Demystifying “Proprietary” Deal Sourcing

By: Leah M. Berend, CPA

Link to Original Article: Demystifying proprietary deal sourcing | Finance & Commerce (finance-commerce.com)

Private Equity (PE) firms are renowned for their ability to identify lucrative investment opportunities and deliver exceptional returns to their investors. However, one concept that has intrigued industry outsiders is the idea of “proprietary” deal sourcing. This notion implies that PE firms have exclusive access to investment opportunities that give them a competitive edge in the market. On closer inspection, it becomes clear that most proprietary deals are not as unique as they appear.

hand pull rope open half tone background vector illustrationThe notion of proprietary deal sourcing suggests that PE firms possess a secret network or special relationships that provide them with access to investment opportunities unavailable to others. While such relationships do exist, the reality is that the majority of deals sourced by PE firms may not truly qualify as proprietary. Instead, these firms primarily rely on a combination of commonly used methods to identify potential investment targets.

PE firms actively cultivate relationships with various stakeholders, such as investment banks, brokers, industry experts, and company executives. These connections enable them to gain insights into potential investment opportunities. However, it is essential to note that these opportunities are often not exclusive to a single PE firm. Investment banks, for instance, typically share deal information with multiple potential buyers, diluting the notion of exclusivity.

In addition to relationship building, PE firms frequently collaborate with intermediaries such as mergers and acquisitions (M&A) advisors, business brokers, and consultants. These professionals help identify and assess potential investment targets, streamlining the deal sourcing process. However, the same opportunities are often presented to multiple buyers, diminishing the proprietary nature of these deals.

Many PE firms have dedicated teams responsible for proactively sourcing deals. These teams employ various strategies, including market research, industry analysis, and screening of potential targets. They leverage publicly available information, databases, and market intelligence platforms to identify investment opportunities. Although this information may not be readily accessible to everyone, it is not exclusive to a particular PE firm. In fact, attractive targets often receive multiple cold calls from different firms.

The demand for quality investment opportunities in the PE industry is fierce, leading to intense competition among firms. Consequently, truly proprietary deals are exceedingly rare. When PE firms claim to have proprietary deals, it typically means they have an exclusive period to conduct due diligence or negotiate terms with a target company. However, other potential buyers may still be aware of the opportunity.

Moreover, advancements in technology and information sharing have made it increasingly difficult to keep deals completely proprietary. Market participants, including PE firms, are constantly monitoring industry news, attending conferences, and utilizing online platforms to stay updated on potential opportunities. The widespread dissemination of information in today’s digital age further diminishes the uniqueness of proprietary deals.

In the highly competitive world of private equity, the true secret to winning direct business lies in a firm’s ability to effectively communicate their expertise and demonstrate their capability to confidently, competently, and discreetly execute deals. While the notion of proprietary deal sourcing may not hold as much weight, the art of conveying a firm’s unique value proposition becomes crucial. PE firms that can articulate their successful track record, deep industry knowledge, and ability to navigate complex deal structures with finesse and discretion have a distinct advantage. Building trust and instilling confidence in potential partners and target companies enhances the firm’s reputation and increases the likelihood of securing coveted investment opportunities. Ultimately, the ability to effectively communicate and showcase deal execution capabilities becomes the true differentiating factor in the competitive landscape of private equity.

While the term “proprietary” deal sourcing may evoke the idea of exclusive opportunities, most deals sourced by private equity firms are not truly proprietary. PE firms rely on a combination of strategies, including relationship building, deal intermediaries, and proactive sourcing, to identify potential targets. The competitive nature of the industry and the ease of information sharing make it challenging for any deal to remain genuinely exclusive. Understanding the mechanics behind deal sourcing in the private equity industry demystifies the notion of proprietary deals, highlighting the importance of a highly effective investment process rather than relying solely on exclusivity.

Leah Berend is the Chief Financial and Chief Administrative officer of Oxbow Industries.

With over $2.5 billion corporate financial transactions completed, Oxbow Industries is dedicated to building businesses in partnership with their management teams. Oxbow seeks to invest in leading middle-market companies with outstanding leadership teams and a significant opportunity for equity appreciation. Learn More at www.OxbowIndustries.com