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Private Equity Deal Origination using new technology solutions and AI

Private Equity Deal Origination using new technology solutions and AI
July 02, 2021

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 must do this to ensure that a large volume of deals is obtained in a given period to keep a continuous stream of deals for generating future revenue flows.

Other than 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 include 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 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.

Investment firms use either a traditional or an online deal sourcing approach.

Traditional approach

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.

Online deal origination

Platforms like Axial, an M&A marketplace, and other sites cost much less than travelling to physically attend seminars or conferences around the world. Investors can research different strategic buyers or private investment firms online through Google, and sometimes through free directories.

Online deal origination is the most modern technique using technology to replace more established methods. Various fintech firms provide deal sourcing platforms which investment firms and originators can use to generate new leads and reach a bigger network. Deal origination platforms include Dealsuite, Dealnexus, Navatar, and SourceScrub.

Platforms connect buyers and sellers online, leading to a reduction in overhead costs and an increased number of leads. Deal origination has become a lot simpler and more efficient. Platforms offer subscription-based research and due diligence services to existing users with records of transactions and the history between participants before closing a deal.

Crowdfunding involves raising capital to finance a particular project or business. It works by offering access to mass-market public investors to donate funds and raise capital for a business. Innovative entrepreneurs also use this method to allow investors to own shares in startups in return for equity investment.

Benefits

Online deal origination platforms have many benefits, including a wider investor audience and access spanning across many geographical locations. The platforms bring together investors who share the same strategy and goals. When a user makes it public to buy or sell a company, the message will reach a targeted audience sharing the same requirements.

Online deal origination platforms have many benefits including a wider investor audience and access spanning across many geographical locations.

Automation

Platforms get rid of manual processes and allow automation of deal tracking. Some platforms offer workflow solutions to manage the deal sourcing process from origination to deal closure. Automating the deal tracking process makes it more efficient and quicker since it would take weeks or even months for a deal to complete in a traditional deal origination approach. Process automation also allows users to collect important data that can be evaluated to determine areas that need to be improved to make the process even more efficient.

Matching algorithms

Deal-origination platforms  use algorithms to help investors match their requirements to find what they are looking for. Typically, an investment bank on the buy-side will specify their target industry, transaction size, and the geographical location of the company they wish to buy. The algorithms will then apply this criterion and generate deals meeting the buyers’ requirements. It greatly cuts down the time spent by the bank on manual sorting through multiple deals to determine if they match up. The automated process also increases the conversion rate since the message is targeted to the right audience.

KPIs

Conventional deal sourcing methods are often difficult to track as they lack measurable performance indicators. The lack of reliable indicators makes it challenging to calculate the conversion rates and compare the firm’s performance against other comparable companies in the market.

Deal sourcing platforms provide the benefit of tracking emails sent, phone calls made, NDAs signed, and LOIs sent, etc. The data is captured with timestamps, which helps in measuring conversion rates and performance management at any given time during the deal sourcing process.

Deal origination solution from HCL and Math Labs Research (MLR)

HCL brings to its clients an advanced, AI-driven deal origination solution built by its partner, Math Labs Research (MLR)– a UK-based computational mathematics and AI research lab, founded by analytics leaders from McKinsey’s London practice.

It comes with the following features:

AI-powered origination

An investment banking division of a bank or a buy-side firm looking to develop an AI platform which will  facilitate the automation of transaction origination, add-on acquisitions, market analysis, and industry trends.

A combination of unsupervised and supervised AI approaches used to build a progressively intelligent engine including - Subsector landscape research Company level competitive, moves tracker, volume and price drivers by sub sector.

Data feeds

Diverse data sets from a wide range of general and industry sources to company-specific information:

MLR’s core AI engines

A combination of unsupervised and supervised engines used to identify key concepts within company static and dynamic information, evolved over several years of research.

  • MLR’s Relevance Engine
  • Unsupervised Concepts Discovery Engine
  • Concept Impact Engine

Key modules and insights

  • The MLR market explorer- Relevant company search
  • Company and peer/competitive level automated key moves tracker
  • Structural, volume, and price drivers by sub-sector
  • Explanatory analysis graph of investment events

References

  1. Deal Origination- A process used by finance professionals to identify investment opportunities in the market (Author: Corporate Finance Institute)
  2. The Rise of the Deal Origination Team (Author: Danielle Fugazy)

Credits

Pravesh Johri, Partner– Financial Services, Math Labs Research Limited, United Kingdom