According to PWC, private equity firms have depended on deep sector expertise and experience to generate returns for years. But to succeed today, that is no longer sufficient. The emergence of private equity markets and increased regulation have resulted in changes to the conventional deal sourcing and origination path.
Early recognition of the appropriate investment and deal opportunity is critical. Yet on average, it takes 10-20 meetings with the management team, 4-5 with target companies, 3-5 due diligence reviews, and three full-time team members to close a deal. If you’ve ever done your due diligence for any transaction, then you know that there’s a lot of information to cover—especially when you’re going through a company for the first time.
With so much at stake, it’s no surprise that private equity companies are continuously looking for improved tactics and tools to help them with transaction origination. In today’s competitive market, private equity firms have considered proprietary deal flows to increase the quantity and quality of deals entering their funnel. However, a lot are still in the gray area.
What is a Proprietary Deal Flow?
In the world of private equity and investment banking, proprietary deals are lauded as the “holy grail” of opportunities. Proprietary deal flows can be a great way to help generate both volume and quality leads for your firm.
Proprietary deals happen when a single corporation is given the first opportunity to buy or invest in a company. Most frequently, a broker or a corporation will approach a company that isn’t actively looking for funding. In many situations, the business is small, privately held, or founder-owned, and there isn’t much information available about its earnings or activities online.
The Advantages of a Proprietary Deal Flow
Proprietary deal flow is one of the most underutilized strategies to grow revenue in any business. The absence of competition within the deal is the primary advantage of proprietary deal sourcing. The likelihood that a bidding war may break out and raise the acquisition price increases with the number of buyers. These kinds of transactions frequently result in far better prices for the company than would otherwise be possible because they take place “under the radar,” so to speak.
The ability of businesses to closely understand their target company is the other major advantage of proprietary deal flow. Deal cycles are substantially quicker and corporations can learn far more about the company they seek to acquire than in a broad auction format due to the closer relationship needed to make this sort of acquisition effective.
The value of private deals is obvious because there is less competition, better prices, closer relationships, and quicker closing.
Tips To Improve Your Proprietary Deal Flow
Private equity firms, venture capitalists, accelerators, angels, and crowdfunding platforms all have one thing in common—they’re looking for a unique business with proven positive results.
Keep Your Targets Engaged
Business owners seek assistance in addressing difficulties and tools to help them expand their businesses more quickly. Many people have recognized that money is only one part of the puzzle. With a broad list of corporations eager to contribute funding, PEs must discover methods to be more than simply money in order to stand out.
In today’s market, PEs must provide value beyond and frequently before finance in the form of access to resources like experience, expertise, and technology in order to acquire unique deals. Being a good partner and a known resource for a business owner enhances the likelihood of a proprietary deal, sometimes years before a deal is even explored.
Identify Opportunities Directly
The goal of a proprietary deal flow is to be the only firm competing for your target company’s attention. While middlemen can be very valuable in discovering opportunities, their primary strategy is to engage many organizations—the exact reverse of the purpose of a private deal flow.
When searching for a specific deal, direct deal sourcing should be your preferred strategy. This will enable you to constantly pursue companies that meet your investment requirements and provide you with the best chances of success.
Create Bespoke Scoring Models
Scoring is another option to improve the efficiency of your proprietary deal flow. One must set guidelines that reflect your firm’s optimum match, these models help reveal the types of businesses that will be successful investments for your firm.
While simple models are frequently available, companies now rely on cutting-edge technology to integrate many data sources and apply data science capabilities to develop their own. Ensuring that your scoring models are tailored to your company’s needs can benefit the companies your firm identifies, resulting in a healthier and more filled pipeline.
Utilize New Technologies
The most recent advancement in private equity deal sourcing strategy has been to use software and technologies to source opportunities and inform a firm’s decision making at all levels and throughout its portfolio firms.
According to a recent Factset Report, 85% of CEOs believe technology is playing an important role in determining the future of the industry. Among technical leaders, this figure climbs to 98%.
Your firm must develop a tech stack. According to Boston Consulting Group (BCG), your tech stack should include deal sourcing and origination platform, customer experience metrics and analytics tools, and social media monitoring tools.
Using technology can help your firm find patterns in a specific market and understand how the industry landscape is moving with the correct data. These and other indicators are useful in determining the quality of private equity deals.
Streamline Your Proprietary Deal Flow with Cyndx
Today’s competitive environment is daunting. To find potential prospects, you cannot rely exclusively on the individuals in your organization or the techniques you employed yesterday. To thrive in an increasingly complex and competitive market, you must use all of the resources at your disposal.
Whether you were lucky enough to engage in a proprietary transaction or not, no one can deny its uniqueness and worth. That is why it is critical to become acquainted with the flow, to make your procedures more robust and efficient, and to know what to do if such a deal arises.
Technological advancements will inevitably lead to increased proprietary contract sourcing efforts while automating procedures throughout the organization and their portfolio. Firms that use these practices now will benefit from enhanced effectiveness, time and cost savings, as well as gain an advantage in an increasingly competitive private equity landscape. Firms that rely on historical approaches or put off implementing these strategies do so at their peril.
Cyndx’s AI-enriched approach and dynamic NLP-based mapping can help finding a proprietary deal more of a reality. See exactly whom to reach out to in seconds. Request a demo today.