It’s the dream of just about every private equity fund manager to source a proprietary deal. Why? Because they are often less trafficked by buyers and therefore can be bought without bidding against multiple buyers. In other words, they are often priced more modestly.
With more capital on the hunt than ever before - recent reports show nearly 12,000 active middle market private equity funds - the pressure on buyers to maximize their efforts to source deals is currently as high as ever.
Of course, a “proprietary deal” can be defined in several different ways. While the extreme example is sourcing an acquisition opportunity that has never been seen by another buyer, proprietary deals are most commonly acquisition opportunities that are not represented by a transaction intermediary (business broker, investment banker, M&A advisor, etc.).
Fund managers and those responsible for sourcing acquisitions' primary focus in a competitive market is not necessarily where a deal comes from, but that a deal gets done.
So, if you want to maximize the various deal sources that can feed your acquisition funnel what are the options?
Here’s a look at the current landscape of deal sourcing technology, platforms and services that you can use.
Fee-For-Service Deal Sourcing
Value prop: Direct sourcing, more deals, fewer fees
A newer option that has become more prevalent in the industry recently is fee-for-service deal sourcing.
These services typically will do direct outreach on behalf of a partner client to generate conversations with potential sellers. It looks and feels like it is conducted by the buyer themselves.
While this may seem like a small difference in strategy, there is good data to support that injecting third parties into the search process can depress response rates from targets who are wary of bankers or unknown third parties.
CAPTARGET, for example, was an early mover in what is now called the "fee for service" sourcing space. They offer a unique model that involves paying a flat fee to run a professional, scaled search process without ever requiring the buyer to pay additional success or finders' fees.
The service can replace the need to hire internal origination professionals and often replaces buy-side intermediary firms that also do similar work. The service is focused simply on top-of-the-funnel opportunity generation, meaning the group does not typically involve themselves in transactions beyond identifying the opportunity.
In the end, fee-for-service sourcing can reduce the cost of closing a transaction by many hundreds of thousands of dollars.
Who is it a fit for?
- Buyers of businesses who value keeping transaction costs low.
- Groups that have the ability to execute but simply need to see more deal flow.
Value prop: Full process control
Many buyers of a certain size or scale will choose to build sourcing capabilities internally. While this is often the most expensive of the options presented here, it also provides the most control over the process and true ownership of all lead flow.
Internal teams are often comprised of a lead business development professional supported by an analyst or junior type team member (at minimum). Using a number of subscription-based tools and databases, analysts will develop prospect lists and manage outreach by phone or email. Once qualified, these opportunities are given to the business development lead, who often will engage in in person meetings, management calls and may even manage most of the acquisition process for the buyer.
It is worth noting that most firms that have fully functional internal sourcing teams also rely on a number of other strategies to round out the effort.
Who is it a fit for?
- Larger buyers who value process control and lead ownership over the associated costs.
Value prop: High-touch service, verticalized expertise
One of the oldest and most common sourcing solutions involves hiring M&A intermediaries to source deals on the buyer’s behalf. These intermediaries often work for a small monthly retainer coupled with a finder or success fee paid at the close of the transaction. This can range from 1-5% of the total transaction value.
Most buy side intermediaries prefer to work on fairly specific search mandates, which allows them to level domain expertise in certain areas of focus, run and maintain smaller more manageable searches, and maintain a higher probability of success. Buy-side intermediaries not only source leads, but will also often qualify them, manage the introductions of both parties and may even support the process as it evolves.
Because most intermediaries have a regional presence, particularly in the middle market, buyers will often rely on more than one group to provide deal flow, which can create additional costs. Buy-side intermediaries that do not work on a retainer also generally do not provide a promise of proprietary deal flow, instead opting to share deals with the best fitting buyer first and passing the opportunity around to other buyers as each earlier buyer passes on the deal.
Who it’s a fit for?
- Buyers looking for highly verticalized or regional opportunities.
- Buyers willing to pay ongoing and success fees at close.
Deal Platforms and Subscriptions
Value prop: Access to prequalified deals supported by quality tech tools
Deal platforms like Intralinks Dealnexus connect buyers with intermediaries and the companies they represent. These platforms typically house deals posted by M&A intermediaries. These are available to review by buyers who find deals through a system's matching algorithm that takes each buyer's specific mandate into account. These opportunities are managed through the company’s online interface, which acts as a de facto deal CRM for many buyers.
While the different platforms have evolved over the years, some now charge for a service similar to that of a buy-side firm through the payment of success fees paid at the close of a transaction.
It is worth mentioning, that deal markets like Axial are often best suited for buyers looking for acquisition opportunities that are represented by an intermediary and are not a good fit for sourcing off-market, totally proprietary deals.
Who it’s a fit for?
- Tech savvy buyers who are looking for an integrated alternative to a conventional buy-side intermediary relationship.