No matter how long you've been in the mergers & acquisitions (M&A) industry, it's crystal clear that change is in the air.
Dealmakers are becoming increasingly aware the same tactics just don't work as well anymore. With multiple factors in play — new forms of competition, the prevalence of remote and virtual meetings, decreased conference attendance, and targets getting flooded with cold emails and calls — dealmakers must adapt if they are to succeed.
To keep pace and generate adequate deal pipeline, firms must change how they approach deal sourcing in private equity. Let's first dive into why direct sourcing can be so powerful for private equity firms. Then, we'll discuss how your organization can use it to its advantage.
There is no shortage of available PE deal sourcing strategies. Depending on each firm's focus and its team's skillset, dealmakers often use a combination of deal origination tactics: online, in-person, inbound, and, of course, outbound (or direct). However, direct sourcing has become increasingly popular as firms have grown more specialized and sought to establish more predictable and proprietary deal flow.
Where inbound sourcing is essentially waiting for interested parties to come to you, direct sourcing is where your firm takes the PE deal sourcing process into its own hands by actively seeking out potential investment opportunities.
Armed with your firm's investment thesis and the right technology, dealmakers first identify companies that could be a good addition to the organization's portfolio. Then, they begin the outreach process to engage these targets. Outreach tactics differ considerably, as some leads respond to cold calls or emails, while others may require introductions through mutual connections. Conferences also remain a popular way for dealmakers to connect with targets.
Direct sourcing often requires dealmakers to build and maintain relationships with targets for months or years before a deal takes place. The key is not to get discouraged and to keep working toward your goal. While you are sure to hear many “no’s,” just remember it takes only one "yes" to make a deal!
While every organization's specific strategy will differ, there are also several foundational components of deal sourcing in private equity that must be considered by most teams.
To succeed in M&A, you must have a strong, knowledgeable team that is capable of handling a wide range of activities:
Having a dedicated Business Development (BD) team is quickly becoming a non-negotiable in private equity. Where traditional private equity analysts and associates may take part in nearly any part of the deal flow process, Business Development teams' sole focus is sourcing deals. Depending on your firm's size and structure, it may be time to consider building out this function.
Attending conferences has always been among dealmaker’s favorite sourcing tactics. But rather than hoping for an expo hall introduction to a top target, think about how to level up your conference strategy to support your direct sourcing efforts.
Start by identifying trade shows with the highest concentration of attendees that fit your investment thesis, and start reaching out to them in advance. This gives you time to build rapport and hopefully schedule meetings with the right opportunities prior to hopping on a plane and hitting the conference floor.
Technology’s greatest strength is augmenting your team's processes and enabling faster, more effective PE deal sourcing. For instance, it's standard practice to start your sourcing processes by doing market research. This involves many different searches on Google and social media networks, talking with connections, reading the news, etc. — especially for private or bootstrapped businesses, for which data is notoriously scattered and messy.
Technology can make market research and mapping far more efficient. Let it scour the internet for you and deliver the information it finds while your team works on other parts of the direct deal sourcing process that need a more human touch. Once your team has the right data in hand, you can pinpoint ideal opportunities, using data signals and custom lead scoring to separate the deals with more potential from the rest.
As your organization becomes more comfortable with using technology, start analyzing all the data you collect. With more data at your disposal, you can make more informed decisions, better identify past trends (and forecast future ones), and gauge the efficacy of your chosen deal sourcing strategies.
In addition to your sourcing criteria and strategy, your actual processes must also be well-defined. Your team needs to understand and follow every step involved in the deal flow process, from origination to close (and beyond). Only then can you optimize efficiencies, automate tasks, and scale your sourcing efforts.
While writing documentation for these steps certainly helps, your dealmaking tech stack can make things a lot smoother. For instance, your CRM can define stages for your entire deal pipeline to make your processes more predictable and efficient. Your sales acceleration tool can also integrate with the other parts of your tech stack to ensure contact information and activity is automatically synced, allowing everyone to work from a single source of truth.
As with all PE deal sourcing methods, direct sourcing isn't a silver bullet. It's necessary to be aware of common challenges and pitfalls, as well as understand how it fits into your firm’s overarching strategy.
Technology is the driving force behind direct sourcing, and is quickly changing the way deals get done. But one traditional method of deal sourcing in private equity that isn’t going anywhere is networking. Augmenting traditional relationship-building tactics with new, innovative methods can supercharge your deal origination processes.
Take email writing, for example. A well-crafted message can be the difference between your dealmakers being left on read or receiving a response. But writing tens or hundreds of emails a day is daunting even for a professional writer. Using artificial intelligence (AI) to create personalized email drafts for each contact that your team only needs to edit rather than write from scratch can save hours of time (not to mention it saves your team's creativity for more valuable activities).
Even with a strong team and robust direct deal sourcing strategy, be sure to keep open lines of communication with potential partners: investment banks, venture capitalists, Corporate Development organizations, family offices, and even other private equity firms. Having a larger network that includes other M&A organizations can only help your firm.
When direct deal sourcing in private equity, it's necessary to cast a wide net — even with a relatively niche investment thesis. It's likely your team will have on-going communications with dozens of potential companies, and may even have multiple contacts at each of those companies.
It’s no longer acceptable to send each of these contacts the same generic message. As VSS Capital’s Head of Business Development, Jordan Margolin, said in a recent interview, "it can't be a generic message that you're going to send to every HVAC business [...] out there. You need to understand the needs and wants of that specific company where they're at in terms of their growth."
Thankfully, your firm's tech stack can make tracking opportunities and managing relationships with them at scale easier. Top private equity deal sourcing platforms and CRMs have automatic notifications to alert your team to events such as key account changes, like a major hire, or when it's been too long between outreach efforts. It's imperative your firm takes advantage of these features to keep your pipeline full and healthy without burning out your team.
Starting direct sourcing can seem daunting. To help inspire you and see what's worked for other firms, here are two PE deal sourcing examples from top organizations.
Being the only one at the offer table in a deal is the dream buying position for any private equity organization. No competition. No chances of being outbid. And, to top it all off, you're likely getting a much better deal than you would have otherwise.
But finding proprietary deals like these requires robust direct sourcing strategies and tools. Take VSS, for example. With a technology-backed PE deal sourcing process that focused on building a proprietary advantage through direct sourcing, approximately 50% of their deals are now proprietary.
Take a deep dive into how VSS built their advantage and now finds deals 1.5x faster.
Generally, private equity firms make two types of deals: platform deals and add-on acquisitions, Because they are often smaller and founder-owned, add-ons are notoriously difficult to source.
Boathouse Capital recently shared how they leverage data signals like website traffic, media coverage, and industry awards to gauge growth and transaction readiness for these companies. You can read all about how they tripled their number of proprietary opportunities and boosted their add-on win rate by 50% here.
No matter how experienced your team is with direct sourcing, it's increasingly difficult to break through the competition. An easy way to help support your team, increase productivity, and win more deals is to use technology more effectively.
Software such as a deal sourcing platform can make many different parts of deal sourcing in private equity much easier, and even help you uncover deals you may not have otherwise found. If you want to get to the deal table more often and keep adding names to your list of portfolio companies, consider adding a tool like Sourcescrub to your tech stack.
See how Sourcescrub can help your firm. Request a demo today.
