Most deals start the same way: A firm chooses a specific niche, creates an investment thesis for the types of companies it wants to acquire, and then learns everything it can about that sector. Then it’s time to source these deals, which is a much less universal or linear process.
It requires understanding current deal sourcing trends and the many types of deal sourcing methods available, and then employing the right mix for your specific goals. Below are some of the pros and cons of each of the different deal sourcing types, including some PE deal sourcing examples that help illustrate the multi-faceted approach the best dealmakers take.
You'll often hear that private equity is a people business. Networking, conversations, and building relationships are all strong deal sourcing strategies. But they're deeply rooted in an outdated, inbound-only sourcing approach, and are most successful when combined with modern data and technology solutions built to fuel a more reliable direct sourcing engine.
Many PE organizations start with traditional deal sourcing types — networking, events, and cold outreach — because they're familiar. However, they’re far from foolproof.
Nearly all dealmakers (88% of them) use networking as a main type of deal sourcing. But networking alone — reaching out to your contacts, hoping for someone somewhere to know someone else who wants an investment — rarely bears fruit.
For networking and other relationship-building tactics to succeed, you must first learn about your contacts: what they like and don't like, their work history, even personal details. All of which takes time and massive amounts of research.
For example, you may pore over a target's social media and learn he likes golf. Then, you might take a page out of Corporate Development veteran Charles Shannon’s book and send him a custom driver head cover, promising to fill it with a driver should he set up a meeting.
But some targets may be concerned with too much familiarity from an essential stranger. Your attempts to relate through both having teenage children, for instance, may feel invasive rather than spark a friendship. Balancing the fine line of building rapport and invading privacy is something that takes time (and if we're honest, a bit of luck).
Another long-time favorite of many private equity dealmakers, industry events and conferences are rife with opportunity. But even this type of deal sourcing has its challenges. Simply showing up and wandering expo halls won't return the results you and your team hope for.
It requires a lot of research, planning, and outreach ahead of time. As Forsyth’s Joe Stevens says, “We put in a pretty big lift upfront. It’s not just a one-email campaign. We try to send a couple emails, try to send our story a little bit, try to make some phone calls…Even if we can’t schedule that time, I’m hopeful that when the day comes, they will know who Joe Stevens is and why he’s been reaching out. So we just try to get some of that name recognition.”
Without more modern deal sourcing types supporting and boosting your efforts, the likelihood of any trade show being a smashing success will largely depend on chance — something no dealmaker likes.
Ask any principal or partner about their analyst days, and they'll likely tell you stories about making 50 (or more) cold calls a day. But they'll probably also tell you how few of those calls actually turned into deals.
The main challenge with this type of deal sourcing is that everybody is doing it. Owners and operators are flooded with calls and emails from potential investors who know next to nothing about their businesses. However, if you cold call after thinning your list to only the contacts that align with your firm’s domain expertise and are sending signals of investment readiness, your conversion rate will be much better.
Of course, each of the three traditional PE deal sourcing examples we discussed is beneficial for firms to use as part of their overall deal sourcing strategy. Networking, for one, will always have a place in PE and dealmakers must have good people skills. Building rapport and making connections with contacts (including company founders, but also other dealmakers, intermediaries, and more) are crucial skills.
The challenge with events is not the gatherings or conferences themselves, it's how your team approaches them. If you can fill your team's calendar with meetings, events can be one of the most successful deal sourcing types thanks to the power of in-person communication. Smart firms even search for relevant opportunities by zip code to schedule additional high-value meetings, plan prospect dinners, and host VIP happy hours while they’re in town for conferences, taking full advantage of highly valuable face time.
Similarly, cold outreach can be beneficial if teams manage to make contact. Even just a few minutes on the phone can help a firm quickly determine whether the company is indeed a good fit, whether the time is right, and if/when they should reach back out.
As we’ve already mentioned, the most effective deal sourcing strategies combine traditional and modern tactics. However, one of the biggest challenges with modern deal sourcing types is that they’re still new and unfamiliar to many dealmakers.
Social media is likely the modern sourcing tactic dealmakers feel most comfortable with, since many are already on platforms like LinkedIn for personal reasons. But using social media to its fullest requires much more than the occasional check-in or using it as a pseudo-search engine.
To build a “professional brand” for individual dealmakers or entire firms takes patience and consistent, regular attention. Success is measured based on how active you and your team are and what information you provide. Because social media platforms are driven by "the almighty algorithm," it requires thoughtful content marketing, building a strategy and writing content that your audience finds valuable.
Of course, using social media to simply research contacts and companies, send messages, and post the occasional thought can still be a viable type of deal sourcing. Just don't expect the same results as if you were taking full advantage of this channel.
AI has been around for decades already, but its newfound success is due largely to the power of generative AI. While the previous iterations of AI were largely useful only for engineers and data analysts, generative AI has found its place throughout entire organizations, but nowhere more so than at the "ground level."
Drafting emails, summarizing calls, generating charts from datasets, and more are now much quicker with AI, especially for those who have become proficient with prompt engineering. Of course, AI in its other forms still exists, helping with analytics and processing huge amounts of data far faster than any human could. And now, powerful AI agents capable of autonomous decision making have hit the scene and are rapidly growing in popularity among dealmakers.
But it cannot be understated: AI is not a "set it and forget it" tool. The power of generative AI lies in the datasets is uses to simulate something new (e.g., the email you requested). The same is true with AI-powered automation: Give AI a set of rules and it will follow them to the letter. Without proper support from humans to fix the (usually) robotic-sounding results from generative AI, as well as any logic loops in traditional AI, the technology can do more harm than good.
Today, there are countless applications for dealmakers to choose from to help fuel their sourcing efforts. These include data service providers that offer company and contact information, customer relationship management (CRM) platforms to organize all this data, sales acceleration tools to scale outreach to top targets, and more.
The problem? Having so many options makes it tough to pinpoint the right tools for your firm and the types of deal sourcing you use. Many vendors promise the same benefits and outcomes, so building a solid dealmaking technology stack takes significant time and research. Depending on your software of choice, you may also require specific people or roles to manage it, especially with more advanced tools such as business intelligence (BI) or analytics systems.
One of the most important considerations when choosing these systems is how they work together. If the various components of your tech stack aren’t integrated and can’t “talk to” one another, data easily becomes siloed. This makes it difficult for teams to work together, causing miscommunication, inefficiency, and even fumbled deals.
All the challenges from modern deal sourcing types considered, technology's benefits far outweigh any downsides. Data and technology augment every other PE deal sourcing example we’ve discussed, making every tactic from cold calling to event planning far more effective.
These modern sourcing solutions empower dealmakers to accomplish more work much faster. This includes reaching more people at once through social media, or instantly crunching through millions of data sources to pinpoint ideal targets using a deal sourcing platform.
AI-powered tools surface previously hidden insights that help teams refine their sourcing strategies and make smarter investment decisions. Some of these tools are even reshaping and elevating what it means to be a dealmaker by automating repetitive, administrative tasks so humans can focus on higher value, more strategic work.
Nobody said deal sourcing is easy. But with the right mix of deal sourcing types and combination of personal versus digitally-enhanced methods, your team is sure to come out on top.
Whether your team is just starting with technology or "all-in," a deal sourcing platform is one of the best investments you can make. In fact, according to a recent survey, adopting a deal sourcing platform is a key point of divergence between tech- and data-savvy organizations and their less advanced peers.
Start your path to a more robust deal flow by adopting a deal sourcing platform in your organization today. Learn the right questions to ask when evaluating deal sourcing platforms when you read our Buyer’s Guide.
