Successful, well-managed deal origination and deal sourcing are essential to the success of private equity firms. It takes work to get there though. The average PE firm evaluates 80 opportunities before investing in one.
Even when you get to that one deal, the PE deal evaluation phase requires a small army. Closing a deal takes, on average:
- 20 meetings with the management team
- 4 negotiations with target companies
- 3 due diligence reviews
- 3 full-time investment deal team members
It’s no wonder that private equity firms are constantly searching for better strategies and tools to streamline their deal origination process. Four ways leading firms are up-leveling their deal sourcing and deal origination strategies include:
- Closely monitoring growth and liquidity signals
- Using data analytics to keep their finger on the pulse of industry trends
- Using a relationship intelligence CRM to make more data-driven decisions
- Building a strong brand presence
The most effective PE firms build, maintain, and optimize their outbound deal sourcing program. According to PE and venture capital sourcing data, many growth investors that have dedicated, large-scale deal sourcing teams almost always perform in the top quartile across stage and sector.
These top firms constantly look for new ways to improve their business development efforts and source the best new private equity deals. Firms such as Battery Ventures and TA Associates maintain between 0.75 and 1.25 dedicated deal sourcing professionals for every generalist investment professional.
Read on for PE deal sourcing tips that can keep your firm ahead of the competition.
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Key takeaways
- Private equity firms evaluate tens of opportunities before making a single investment, highlighting the importance of efficient deal sourcing and origination strategies.
- Leading PE firms are improving their deal sourcing by monitoring growth and liquidity signals, acting based on data analytics, using relationship intelligence CRMs, and building strong brand presence to stay competitive in an increasingly crowded market.
- Brand building has become crucial in private equity, with 70% of firms considering it very important and 91% noting its increased significance in recent years, particularly as meaningful introductions and best deals often come from existing portfolio companies.
Proactively monitor investment signals
Your firm needs to monitor key deal signals and proactively source deals to get to them before your competition. These deal signals include both growth signals like:
- Rapid growth in industry revenues
- Fragmented market suitable for acquisition
- Rapid growth in revenue and/or profits
- An experienced, proven management team
- Leading industry market share or the potential to become the market leader
And liquidity signals like:
- A large corporation shedding subsidiaries
- Death, disease, or divorce (“the Three Ds”)
- Older CEO seeking retirement
- Consolidation occurring in the industry
Firms with high deal flow use third-party data and trusted industry news sources to spot these deal signals more quickly. A CRM that connects with tools like Pitchbook and Crunchbase can give your firm a leg up on these deal sources.
Analyze your deal flow pipeline to gain insight into the most successful deals
While deal signals can help PE deal teams find lucrative opportunities, leading indicators aren't enough. Top-performing PE firms use analytics and reporting dashboards to get new insights into their data that help identify potential deals based on past successes. With this information, they can make more data-driven decisions about their next investment.
To find this data, the PE tech stack should include deal platforms, customer experience metrics and analytics tools, and social media monitoring tools. With the right data partners integrated into their CRM and analytics functions (like Affinity Data) PE firms like yours can uncover trends in a given market and understand how the landscape of private equity opportunities is evolving.
Global consulting firm Boston Consulting Group believes the key to getting ahead is to be proactive. Firms that are the first to find brands that are gaining traction or attention can "further analyze those companies, assess the brands' market positioning, and evaluate consumer sentiment in online discussions.”
Analytics not only help improve deal origination by helping monitor these key investment details, they also enable teams to understand and optimize their own deal management processes and performance. Easily shared, custom dashboards also make it easier to share that information with important stakeholders like senior leaders, prospective clients, or co-investors.
Use a relationship intelligence CRM platform
Your firm can consolidate all of this data to uncover opportunities for proprietary deal origination—that is, deals that haven’t been seen by many (or any) other buyers—in one place. One of the key technologies on the rise is relationship intelligence.
Relationship intelligence—insights into your team’s network, business connections, and client interactions—is changing how private equity deal and relationship data is being managed and utilized. For small private equity firms that struggle to get a bank’s attention, relationship intelligence platforms can be a powerful tool to keep your firm top of mind when the next big deal comes around.
Explore the best private equity CRM options available today.
PE deal sourcing is the first and most important stage in deal flow—and streamlining this step while at the same time building better relationships can give your firm a huge competitive advantage. By focusing on relationships and the value in your existing network. relationship intelligence platforms make sure your team doesn't miss out on a deal because you hadn't checked in with an old contact for six months.
No matter how much of the sourcing process goes digital, sourcing high-quality investments will remain a very human activity. Maintaining high-quality relationships and leveraging them to find potential investments will make the deal process faster and smoother. You can use technology to your advantage by choosing tools that help you stay focused on relationships.
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Build your brand
In recent years, building a strong brand has become top of mind for PE firms. 70% of PE firms state that building a strong brand is very important, while the remaining 30% say that it is somewhat important. What’s more, 91% of firms say the need for a strong brand has escalated over the past two years.
This laser focus on brand building has been spurred by greater competition for private equity deals. It’s also been driven by a rapidly increasing number of private equity firms in the market and increased fundraising competition.
Relationships are the lifeblood of private equity. Your firm’s brand strength depends on the relationships your team members have—and there are many types of relationships to foster, including existing portfolio companies, investment banks, attorneys, peer private equity firms, executives, and other sponsors. When you think of these relationships for your team, remember that more than 90% of PE firms say that meaningful introductions, and the best deals, often come from existing portfolio companies.
The future of private equity deal origination
A more connected, remote-focused deal landscape has led to an increased emphasis on deal origination is a core competency among PE firms—and one that contributes to increased deal sourcing resources. The key is to be proactive and embrace a multi-tiered strategy for reaching out to and connecting with the connections in your network.
Leading PE firms are doubling down on outbound origination teams, monitoring signals, using data analytics tools and online deal sourcing platforms, and building a strong brand.
Private equity firms must be resourceful to generate as many investment opportunities as possible, as quickly as possible. With these deal sourcing tips, your firm can get a head start on finding high-quality deals before everyone else.
On top of these changes in strategy and approach, tech-forward private equity firms are turning to private equity CRM platforms that support their deal sourcing strategies, high-level investment strategies, and deal origination processes alongside their contact and deal management.
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