If you haven't operated in the investment banking space before — or it's been a few years, as many dealmakers start their careers in investment banking — you may find certain aspects much different than what you're used to elsewhere in the mergers & acquisitions (M&A) industry.
Contrary to many other M&A organizations, such as private equity, venture capital, and even corporate development, the investment banking deal flow process involves sourcing deals for others rather than yourself.
Investment bankers aid other companies as an advisor, offering their expertise on the many different steps in a deal, depending on what their clients need. Let's dive into the investment banking deal flow process, including its steps, potential challenges, and ways to make it easier.
Creating an investment thesis is a common first step in most M&A organizations' deal flow processes, but not for many investment banks. While many choose to operate only within a specific industry (which benefits them because they’re usually chosen for their domain expertise), a bank's focus and ideal target changes depending on its client.
Instead, investment banks’ deal process starts with finding a client, which can range from companies and corporations to other M&A organizations such as venture capitalists, private equity firms, and more. The next step in the process also depends on contract type.
Contrary to private equity, where dealmakers are tasked with managing a deal from start to finish, investment bankers can be contracted to advise anywhere in the deal flow process, including for only a specific portion of the transaction, such as negotiations. Further complicating the potential deal flow for investment bankers is that they can operate on either side of the deal: the buy-side or the sell-side.
Despite the variability of an investment bank's role in a deal, the main goal is always to get the best deal possible for their client.
Investment banking deals can either involve an entire company or a part of one. The former is usually referred to as a merger or acquisition, and the latter is known as a divestiture. M&A is the more common type of deal, partially because it's easier to complete.
Researching an entire company is far more straightforward and includes fewer variables and assumptions. When attempting to understand the potential growth of a company, for instance, you can often find estimated revenue numbers for private companies through a deal sourcing platform and base your forecasts off those. However, finding estimated revenue for a single division of a company is extremely difficult.
Additionally, a common reason that a company is trying to sell off a portion of itself is because it's under-performing. While you may find instances where the department or product doesn't serve the company's strategy or future vision, it's less likely.
Divestitures also can take two different forms: sourcing an organization to acquire and then absorbing the assets, or spinning the division or product off into its own company.
While the exact flow of investment banking deals may differ, finding the right partner for the deal is usually similar. Many of the same deal sourcing strategies that bankers use to find clients are the same as when they want to find buyers or sellers for these clients. Let’s explore a few of the tactics investment bankers use in both scenarios.
Although it’s a more traditional deal sourcing tactic, networking can still be effective for generating deal flow for investment bankers. Building on a large network of connections improves dealmakers’ chances of receiving warm introductions and opportunities across organizations and industries.
Direct sourcing is quickly becoming a required part of the deal flow for any M&A organization, including investment bankers. Rather than rely on deals to come to them, IBs are more often proactively searching for the next great client or deal. Data and technology advancements have made this once highly manual and time-consuming strategy much faster, easier, and more reliable.
There's nothing quite like meeting someone face-to-face, and while virtual calls can at least provide some valuable face-time, many dealmakers prefer the in-person vibe from conferences and events. Just make sure you've modernized your conference strategy.
The M&A industry is known to be more challenging than most, partially because of the amount of money at stake in each deal and the magnitude of change that comes with each transaction. To help put it into perspective, the average deal size in 2023 was $58.9 million!
Here are a few other challenges that may arise during the investment banking deal flow:
Unfortunately, this list isn't exhaustive for the potential challenges dealmakers face when making investment banking deals. However, many of these can be countered or even avoided altogether with the right technology and a strong deal team.
Investment banking teams’ responsibilities often differ across firms. Depending on where your team has been contracted to advise, your team may even need different skills from deal to deal.
However, the ultimate goal is always to get the best possible deal for your client. So, while what is considered success for your team may vary depending on the deal type and what side of the transaction you’re on, many of the required skills are the same:
For investment banks to succeed and properly support their clients, they must ensure they have a modern deal flow supported with the latest and greatest technology. If you don't already have a modern tech stack that includes a customer relationship management system (CRM), business intelligence (BI) tools, and a deal sourcing platform, this is your sign to fix it.
Learn what's in the modern dealmaker's tech stack with our guide.
