As a private equity professional, you know that deal flow is the lifeblood of your business. But how do you manage the influx of potential investments and prioritize the most promising ones? In this article, we will share some best practices for managing deal flow and prioritizing investment opportunities in the context of private equity.
One of the first steps to managing deal flow is to track and measure where your deals come from. You can use a CRM system, a spreadsheet, or a dedicated software tool to record and analyze your deal sources. This will help you identify the most effective channels, such as referrals, intermediaries, direct outreach, or online platforms. You can also evaluate the quality and quantity of your deal sources based on metrics such as conversion rates, deal size, and return on investment.
I always have to be connected to my cash flow and avoid waste, analyze where I gain to move forward, and where I lose to remedy the same. Find out if the best investment is in a Company or in investments such as funds, and see what is best over time but for this to happen, my source has to be fully validated with the exact reality of the current market, so that there are no errors
Deal origination & deal sourcing has to be distinguished to create a robust deal flow for investments. Deal sourcing can come from an effective network of lawyers, accountants, bankers & other intermediaries. However, most promising investment opportunities can come from deal origination, which requires close networking with promoters & founders. Deal origination can also ensure that funds focus only on those investment opportunities which are compatible with their investment strategy rather than investing their time & resources on opportunities which are already in the market through intermediaries.
Another key step to managing deal flow is to establish a screening and filtering process that allows you to quickly and efficiently sort through the deals that come your way. You can use a set of criteria, such as industry, stage, valuation, growth potential, and fit with your strategy, to screen out the deals that are not relevant or attractive. You can also use a scoring system, such as a weighted average or a checklist, to rank the deals that pass the initial screening. This will help you focus on the most promising opportunities and avoid wasting time and resources on the less viable ones.
I think the most important way to develop a proper deal sourcing funnel (whether in PE, VC or PE/VC funds) is to first consider what the relevant screening criteria are. A lot of deals sounds interesting on first glance - but there are way more deals out there than an investor can properly screen. Accordingly, being clear on what deal qualifies as one to screen is the key first step. The second step is then to be proactive, not reactive. An investor should do a preliminary screen on each opportunity based on their investment criteria - but then pick from those deals only that one that qualifies as the best one for deeper due diligence.
Before screening any investment opportunities, funds should be clear about the stretch or flexibility they can accept to consider deals which may not be hundred percent fit with their core focus. It is essential that investment partners or GPs to get involved in screening & filtering rather than relying on analysts
When you are on a business journey you notice the lack of quality companies and professionals, When I play the role of screening and filtering, I discover a rupture in my business that even leads me to the idea of opening and financing new businesses, all through filtration and screening
Once you have narrowed down your deal flow to a shortlist of opportunities, you need to conduct due diligence and validation to verify the information and assumptions that you have about the deals. You can use a combination of primary and secondary research, such as interviews, surveys, financial analysis, market research, and competitive analysis, to gather and assess the data and evidence that support or challenge your investment thesis. You can also use a validation framework, such as the lean startup methodology, to test and refine your hypotheses and assumptions about the deals.
After screening, a more common practice is to perform a high-level diligence on the financials of the deal to arrive at a non-binding term sheet. Negotiating a non-binding term sheet upfront can save cost & time on both sides. If a non-binding term sheet is agreed, the assumptions & conditions in that term sheet can be validated in the formal due diligence which should involve financial, legal & management due diligence.
The final step to managing deal flow and prioritizing investment opportunities is to communicate and collaborate with your team and stakeholders. You need to share your findings and recommendations with your colleagues, partners, advisors, and investors, and solicit their feedback and input. You also need to coordinate and align your actions and decisions with your team and stakeholders, and ensure that everyone is on the same page and working towards the same goals. You can use tools such as email, phone, video conferencing, or project management software to facilitate communication and collaboration.
Managing deal flow and prioritizing investment opportunities is a challenging but rewarding task for private equity professionals. By following these best practices, you can improve your efficiency, effectiveness, and performance in deal sourcing and execution.
Briefing the investment team on investment deals to prioritise can enhance the focus & efficiency of deal making for any fund. However, the team should also be prepared to deal with the push or urgency which may come from intermediaries who may be keen to close the deal early. There have been quite a few incidents where funds have lost lucrative deals while chasing other promising deals but with low chances of closure. If a fund has limited interest or resources to chase all the deal opportunities on the table, then its better & most fair to withdraw from deals where it can not devote the required time & resources.
From my experience I can sight a large fund with multi-billion dollars at its disposal to invest but a very unimpressive track record of losing deal opportunities. At times, the investment partners or GPs may demonstrate lack of effort to communicate their level of interest in the deal upfront to sell-side advisors and when in the deal evaluation phase, they would often take unusually long time to either complete their diligence or present a term sheet, which would prevent the fund from becoming a first choice investor to close the deal. The fund did change its investment team later but lost several promising deals for about 3-4 years which may have brought good returns to the fund's LPs
I need to know that a company where the sum is filtering × screening × bosses × employees = everything to be successful, the company is mine by name but when it comes to doing it and it happens, wow, when we succeed, everyone wins, when we avoid losses too, we are a team and this makes the company prosper and continue