The many commercial relationships between a JV and its parents can cause JV partners to butt heads. Here’s our advice on how you can design these relationships to keep the peace.
November 2021 – We recently benchmarked the corporate development functions of 24 companies across the renewable energy and chemicals industries. Our goal was to understand how firms organize corporate and business development to execute M&A, JV, investments, and partnership transactions, and to give some dimensions to their deal funnels and close rates.
Key findings from our research include:
- Deal Flow: 80% of companies screened over 100 opportunities per year, and almost all chemical companies have seen a material uptick in opportunities being brought to them, especially related to the circular economy – which is also bringing an influx of new kinds of partners and opportunities (from small technology start-ups to end users) that are driving deal teams to rapidly expand their internal capabilities to effectively evaluate such deals
- Deal Origination: Beyond using investment banks and internal teams, companies are using a range of methods to source deals (Exhibit 1). 17% of companies use third-party scouts (individuals typically under a retainer- and commission-based contract in specific markets) and 38% run internal technology forums to source opportunities, while 8% fund or otherwise participate in incubators and accelerators and 13% participate in third-party venture funds
- Corporate Venture Capital: In an expanded dataset including the same 24 renewable and chemicals companies, plus an additional 34 oil and gas and mining companies, we tracked whether companies have set up their own corporate venture capital units; 64% of those we surveyed have done so, with the high number driven mainly by the largest renewable energy players (e.g., major European power companies) as well as the oil and gas and chemicals companies in our dataset
- Close Rates: Second and third quartile companies in our dataset closed between 20 and 43% of deals that passed the first screening gate and entered into serious negotiations, with top quartile companies closing more than half of deals they seriously consider; M&As and JVs had similar close rate, though for very different reasonsClose rates in M&A are principally driven by the competitiveness of the process, with multiple potential acquirers engaged in the auction process (e.g., signing confidentiality agreements, … Continue reading
- Resourcing: On average, corporate development teams closed 0.3 deals per year per FTE, with the most efficient company in the dataset closing 0.88 deals per FTEWe did not benchmark companies’ deal complexity, relative reliance on external advisors, and other factors that would impact the size of the corporate development teams.While we did not benchmark deal team skills sets, a separate analysis showed that corporate development leaders report higher transaction success rates overall when the corporate development function … Continue reading
- Non-Deal Roles: 67% of corporate development teams are responsible for or are deeply involved in corporate strategy and portfolio analysis and optimization, and 47% have meaningful roles post-close, in launch management or governance, including post close integration, sitting on venture boards, or managing partner relationships (Exhibit 2)
These numbers are directionally consistent with what we have seen in other asset-heavy sectors, including mining and industrials, as well as more technology-driven sectors, such as pharmaceuticals and high-tech.
Companies are also rethinking the processes and tools they have to support corporate development – especially in light of the uptick in technology- and sustainability-related JVs, minority investments, and non-equity partnerships. We have benchmarked these processes across several industries (Exhibit 3). Our dataset includes the same 24 renewable energy and chemicals companies from Exhibit 1, plus an additional 34 companies in the oil and gas and mining sectors.
We found that nearly half (47%) of companies have revised their investment stage gate process to explicitly accommodate JVs and non-equity partnerships, including clarifying different decision thresholds, approvers, and input requirements for each gate based on certain transaction types. For instance, a deal lead managing a potential JV transaction through an internal review might be expected to provide an analysis of the counterparty’s partnership history, frame alternative venture structures including different scope, ownership, and control combinations, and a lay out a vision for potential evolution and end-game scenarios. These issues are highly relevant to evaluating a potential JV transaction, but much less so in an M&A deal.
Similarly, 43% of companies have developed a JV Major Clause Guide – that is, corporate guidance establishing minimum and preferred language across key provisions and terms in JV agreements. The purpose of such a document is to ensure that new JV agreements address key risks and reflect prior learnings and best practice.See Tracy Branding and James Bamford, “No Clause for Concern: Developing a Major Clauses Guide for Better JV Transaction Structuring,” The Joint Venture Exchange, April 2019. And 29% of companies have explicitly included lookbacks as a final gate at the conclusion of their deal process to identify lessons learned for future deals, and drive them backwards into their JV-related terms and processes.
Reflecting on our conversations and looking to the future, the next frontier of corporate development functions is likely to include improvements in four areas:
- Evaluating (partnership) investment performance – that is, acting more like a fund manager or private equity firm, with more consistent use of deal lookbacks, better tracking of investment performance over time, and more directly linking dealmaker compensation to performance of new partnerships
- Driving more rigor into the transaction structuring and approval process for non-equity partnerships – especially partnerships that entail exclusivity, IP sharing, guaranteed funding, or other company commitments, but traditionally were not subject to the same level of scrutiny as equity deals
- Accelerating the use of big data analytics to evaluate potential transactions and counterparties, including using social media data to evaluate counterparties and their products and services
- Enhancing JV evaluation and restructuring capabilities, especially restructurings other than divestitures or buyouts – i.e., changes to the operating model, financial structure, governance and legal framework
Today, corporate development organizations are taking a more strategic and broader role in many companies – and screening, negotiating, and structuring a more diverse set of transaction. As we would expect, we are seeing that the teams, processes, and tools to support Corporate Development Officers are also evolving within, albeit with mixed pace across firms.
|↑1||Close rates in M&A are principally driven by the competitiveness of the process, with multiple potential acquirers engaged in the auction process (e.g., signing confidentiality agreements, submitting IOIs, participating in management presentations, and making non-binding and binding offers). In contrast, JVs are rarely competitive processes with multiple counterparties negotiating in parallel; the ~20-50% close rates of JV transactions are driven by the number and complexity of business issues to solve (e.g., venture authorized scope, non-competes, contributions and ownership, voting and control, exit rights and protections). This article does not provide any accounting or legal advice or recommendations.|
|↑2||We did not benchmark companies’ deal complexity, relative reliance on external advisors, and other factors that would impact the size of the corporate development teams.|
|↑3||While we did not benchmark deal team skills sets, a separate analysis showed that corporate development leaders report higher transaction success rates overall when the corporate development function directly includes lawyers, tax experts, and those with significant regulatory skills. See EY 2015 Corporate Development Survey.|
|↑4||See Tracy Branding and James Bamford, “No Clause for Concern: Developing a Major Clauses Guide for Better JV Transaction Structuring,” The Joint Venture Exchange, April 2019.|