The formulas, tricks and trade secrets of Private Equity

Middle Market Private Equity

Sample Chapter

I haven’t posted anything opinionated for a while (except suggesting you should quit your job every 6 months), so what better way than suggest I have the middle market private equity ‘recipe for success’.

The role of a middle market private equiteer is divided into, 1) Origination, 2) Analysis, 3) Dealmaking, and 4) Consulting. In simpler terms, 1) you find investees, 2) analyse them, 3) close deals with them, and 4) improve them. (Of course, you then need to exit your investments, but I classify that as dealmaking.) All of this is done to achieve target returns for investors, but more importantly, so you can take lots of carry home.

To find the recipe for success in mid market private equity, we just need to deconstruct each of these roles and understand what is most important to achieve good outcomes.


This refers to finding leads that may turn into investments. You can sit back and wait for bankers to bring you deals, or you can use your resourcefulness to go in search of good deals. Both work, and both have their ups and downs, so it’s best to keep your nets spread wide and options open.

The main problem we face in proactive deal origination is just getting a few minutes of a business owner’s undivided attention. The recipe for success for middle market deals is to be amiable and tenacious. That is, be genuinely friendly to everyone (including receptionists) and try to contact business owners over and over again (not necessarily the same ones; just keep active). I guarantee, if you are nicer and more genuine than your colleagues, and you make MANY more calls than them, you’ll trounce your colleagues in terms of lead volume and quality.


This refers to appraising a business before making an investment, plus the analysis required to help improve the investment later. The main problem in middle market private equity is boiling the ocean. What I mean is, spending too much time building pretty (useless) financial models. The recipe for success in mid market private equity is to ask yourself what matters most and just focus on testing a handful of related hypotheses. Are earnings maintainable and real? Do earnings translate well to cash flow? Are there any anomalies regarding Capex or working capital? Are exit opportunities plentiful? Etc. It shouldn’t take more than an hour with the information already at hand.

Keep in mind, great financial models don’t make great investments; great businesses make great investments. And great businesses aren’t found using financial models; they are found by getting away from the computer and developing your entrepreneurial intuition.


This refers to turning a lead into an investment. The main problem in mid market private equity is losing a deal due to a gap between your offer and the vendor’s expectations. The recipe for success in middle market private equity… well, it really depends on the situation. Your offer doesn’t just include a monetary value. It may include prestige, future returns, profitable ideas, strategic synergies, and even friendships. If you deconstruct this, you’ll realise that a vendor is influenced by all of these ‘soft’ offerings, and they may choose a lower price as a result, by monetary value is always a trump card. Depending which way the wind is blowing, a vendor can suddenly forget the connection you made and go for the highest price; that’s human irrationality.

But I don’t want to sit on the fence with this one. If I had to say there was one thing that constitutes a ‘recipe for success’ in dealmaking, I’d say it’s transparency. People are blown away when you’re amiable and transparent, especially when they’ve been dealing with ‘bankers’ all day. This theory is in stark contrast to some of my previous theories, but hey, it’s 2010 (that’s my official reason for everything this month).


This refers to giving advice to help improve it your investee. I call this consulting because that’s what it is. You’re not employed by the business, you’re only on the board (or not even that in some cases). And the board is there in an advisory capacity. The main problem in middle market private equity is actually making a difference. Too often, private equiteers mess with the mojo of their investees by trying to implement textbook McKinsey concepts in a world they’ve never operated in. The recipe for success in mid market private equity is to acknowledge your relative inexperience in the investee’s industry and listen to what people say (and talk to them). Then, deconstruct the investee’s issues by focusing on what matters most to desired outcomes. It’s that easy.

Above all, work with your investees, roll your sleeves up and get your hands dirty. Become one of them, earn their respect and be diplomatic with ideas; form ideas together and implement them together. Don’t be the private equiteer that drives up in his/her Porsche and walks around with some superiority chip. You don’t effect change unless you can connect.

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