Deals are getting complex - Are you ready?

Deals Getting Complex!

The CEO of Blackrock - one of the world’s money manager, Larry Fink had once said  “Using technology is critical, It’s critical for us as investors, as we’re spending more time analyzing new sources of data, spending more time creating algorithms on the new sources of data. And we’re using technology to be more connected with our clients to help with financial literacy, to help all our clients navigate all our clients’ money.”

The best Fund Managers including those at Goldman Sachs, JP Morgan or Blackrock are making outsized bets on technology to manage the business of investment. As Fink goes on to say “Technology will change the entire eco-system.” Technology has traditionally been deployed to reduce Operational Costs and get better access to data. But increasingly it is being used to manage the entire process of Investment Management.

Fund Managers are increasingly developing sophisticated tools and techniques to manage the front end of the business or the Deal Making process.

What allows the top quartile Alternative funds consistently out-perform over long periods is this ability to make the “best deals” happen. They get to the “best-deals” earlier and close them faster. There has been more pixels used and management reports created on what it means to get the best deal, so we will not be rehashing the subject. What we want to highlight is how the use of technology can enhance the deal making opportunities and lead to better returns.

A Harvard study had shown that most dealmakers in the VC community review an average of 80 deals, 20 management meetings, 4 negotiations, 3 due diligence interviews before making a single commitment.. These metrics may change a bit depending on the nature of the Asset class but the fact remains that a large amount of analysis one and time spent before any deal is made. The best managers are able to optimize these numbers better than competition, by processing the information they have about these deals.

They are fully aware of what deals have higher chances of moving forward, which deals have the best chances of succeeding, and which deals have the best backers. As the portfolios grow larger, deals become more complex, and the number of deals rise, the number of data points being tracked keeps rising. It becomes difficult for the fund manager to be aware of the deals and that is where a well-designed deal tracking system becomes important. A sophisticated deal pipeline infrastructure to track the different deals, every stakeholder, the timelines, the offered terms, the financials and the competition.

During the process of analyzing a deal, stalwart deal makers focus intensely on the mechanics of each deal, even those, that they do not consummate. They are aware of the technical nuances of each deal;  just like a chess player who can recall every move from thousands of games, they can recall the specifics of any deal that took place. Some of the best funds are building out the infrastructure that can capture details of every deal that the fund manager has ever known.  It requires obsessive discipline for record keeping and technologies to collect and organize data that can be queried easily.

Legendary deal makers from Warren Buffett to Stephen Schwarzman to Joseph Landy have a nose for the best-deals in the market. They are keenly aware of every deal in the market, seemingly connected to every other deal maker, investment banker and lawyer. It’s almost as if, their internal CRM is always working. What works for the best deal makers, mere mortals can try and replicate through channeling technology served intelligently.  In a study published in Journal of Political Economy called “The Small World of Investing: Board Connections and Mutual Fund Investing” there was a clear link established between better connected managers gaining higher returns. Social technology can take advantage of the many different connections and build out how A is connected to B, and B to C.The younger generation of deal makers are getting intimate with the power of Social media. They are using to to reach new Deals, create a bigger community around their deal strategies.. 

We are often lured by the stories of how some fund manager found the deal of his lifetime while sitting at the bar and talking to a complete stranger. It’s a great story for getting eyeballs. But not comforting to the investors of the fund manager, that his best deal was all due to chance. How often is “chance” repeatable. Investors would rather bet on a Fund Manager who show access to a large number of deals and a process that can filter through these deals, without missing out the best ones.

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Author Pulak Sinha

Founder and CEO 

OnPepper LLC