Business Development - Growing Importance in Private Equity

The role of business development in private equity has evolved from a mere afterthought to a pivotal function. Traditionally, private equity firms would often distribute business development tasks among vice presidents, principals, or even the entire team. This approach, however, diluted the focus and led to missed opportunities, hindering growth. But as the landscape has shifted, so has the recognition of the importance of dedicated business development roles in driving relationships with intermediaries and shaping the overall strategy for the deal pipeline.

According to a piece from 4Degrees, the demand for private equity business development professionals has surged, especially within lower middle-market and middle-market private equity firms. This rise can be attributed to the realization that these professionals can foster relationships, ensuring a steady flow of deals and opportunities.

This sentiment is echoed in an article from DealCloud, which highlights that general partners are now prioritizing private equity business development more than ever. Leading firms are appointing dedicated professionals to this role, aiming to outpace their competitors. Data from the Deal Origination Benchmark Report by Sutton Place Strategies further underscores this trend. In 2017, only 47% of private equity firms had at least one in-house professional dedicated to business development. By 2021, this figure had risen to 70%.

The benefits of this dedicated approach are manifold. With more professionals focusing on business development, other dealmakers can concentrate on analyzing and evaluating deals, managing investors, conducting due diligence, and engaging with management. This division of labor ensures that each function receives the attention and expertise it deserves.

Moreover, in the current private equity landscape, characterized by a record amount of dry powder and heightened competition, standing out is a challenge. New firms are entering the fray, and aggressive bids have rendered many acquisition targets unprofitable. As per DealCloud’s 2022 Dealmaker Pulse Survey, differentiating oneself in this market is the top challenge for acquiring firms. By prioritizing business development, firms can project an image of a winning acquirer, attracting stakeholders and intermediaries.

Importantly, limited partners (LPs) are keenly aware of the efforts a firm puts into business development. They recognize that a firm willing to invest time and resources in finding the right investment fit is more likely to execute deals that yield consistent returns within the expected timeline. This commitment to diligence signals to LPs that the firm is serious about its investment strategy.

As highlighted by Middle Market Growth, the evolution of the business development role in private equity firms signifies its growing importance. Firms that prioritize this function are better positioned to build profitable relationships, derive insights from their activities, and ultimately, stand out in a competitive market.

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