Deal Sourcing Strategies for Private Equity Firms

Sourcing & Origination
Private Equity
Last updated:
March 1, 2022

Deal sourcing strategies are the underpinning of any prosperous private equity firm. In the past, firms employed a more traditional methodology that emphasized investor networking and relationships.

But advancements in data and technology have given way to deal origination platforms that empower firms to take a more structured, predictable, and proactive approach to finding and closing deals. Below, we’ll discuss how to find private equity deals using new school deal sourcing strategies.

Traditional Deal Sourcing Strategies for Private Equity

How do private equity firms find companies to buy? On the surface, it's a relatively straightforward process by which firms:

  • Discover who is doing the selling.
  • Offer a competitive bid for the deal or formulate their own arrangement.

While deal sourcing in private equity may seem simple on paper, in practice, it’s anything but. In his famous 2010 Equity Study, “Where Are the Deals?” David Teten shares that the average investor in a private equity firm will review at least 80 investment opportunities to make just a single investment.

Another industry veteran estimates that just 1% of evaluated deals actually close, with the entire process taking up to a full year.

The 12 phases of a private equity deal.

PE firms must be resourceful and cast very wide nets to generate as many investment opportunities as possible. Depending solely on relationships and intermediary interest isn't enough in today's highly competitive market.

That's why leading firms are expanding their deal sourcing efforts and taking a more modern approach. New school dealmaking harnesses data, technology, people, and process to take a proactive, agile, and streamlined approach to finding and closing deals. Let's dive into a few of these methods.

Modern Deal Sourcing Best Practices for Private Equity

Hire an In-House Team

A sample of the top 10% of equity firms reveals that they pay special attention to outbound deal origination. They do this by hiring at least .75 and 1.25 dedicated deal sourcers for every investment professional on the team. Alpine Investors’ Director ofBusiness Development Ajeet Gautam agrees, “I’m hard-pressed to find a PE firm out there that doesn’t have some form of BD [function] these days.”

To do this successfully, many firms are taking a page from outbound technology sales and adopting similar team structures and processes. This webinar highlights some of the most valuable things modern firms can learn from SaaS sales teams.

Define Sector-Specific Strategies

More firms are choosing to focus on specific industries. One of the first steps is to identify, research, and segment all of the companies within a given space. This process is called market mapping.

Market mapping enables firms to understand the landscape, justify an investment, and then narrow their focus to specific targets. It empowers your firm to develop deep domain knowledge and expertise before pursuing a company, which ultimately sets you apart from other dealmakers in today’s highly competitive market.

Look for Deal Signals

Firms with consistently high deal flow – such as TA Associates, which is committing to more than $3 billion in new investments each year – use data to be more scientific about their sourcing initiatives. One way to do this is by actively looking for companies that are sending up "deal signals," or data points that your firm has determined indicate investment readiness or interest.

One example of a deal signal is if a company hires a new CFO. Another may be if they are ramping up conference attendance. Paying attention to deal signals like these allows firms to proactively seek our firms that are both attractive to investors and likely to welcome outside capital.

Score Opportunities

In addition to deal signals that indicate investment readiness, new school firms seek key data points about opportunities to determine whether or not they are a good fit for their current thesis or sector-specific strategy. These data points range from industry to ownership to website traffic to current job postings.

Developing proprietary scoring around these data points is a great way to quickly identify whether or not a particular opportunity is worth pursuing. It helps your BD team prioritize its outreach and spend their time and effort where it matters most.

An example of custom scoring in SourceScrub
An example of custom scoring in SourceScrub.

Use Technology to Make Life Easier

Doing research, mapping markets, and scoring companies is extremely time-consuming and tedious when done manually. Many founder-owned, non-transacted companies are difficult to find in the first place, let alone understand and reach.

Fortunately, data and technology are streamlining these processes through tools like CRM and private equity deal sourcing platforms like SourceScrub. These tools help firms:

  • Minimize guesswork and manual research for both private and public companies.
  • Ensure all contact information is accurate and up to date.

  • Track and centralize all relevant data and documentation.
  • Better understand evolving target markets in real-time alerts.
  • Automate personalized outreach at scale.

Build Rapport with Strategic Outreach

Once you've identified a prime investment target, you need to act before another firm does. Connecting with companies early in their lifecycles, building rapport, and staying top of mind is the ticket. Maintaining a consistent dialogue helps your prospect feel valued and illustrates your continued interest in getting a business deal done.

Take advantage of compelling events like trade shows a company attends or great new hires they make to reach out and connect. If you are able to reference specific data points on the business in your outreach, you are more likely to receive a response as it will appear more thoughtful and intentional.

Private Equity Sourcing in the 21st Century

Deal sourcing is one of the most critical factors in ensuring a private equity firm’s success. With so much competition in the market, an old-school approach simply won’t cut it. Forward-thinking organizations must employ the latest data and technology-driven investment strategies to crank up their number of leads.

To learn more about these and other new school dealmaking strategies, download this free 5-step guide to taking control of your private equity deal flow.

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