Digital Deal Sourcing in Private Equity (2022)

The global private equity (PE) industry is continuing to outperform other asset classes, but at the same time, it is being buffeted by a changing environment. Unprecedented levels of dry powder and a steady rise in the number of new firms are leading to intense competition for high-quality assets. Average deal multiples have increased by 40% over the past five years, and the number of deals that close in less than five weeks has risen tenfold. Compounding these issues is the surge in unregulated yet high-caliber sources of private-debt financing; it is further driving up the price of quality assets across deal sizes.

These challenges spotlight an opportunity for investment professionals at PE firms: as the world becomes increasingly digitized and analytics tools become more powerful, investors can gain a clear edge over competitors by using data analytics to better identify and assess targets. Top-performing firms are beginning to view data analytics as a complement to their existing channels, procedures, and processes.

Data analytics can improve a PE firm’s performance all along the deal value chain. But in this article, we focus on the initial stages: deal sourcing and due diligence.

Deal Sourcing

Deal sourcing is the first stage of the PE value chain. It is often the most important stage for generating a competitive advantage and still very much a human endeavor—there is no algorithm or digital process that can source winning investments.

But by using data analytics tools, investment professionals can gain access to far more information about a much larger universe of companies than they could possibly do through traditional processes. They can also evaluate a tremendous amount of unstructured data—such as social media posts, quality ratings, and customer reviews—to identify potential targets. Moreover, new tools are emerging to help investors understand which information is truly relevant and the meaning of data patterns and trends.

In short, data analytics tools can provide richer and more comprehensive information about a potential opportunity than conventional processes can produce. These tools can also help investors assess multiple variables, such as increasing consumer engagement and the opinions of influencers, and thus generate deeper and more actionable insights. Professionals who use these tools will be able to see various aspects of a potential investment (or the sector in which it operates) faster and with more granularity than their competitors will be able to do. (See the exhibit below.)

Digital Deal Sourcing in Private Equity (1)
(Video) Where Are the Deals?! Best Practices of Private Equity Funds in Originating Investments

For example, one rapidly evolving digital tool, social media analytics, can monitor brands—tracking the number of customer mentions or brand hits in the media, for example—and send customized alerts when patterns shift or certain thresholds are reached. 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. (See “How Social Media Analytics Can Be Applied to PE Deal Sourcing.”)

Social media analytics is an evolving tool that can help investment professionals translate broad investing themes and trends into actionable insights, in the form of attractive investment opportunities. PE firms can contract with a growing number of vendors that provide social media analytics as a service.

Here’s an example of how this tool could be used. (See the exhibit below.)

Digital Deal Sourcing in Private Equity (2)

  • A PE investment professional starts with an initial hypothesis. For example, consumers’ rising living standards, their greater focus on health, and an increase in their disposable income will lead to higher spending on health and wellness products and services.
  • By tracking comments across numerous social media platforms and in various digital communities and forums, the investor begins to focus on a target category: essential oils.
  • The investor builds search strings to find companies that are in the value chain of that category. Such companies may include manufacturers and refiners, distributors, and retailers.
  • After the investor chooses which companies to follow, the analytics tool sends automatic notifications when it detects spikes in social media traffic that indicate a selected company is trending (for example, when the number of company hits or mentions increases by 5% in one day or when the number of company followers grows by more than 10% in a week).
  • After receiving these notifications, the investor examines the underlying cause of the spike and the sentiment expressed in the traffic. The use of terms such as “quality” and “innovation” could signal ways in which the brand differentiates itself from its competitors. Those terms could also suggest that other factors, such as price, are less important to customers. The investor also reviews the demographics behind the social media hits. For example, the analytics tool may determine that the majority of participants in the discussion forums are women under the age of 35 who primarily live in coastal cities.
  • Through this analysis, the investor surmises that essential oils could be an interesting avenue to explore further and begins to identify companies and set up meetings with their management team to learn more. This is where digital and conventional analyses conflate.
(Video) Alternative Data for PE – Deal Origination & Due Diligence

Social media analytics is often associated with B2C industries. Many PE firms view it as a way for consumer-focused companies to anticipate current and potential customers’ wants and needs and stay a step ahead of the competition. However, such tools are equally applicable to all industries.

Indeed, the global PE industry is beginning to understand the sheer potential of applying these innovative tools early on in the investment value chain. “Digital and advanced analytics during the sourcing process allow us to move around pieces of complex data in different ways to really see the excitement of an opportunity,” noted a partner at a large-cap fund. “We have the same data as everyone else, but we can generate completely new insights if we just interpret patterns differently. We’re not quite there yet, but we’re rapidly moving in that direction.”

Importantly, data analytics tools enable investment professionals to identify more proprietary deals. (A proprietary deal can take one of two forms: a deal in which a firm is the only bidder, or a deal in which a firm is the first of multiple bidders and has a significant head start in terms of a relationship and access to company information.) The investment director at a leading midmarket fund told us, “Of course, everyone is trying to find a proprietary deal, but we know that it’s nearly impossible once transaction sizes move beyond the lower midmarket.”

Due Diligence

After identifying potential targets, investment professionals can partner with companies that have the data analytics tools required to create multidimensional views of those opportunities. These tools can complement conventional analytics processes and, in the hands of those who understand how to use them, allow investors to dig deeper into companies’ performance and potential.

For example, data analytics tools can help an investor explore how to develop or grow a market for a company or its products. Key areas of analysis may include potential pockets of value, customer demographics, brand value relative to the competition, and potential new customers. These tools can also help validate the market—and company—specific assumptions being used in valuation models and inform a PE fund’s subsequent bidding strategy. By combining data analyses with conventional analyses, investors can gain unique insights and spot early indications of value creation opportunities. (See “Data Analytics Delivers Due Diligence Insights for a PE Firm.”)

An investment professional at a leading PE fund was conducting due diligence on a consumer products company. In addition to using more conventional analyses, the investor and his strategic partner used data analytics to understand how the company performed relative to its competitors in several areas. (See the exhibit below.)

Digital Deal Sourcing in Private Equity (3)

(Video) Understanding the Hierarchy of Private Equity & the Process Behind Repeated Investment Success

  • Social Media Ratios. By expressing the number of social media followers of the company as a multiple of revenue, and comparing the multiple to that of competitors, the investor determined that the company had the potential to monetize a larger fan base and thus strengthen its market position.
  • Influencer Metrics. After evaluating the social media comments from influencers, the investor determined that the company’s network of influential customers was larger than that of its competitors. The company’s customers also spread its brand news faster. Thus, the company’s revenue growth potential was stronger relative to that of its competitors.
  • Search Trends. Looking at Google search trends, the investor found that consumer interest in the company grew much faster than consumer interest in its competitors. This was true across a variety of regions, which was additional evidence of the company’s strong potential for revenue growth.
  • Sentiment and Attribution Analyses. By aggregating and analyzing 5,986 product reviews, the investor understood customers’ product-specific reactions and sentiment for the company’s portfolio of offerings. The investor also grasped what was unique about the brand and what differentiated it from its competitors.

A Wide Variety of Benefits

In addition to the uses we’ve mentioned, data analytics tools are helping PE firms in the following ways:

  • To act on attractive businesses that are below the firm’s threshold for acceptable deal sizes; by identifying and investing in several “too small to consider” businesses—and finding a way to link them together—an investment professional can potentially create a strong and stable investment platform in a given segment
  • To identify opportunities for established companies that are in the firm’s portfolio; such investments may include smaller add-on businesses that have been operating under the radar
  • To generate insights regarding disruptions that may affect the value of existing portfolio assets (and also affect the timing and means by which the fund exits those investments)
  • To change the culture and mindset of investment professionals, encouraging them to think about value creation from multiple angles and in unconventional ways

Data analytics tools are increasingly applicable to helping PE investment professionals identify potential targets and conduct due diligence. And as the world is increasingly digitized, the trend is likely to gather momentum. These tools are continuously evolving and can be customized to reflect the theses and investment strategy of a given PE firm; we have only scratched the surface of the proprietary insights that can be generated. The investment professionals who embrace and apply these tools will give themselves a sustainable edge. Those who don’t risk putting themselves at a permanent disadvantage.

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(Video) Effective Deal Sourcing Through Market Mapping | Sabeeh Khan w/ Kison Patel

FAQs

How do PE firms source deals? ›

Private equity firms find their deals through these sources: Investment banks / M&A intermediaries. Referral sources (attorneys, accountants, etc.) Other private equity firms.

What is deal origination in private equity? ›

Deal origination is the sourcing of investment opportunities by private equity (PE) firms, venture capital firms, and investment banks. It involves generating deals to pitch to potential buyers, and it is the first step in creating a deal. Successful investing is built on a foundation of effective deal origination.

What is deal by deal private equity? ›

Deal-by-deal structures tend to charge a lower fee, based on the deal value (say, 1% per annum), and only once the investment has been acquired. No abort costs: unlike with a traditional fund, any costs from an aborted investment opportunity are borne by investment manager, not the investors.

What is deal sourcing platform? ›

An effective deal sourcing software platform can help your team source better deals, giving your firm a competitive advantage. With more features, capabilities, and automation than a spreadsheet, deal sourcing software enables your team to identify and act on opportunities much faster.

What does sourcing mean in private equity? ›

Deal sourcing or deal origination is a term used by finance professionals such as private equity investors and investment bankers to describe the process by which firms identify investment opportunities. The term can apply to venture capital or private equity.

How are VC deals sourced? ›

How do VCs source deals? They traditionally source deals through personal networks and referrals, although more dealmakers are also utilizing direct deal sourcing tactics.

What is deal sourcing in investment banking? ›

Deal sourcing, also known as deal origination, is a process through which finance professionals find investment opportunities. It is used by private equity investors, venture capitalists, investment bankers, and other firms. The main purpose of deal sourcing is to find various deals to keep an uninterrupted deal flow.

What is M&A sourcing? ›

M&A deal origination, also known as 'deal sourcing' is the process through which investment bankers, lawyers and other financial intermediaries 'originate' the mandates to advise on companies' transactions.

What is deal sourcing property? ›

Property deal sourcing involves searching for, and negotiating, a deal for a property. This is then sold on to a buyer, who has either asked for such a property deal or who may be interested when approached.

What are the stages of private equity? ›

According to Blackstone's Private Wealth Solutions group, the life cycle of PE funds is typically 7 to 10 years, and is generally broken down into three stages: the fundraising period, the investment period, and the harvest period.

What is due diligence in private equity? ›

In the private financial markets, private equity due diligence describes a potential investor's process for assessing the desirability, value, financial viability and potential of an investment fund before they commit capital.

What is deal by deal waterfall? ›

The deal-by-deal waterfall distributes carried interest faster. With a European waterfall, the first distributed amounts are used to return the capital called by other deals. In the deal-by-deal waterfall, the first deal may return some carried interest if the deal IRR is above one of the hurdle rate.

How much does a private equity principal make? ›

Private Equity Principal Salary, Bonus, and Carried Interest

On average, Principals at mid-sized-to-large firms in the U.S. earn in the $500K – $800K range in terms of base salary + year-end bonus.

How do you source investment opportunities? ›

How to Source Startups for Investment Opportunities
  1. Build Relationships With Other Investors. ...
  2. Go Where Startups Congregate. ...
  3. Mentor at Startup Accelerators and Incubators. ...
  4. Find Them on Internet Platforms. ...
  5. Work on Your Inbound Strategies. ...
  6. Watch Where Talented People are Going. ...
  7. Take a Problem-first Approach. ...
  8. Host Events.
9 Aug 2022

What is equity origination? ›

Equity Origination: This team pitches companies on raising capital and then executes financing deals such as IPOs and follow-on offerings. Syndicate: This group communicates with other banks to coordinate deal execution – since most equity deals involve other banks in order to distribute risk.

What does sourcing mean in finance? ›

the selection by a firm of its sources of supply - raw materials and components in the case of a manufacturer, final products in the case of a retailer. A firm may choose to buy in a particular input (or product) from an outside supplier or to produce it for itself as part of a vertically integrated operation.

What is logistic sourcing? ›

Sourcing is an upstream part of the supply chain: It's the process of strategically choosing the right services and goods that a company needs to run their business. Sourcing is also the act of buying goods, including seller selection, contract negotiation and measuring the long-term performance of your suppliers.

What is origination and advisory? ›

Origination & Advisory aims to build long-term, trusted and mutually beneficial relationships with the major corporates, financial institutions, financial sponsors and sovereigns around the world.

How do angel investors source deals? ›

Investor Events and Forums: Local or online events such as startup showcases, demo days, speaker events, and educational investor forums. These may also include matching services or events held by larger institutional investors, corporate venture capital groups, and accelerators.

What is the difference between venture capital and private equity? ›

Private equity is capital invested in a company or other entity that is not publicly listed or traded. Venture capital is funding given to startups or other young businesses that show potential for long-term growth.

What dealflow means? ›

Deal flow is a term used by investment bankers and venture capitalists to describe the rate at which business proposals and investment pitches are being received. Rather than a rigid quantitative measure, the rate of deal flow is somewhat qualitative and is meant to indicate whether business is good or bad.

How do investment bankers find clients? ›

The best investment bankers recognize that even without in-person meetings, they can leverage their network to find new clients. Using Affinity, they can build a robust network of industry experts, venture capitalists, and private equity investors who can prove invaluable as they search for new businesses.

What is origination and structuring? ›

Origination & Structuring is a client facing function involved with identifying asset based financing opportunities with the banks' clients, translating such opportunities into feasible deal structures and successfully executing such deals. THE ROLE. Assist senior marketers in scouting for business opportunities.

What does source scrub do? ›

SourceScrub is the world's leading data service for firms looking to research, find and connect with privately held companies. Our Private Company Intelligence platform allows deal teams to take a data-driven approach in a traditionally opaque segment of the market.

What is equity syndicate? ›

An equity syndicate refers to a group of investors who come together to determine the price and sell new IPOs to the public. The syndicate takes various considerations such as risk and the financial status of the company when deciding on the price of the floated IPO.

What does structuring a deal mean? ›

Deal Structuring allows the buyer of a business to shape the deal to their advantage. It can result in a large transfer of value from the seller to the buyer at the closing. M&A negotiations are tense and usually involve back and forth around the price.

What is buy side and sell side? ›

Buy-Side – is the side of the financial market that buys and invests large portions of securities for the purpose of money or fund management. Sell-Side – is the other side of the financial market, which deals with the creation, promotion, and selling of traded securities to the public.

What is the main difference between sourcing and deal packaging? ›

Deal sourcing is searching for a property deal and negotiating the price investors are willing to spend on it. A good deal sourcer can get up to 25% BMV (below market value) on these sorts of deals. Deal packaging is taking that deal and packaging it to investors to purchase from you for a lucrative fee.

Is property sourcing profitable? ›

Property sourcing can be an extremely lucrative career, but like anything else, to be successful, you need work ethic, knowledge, skill, and the right contacts.

What is a sourcing fee? ›

Sourcing Fees means the product of (i) the lesser of (A) the Outstanding Balance of an Investment at the time that such Investment is purchased or otherwise acquired by Owner and (B) the purchase price of such Investment, multiplied by (ii) 0.02, multiplied by the Sourcer Fee Multiplier.

What is the J curve in private equity? ›

The J-Curve in Private Equity

The term J-curve is used to describe the typical trajectory of investments made by a private equity firm. The J-curve is a visual representation of the plain fact that sometimes things will get worse before they get better.

What is harvest period of PE? ›

Typically takes about 3-6 months. Initial investor commitments are made and the fund launches. Initial “calls” are often not full the full amount committed. Also called “first closing.”

Is a CFA good for private equity? ›

But if you're aiming to break into investment banking, private equity, venture capital, or sales & trading, the CFA is marginally helpful at best.

How do you evaluate a private equity deal? ›

The three measures of private equity performance you need to know are internal rate of return (IRR), multiple of invested capital (MOIC), and public market equivalent (PME). It's important to learn and use all three metrics in tandem because they account for the others' blind spots.

Which consulting firm is best for private equity? ›

The leading consulting firms for Private Equity services:
  • BearingPoint is an independent Management and Technology Consultancy firm led by and owned by its partners. ...
  • Capco. ...
  • CIL Management Consultants. ...
  • dss+ ...
  • Point B. ...
  • Sia Partners. ...
  • Genioo.

What is due diligence checklist? ›

A due diligence checklist is an organized way to analyze a company that you are acquiring through sale, merger, or another method. By following this checklist, you can learn about a company's assets, liabilities, contracts, benefits, and potential problems.

Which waterfall method is better in private equity? ›

U.S. sponsors prefer the American equity waterfall

Some sponsors now use hybrid waterfall models that partially distribute carried interest on a deal-by-deal basis. For the time being, however, European and American equity waterfalls are the two standard waterfall models for commercial real estate.

What is a 100% catch up? ›

In practice, in a deal with a GP Catch-Up clause, the LP receives 100% of the property's cash flow until their preferred return hurdle is reached. Above the hurdle, the manager/General Partner receives 100% of the income and profits until they are “caught up” to their performance fee.

How do waterfalls work in private equity? ›

A distribution waterfall is a way to allocate investment returns or capital gains among participants of a group or pooled investment. Commonly associated with private equity funds, the distribution waterfall defines the pecking order in which distributions are allocated to limited and general partners.

How much does a VP in private equity make? ›

How much does a Vice President, Private Equity make? The average Vice President, Private Equity in the US makes $366,700. The average bonus for a Vice President, Private Equity is $179,200 which represents 49% of their salary, with 100% of people reporting that they receive a bonus each year.

What is the highest paying job in finance? ›

Highest paying finance jobs
  • Investment banker.
  • Information technology auditor.
  • Compliance analyst.
  • Financial advisor.
  • Insurance advisor.
  • Financial analyst.
  • Senior accountant.
  • Hedge fund manager.

Does PE pay more than IB? ›

Analysts at all types of private equity firms earn significantly less than Associates, just as Analysts in IB earn significantly less than Associates. In fact, PE Analysts often earn less than IB Analysts! So, you might initially make less money if you start in private equity.

How do you find investors for private equity? ›

How to Find Private Investors For Small Business
  1. Friends and Family.
  2. Small Business Loans.
  3. Angel Investors.
  4. Venture Capitalists.
  5. Private Equity.
  6. Crowdfunding Platforms.
31 Aug 2022

What does it mean to source a startup? ›

Sourcing does not only imply searching but also qualifying and shortlisting, i.e. sorting out and identifying the innovations that will serve the needs of the group. To properly identify the startups with which to collaborate, large groups must first and foremost know the needs of their market and their business.

What is CVC startup? ›

Corporate venture capital (CVC) is the investment of corporate funds directly in external startup companies.

What is the difference between ECM and DCM? ›

The major difference between DCM and ECM is the type of investing activity that occurs. In DCM, investors are lending money to companies. In ECM, investors are purchasing a portion of ownership in a company. These two different investing activities yield two very different levels of risks and rewards.

What is deal origination in private equity? ›

Deal origination is the sourcing of investment opportunities by private equity (PE) firms, venture capital firms, and investment banks. It involves generating deals to pitch to potential buyers, and it is the first step in creating a deal. Successful investing is built on a foundation of effective deal origination.

What is DCM origination? ›

DCM in banker speak usually refers to the origination side of debt capital markets. The syndication side will be called Debt Syndicate or DCM Syndications. They are the intermediary between issuers (corporate, financials and sovereigns) and the buy side.

What typically happens when a private equity firm acquires a company? ›

When a private-equity firm (PE) acquires a company, they work together with management to significantly increase EBITDA during its investment horizon. A good portfolio company can typically increase its EBITDA both organically and by acquisitions.

What is deal sourcing property? ›

Property deal sourcing involves searching for, and negotiating, a deal for a property. This is then sold on to a buyer, who has either asked for such a property deal or who may be interested when approached.

What does source scrub do? ›

SourceScrub is the world's leading data service for firms looking to research, find and connect with privately held companies. Our Private Company Intelligence platform allows deal teams to take a data-driven approach in a traditionally opaque segment of the market.

How do you make money in private equity? ›

Key Takeaways

Private equity is an alternative investment class that invests in or acquires private companies that are not listed on a public stock exchange. Private equity firms earn money by charging management and performance fees from investors in a fund.

What is the difference between equity and private equity? ›

To go back to first principles, equity is a stake of a company's value. Public equity is a share in a company that is publicly traded on a stock exchange. Private equity is a stake in any company that is not publicly traded.

Does private equity pay well? ›

Private Equity Associate Salary + Bonus

For the vast majority of private equity associates, the base salary is around $135k-$155k. Then, based on fund performance, bonuses tend to range from 100% to 150% of the base salary.

How long do PE firms hold companies? ›

Private equity investments are traditionally long-term investments with typical holding periods ranging between three and five years. Within this defined time period, the fund manager focuses on increasing the value of the portfolio company in order to sell it at a profit and distribute the proceeds to investors.

How do private equity firms ruin companies? ›

Their tactics include paying themselves fees for nonexistent services and quickly converting the assets of the companies they have bought into dividends for the private equity firm. This leaves the companies without resources to invest in sustaining and growing their businesses, or paying workers fairly.

Do private equity firms fire people? ›

Private Equity firms generally find the value that attracted them to a business lies largely within its employees. Private equity firms don't “win” by driving companies into bankruptcy or firing all of the employees.

What is the main difference between sourcing and deal packaging? ›

Deal sourcing is searching for a property deal and negotiating the price investors are willing to spend on it. A good deal sourcer can get up to 25% BMV (below market value) on these sorts of deals. Deal packaging is taking that deal and packaging it to investors to purchase from you for a lucrative fee.

Is property sourcing profitable? ›

Property sourcing can be an extremely lucrative career, but like anything else, to be successful, you need work ethic, knowledge, skill, and the right contacts.

What is a sourcing fee? ›

Sourcing Fees means the product of (i) the lesser of (A) the Outstanding Balance of an Investment at the time that such Investment is purchased or otherwise acquired by Owner and (B) the purchase price of such Investment, multiplied by (ii) 0.02, multiplied by the Sourcer Fee Multiplier.

When was SourceScrub founded? ›

Founded in 2015, the SourceScrub platform has over 160M data points on private companies and combines the most advanced technologies with a Data Operations team of over 600, to ensure the highest quality signal.

Videos

1. (Webinar) A Roadmap for Building a Technology-Driven Private Equity Firm
(Grata)
2. Deal Flow and Deal Sourcing | Venture Capital Deep Dive | Curated
(Curated)
3. Deal Sourcing, Valuation and Due Diligence 5/10
(Dr Ola Brown)
4. Deal Sourcing for Searchers
(Searchfunder)
5. For Buyers & Intermediaries: Deal Sourcing Solution For B.N Digital, an Agency Powered by BizNexus
(BizNexus)
6. Deal Origination: How To Do Buy-Side Searches On BizNexus
(BN.Digital)

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