful, maybe easy to think about two primary halves of our business.
One half for white collar professional services, and the other half more like IT and marketing services. And on the IT and marketing services side, there's definitely a number of groups that we have very strong relationships with and we're trying to figure out the correct timing on when to go to market.
Some of them I've seen softness in their business, not necessarily declining, but just not the same level of growth experience, kind of through 2022. And so those aren't as obvious. And it's more company and shareholder-group-dependent on when exactly to go to market.
On the white collar professional services side of our business, largely, there's been some pretty good tailwinds and a lot of these end markets. And so whether it's kind of a strategic communications or PR services business, whether it's a restructuring advisory services business, as you can imagine, that end-market is experiencing some pretty strong tailwinds and probably will continue to over the next few years.
A lot of opportunities in the healthcare and life sciences consulting and advisory world, and also, another very hot topic in the certainly from the private equity community as well, is the office of CFO services. So think like outsourced finance and accounting services sometimes outsource bookkeeping. That whole kind of office of the CFO services has been a very popular investment theme over the last few years, and frankly, feels like we're in kind of maybe bottom of the second, top of the third there.
And it's starting to approach the excitement levels of what we saw a few years ago from investment in the managed services provider, the MSP or MSSP, world. And so there's a lot of pockets where these businesses are growing, Mike. And there's a lot of excitement from investors and strategics alike. I would say we are seeing more momentum right now, on the white collar professional services side of our practice.
And maybe a little bit, a little bit more caution, and still getting back into growth mode for the IT and marketing services side.
MW: And Kate, how about in more government-related services where you guys focus? What are you seeing? Where are you finding that the flow is actually happening?
KT: Yeah. You know, maybe you know, oh maybe twists that a little bit.
That question. Because, as I mentioned, our sector has been a little bit on pause for a little while. And the deal activity, I would say, through that pause has been less interesting. You know, what we've been hearing is that there's been some less attractive assets that are in market, some key assets, B minus, and a lot of the A assets were being held.
Because if you're an A asset, why would you go to a market if there's no buyers buying? You know, why would you want to take either a massive valuation hit or not get a deal across the finish line? And so we're now, you know, I think, as I mentioned, starting to see our peers and and we're doing the same thing, start to think about taking some of those assets to market.
And so maybe I'll answer that question as to what types of businesses in today's environment that focus on the government sector could get a deal done in today's climate, which is still pretty M&A risk-averse, just given what's still continuing to go on. And public companies in the space are still being very cautious to deploy capital, given that their public pricing is under pressure right now. And private equity and their ICs have been a little bit less focused on getting deals done in the government space, for obvious reasons.
So, when we think about businesses that should do well in the new world, what does that look like? And I'd say that there's, you know, probably kind of three if I had to break it down, major areas that, you know, that the businesses could, still see, as you mentioned, Mike, you know, that there are businesses getting great valuations, right?
There's you know, there was recently a deal announced in our sector, a pretty frothy valuation. So, deals are getting don,e and deals can get done in a pretty attractive valuation parameter.
And I would say one, and Justin kind of mentioned this, I believe, is around growth. It's really important now more than ever that businesses that go to market in the government space have their ducks in a row organically, right?
You don't want to go to market right now with a major recompete up in six months, right? You don't want to go to market if you're down 20% because three of your programs just got whacked by DOGE, and three more are currently being interviewed by DOGE, right? You want to go to market when you're showing momentum, growth, strong back long, good pipeline, execution, etc. and can give a buyer confidence that your business is sustainable, and add synergies for a revenue standpoint to their book of business.
And two, you know, alignment with the current administration. You know, Trump released a skinny budget, you know, and I think we can we can probably make some bets on who the winners and losers are going to be.
You know, there's been a lot of executive orders and attention around certain agencies within the government, right? If you're a business focused on Space Force, Golden Dome, DoD, and you're focused on certain pockets, that the administration has said they want to invest in AIML, cyber, etc., certain areas around it, modernization, then odds are you're going to attract interest from certain buyers in the in the environment who are looking to align themselves more acutely with kind of expected budgetary trends going forward.
You know, if you're Department of Education, HHS, you know, heavy feds said, you know, we'd want to be really thoughtful as to exactly what your book of business looks like, who the type of buyers could be, because that has not been, top of mind for the most active buyers right now, for obvious reasons, around, DOGE and the current administration's focus.
And then the third bucket would be differentiation. The government services market is highly competitive. And so what is that business doing to differentiate itself? Is there IP? Is there a non-FAR-based, and sorry for using acronyms. Kind of contracting if you have access to OTAs or sivors for the folks that are in the government space, you'll know what those are.
But kind of areas that provide less competitive revenue streams, or do you have strong margins or certain capabilities that are aligned with commercial software products that are being used? What are you doing that can differentiate yourself in the market? Those are the types of assets, Mike, that were, you know, thinking, you know, thinking through bringing to market right now, even with some of that remaining overhang of uncertainty in the government space, that should do well in this kind of climate, just because, you know, they're solid businesses.
MW: Great. So very clear. There's sort of a bifurcation, right? A and A+ assets versus sort of all the rest in terms of interest and valuations. John and Heather, maybe we can get you in the conversation here and talk a little bit about what you're seeing in terms of valuations and multiples for those A+ assets. Are we are we at a place where they're just not interesting to look at because competition for them is so frothy or yeah.
Anyway, you guys you guys answer the question.
JB: Yeah, I think it depends on. Yeah, I think I mean, Heather, I think hit on it earlier, but I think it depends on really firmly understand your investment criteria, where you're going to compete, where you're not going to compete, right? There was a fire life safety deal. Probably some people on the call for it.
But, you know, call it true Sub-10 EBITDA. It got 100 plus IoIs and generally speaking, that's not where we're focused, right? And so we BD best practices group with 12 other people and we consistently trade notes on what's going on in the market. Like what are we seeing? And I think the key theme is, is really, one, understanding: Are you that 13 times buyer on a five EBIDTA business doing know industrial services. There was another one that, got 76 oIs and you really had to be in that 12 to 13 range, which I think is unprecedented. But back to Justin's point, I think there's a bifurcation in supply and demand. And, you know, if you're a good business that checks all the boxes, no tariff exposure, you’re gonna get, I think a premium valuation.
And so I think you just really have to understand where you're going to compete. If you're that buy and build model, maybe it works that you're paying 13 times and then trying to buy it down with 16 add-ons. It's not really our focus. You know, I think being strategically focused in the market, similar to Heather where we're out there and found this out right before their call that we actually partnered with, her cousin Candace on the registration services side. Great industry. Yeah, too small in a big world.
But, yeah, we take a deep thematic approach where we're not saying put a few bullet points out on a one pager. Let's see if we can find something in that space. Let's go out, similar to Heather, go out, talk to every center of influence, every industry executive that we can possibly find this far in this space over the course of two years, and then really resonate with that owner and find them through, hopefully, you know, Kate and Justin, hopefully out of a process. I wouldn’t mind you guys, but, you know, hopefully that's where we're focusing and finding unconventional paths, getting in person. I think more city trips. That was another thing coming out of our practice groups. More people are, you know, as you go to the same conferences, you're going to see the same deals, and you got to get out in the market and have a strategic approach.
And, Humic Arthur from Bain, I think he was even quoted, “There's even a bifurcation between funds right now.” They're having a quick fund raising process. If you have that deep, thematic approach. And so that's really how we focus, and it sounds like. Yeah, it’s similar to how Heather is.
HM: I'm going to actually put some stakes in the ground on valuation multiples.
So maybe this will well elicit a debate among us. But I would say middle market companies like still command low digit, like premium A+ businesses are commanding low double-digit multiples, 12 to 14 times. Where companies that we're seeing snag another 1 to 2 plus terms are recurring revenue models with strong customer retention. And John, you certainly spoke to that with some of the sectors you guys invest in.
And, Kate, strong organic growth is a must-have for these types of multiples. I mean, these are all things private equity wants to see: predictable, sustainable, recurring cash flow. And I would say in particular for our tech fund, larger profitable B2B software or services businesses that have proven upsell and a product fit, like these companies are going for premium valuations.
Healthcare IT is one of our sectors within technologies. And two of our last four platforms have fallen within that sector. Compliance GRC is particularly active as well, as well as anything that touches data or data analytics, information services, I would say, as well. But look, I mean, I think the point I wanted to make is that scarcity value is alive and well.
I hear you on the broad processes and people submitting bids, but where the way that we go to market, we see much tighter processes. And I would I would really point out three major drivers of ultra premium multiples in this market today. Otherwise, you know, I think people are being fairly disciplined, and a lot of those boxes need to be checked for premium multiple.
Look, if you're a category leader, and you know, there's a there's fewer of those companies out there. And in sectors like specialty healthcare, healthcare IT, industrial software, digital infrastructure, there are only really a handful of scaled platforms, you know, that are platform-quality assets. And when these come to market like these are highly competitive and they're pushing valuations above 15 times in some cases.
The other area where we're seeing ultra premium multiples is long holds high-quality assets. And so we're going to touch on this a little. But we call, you know, cash cow assets. Assets with low customer churn, high margins recurring revenue. They're staying private longer. I mean, we have seen through all the reports that private equity, the average hold period for private equity portfolio companies, has extended by 1 to 2 years.
And we know that. We know that because we like them and we're recycling them into continuation vehicles, which is further tightening the supply for some of these, A+ assets. And so when they do come to market, it's just lifting the price of those deals, beyond our reach in a lot of cases, frankly. And then finally, regulatory moats and specialized technology, I'd say companies with IP regulatory complexity, long-term contracts, like a lot of our digital infrastructure deals have, look, I mean, scarcity and defensability, you know, that equals pricing power. And I feel like, you know, when those businesses do come to market, those tend to be going for ultra-premium multiples as well.
So, in a nutshell, I think the lesser performers just reverse everything I just said. But one thing that I'll point out is that growth at all costs. You see this in software businesses who aren't profitable yet. You see this in M&A buy-in builds where it's scale for the sake of scale. You know, these are all being discounted today. We saw what happened kind of post-COVID, with some of these companies coming to market that we're not integrated. So I would say growth at all costs, were we have less tolerance, and I think the market overall does as well.
And then finally, from a leverage standpoint, just because if folks are curious, I would say, you know, the non-bank, you know, lending market is alive and well, as we all know. And, you can certainly get leverage for some of the valuations that were floating today. You know, we're now taking it, though, of course.
MW: So, Heather, thank you. That was a really great and detailed answer and summary, but Heather said she was trying to stir things up there. I'm just interested if you've got any other sort of contrary points of view, you guys might throw out there.
HM: So I would say like, absolutely manufacturing and some of those other industries that we focus on in Canada are certainly commanding less than that.
JL: No, I think that's right. I think, Heather, I think, I mean, all that commentary I think is very alive and well with the sectors that we're focused on here at Clearsight and yeah, I mean, again, that goes back to what I was saying earlier, what we're seeing from a valuation standpoint is still things that are north, like very heavy premiums above pre-COVID levels, right?
And so, yes, for some of these digital services assets, they're not going for 20 to 25 times EBITDA anymore. They're only going for 15 to 20 times, right? Which, I mean, to be fair, is a very material difference. But it's still, far, you know, far and above, you know, 8 to 10 times we were seeing for some of these assets in 2017, 2018, 2019.
HM: Yeah.
JL: So, that really resonated for me. And, and certainly for the industries, that I'm focused on one thing while we're trying to stir the pot, one thing that I will, delicately, suggest maybe stirring the pot a little bit just because I hear it so often. And I think I think there should at least be an asterisk next to it, but, everyone's just loves talking about, every single person I talked to, right, says, oh you know, A+ assets are the only thing getting done. And you gotta do all this and that to get a deal. And it just, it just couldn't be farther from from the truth. And, and and I think A+ and grading business is that way is maybe a little bit too simplistic. And so the way I think about it is kind of complexity or lack of complexity, right?
And when there's more complexity, typically investors have to underwrite that complexity. And, and that could result in a lower valuation. That could result in fewer bids and less competition for the asset, etc. The reality is like, I think, you know, the clients we're bringing in the market are fantastic businesses. I think it's kind of impossible to make an argument that for like, for example, a couple of the divestitures, and carve outs that we've already done this year that there's not more complexity inherent with those transactions than with a normal founder-owned or private equity+owned, sell-side process.
And even in those situations, as examples, tremendous amount of interest, great deals get done. And and so I just, I'm getting a little bit of an echo. I don't know if you guys are too. But just in those examples, right, there's certainly more complexity with any corporate carve out. And we're still seeing a ton of interest from both sponsors as well as larger corporate acquirers.
And so I just, I kind of want to dispel that notion for folks listening that either are owner operators or investors and on the board, certainly at least companies in the B2B services world and tech-enabled services world, like, you don't actually have to check every single box as long as, again, you're growing and the margin profile makes sense. You don't have a ton of customer concentration. Chances are there's going to be a there's going to be a lot of interest and valuations, to Heather's point, are actually probably going to be pretty robust if you're running a competitive auction.
JB: Yeah, I completely agree. I would say, you know, I don't like the ranking system as well, but I think it's a mode for just identifying what checks eight out of ten boxes.
And I think those deals are still getting done. One in particular, you know, got 90+ IoI’s. And I think there's this return. You know, we're in a low interest rate environment, right? Money was essentially free for a long time. And now that we're coming out of that, yeah, I think something people aren't talking about PE bankruptcies are at their all-time high right now. And this notion that things are just going to be easy. PEI’s got a report about operational excellence. And, you know, the next 15 years of private equity are going back to the old model of roll up your sleeves and, you know, our job is to professionalize these businesses. And not everything is going to check every single box. But, I think, you know, to your point, those deals are definitely getting done.
I think, especially with how much tri-capital is out there, you need to roll up your sleeves and find ways to still dig in on those opportunities. And, you know, the supply aspect of there's not that many of those in market, they're still getting done at a premium valuation.
MW: Yeah. Yeah, yeah I think we think we like simple, right? But the world's not simple. So I appreciate you guys getting into some of the details about that.
But John, maybe I'll put you a little bit on the spot, but at Compass, I know in normal times maybe some of us remember what normal times look like, but I know firms are trying to do deals on both sides, right?
Buying and selling, in kind of equal measure. I don't know if that's the case this year. So, are you feeling more like a buyer or more of a seller? What's your sentiment there?
JB: I think it's both. You know, I think it depends on you. Look across your portfolio, everyone hit it on the call. I think the average hold period is 7.3 years, right?
You can only do so many CVs. Liquidity is at an all-time low. Distributions are at an all-time low. At some point, that's the model, right? You gotta return capital. I think we're going to talk about this later. But going through CVs, Houlihan put out their inaugural report, which I think shows a trend of how much people are talking about it.
But, you know, if you've got a business that is resilient in these times and there's a scarcity, I think 3800 port co’s (portfolio companies) are passed that five-year mark closer to, you know, in that 5 to 12 benchmark talked about it. Assets under management went from 1.5 trillion to 4.7 trillion over the last ten years. There's a lot of bandwidth issues, I think, within PE firms where, you know, to get new deals done, you got to unlock that capital from prior deals.
And so I think, you know, both, seller in this market, if it's an opportunity where you can return capital, put a win on the board, get back out there and find opportunities. But you're a buyer in this market if you have that strategic lens, and that strategic lens doesn't start three months ago when things got slow, and now you've got to come up with a thesis, you know, 18 months ago.
And I think you're seeing more groups take that approach. Just getting out at these conferences, and networking, just meeting a lot of other firms, and trading notes. And the trend is heard from one banker. He thinks 90% of firms are taking a quote-unquote thesis-driven approach, whether that's be thematic or not, I'm not sure.
But, you know, it shows a trend of you've got to have an angle. I think, you know, John, our managing partner, he came from a corporate strategy and development background where you had a reason to get in the business. And I think he's really done a good job of implementing that at Compass. But I think more groups are, I think, starting to take that model.
And so you can be opportunistic. You know, we just got a deal closed new platform last week. We closed that restoration services platform with Ken, Heather's cousin, which was an awesome. So that's a you know, two years, both of those from ideation of the thesis to getting out to trade shows, industry conferences, talking to industry executives. It's not the easy path, but it is the path I think that more groups are going to start to take. But it is a moat as well, right?
It's, there's a ton of opportunities that come across are that said, you know, look like great businesses. But if it's out within a thesis, we're pretty, you know, resilient on staying focused, which I think has definitely paid off for us in the long run.
MW: Yeah. So get in early, take the long view, build those relationships and confidence over a long period of time.
Heather, can I get you to comment on the same question?
HM: Yeah. Look, I mean, I we're both we're always opportunistic and this firm I would say is probably more opportunistic from a sell-side perspective, like not hiring a banker, but taking phone calls and really pursuing, you know, sell-side opportunities that might be interesting for our portfolio companies.
But I would say, look, we are embracing complexity. We go where most others do not. And so your all your commentary around complexity resonates highly with Novacap. We have tripled the size of our operations team in the last two years. Most of those individuals sit within like an accounting finance function supporting our diligence and portfolio company efforts.
And the other, big portion of that sits in our legal department. And so we love carve outs. We love corporate orphans. We love companies with accounting hair because we've got a lot of geeks on staff. But we're betting that our ops team can unlock that value. And so we're really trying to create our own opportunities.
We just carved out a fairly large division from an older asset in our technology strategy and made it an investment in our newest fund. There's another asset in market that we're looking to combine with it. Like it is super complex. It has taken hours and hours and hours of legal and tax work to get this right.
We're also using CVs and secondaries as a sourcing tool. Like I said before, we took an opportunity in our financial services strategy, to take one of our NGAs and give liquidity to fund one. But made it our first platform and fund two by making a transformational add-on, which was the first in the United States where there's a very large TAM, deeper, much, much deeper than Canada.
And I guess what we're most known for in the last two years is our take private of Nuvei. It's an asset that we had owned previously. We took it public. We just took it private again with Advent as a minority shareholder, via a continuation vehicle, which, according to our placement agent and other folks, is the first time that's ever happened in the industry.
So if nothing else, we are definitely leaning into complexity. And I would say the sector and theme-based stuff when we talk about sourcing, you know, we have built a different model in my opinion, to tackle this, this market.
MW: So that we're continuing continuation vehicles has come up a few times now. Why don't we jump into that one?
I think it's one of the ways that firms are getting creative to generate liquidity. I'm curious to hear you all talk about ways that you might be getting creative and what sort of impact some of these new vehicles are having on the market. Kate, why don't you, if you have a point of view on that, would love to hear. I'd love to hear from you.
KT: Yeah. I mean, I think it's a great solution. And we've talked a lot on this call, this panel about how the hold period for private equity is elongating. Over that same time period, it feels as though the length of time between raising new funds has shortened, at least in our sector.
A lot of the private equity-focused funds in the government space feels like we're raising a new fund every other year. And there just feels like there's just so much capital to deploy, and that, you know, it’s because of sort of maybe two trends. One overall, private equity continues to grow, and two, interest in the government services and tech space has rapidly growing from a private equity standpoint.
Over the last six years, private equity represented a quarter of all transactions a decade ago. And now they represent close to 75. So when you think about the activity, private equity continues to apply to our sector. But continuation vehicles absolutely are becoming much more common. As a you know, when you think about, you know, your exit strategy, you know, you, you no longer just need to sell to a strategic or sell to private equity.
You can be more thoughtful about how to, you know, alter the whole period and the exit for that. So, yeah, we're certainly seeing it. And we're certainly seen private equity maybe be a little bit longer in the whole period, than we saw maybe, you know, five, ten years ago.
HM: Sorry to interrupt, but when you say that you've seen that, when do potential buyers of companies you're selling tell you that that might be their strategy for an asset.
KT: Not the buyer, more of the seller or client. So our clients or sellers that we're talking to may say that they're thinking through either an exit or utilizing their continuation vehicle.
HM: For sure, there's multiple ways to sell.
But even on the buy side, like with transformational add ons happening and people using that as an opportunity to flip it into a CV or an SPV or something like that, like, you know, I'm just curious, you know, how much sort of where is this capital coming from and how important that is to you guys, you know, deciding kind of who makes it, who makes it forward and who doesn’t.
KT: That makes no difference to us, right? We don't see it as much on the buy side. It's more seller opportunity. If they don't get the valuation they're thinking through first where we set. When we're selling businesses, the buyers are typically not, but that doesn't necessarily come into play. Okay. Good question.
JB: Yeah. And I think single-asset CVs in the Houlihan reports show a strong uptick year over year, where you know it's tougher to find new platforms in this current market.
And people are holding on to those quote unquote, trophy assets, where family offices used to have the benefit of that. And, now, you know, I think it's been, but even cross fund transactions, you know, selling between funds, I think it was actually outpaced, CVs last year. And so I think that's a trend where, you know, if you can't go back out and find those opportunities, you say, hey, let's look through the port co and and figure out what we want to continue to hold.
And if you have a strong conviction, you know, why not continue to hold that? But again, LPs one distribution, I think distribution at an all-time low, and if they're going to put wins on the board where you can and have a full exit, but.
MW: Yeah. Justin, Heather, I wonder if you guys have any comments on the activity you're seeing in the form, you know, some of these new creative forms? And what impact do you think that's having?
JL: I don't think I have anything to add specifically on the CV front, except one thing that we've seen that I don't know, I haven't heard people maybe talk about it as much as, you know, maybe two things. One, some of these continuation vehicles got done in 2021 and 2022 at some pretty aggressive multiples.
And, I think some of those same groups in certain situations wish they had sold the businesses in a normal process and realized a return and return some more capital, because now they're trying to raise new funds, and their DPI metrics are not where LPs want them to be. And, and, and so, you know, we're seeing we've seen some examples of that, but maybe the other thing too, in terms of just creative kind of approaches to maximizing value for existing investments for private equity firms.
I mean, this trend has been happening for a while, but we're definitely seeing, from the institutionally backed side of our sell-side business, more groups that are, you know, they're running, they're not really running traditional broad auctions anymore, right? It's a much more concentrated, targeted, sort of like, you know, warm conversation and fireside chats, early load, gold card buyers, whatever you want to call it.
But, you know, the approach tends to be pretty similar. And it's just a little bit more targeted. And, you know, you'll get reached out to by certain private equity firms, asking about a new opportunity. And you're like, I think this is the third round of groups that they've gone out to because other folks are just and got our opinion on this like four months ago, right?
So there's no way they've been doing their initial marketing that entire period. And so there's more like a staged kind of targeted discussions, especially again, like probably less so from the founder-owned side of our business, although, you know, there's still some elements of that and more so from the private equity-owned, sell-side, mandates for Clearsight.
That's where that's happening. But, but that's all I'm at. I'm kind of seeing that, and getting creative is maybe that, you know, staged.
JB: Yeah. And just to double click on that point specifically, even I would say boutique firms are even trying to run those more limited quote-unquote processes where, you know, there's two sides of the coin.
There's still some that are taking it out to the 300 groups that they know and getting 90 IoI’s, but heard from one in particular, 20-person firm where they really said, hey, let's take it out to 20 people that have been inquiring about this industry for the last year or two years, and staying on our radar really have a proved thesis. Not just a one-pager, but a robust thesis in this space.
And, I think a bonus point if you have that industry executive on board already and moving to that group and, and, you know, like you said, opening it up from there, but starting with 20 groups and then slowly opening the doors, not just even at the up-market stage, but, you know, I think, you have to know about the deal.
Even when they first had the conversation, they don't even have them engaged, you know, tracking some opportunities for 18 months, a year. And again, we don't compete in too broad auction processes. But, you know, definitely in that as a transaction.
HM: I would I would absolutely say that that to be true for what we're seeing. You know, we very, very rarely participate in broadly shopped auctions unless we knew the company before it hit the market.
I would say what we're building from a sourcing perspective at Novacap is an engine that prioritizes sectors and teams across all of our strategies. And I think the bar is higher now for private equity firms in general. You need a point of view on the sector. And you need to know what you're looking for and what your messaging is.
Get out early. And then when the deal comes to market, because you already knew it was. So, we have a very robust tracking and watchlist system for prospects. I can't say I've built the muscle behind this. The firm is uniquely well-positioned to reach out to targets directly, given the sector focus. And we're building these relationships early and tracking how long we've known them, leading up to a sale.
Nine times out of ten, if we don't, if a book just falls on our desk and we had no idea it was coming to market, nine times out of ten we're going to pass immediately. So we are really hyper-focused on those themes within the sectors that we like, and also with the backdrop of resilience, right, as a filter, because in this uncertain macro environment, you have to have that.
But the reach out directly to targets; we don't use buy-side firms. This is all done, directly by our sector leads, and they're just really thoughtful about building those relationships early. And we're leveraging technology and in some cases, AI-powered technology to do it.
So it's it's just been it's fascinating.
MW: And not just time to get. I'm sorry, Kate. Go ahead. Yeah. Go ahead, go ahead.
KT: I was just going to say not to be a major plug for myself and Justin and the advisors of the world, but I think this, this conversation, is really why investment bankers can be a huge help when you're running a process.
Because, you know, it just depends on the asset. In my mind, in our sector, it really depends on the asset, the dynamics, the shareholder dynamics. And, sometimes we'll reach out to five buyers, sometimes it's three, sometimes it's one, sometimes it's 20, sometimes it's 60. You know, it's at least in the government space, it's become crowded.
There's more than 125 private equity-backed assets looking to acquire and grow in the government space. So there's no shortage of buyers. There's no shortage of buyer demand. Sometimes it does make sense to go to a limited group of folks. And like I said, we're we are always thinking through whether it's fireside chats, whether it's broad, broad is not 300 in our world. It’s maybe 60, but what that looks like, and it's being able to think strategically about how to how to leverage the buyer universe and the timing of the of the kind of the market dynamics.
HM: Yeah, I agree. I repeat this all the time to my team. Do not be a book taker in this market.
You have to be selective, and you got to have a clear investment point of view and be concise about what you're looking for. Don't be a book taker because then that sector banker, that's, you know, driving that cybersecurity software deal. Like, how are they to know what we like in cybersecurity or not unless we're connecting directly with that sector banker through our investment team?
Like that, that type of sourcing engine is where is is what we're is what we've built at Novacap.
MW: So let's jump. Let's jump in there a little bit. On the way, I just want to remind the audience we're coming into the last 15 minutes of the program. So if you have specific questions you'd like to ask the panel, please, put them through in the question panel. The Go-To webinar panel, and we'll save some time at the end to get through a number of those.
But on the way, I want to get to this topic of deal sourcing technology and AI specifically. I think access to the data, the technology that can automate a lot of these steps and really drive targeted processes like you're describing, Heather, have become more accessible, they've become more affordable. The technology has become much more, much easier.
And so I think we are seeing broader uptake and use of those tools towards more and more firms, at least adding a direct sourcing process into the mix of ways that they're finding deals. I mentioned at the top, we just ran a survey with a bunch of private equity dealmakers, and we got a couple of surprising results, some of it not so surprising, some of it's surprising.
About 70% of the people who responded to the survey said that they have used AI-driven tools for productivity. I thought that was kind of a surprisingly, and we didn't ask that in a narrow deal sourcing way. We asked that just broadly in your, you know, professional work. So that was kind of surprising me, and 10% not using AI technology at all.
And some of that may have to do with, obviously, accuracy and reliability. The results you're looking at when you're using AI-driven tools has been an issue. But close to 50% of the people we surveyed still see the accuracy of results as the biggest obstacle to using these kinds of tools. More broadly. So we're at this interesting point, I think, in the adoption of these tools, where it's happening really fast, the evolution of these tools and the capabilities is really, really happening fast.
But surprisingly, there are still some people sitting on the sidelines. But I'd love to. I think this is a really valuable topic for a lot of people listening in today. Would love to hear you guys talk a little bit about your own experiences, your firm experiences.
Heather, I think ahead of our session today, you talked about, you know, how far you feel like you're ahead of the game a little bit, where this is concerned with these tools. Maybe we'll start with you, but I'd love to get each of your takes on this topic.
HM: Yeah, I had, but you know, to be behind, not in the near term. And that's okay with us. And I'll explain why. We hired a CTO about two years ago, and I cannot emphasize this more upon you all how game-changing it was to have business leadership, at you know, you know, running our technology strategy and data platforms, at a private equity firm our size. Complete game changer.
And I would say, you know, the data, the anecdote I threw out earlier was, the head of ChatGPT, OpenAI, called our CTO last month and said, what the hell are you guys doing over there? And Tim's like, what do you mean? And he said, well, you guys were the number one user across all of Canada by the number of prompts.
We had over 40,000 prompts for our across our enterprise customers in all of Canada, like, what are you doing? And the reality is, he's built a safe space for us to use AI in a way that protects us and our information from being public, and vice versa, and letting people do what they do. This younger generation, it's just giving them a safe place and a tool that's protected cyber-wise and whatever else, and letting them play.
It has been a game where we have 175 bots deployed across the firm. I have a deal screening bot called DEELA, D-E-E-L-A. Yes, I use ChatGPT to come up with the name. But you know, it has given me a tremendous amount of efficiency because if anything, my number, like a big chunk of my time is turning deals down.
And the number one differentiator in my mind for BD professionals today is actually responding within 24 hours when a deal hits your inbox. And lots of people just don't respond at all. Radio silence is not a no, and it's crazy. It's a differentiator to be responding quickly to deals. But I use the teaser. It screens it, and it gives me a summary.
It gives me an assessment fit across all our four strategies, and it even drafts an email for me. And it's about 80 to 90% accurate. So those turn downs, when we talk about making a thoughtful turn down and actually saying this isn't what we like, but here is what we like. It's an incredible efficiency tool for us.
And then I will just comment on one other way. We are prototyping something that will really, it works across all the data platforms that we have access to. And drives insight and trends into the types of businesses we want to buy based on a very narrow set of filters within our sectors, within specific sectors, giving us key signals for when it might be coming to market.
It integrates Sourcescrub and, you know, all the data that we see from conferences and trade shows there, I mean, there are lots of things happening. I would say our viewpoint generally, though, he always says, I want to be credible. If I pick a tool and someone else does it better, or it falls apart or it's not safe, that's my ass on the line.
And so I think reputationally, private equity firms are being cautious. We are being cautious, which is why I say we're ahead now. But I know there's lots more tools coming out. We are very intentional and thoughtful about, you know, when we have a tool that it's got length.
MW: So it's interesting automating those kinds of process because it seems to be one of the most interesting use cases for people.
But across the customers we work with, you talk to about them. What's your secret sauce for sourcing and business development? It's all about the quality and personalization of that outreach. It's about you know, and so the idea of automating that certainly is appealing. But, not without its downside approach, and knowing how to do it right, that you need.
HM: It’s got to have that approach and tone that you need, right? And that's why it's you can train those. It's actually mind-blowing.
JB: And I was, yeah, I was on a panel for you know AI and P and you know some lawyers on the panel and some bankers on the panel and everybody, you know, a lot of concerns around, just data, right? But if you operate on a closed-loop system using various forms of AI, you know, we do a lot of direct outreach internally every time we get an active thesis.
You know, a lot of calls as well as, you know, how can you customize and be professional? But then going back to, I think, to Heather's point, how do you stand out as a BD professional, offer concise, clear feedback. You do that on the 1000 deals you see a year, which is that easy just looking at my inbox already.
But after being on this panel. But you've got to do it. I mean, that being responsive, being clear, concise messaging and doing it, I think BCG had a report, it was like, how do you become 37% more efficient in your current role? And somebody came to you and said you could have four hours of work back on your calendar. You know AI is the way to do that and figuring out ways to be more efficient, especially to prevent every…
HM: I want to make one more point because I think it's exactly the next tier for AI, for sourcing, and for PD overall. And we're doing it already is. How do you query all the data that we've accumulated as a firm in our CRMs, in our fundraising databases?
It's not just about doing a smart search; it's about using an AI-powered tool to query the data. Hey, what's give me a summary of our relationship with Piper Sandler? You know, and it just immediately spits out like everything or summarize, give me the trends that we're seeing in data center cap rates over the last 12 months. Picking all our email’s interactions that we've uploaded.
So my you know, I've always been about a single source of truth for data. The reason to have good data and quality data is to use AI eventually to query it. And I know DealCloud and others are coming out with similar tools very soon.
MW: Yeah. And that's where you mentioned hiring the CTO not so long ago. And certainly this is where the value of the CTO comes in, having data sets that are knit together and accessible through some of these new and really exciting tools coming on the market now that do the kinds of things you're talking about.
But if you don't have the right data and the right infrastructure, you're not going to get very far with it. But, Justin, Kate, maybe we can get your voices in here from the investment banking side, the way AI is being used effectively. What have your experiences been? Where are you finding real promise and potential? What advice might you give to people listening in?
JL: Yeah, well, I'll maybe I'll go because it'll be very short, Mike. And I'm curious and, I'm curious, based on your your survey, if I think you said 10% are not using at all, if there was any option for folks to select, compliance or regulatory hurdles that prevented them from using those technologies, because if so, I don't think I completed the survey, but I and my colleagues would be in that in that bucket.
And so what I'm told is and and maybe helpful for the audience, Kate mentioned their transaction, Kipps’s transaction with CapitalOne. Clearsight just, just over three years, actually, plus or three and a half years ago now, we consummated our own transaction and sold ClearSight to Regions Financial, which is a publicly traded bank holding company with about 150 billion in assets based in Birmingham, Alabama. And they've been a fantastic partner.
But as part of that, you know, the evolution and kind of processes, around acquiring any new access to any new technologies, as you can imagine, is a bit more complex. And so we do not have any access today. I am told we are getting access to a closed-loop version of CoPilot, as well as I can't remember which LLM, I think it's a, ChatGPT subscription and kind of, you know, closed sandbox or whatever the right nomenclature is for being able to use that, in the next couple of months. But have not been able to use those technologies today.
HM: But for your personal use.
JL: Anybody from Regions would never do that.
(Laughter)
HM: Let's use it personally.
KT: We were in the same boat as you, until literally last week, and we just got access to CapitalOne's approved ChatGPT and Gemini.
And so we're still, digesting and learning, figuring out how to utilize it in the best ways. You know, I think with respect to buyers, that's a tough one. Because that really is your internal IP, right? Also, knowing and Heather, I think you raised this point, you know, a lot of what I and my colleagues spend time on is getting to know the buyers under, that's our IP. It’s understanding exactly what SAIC or Booz Allen or private equity A, B, or C, and their platform companies is looking to acquire so that we can say these should be the five, ten, 20 buyers that should be on this list.
And we have those relationships, so that the ChatGPT tools will only be as good as the data in your CRM if you're going to use that. Otherwise, it's getting that information out of our collective heads into a format that we can use. So we're still working through getting that into our CRM. I think that'll be, probably, a slower change because it's so strategic, and it's so. And a lot of times, what we do is just on a deal recently we were thinking through who to use our, you know, seven bullets on for pre-market meetings with an asset that's of size that we're bringing to market.
And honestly, what I did is because I could easily make an argument to put 30 buyers on the buyers list. I set up 16 calls with the 16 best buyers and did a pre-pre-market meeting where I set up these, you know, half an hour conversations, and just like, hey I know we chatted a month ago, but right now what are you looking for.
And then we distill those 16 into seven people that we recommended for the fireside chat. And so that's going to be something that I think will continue to be a banker's IP. But how can we leverage AI to help us with teasers to help us with SIP development, to help us with some of the more junior type activities, to make us more efficient and allow senior bankers to spend less time reviewing, processing, doing some of those administrative type work, and doing more of those higher value activities like interacting with the public companies in the largest and most active buyers, so that we are our IP and our brains is as sharp as it can be.
So I think it's evolving. We haven't necessarily gotten there. I think if you ask us to ask me this question in 12 months or 24 months, it'll be a much more interesting answer, just given that we just got access to our AI tool.
JB: And I would say one last thing. You know, anybody dipping a toe in the water and just curious about this space.
You know, Taylor at MetalAI. He's up in New York. They're doing a lot of really interesting things on aggregated data from your CRM and synthesizing that data. A lot of that stuff Heather talked about, with their CTO, we've got a CTO as well. I think anybody just even curious learning about how to do that would be a great resource.
And obviously, our host at Sourcesctub, we look at, you know, all of within our thesis, you know, what's our buyer or market universe platforms. How many people have they added on LinkedIn? Some of those AI trends that you're not going through and manually doing that, I think is crucial is how to get smart quick and focus in on the right targets
MW: To Heather's point, the more that you can harness the data that you've already got available, right, the more effective you're going to be. And that's been one of the challenges historically, is to take advantage of all the data points that you do have.
And I mean, a lot of the stuff is really adding a lot of power to stuff that you've already got, you know, sitting around.
Justin, I just I looked up some of the results from that survey because I was kind of curious about your point, about compliance and legal. And when you look at the question asking about obstacles, 10% of the people responding said that it was compliance and legal.
So it's probably not a coincidence that as 10% are sitting on the sidelines, I think it's the same. I think it's that same 10%.
JL: Yeah. Makes sense.
MW: So we are at the time, I think that's probably a good place to leave it. As we wrap up, I want to say thank you very much. John. Justin. Kate. Heather, it's been a great conversation.
I really enjoyed myself. Really appreciate you guys joining us today for the conversation. And, David, at PE Careers, is a great resource for everyone out there. I think everyone who's joined the conversation today understands that, but I want to say thank you to you for allowing me to host the conversation and say thanks for putting this all together, getting such a good group together.
Really look forward to the next one. Thank you guys again for the time, and I hope you all have a great day today.
HM: Thanks, everyone.
KT: Thanks, everyone.
JB: Thanks, guys. Appreciate it. Thanks, Mike.
