Pick any part of the M&A deal flow process, and someone will say it's the most important part. Most often, the stage chosen relates to that person's job or the part of the process they find most enjoyable. But one thing all analysts, dealmakers, and even principals can agree on is that deals can't exist without someone sourcing them.
Once a deal lands on the table, there's no shortage of tasks for dealmakers to undertake next: research competitors, verify financials, meet with key stakeholders, etc. But getting that opportunity in the first place is another challenge entirely.
Join us as we discuss deal sourcing in private equity and its importance, the best ways to approach and streamline deal sourcing, and of course, how to source deals for your organization.
Deal sourcing is where private equity begins. While the majority of a firm may be focused on ensuring deals go through once they're in the pipeline, none of the firm's activities can occur without deal sourcing.
As the M&A industry becomes increasingly competitive and organizations are narrowing their focus, creating a proprietary advantage and embracing your unique angle will only become more important. How you find and approach a deal can make or break it.
This is one reason why it's so important to choose the right deal sourcing strategies that match your firm's chosen specialty. For instance, in-person strategies such as meetings and events might yield the best returns for industries such as manufacturing, where more traditional tactics can be more effective. Others, such as high-tech, might require a less forward approach, such as repeated emails sent over a longer period of time.
However — and as we'll discuss later — it's important for your firm to test tactics to see what works best for your particular audience. Most firms choose a variety of different strategies to suit their particular sourcing style, target opportunity preferences, and dealmakers' proficiencies.
The first step to develop a strategy for how to source deals is research. You must understand where your firm will focus, both in terms of the markets and the specific types of investment opportunities. So, before you can determine what strategies will best suit your firm, you must map your intended markets and fully understand them.
Not only does all this knowledge help you make better connections with your targets' contacts, but it makes later stages of the deal flow process, such as due diligence, far easier. At a minimum, ask yourself the following questions:
With a firm understanding of the industry, you can then build an investment thesis: guiding principles for which investment opportunities are right for your organization. Everything from company size, subsector, profitability, revenue, and more should be part of this thesis, as each of these criteria can then be used to source and filter opportunities.
In what feels like a sigh of relief, the second quarter of 2024 recorded the highest total deal value — $159 billion, according to Ernst & Young — after the monumental fall in Q3 of 2022. As the industry seemingly picks up in an attempt to burn through $2.62 trillion in dry powder, dealmakers are now faced with increasing pressure to source better and more deals than ever. The biggest question on dealmakers' minds is, "How will those deals be sourced?"
Networking has and will arguably always be a key strategy for deal sourcing in private equity. But it's not enough to simply tap on the shoulders of who they know and chase every lead that comes to them. Dealmakers must be able to find the right opportunities for their organization.
With an understanding of your firm's ideal market and an investment thesis to guide your direction, it helps to start making the right connections. While you can certainly use your existing network to start making headway, building relationships with notable industry members, influencers, and founders will help to increase the connections at your disposal. It may also be valuable to make friends with other private equity firms, too, as they may hear of opportunities that aren't right for them but might be for you.
You may also consider using a relationship intelligence tool that can help you manage and leverage your network more effectively and help you on your deal sourcing in private equity journey. With it, you can track who you've contacted and when, who your 2nd- and 3rd-level contacts are, what companies they have access to, etc., to better create maps and pathways for finding the right contacts at the right private companies.
A relationship intelligence tool isn't the only software able to make your deal sourcing efforts easier. While dealmakers have relied on data services such as Capital IQ for years, more tech-savvy firms also use full deal sourcing platforms. These platforms can surface hidden investment opportunities and provide a deeper understanding of private companies and markets.
The best deal sourcing platforms provide more than just data points — they offer data signals, which can provide valuable insight into a private company's health and suitability, from its employee growth (or decline) to revenue signals and more. These data signals provide an interconnected web of insight that paints a much clearer picture of potential investments and makes it far easier to single out the hottest opportunities.
Of course, deal sourcing platforms should only be one part of your firm's tech stack. A customer relationship management system (CRM) to track deals end-to-end, a sales acceleration platform to gently nurture leads that aren't quite ready, and a business intelligence (BI) platform to collect and analyze your organization's data are all important parts of evolving your firm's entire operation through technology.
Data analysis, especially, will help your organization scale beyond what it was capable of before. For example, by continuously collecting information on what tactics were and were not successful, for whom, and by which person, team, or department, you'll be able to better understand how deals are sourced best.
In addition to analyzing past events, data analysis can also help to forecast future ones. When evaluating potential investments, it is incredibly helpful to understand the trends that are currently impacting a company as well as those that may arise in the future.
When data helps inform your decision-making, you can be sure the choice you make is the right one. This is why data scientists have become an increasingly important part of the modern private equity organization, as they help you analyze all the data you collect and make smarter decisions at every stage of every deal.
For many years, Business Development (BD) departments have been a key method for how technology companies bring in new business. Recently, private equity has taken notice, and BD is becoming a much more prevalent inclusion for how to source deals. In fact, Limited Partners (LPs) may even walk away from your organization should you not have a BD function.
Part of the success behind BD is because they are able to generate a much healthier deal flow pipeline. This is due, in part, to their sole focus on finding target investments. Without the additional tasks that analysts and other traditional private equity roles must handle, BD professionals are able to specialize and prioritize only the most valuable work.
The crème de la crème of the private equity world, proprietary deals are also the most difficult to come by. Because they're not widely marketed, they often offer better deal terms and have far less competition. But it's not enough to simply knock on the virtual door of a founder or operator’s office and hope they're willing to sell part of or all their business.
While you may use tech like a deal sourcing platform and direct sourcing strategies no matter what type of deals you're chasing, they're most valuable when looking for proprietary deals. Because these companies aren't actively looking for an investment, you must ensure the company is a good fit for your organization and your team is using the right methods to persuade them to sell.
Proprietary deals are partially why BD teams have become so important for private equity. With a BD team focused solely on sourcing and building relationships with the right contacts, your firm can potentially land deals they may not have otherwise, well outside your competitors' purview.
Once your organization determines how to source deals, it's time to make your processes more efficient. Just as the types of deals you focus on today may not be the same as the types of deals you chase in a decade, the same should be true of your deal sourcing strategies and processes. Adopting new technology, standardizing your practices, and using data to stay ahead of your competition will be paramount to your success.
Recent advances, such as generative artificial intelligence (GenAI), are making certain tedious portions of dealmaker's lives much easier. From generating countless personalized emails to analyzing millions of points of data at lightning speed, GenAI can easily take care of some of the more repetitive administrative tasks and free your team to spend their time on more valuable work.
AI can also help to identify trends while analyzing data, often faster than humans can. The technology is also far better than a human at recognizing what's not there, such as missing information or lapses in a specific pattern. While we don't recommend giving AI full control over decision-making, using its analytical prowess to help inform it can be a great benefit to your organization.
Time is one of our most precious resources. When overhead is likely one of your organization's most expensive costs, you must ensure your team is being efficient with their time and doing the tasks best suited to their strengths and skills. Not only will they be more engaged and motivated, but work will often be completed more quickly.
Implementing standardized processes in your deal flow can help ensure their efficiency. When everyone knows what the steps are, who is responsible for what, and when different stages are happening, the entire organization benefits from it.
It may seem like an obvious point, but staying ahead of your competition is becoming increasingly important as the number of private equity firms continues to grow. Deals are more difficult to come by, even as organizations become more specialized. Continuously monitoring your target markets and adjusting your strategies must become a regular activity if you're to outpace your competitors.
Becoming data-driven can help your firm make smarter decisions. However, if you want to truly get and stay ahead, consider building your own data models to generate proprietary insights. With them, you can streamline how to source deals and ensure your team is always one step ahead.
Sourcing the best deals in private equity is a multifaceted process that requires a strategic approach, strong relationships, and the effective use of technology. By following our tips and strategies, private equity firms can improve their deal flow and secure high-quality investment opportunities.
Download our guide to get the six steps your organization could take today to make your deal sourcing efforts smarter.
