Deal sourcing or Origination is a process used by Investment bankers, VC, PE and Finance professionals to identify investment opportunities in the market. Investment firms need to do this to ensure a large volume of deals is obtained in a given period to keep a continuous stream of deals generating future revenue flows.
Aside from an Investment firm and their deal originators having an excellent network and a professional reputation, deal origination entails managing relationships, generating leads and pitching to buyers. Outbound marketing activities includes trade shows, emails, cold calling and road shows as well as outsourcing through bankers to spread the message widely to different audiences.
Industry reports show that Private Equity (PE) investment firms with large, proactive outbound origination teams are 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 sourcing teams that were specialised were star performers by stage, year and sector with every investment professional achieving unique deal sources.
All PE firms have a strategic programme in place which vary widely from cold calling, outsourcing to business development executives at Investment Banks. Some PE funds are industry agnostic, ideally looking for a well-run company in a defensible market with healthy margins, solid growth and a good management team that wishes to stay long term. Deal originators may wish to analyse every deal which they request a bank to undertake however, a lot of investment bankers have the view 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 like Pitchbook, Capital IQ and Axial often making recommendations to PE firms with existing Portfolio companies that are active in the same space as the companies PE firms are targeting to buy.
Investment firms use either traditional approach or an online deal sourcing approach.