Nov 29, 2023 9:24:15 AM | For Private Equity Investors Innovate buy-side deal sourcing with these 6 questions

Buy-side deal sourcing is more challenging than ever in light of slower market activity. Here are 6 key questions to evaluate how your firm is innovating.

Macroeconomic trends of the last four years are reshaping how deals get done in private equity. 

Federal stimulus growth and contraction, interest rate increases, and the threat of a potential recession have softened momentum and forced firms to reevaluate their approach. 

TruSight subsidiary Private Equity Info, an M&A research database that has tracked acquisitions for two decades, recently shared analysis of several of the most prominent trends. Platform and add-on acquisitions have dropped significantly, firms are holding portfolio companies longer, and add-ons are becoming a more dominant investment strategy. 

In other words, deals are harder to find. Relying on only the highest volume sources of deal flow is a fading strategy. But the alternative, casting a wider net with a proactive approach, is often out of reach for firms with small or non-existent business development teams. 

For more than a decade, TruSight has helped private equity firms and strategic investors optimize their position in the Lower Middle Market by providing intermediary-led and proprietary deal flow.  

As a firm focused on enhancing deal sourcing, we often frame the challenge around six simple questions with one theme: how you are innovating your deal origination process.

Use the questions below to help you determine if you’re ramping up for the change ahead. 

How strong are your relationships with long-tail investment banks? 

With the crunch, deals from Lower Middle Market have become increasingly attractive. With more than 4,600 investment banks and business brokers in the U.S., it’s a huge market to cover, and hard to justify given the lower percentage of relevant deal flow. You’re certain to find great deals, but the question is how to cover the sector with your team. 

Many private equity firms reach out a few times a year with a press release or company announcement, but if your investment criteria and subsector focus aren’t top-of-mind for these bankers, you’re likely to miss deals. 

TruSight’s Intermediary Coverage deal sourcing service helps private equity firms alleviate this challenge. We maintain relationships with thousands of investment banks, share their deals, and proactively send your investment criteria, making sure you’re efficiently covering the long-tail. 

Are you seeing deals from new intermediary sources? 

Deal flow from new sources should be a key performance indicator for firms looking to expand their business development strategy. It’s practical to rely on existing relationships for new opportunities, but as the market tightens, having access to a broader network of sources can be fruitful. Many of our clients tell us that they evaluate the quality of our service on two factors: if the deals we send fit their investment criteria, and whether or not they would have seen it without us. 

Is your executive contact data up-to-date? 

Your outreach needs to land in the right hands to move forward. Email deliverability is one way we measure our marketing efforts, and because firms and people change often in this industry, having accurate executive contact data is paramount. In 2021, TruSight acquired Private Equity Info to improve our data operations. PEI’s relational database is built specifically for M&A and allows a private equity investor to find and build relationships with intermediaries. More specifically, PEI’s highly accurate lists give investors the most up-to-date contact information of the lead executives involved at investment banks.  

What is the best use of your team's resources? 

While business development roles within private equity firms have been a growing role in the last 5 or so years, the vast majority of groups we speak with have a very distributed approach to deal sourcing. Senior partners are often leading some of the longer standing sourcing efforts with the highest quality relationships. As these relationships require significant time and expense to maintain, this leaves little time for covering the firms that only work on 1-3 deals per year. 

Enhancing those outreach efforts with a third-party service provider is a great way to stay efficient, and keep your team focused. Whether through our intermediary or proprietary deal sourcing offerings, TruSight provides a constant flow of vetted opportunities and maintains those relationships so you can focus on closing the deal. 

Are your deals qualified enough to make quick decisions?  

As the market becomes more competitive, speed to conviction becomes a real difference maker, both when it’s time to pursue aggressively or pass quickly. 

But another way to improve deal closures is to encourage higher quality leads at the top of the funnel. You want to know that your sources are high-quality, so it’s easier to make decisions later. Tightening your pre-evaluation process can reap significant gains. 

One way we achieve that with our Retained Buy-Side Search service is with a clear discovery process, following a template to gather a summary of revenue, EBITDA, industry verticals, customer concentration, employee count, management team, and more. Everything is pre-vetted before it reaches our clients, and the relationship is kept warm in the background until an introductory call is requested. That way, only the highest quality opportunities reach time-constrained senior team members. 

Is your firm’s messaging differentiated? 

We’ve learned a lot about the best approaches for outreach through all of our deal sourcing services. Private business owners are incredibly busy, and may not be considering a sale, so getting the right message across, as succinctly as possible, is critical. Investment banks want to connect with the right investors that match their clients’ needs, so they’re discerning. 

It’s not just about identifying the right investment criteria to broadcast, and the right values, but continuously gathering market feedback and refreshing marketing and messaging needs so it hits home for the seller.  

Expand your deal sourcing efforts with TruSight

Learn about TruSight's proprietary and intermediary-led deal sourcing services and schedule a call with us today.

Dan Mahoney

Written By: Dan Mahoney

Dan is the co-founder and managing director of TruSight, leading a team that delivers outsourced business development and deal origination services.