Small and Mid-Cap Deal Origination Strategies
What is Deal Origination?
Deal Origination, also known as Deal Sourcing is a term that is used by finance professionals such as private equity investors, venture capitalists, and investment bankers to identify the search for new investment opportunities in the market. The main role of deal origination is to ensure that viable deals are sought in high numbers within a certain period of time to maintain a steady deal flow.
M&A Deal Origination Strategies
The traditional deal origination approach that most investment firms have been using to source new investment opportunities relied heavily on having a vast network of contacts, professional referrals, and a good reputation within the sell-side M&A advisors in their home region.
Some of the most commonly used traditional deal origination strategies include:
1. Growing firm’s in-house team
For established mid-market investment firms, growing their in-house M&A deal origination team appears to be the first option. The in-house team is usually made up of experienced finance professionals who have a proven track record of generating new leads. They are hired on a full-time basis, typically, from another investment firm, or the sell-side (hello again, investment bankers). Although it’s a worthwhile strategy, the recurrent fixed expenditure becomes an expensive cost to bear when you hire senior members of your team and such senior members are focused on origination. The other cheaper alternative would be hiring junior financial analysts or a team of interns but the investment firm will have to spend time and resources during the hiring and training process. As a result, the firm will get the deal flow, but at a decent cost.
2. Delegating deal origination tasks to portfolio companies’ executives
For firms with an existing portfolio of companies, another viable strategy would be to delegate deal origination to the senior management of the portfolio companies. These executives usually have vast industry experience and good connections. However, they might not optimally deliver, as they tend to concentrate more on the core business development or their primary duties. Most of their focus is on daily business operations as opposed to deal origination as it’s the case with an in-house team of investment specialists. For investment firms pursuing this strategy, the motivation of these dedicated portfolio companies' managers becomes the key element of success. Motivation usually goes together with costs, so this option might be cheaper than additional dedicated sourcing FTE in the investment firm, but the results are also usually lower.
3. Hiring a Buy-Side M&A advisor
Investment firms work with M&A advisors who are well-versed with the M&A deal origination process. They are hired on a contract and compensated based on their ability to generate new M&A investment leads. The investment advisors closely monitor all new opportunities in specific niches and sometimes proactively reach out to their contacts within the industry to activate the shareholders for a potential sale. Another additional value-add from the M&A advisor could be that they will help the investment firm with deal structuring and negotiations, due diligence, or bank and Mezz financing. However, most investment firms have enough expertise to manage these processes without any external help. As a result, this option appears to be the least attractive out of the traditional ones. Probably the most expensive and least delivering.
So, most investment firms should prioritize building up their in-house deal sourcing teams and hire dedicated deal sourcing employees.
Or shouldn’t they?
Online deal sourcing platforms
The online deal origination approach is one of the latest and most advanced strategies that investment firms use to generate viable leads for M&A transactions. Most investment firms are opting for online deal origination over the traditional approach, or at least use it as an add-on to one of their traditional strategies.
The main reason why it is gaining popularity is due to the ease of accessing the high-quality deal flow in high volume. A click of a mouse or a push on a button is enough to get the opportunity in your mailbox. Unlike a few years ago, when different ‘platforms wannabes’ like open boards or open databases of deals were popular and contained tons of crappy deals, these days the platforms of new generation, such as us, AQCON (or BankerBay, or DealCircle to name a few), are built with investors’ interests at their core.
First off, absolute confidentiality is now the standard. Nobody will ever know your contact details or your firm preferences without your explicit consent.
Secondly, there are no garbage deals on some of the platforms. What makes one platform different from another one is the set of participants and the quality of deals. At AQCON we make sure that sell-side advisors present on our platform are of the highest professional standards.
Thirdly, digital platforms have matching algorithms that match the investment opportunity profiles to buyer’s investment criteria. This allows tracking targeted leads and getting rid of irrelevant deals.
Fourth fact - modern platforms automate the first few steps of the deal and shorten the time parties would take to close the deal thus, making it more efficient compared to the traditional deal origination approach. It usually takes 1-2 days from the moment the sell-side advisor is ready to go to the market to the receipt of the first signed NDAs and Information Memorandum distribution.
Last, but not least, is the fee model, or the cost of use. While some platforms take subscription fees to get access to deal flow, we believe in risk alignment with the buyer and get compensated if and only if the buyer closes the deal. 100% success-based.
Closing remarks
All investment firms utilize some of the traditional deal sourcing strategies. However, these days, as the high-quality deal flow of high volume becomes crucial for investment firms’ success, deal-sourcing platforms like AQCON become an absolute must for every firm’s deal sourcing approach.