Detailed Case Study: Mastering the Deal Thesis in Private Equity

Introduction

In the competitive landscape of private equity, the success of an executive often depends on their ability to craft and communicate a compelling deal thesis. This case study, based on a meeting led by Gerald Moran O’Dwyer II on August 13, 2024, explores the critical elements of creating a deal thesis that resonates with private equity investors. It captures the nuanced presuppositions of the participants and the strategic insights provided by Gerald, offering a comprehensive guide for executives aiming to succeed in the private equity space.

Background and Context

The meeting brought together a group of executives, including Patrick Szaroletta, Saibal Sengupta, Dr. Joe, Scot Bernstein, and others, who were at various stages of their private equity journeys. The focus was on understanding the importance of a deal thesis, how to present it effectively, and how to align it with the expectations of private equity firms. Gerald led the discussion, addressing each participant’s concerns, and providing detailed examples and guidance.

Key Presuppositions and Gerald’s Responses

1. Patrick Szaroletta’s Presupposition: Personal Background vs. Deal Focus

• Participant’s Assumption: Patrick believed that the 30-second introduction at a private equity conference should primarily focus on his personal background and experience. He assumed that highlighting his credentials would be crucial in making a strong impression.

• Gerald’s Response and Presuppositions: Gerald immediately redirected the focus to the deal thesis, emphasizing that in the private equity world, the deal itself takes precedence over personal background. He outlined that the introduction should be structured to prioritize the specifics of the deal—such as sector, target company size, revenue, EBITDA, and growth strategy—before briefly touching on the participant’s background.

Gerald’s Presupposition: Private equity professionals are deal-centric, and their primary interest lies in the potential returns of the deal rather than the individual’s past achievements. Therefore, the introduction should reflect the participant as the embodiment of the deal thesis, demonstrating their understanding of the target market and growth opportunities.

Example: Gerald provided a template: “Hi, my name is Patrick. My thesis is focused on acquiring a company in the [specific sector], with a target revenue of $30 to $50 million and an EBITDA margin of 10-15%. I plan to grow this platform through organic means and strategic add-ons, particularly in areas with high fragmentation, such as [specific sub-sector]. My background includes over 20 years in [relevant industry], where I led successful expansions and M&A activities.”

2. Dr. Joe’s Presupposition: Revenue vs. EBITDA in the Deal Thesis

• Participant’s Assumption: Dr. Joe was unclear about whether to emphasize revenue or EBITDA first in his 30-second pitch. He assumed that the order might significantly impact the effectiveness of his introduction.

• Gerald’s Response and Presuppositions: Gerald clarified that while both revenue and EBITDA are important, the key is to communicate them clearly and concisely. The order is secondary to the substance; both metrics should be included because they provide a comprehensive snapshot of the deal’s financial potential. He reinforced that the focus should be on presenting a well-rounded financial picture that resonates with private equity investors.

Gerald’s Presupposition: Private equity firms are interested in a complete financial picture that includes both revenue and EBITDA, as these metrics are essential for evaluating the viability and scalability of a deal.

Example: Gerald recommended a structure: “Our target is a company with $30 to $50 million in revenue and $5 to $7 million in EBITDA. This company operates in a fragmented market, allowing for significant growth through strategic acquisitions and operational improvements.”

3. Scot Bernstein’s Presupposition: The Perfect Deal Thesis

• Participant’s Assumption: Scot struggled with the idea that his deal thesis needed to be fully developed and perfect before presenting it to private equity firms. He was concerned about the quality and completeness of his thesis.

• Gerald’s Response and Presuppositions: Gerald addressed this by highlighting the iterative nature of developing a deal thesis. He encouraged Scot to start with what he knows and refine the thesis through interactions with industry professionals and private equity firms. Gerald emphasized that a deal thesis is a living document that evolves over time, and the key is to get started, gather feedback, and make adjustments.

Gerald’s Presupposition: Perfection is the enemy of progress. The private equity journey is about iteration, learning, and adapting. A deal thesis is not a static document but a hypothesis that needs to be tested and refined.

Example: Gerald advised Scot to start with a basic thesis: “I am focused on building products, specifically targeting companies in the $25 to $40 million revenue range, with a history of family ownership and operational inefficiencies that can be improved through strategic investments. This market is highly fragmented, offering ample opportunities for consolidation and value creation.”

He suggested that Scot should use this as a starting point and refine it based on feedback from private equity firms and industry experts.

4. Saibal Sengupta’s Presupposition: Need for Specific Targets

• Participant’s Assumption: Saibal believed that he needed to have specific acquisition targets identified and possibly even under negotiation before presenting a deal thesis to private equity firms.

• Gerald’s Response and Presuppositions: Gerald dispelled this notion by explaining that the private equity process is more about building relationships and exploring opportunities than having a deal ready to close. He shared an example of a deal falling apart at the last minute, emphasizing the importance of maintaining a strong pipeline and understanding that a deal is not real until it is closed.

Gerald’s Presupposition: The process of identifying and securing deals is ongoing and fluid. The focus should be on building a robust funnel of potential opportunities rather than fixating on having a specific deal in hand.

Example: Gerald recommended that Saibal focus on his overall acquisition strategy rather than specific targets: “My thesis is centered around the HVAC industry, where I am targeting manufacturers in the $30 to $50 million revenue range. However, I am also exploring opportunities in the service sector, which is more fragmented and offers better growth potential through add-ons. My approach is to build a pipeline of potential targets, starting with companies that align with my strategic vision.”

Gerald’s Strategic Insights and Examples

1. The Executive as the Deal Thesis

• Insight: Gerald emphasized that in private equity, the executive is not just presenting a deal—they are the deal thesis. This means that the executive’s expertise, vision, and strategic thinking should be seamlessly integrated into the deal thesis.

Example: An executive with a background in consumer goods should present a thesis that reflects their deep understanding of that industry. For instance, “I am targeting a consumer goods company with $40 million in revenue, operating in a fragmented market with significant opportunities for brand expansion and product line diversification. My experience in leading brand turnarounds and executing strategic growth initiatives will be pivotal in driving this company’s growth.”

2. Speaking the Language of M&A

• Insight: Gerald stressed the importance of using the language of M&A—revenue, EBITDA, market size, growth strategy—when communicating with private equity firms. This language allows private equity professionals to quickly assess the viability of a deal.

Example: Instead of saying, “I want to buy a company and grow it,” an executive should say, “I am targeting a $50 million revenue company in the automotive sector, with a 12% EBITDA margin. My plan is to implement operational efficiencies that will boost EBITDA to 15% within three years while expanding market share through strategic acquisitions.”

3. The Private Equity Journey is Iterative

• Insight: Gerald underscored that the private equity journey is iterative, with the deal thesis evolving as new information is gathered and relationships are built.

Example: An executive might start with a thesis focused on a specific sub-sector, such as “I am targeting regional HVAC manufacturers with $20 million in revenue.” However, after discussions with private equity firms, the thesis might evolve to include service companies within the HVAC sector due to their recurring revenue potential and lower CapEx requirements.

4. Networking and Feedback are Crucial

• Insight: Networking events like ACG and BlackmoreConnects conferences are critical for refining the deal thesis. These events provide opportunities to gather feedback, learn from others, and make warm introductions to private equity firms.

Example: An executive attending an ACG event might initially pitch a thesis focused on manufacturing. After discussions with attendees, they might pivot to include service companies in their thesis, based on feedback that service sectors offer better growth potential through consolidation and recurring revenue streams.

Potential Examples and Applications

Example 1: Shifting Focus Based on Feedback

• Context: Saibal initially focused on acquiring HVAC manufacturers but shifted his thesis to include service companies after receiving feedback from a private equity firm.

Application: This example illustrates the importance of being open to feedback and willing to adjust the deal thesis. Saibal’s shift from manufacturing to services in the HVAC sector not only broadened his scope but also aligned his thesis with the preferences of private equity firms that favor fragmented, service-oriented industries with recurring revenue models.

Example 2: Building Products Industry Strategy

• Context: Scot Bernstein, with a background in building products, struggled with formulating a deal thesis. Gerald advised him to focus on niches with high fragmentation and consolidation potential.

Application: Scot could start with a thesis like, “I am targeting family-owned building products companies in the $20 to $40 million revenue range, focusing on those with outdated operational processes that can be modernized to improve margins. My strategy involves consolidating these companies into a larger platform, leveraging economies of scale and improving distribution efficiency.”

Example 3: Iterative Development of a Deal Thesis

• Context: Gerald emphasized that a deal thesis is a starting point and is always subject to refinement. For example, an executive might start with a broad focus on the healthcare sector but narrow it down to medical devices after gathering market intelligence and feedback from private equity firms.

Application: An executive might initially pitch, “I am targeting mid-sized healthcare providers.” After refining the thesis based on feedback, it might evolve to, “I am targeting medical device companies with $15 to $25 million in revenue, focusing on those with innovative products that have not yet fully penetrated the market. My strategy involves scaling production and expanding into new markets.”

Conclusion

This detailed case study demonstrates the critical importance of crafting a well-formulated deal thesis in the private equity world. By focusing on the deal, speaking the language of M&A, embracing the iterative nature of the process, and actively seeking feedback, executives can significantly enhance their appeal to private equity firms. The insights and examples provided by Gerald Moran O’Dwyer II offer a practical roadmap for executives looking to refine their deal theses and successfully navigate the private equity landscape.

Key Takeaways for Executives:

By applying these principles, executives can better position themselves in the competitive world of private equity, ultimately leading to more successful deals and career advancement.