deal origination entails managing relationships

Industry reports show that private equity (PE) investment firms with large, proactive, outbound origination teams being the best performers. HOF capital, a venture capital firm undertook research on PE firms Battery Ventures, Great Hill Partners, Insight Venture Partners, Platinum Equity, Summit Partners, TA Associates, and TCV which have the largest origination functions. The results showed that large-scale, specialized sourcing teams were star performers by stage, year, and sector with every private equity investment professional achieving unique deal sources.

All private equity firms have a strategic program in place which vary widely from cold calling and outsourcing to business development executives at investment banks. Some private equity funds are industry-agnostic. Ideally, these funds are looking for a well-run company in a defensible market with healthy margins, solid growth, and a good management team that wishes to stay for the long term. Deal originators may wish to analyze every deal which they request a bank to undertake. However, a lot of investment bankers think this is not always the most efficient method to obtain relevant buyers for their target companies.

Originators at investment banks will put together their buyer list using sources such as Pitchbook, Capital IQ, and Axial. They often make recommendations to PE firms with existing portfolio companies that are active in the same space as the companies PE firms are targeting to buy.

This is the most conventional process relying on an investment firms’ historic network and reputation within the investor community. Firms bid against each other with their success on deals reliant on access to specific industry or company information.

Traditional approaches are getting much less effective with time. Mainly because private companies with >$15M of revenues and $2m EBIT or adjusted EBITDA are regularly contacted by PE firms and strategic buyers. Furthermore, it’s getting a lot easier for company owners to find out more about different buyers and capital sources through search engines and social networks like LinkedIn.

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