Private Equity Deal Origination Tips, According to Research

Few activities are more critical to private equity success than deal origination/deal sourcing. According to research by Tenten Advisors, the average private equity firm evaluates 80 opportunities before investing in one. What’s more, the evaluation phase requires a small army. Closing a deal requires, on average, 20 meetings with management, four negotiations, 3 due-diligence reviews, and 3.1 full-time investment team members. With so much on the line, private equity firms are constantly searching for ways, and new tools, to increase the effectiveness of their deal origination process.

Deal origination needs to be top-of-mind for private equity firms. The most effective firms build, maintain, and optimize a dedicated outbound sourcing program. According to data, many growth investors that have dedicated, large-scale sourcing teams almost always perform in the top-quartile across stage, vintage, and sector. They constantly look for new methods and new tools to improve their deal origination 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.

Monitor signals

In order to successfully source ventures, PE firms need to monitor key deal signals and proactively source deals. These signals include both growth signals (such as growth rate in revenues and/or profits) and liquidity signals (such as consolidation in the industry).

Use data analytics tools

While deal signals can help PE get a powerful pulse into lucrative opportunities and source the best deals, these signals are not sufficient on their own. Top performing PE firms are doubling down on data analytics and adding new tools to their arsenal. These data analytics tools empower PE firms to evaluate unstructured data, filter noise, and pinpoint lucrative deals. According to BCG, the PE tech stack should include deal platforms, customer experience analytics tools, and social media monitoring tools. Using technologies like Crimson Hexagon, 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. According to BCG, the key is to be proactive. It explains, “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.”

Private equity firms also reap value from technologies that arm them with opportunities for proprietary deal origination. One of these key technologies is fully leveraging the power of relationship intelligence. Using AI-technologies such as Affinity, private equity firms decipher the clearest path to a warm introduction or referral to a key prospect. In private equity, your network is your net-worth.  Affinity's patented AI-technology can understand the strength of different connections and identify the most lucrative individuals to open up new opportunities and facilitate introductions. An additional advantage of Affinity is that investors don't need to be a data scientist to use it. Simply upload a list of potential executives they want to connect with and Affinity automatically tells them who at their firm or in their extended network has the best relationship. Unlike LinkedIn, relationships are based on communication data, not just friend requests. 

Affinity also helps private equity team's stay on top of their relationships with intermediaries. Create a smart list of all your relationships at banks and then leverage alerts and notifications to ensure that investors never miss an email and never let a relationship go cold. For small private equity firms that are struggle to get a banker's attention, Affinity can be a crucial asset in keeping your firm top of mind when the next big deal comes around. 

Build a 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. The elevated need has been driven by greater competition for private equity deals, increased number of private equity firms, and increased fundraising competition.

Building a strong brand depends on relationships. Relationships are the lifeblood of private equity. The are many types of relationships that PE firms need 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 key is for PE firms to have high levels of relationship intelligence and a key understanding of their network, and to pinpoint lucrative relationships to gain access to new opportunities. In addition, protecting the firm's brand by not crossing wires when pursuing deals.  Affinity ensures that you always know who talked to who and when. Never get caught off-guard by not knowing if or when your colleague reached out to an intermediary. 

According to a recent 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. The leaders of tomorrow will double down building an outbound sourcing arm, monitoring signals, using data analytics tools, and building a strong brand.