BUILDING AN M&A FUNCTION FROM SCRATCH IN 2024? AVOID THESE COMMON

2023 was a year to forget for large-cap M&A, as mismatched valuations meant many IMs were abandoned. Global M&A volume was down 20% on 2022 according to Bain & Co, rising to 35% amongst private equity-backed deals. That meant many larger assets stopped building their M&A functions completely, instead switching their focus to PMI/Operational activities, and therefore reducing what is an expensive headcount area when not required.

While this wasn’t the case for all large cap assets, the current climate has sparked a shift in creative deal-making, with new priorities and targets emerging for those looking to deploy capital. Large-cap investors have become more creative in seeking out public-to-private deals (P2P), taking advantage of stock market declines to snap up turnaround opportunities at discount prices. Meanwhile, mid-market M&A has become attractive as a more risk-averse option, enabling investors to add value to their existing portfolios.

With both these trends in motion during 2023, Altus Partners saw a significant uptick in private equity funds looking to build M&A functions from scratch. Around 40% of our M&A and Corporate Development mandates last year were for organisations looking to make their first hire, spanning P2P deals and mid-market assets. Interestingly, over half of these were following unsuccessful attempts to fill the role directly or through other search partners, demonstrating the need for a considered approach.

Whilst there are never any guarantees when making any hire, we noticed a few key mistakes that companies consistently make when bringing in their first M&A specialist. In turn, these give firms some important pointers on ensuring they get it right.

Hiring at the wrong level

There is no one-size-fits-all profile for a first M&A hire, and we frequently see companies rush the process and hire somebody who is either too senior or too junior for their requirements.

In many cases, the first instinct is to opt for a ‘Head of M&A’ candidate; somebody who has a track record of running and completing numerous successful deal processes. But this kind of experience comes at a cost and is potentially surplus to requirements in a business where M&A will be opportunistic and tactical, at least to begin with. The result is a mismatch and frustration for both parties.

To avoid a disappointing outcome, companies should invest time in gauging what their M&A requirement is, what part of the cycle the individual will be involved in - origination, execution, strategy, or a bit of everything – and how much support they will have, internally, or externally from investors. If you’re looking to scale up quickly and carry out large-scale M&A on an international basis then a ‘Head of M&A’ might be what you need. But, if you’re looking for an all-rounder who is happy to get stuck into day-to-day deal-making, it may be better to hire somebody who is a level down from this.

Thinking advisory is the answer

Another common approach is to opt for a candidate with a pure advisory or investment banking pedigree, rather than prioritise in-house business experience. There are of course exceptions, but the advisory route should be approached with caution as it often doesn’t translate well into corporate M&A. Working as a consultant within a team under a senior partner is very different to operating on the front line of M&A within a business, making your case to a range of internal stakeholders. It is nearly always preferable to ensure a candidate has proven themselves within a frontline business environment, whether that is within private equity, or through a combination of direct advisory, investment, and corporate work.

Leaving it too late

If M&A is an important strategy for your business in 2024, then moving quickly is vital for two reasons. Firstly, mid-market M&A is very active right now and the competition is increasing all the time. Finding the right person and bringing them up to speed doesn’t happen overnight, so getting started now will ensure you can start originating and executing deals as soon as possible

Secondly, bear in mind the importance of an M&A function when it comes to exit valuation. While the vast majority of private equity-backed C-suites/senior management teams have M&A within their skillset, potential buyers still prioritise those businesses with dedicated capability in-house. Large-cap private equity buyers want to see an established M&A team and a track record over the prior 18 to 24 months. Without this, the valuation multiple and eventual deal success could be at risk. M&A strategy is one thing, but a proven track record of autonomous execution is another.

Failing to deliver on equity assurances

Talent shortages mean good M&A professionals are at a premium and if one business can’t deliver, another won’t hesitate to step up. For private equity-backed senior management and management roles, equity is an integral part of building a successful strategy through M&A and while there may be legal barriers to giving equity immediately, if it is promised then that must be honoured within a reasonable timescale. The alternative is valuable onboarding time wasted, and a costly vacuum in the M&A function, as a new hire goes elsewhere.

Not consulting specialist expertise

M&A is a highly specialist area, with many nuances around skillset, experience, and behaviours, that can impact the success of a new hire. Running a successful hiring process demands a methodical approach, from mapping out the need and current structure to scanning the available talent pool, reviewing what has worked elsewhere, and finally assessing potential candidates against your criteria. Putting the time in at the outset, and consulting specialist expertise is more than worth it to ensure a successful hire and faster ROI for your business.

Here at Altus Partners, we specialise in placing M&A professionals of all levels within private equity-backed businesses and we have the network, capabilities, and experience to get it right, first time.

To discuss any of the any of the topics in this article further then please reach out to Philip.hodson@altus-partners.com