Deal Sourcing Strategies for Private Equity Firms
Deal sourcing strategies are the underpinning to any prosperous private equity firm. In the past, firms employed a more traditional methodology that emphasized investor relations. These days, however, technology has opened up alternative deal origination avenues that two decades ago would’ve been unimaginable. Below, we’ll discuss common deal sourcing strategies that private equity firms commonly employ.
Deal Sourcing Strategies for Private Investing Firms
On paper, deal sourcing in private equity is a relatively straightforward process by which firms:
- Collect high-net-worth equity funds and seek out investment banking deals occurring within the market.
- Discover who is doing the selling.
- Offer a competitive bid for the deal or formulate their own arrangement.
As you know, while this may seem simple on paper, in practice, it’s anything but. To understand why that is, let us refer to David Teten’s 2010 Equity Study, “Where Are the Deals?” Amongst his many takeaways were two particularly interesting revelations:
- Your average investor in a private equity firm will review at least 80 investment opportunities to make just a single investment.
- It can take a team of 3 institutional investors up to a year to capture a single transaction.
What this figure perfectly illustrates is just how critical lead generation is for private equity. An equity firm must be resourceful and cast very wide nets to draw in several opportunities if they wish to increase their chances of landing that legendary one.
And how can you cast wide nets? That’s where top deal sourcing strategies come into play. Common methods include:
Hiring an In-House Team – A sample of the top 10% of equity firms reveals that they pay special attention to outbound origination. They do this by creating a team where there is at least .75 and 1.25 dedicated deal sourcers for all investment professionals on the team. Such PE funds often use market mapping to locate the most prime investment sectors.
Using Online Platforms to Make Life Easier – Technology has helped streamline many of the processes that once wasted time. Many top equity firms will utilize an M&A platform such as SourceScrub to accomplish the following:
- Enhance or build deals via an optimized sourcing process.
- Reduce the need for guesswork of company information for both private and public companies.
- Ensure all contact information is up to date via integrations with your CRM.
- Track and centralize all data and documentation.
- Better understand your target markets by getting alerts in real time on changes of companies within the market
If you don’t already use one, consider working with SourceScrub’s revolutionary platform to increase your team’s efficiency.
Looking for Deal Signals – Firms with consistently high deal flow year over year – such as TA Associates with 210 accretive acquisitions over the last 5 years and $40+ billion in capital market transactions – make opportunities instead of waiting for them, by leveraging a proprietary sourcing initiative as part of their Business Development strategy. They engage in an origination strategy where they actively look for companies that are sending up deal signals. This lets them proactively seek out investment targets that are both:
- Attractive to investors
- Likely to welcome outside capital
Following-Up with Priority Companies – Once you’ve got your sight set on the prize, you need to act before someone else does. There must be a steady, open line of communication that stays active or else it’s all too easy for the lead to grow cold and another investor to swoop in. Maintaining a consistent dialogue helps your prospect feel valued and illustrates your continued interest in getting a business deal done.
Employing Several Outreach Methods – You have various tools at your disposal, including email, social media, text, call, video, and in-person meetings. Use all of these to get maximum coverage on prospects and deal sources. Your potential investment lead may use one more often than the others or respond better to different lines of communication. Another key to outreach is the quality of your communication. If you are able to reference specific data points on the business in your outreach, you are more likely to receive a response as it will appear more thoughtful and intentional.
Defining Sector-Specific Strategies – Some firms will dedicate analysts to specialize in a certain sector, in order to more efficiently utilize in-house resources. Allocating your internal team to specialty areas will ensure you have experts who are dialed into one niche or specific investment market. This can help surface potential deals that would never pop up in a broad sweep.
Private Equity Sourcing in the 21st Century
Deal sourcing is one of the most critical factors in ensuring a private equity firm’s success. Since it’s the impetus for quality deal-flow, forward-thinking companies must employ smart investment strategies to crank up their number of leads.
These days, with so much competition in the market, an old-school approach simply won’t cut it. That’s why private equity firms chose to work with SourceScrub to optimize the origination process. So, if your nets have seemingly run dry, it’s time to upgrade.
- Teten, D. Journal of Private Equity. Where Are the Deals? Private Equity and Venture Capital Funds’ Best Practices in Sourcing New Investments. (2010). https://jpe.iijournals.com/content/14/1/32
- Fugazy, D. Axial. The Rise of the Deal Origination Team. https://www.axial.net/forum/the-rise-of-the-deal-origination-teams/
- Steele, J. Recruit Loop. What is Market Mapping and How Do You Do it? (2014). https://recruitloop.com/blog/what-is-market-mapping-how-do-you-do-it/