Private Equity Shifts to Deal-by-Deal Investments Amid Market Downturn

Amid a challenging market environment and a desire to reduce management fees, private equity firms are increasingly adopting a deal-by-deal investment approach, representing a departure from traditional fundraising structures. Data from private equity advisory firm Triago reveals a record $31 billion was deployed in deal-by-deal investments last year, more than five times the amount raised in 2019. Over 650 companies were acquired through this model in 2023, doubling the total from five years ago.

Prominent financial entities, including hedge fund Elliott, investment giant Hamilton Lane, and European credit firm Hayfin, are reportedly exploring or already engaged in deal-by-deal transactions, reflecting a broader trend in the industry. Notably, firms like FGA Partners have taken a unique approach, focusing exclusively on deal-by-deal transactions with a specific emphasis on leveraged buyouts and risk mitigation strategies.

FGA Partners, for instance, is structuring leveraged acquisition deals in 2024 that incorporate debt risk mitigation as part of deal, eliminating the need for management fees. The firm’s methodology includes partial exit options, allowing acquisition targets to remain involved and benefit from growth throughout the process.

The deal-by-deal approach offers a more flexible and tailored investment structure, appealing to various investor profiles, including insurance companies, sophisticated family offices, and sovereign wealth funds. The model deviates from the traditional private equity fundraising strategy, where firms raise funds over a decade, charge management fees of 1.5 to 2 percent, and take a 20 percent share of profits when portfolio investments are sold.

The broader private equity industry has faced challenges in recent years, with difficulties in selling portfolio investments, convincing investors to commit to long lock-up periods, and grappling with a surplus of client funds not invested amounting to $4 trillion. Deal-by-deal transactions present a more transparent and efficient option for investors, allowing them to select specific companies and benefit from lower fees compared to traditional fund investing.

“Raising one big fund for acquisitions can put an investor in limbo, if investments aren’t made then they can essentially lose other opportunities along the way if their funds are committed for a time period. Deal-by-deal transactions bring clarity and opportunity, this is why we are solely taking this approach as it benefits everyone involved”. said Louis Velazquez, Managing Partner at FGA Partners.

Sunaina Sinha Haldea, Head of Private Capital at Raymond James, noted, “Deal-by-deal transactions are favored by institutional investors because they have the opportunity to cherry-pick their preferred companies. These deals typically come with lower fees than traditional fund investing.”

Investment banks are also entering this arena, with California-based Houlihan Lokey announcing a deal to acquire Triago in December 2023. The shift towards deal-by-deal investments is expected to continue as executives seek alternatives in a difficult fundraising market, appreciating the clarity and flexibility that this approach offers.

Richard Wells
Financial Desk