As 2022 comes to a close, dealmakers are facing a new challenge. After the high deal volume of 2021 - which totaled over $5 trillion in M&A alone - comes the worst Q3 in over a decade and the second-lowest quarter in total deal value since 2017.
But firms still have $3.4 trillion in dry powder to invest. On top of that, the M&A landscape has changed: Now more than ever, the companies looking to find funding want firms with deep expertise in their particular spaces.
For private equity to properly address these challenges, a fundamental shift in how firms source deals is needed. Enter thematic strategies and sourcing.
In their simplest form, thematic strategies reflect what your firm believes will capitalize on long-term global economic trends. The key to thematic strategies is the forward-looking macro stance they take on target opportunities and investments, such as environmental sustainability with ESG investing.
Thematic strategies allow firms to address target companies' desires for domain expertise while simultaneously strengthening their own position and best setting themselves up for the future. By identifying a theme that enables your firm to take advantage of current global trends and influence future shifts, you're setting your firm up for success on levels far beyond what any generalist strategy might yield.
For example, imagine your firm had based its early 1990s investment strategy on the belief that the internet would become a major part of daily life for most of the world. During the early 90s, your firm would have potentially sourced and won deals with companies that were part of that trend: IBM, Nvidia, Apple, Microsoft, etc. - making up quite a valuable thematic portfolio. A more modern thematic investing strategy might be to capitalize on the advent of cryptocurrency or the legalization of marijuana in the US.
That said, it is important to note the difference between thematic investing vs. sector investing. Using the cryptocurrency example, a thematic strategy means investing in not only the hardware companies that make crypto mining possible, but also the cryptocurrency companies themselves, as well as the financial services firms that help people and businesses adopt cryptocurrency. In contrast, sector investing looks only for potential deals in a particular sector or industry, such as healthcare or manufacturing.
Here's a thematic investing example from Partners Group, a private equity firm in Switzerland:
As you can see, Partners Group thoroughly believes in the importance of digitization and automation, especially as it relates to the healthcare industry, and has built its thematic strategy around this. They even have multiple investment theses for opportunistic deals, as well as theses that dictate the deals they will actively source themselves.
Similar to Partners Group,if your firm has an investment thesis, it's already well on its way to thematic investing, and needs to take the next step to determine its overall thematic strategy. Here are our top tips for building and executing your own strategy:
Collecting and analyzing data to create and execute your investment theme is non-negotiable. For your thematic strategies to be successful, you must do the appropriate research to identify the right socioeconomic trend for your firm. The process here can be very similar to the one you might take for a college thesis: start with a hypothesis (e.g., "We believe the importance of remote work will only increase, even after the COVID-19 pandemic."
Then, delve into the companies and industries related to your thesis. (Our example would be companies that support telecommunication, project management, etc.) How many are there, and how have they performed in the past 3, 6, 12 months? To what businesses/industries are they related and how have those performed? What funding events have happened for those companies?
By following this process, you're not only testing your potential thematic investing strategy but also mapping your target market and documenting important information to be more knowledgeable in your newfound niche. Dealmakers can then use that information and data in myriad ways - for example, getting specific with messaging to target company executives. As more businesses are looking for non-generalist firms, this type of personalization shows you're serious about your chosen theme - and them.
Additionally, as the burst of the housing bubble and subsequent market crash in 2008 shows, keeping an eye on the health of the companies and industries that relate to your chosen theme can help you know when to get out and potentially avoid disaster.
In a recent survey Sourcescrub conducted, we found that traditional deal sourcing methods are still the most popular among firms. Nearly 90% of respondents use networking,with conference lists and industry guides a close second (84%).
The problem that most dealmakers face with these traditional approaches is sorting through inbound opportunities can feel like finding a needle in a haystack. On top of that, slower inbound deal flow and increased pressure to find more valuable deals because of economic uncertainty means dealmakers should move toward a more outbound, thematic sourcing strategy. In doing so, your firm can build the domain expertise companies want while allowing you to focus and find the right investment opportunities.
But embracing direct deal sourcing doesn't mean abandoning the traditional methods entirely. By doing the research and making connections in the circles related to your firm's thematic strategy from the data you collect, you can build specialized lists of "who to know." You can also tailor your conference strategy to attend those where companies that match your theme will attend. With thematic sourcing (and the right tools), your firm can have the best of both inbound and outbound
The key to being data-driven and embracing outbound is arming yourself with the right technology, which takes the form of 3 separate components: a deal sourcing platform, CRM, and marketing and sales automation tools.
The advantage of a data services or deal sourcing platform is the data and insights you are able to surface to your business development teams. These platforms enable you to find private, bootstrapped opportunities your firm would've never found otherwise. They can also help you do better research more easily by tracking target companies' headcount growth, product announcements, conference attendance, and more.
The second component, a CRM, is how you will more easily track deals in your team's sales pipeline. When your tech stack is working at full efficiency, your CRM and your data sources will integrate with each other so your team always has the information they need at their fingertips. The last layer, marketing and sales automation, is how your firm can streamline their processes and help reduce manual, repetitive tasks.
For more information on how these 3 components work together to improve your deal flow, check out our guide on the modern dealmaker's tech stack (with one bonus component we didn't discuss here!).
If so, your next step is to start researching. Sourcescrub can help. With over 115,000 lists and sources, you can rest assured your firm will find the information it needs to build and execute your own thematic strategies. Let's talk!