Few activities are more critical to the success of a private equity firm than deal origination and deal sourcing. In fact, according to research by Tenten Advisors, the average PE firm evaluates 80 opportunities before investing in one.
What’s more, the PE deal evaluation phase requires a small army. Closing a deal takes, on average, 20 meetings with the management team, four negotiations with target companies, three due diligence reviews, and 3 full-time investment deal team members. With so much on the line, 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 a dedicated 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, vintage, 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 could change the game for your firm.
Monitor signals intelligently
To successfully source opportunities, PE firms need to monitor key deal signals and proactively source deals. 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.
Use data analytics tools to keep your finger on the pulse
While deal signals can help PE deal teams get a powerful pulse on lucrative opportunities and source the best deals, these signals are not sufficient on their own. Top-performing PE firms use analytics and reporting dashboards to get new insights into their data, identify potential deals, and make more data-driven decisions.
According to Boston Consulting Group (BCG), 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 can uncover trends in a given market and understand how the industry landscape is evolving. These and other pulse points are powerful in assessing the quality of private equity opportunities.
BCG believes the key is to be proactive: “ … receiving advanced notice about brands that are generating buzz lets investment professionals further analyze those companies, assess the market positioning of the brands, 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
Private equity firms also reap value from technologies that arm them with opportunities for proprietary deal origination—that is, deals that haven’t been seen by many (or any) other buyers. 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. Intelligent CRM platforms like Affinity are giving private equity firms data that they can act on—helping teams identify the clearest path to warm introductions and referrals and build stronger connections in their network.
For small private equity firms that struggle to get a bankers’ attention, Affinity 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.
There are unprecedented levels of dry powder at the same time there has been a rise in the number of PE firms competing for high-quality assets. In 2017, BCG reported that average deal multiples had increased by 40% over the preceding five years, and the number of deals closing in less than five weeks has risen 10x.
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. That’s the benefit of using a relationship intelligence CRM like Affinity. 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.
Build your brand
In recent years, building a strong brand has become top of mind for PE firms. According to Pitchbook data, 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 PE firm brands 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. One study found that more than 90% of PE firms say that meaningful introductions, and best deals, often come from existing portfolio companies.
The future of private equity deal origination
According to a report by PEHub, 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 building an outbound origination team, 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 for PE, your firm will get a head start on finding high-quality deals before competitors do.
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. Gain new insights into your most valuable opportunities and get—and stay—ahead of the competition with a CRM purpose-built for private equity. Talk to the Affinity sales team today to learn more. 
