New technology is bringing more deals to private equity firms than ever before, but it is not helping private equity managers close more transactions.
In the third quarter of 2015, the trailing four-quarter average private equity deal flow — reflecting the average number of deals the average private equity firm sees — increased for the seventh consecutive quarter, to 165 from 134 in the third quarter of 2014. However, private equity managers closed 823 transactions in the quarter, a slight drop from 888 deals in the year-earlier quarter, according to Sutton Place Strategies LLC, a New York-based data and analytics research firm.
Nadim Malik, CEO of Sutton Place, said there are two factors to this apparent incongruity.
“No. 1: It continues to be a sellers’ market,” Mr. Malik said. Business owners are not willing to sell their companies at valuations buyers are willing to pay, he said.
“Closed deals will be flat to down, compared to last year while deal flows will be up,” he added.
The second factor, he said, is that overall greater efficiencies in the mergers and acquisitions process is increasing the flow of potential deals to private equity buyers, Mr. Malik said.
“Deals can be shown to more buyers than ever before,” he said. Technological services are making the M&A market more efficient, with deals being shown to a broader audience, he added.
“The way deals are being marketed is changing,” said Richard Morris, corporate partner in the New York office of law firm Herrick, Feinstein LLP. The idea of distribution and advertising for M&A transactions is catching on, Mr. Morris said.
Sellers are marketing deals through a variety of channels including clubs, showing deals through trusted advisers and through networks of private equity funds, he said.
“Some people are putting up automatic data rooms to solicit bids … it’s a more efficient mechanism to market the company,” Mr. Morris said.
Sellers try to anticipate the concerns buyers are going to have, address them and put them in these data rooms, Mr. Morris said.
“It speeds up the process,” he said. “Having technologically enabled mechanics makes the transaction more efficient and reduces the execution risk.”