Intermediation in private equity refers to a middleman that facilitates a deal (business brokers, investment bankers, corporate advisers, strategic consultants, etc). I talked briefly about intermediation in my post about deal origination, but here I’m going to expand on what I believe are the pros and cons.
Personally, I much prefer to work on proactive deals because you have the chance to build a rapport with the owners and work on a more personal level. The processes created by investment banks typically (not always) take the subjectivity out of the deal, which is the foundation of most private equity deals. With that said, the higher prices typically achieved with intermediated deals suits private equity firms when they want to exit investments. So, it’s really a case of “can’t live with them, can’t live without them”.
Contrary to common belief, investment bankers have feelings too. In fact, bankers think of us (private equiteers) the same way we think of them; as cold, callous, calculating financiers. Sure, we act like close comrades in tête-à-tête, but deep down we boil each others’ blood. You see, investment bankers hamper our dealmaking efforts. They may think we wouldn’t have access to deals without them, but we actually think we’d have a more direct path to deals if they disappeared. We’d understand vendor needs to a greater extent, be able to negotiate more effectively and not have the usual problems dealing with middlemen. So, it’s a little love/hate as you can see.
But, this is a dangerous view. Investment bankers undoubtedly have influence over markets and their clients (who just happen to be our potential investees). And even leaving the investment banker value-add debate to one side, it’s impossible to make a case that states investment banks have no influence over our deals. They are hired as stewards, have pride in this implied stewardship and don’t exactly have a lack of access to private equity firms (or other potential buyers).
So what’s my point? Well, we only hurt ourselves by disrespecting investment bankers. I’m not talking about the kind of disrespect that gets in a banker’s face; I’m talking about the disrespect we try to obfuscate but secretly hope isn’t too obfuscated. The disrespect that says you’re middleman pond scum and we’re the kings that control the money. The disrespect that they feel when we beguile their efforts to manage the transaction with them at its epicentre. However, apart from being pretentious and pugnacious, this disrespect just doesn’t help our cause (and I’m sure Dale Carnegie would agree).
I’ve (secretly) found it pays high dividends to empathise with an investment banker’s soulless benevolent endeavours and to treat them as equals. They provide additional deal flow, intel on the market, hints to handling vendors, notes on competing offers, honesty around expectations and suggestions on deal structuring. But remember that they’re generally quite perceptive, so any egregious attempt to appear best pals will just make the situation worse. You need to find some genuine empathy, which may just be the difference between a great deal and no deal at all. Plus, you never know, your new-found banker friends may even provide good company over a cold ale on a hot summer’s day.