11 Ways to Source Better Deals

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  1. 1. Be clear upfront about everything on the website.
  2. 2. Use a quant-based filter or scoring system early in the process.
  3. 3. Dive deeper to find what your existing deals have in common
  4. 4. Leverage technology
  5. 5. Identify your team’s value proposition
  6. 6. Brand yourself to attract better opportunities AND LPs
  7. 7. Have a pitch day
  8. 8. Partner with a wider variety of referral sources.
  9. 9. Turn C-grade deals into A and B-grade deals
  10. 10. Stay networking
  11. 11. Cold outreach

August 2022

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It’s almost become a badge of honour for capital providers to advertise how many deals they turn down annually. Proud statements like: “We see hundreds, THOUSANDS, of deals per year — and only do one or two!”

At what point does this sound less like the Harvard Admissions Committee, and more like a process that lacks efficiency and creates a mountain of unnecessary work?

An increasing amount of the returns in Private Equity comes from investment teams rolling up their sleeves and putting in real strategic work to improve their portfolio companies, rather than simple cost-cutting strategies or financial engineering.

This means the more time investment teams spend working on the actual portfolio companies, and less on sifting through the slog of opportunities — the better.

So how can we improve?

Here are 11 ideas organized into three clear categories:

  1. Finding Efficiencies
  2. Building a Brand
  3. Pure Grit.

Full disclosure, this article is written for investment teams that are in serious asset gathering mode and want to significantly increase the AUM and profile of their funds. If that’s not your fund, then the ideas here might not apply.

Let’s get into it.

Finding Efficiencies

1. Be clear upfront about everything on the website.

This includes deal criteria, typical terms, timeline and process, and initial must see-documents. Some investors take the approach of being less prescriptive because they don’t want to miss out on opportunities. The truth is that if you put “investor” and “your name” in the same sentence on the internet, you’re going to be inundated with opportunities regardless, so you might as well be crystal clear about what you need to see to start the process of self-selection.

2. Use a quant-based filter or scoring system early in the process.

Adding an automated scoring element to your intake process can help you easily focus on the best opportunities, provide quick feedback to the so-so opportunities, and discard the rest. It can also sit neatly atop your deal pipeline so you can see your full funnel; from the very top, to the completed deals and existing portfolio companies at the bottom.

These first two points combined are like the difference between Linkedin “Easy Apply” where anyone can just click a button to fill your inbox vs. adding a simple question or two as a hurdle to weed out those who are actually serious.

3. Dive deeper to find what your existing deals have in common

Take a strategy day to go deeper than the typical EBITDA, Geography, Industry markers to find the unique insights in existing and past portfolio companies. Are they in a particular niche or sub industry? Do they have particular functional strengths in say marketing or finance? Are they taking advantage of a particular market trend? Do they have a unique culture, or problem solving approach? Are there a handful of abstract financial ratios they have in common? Brainstorm a huge list, group the points into categories that make sense, and run an analysis on which factors contribute the most to returns. Then include those criteria on the website.

Challenge #1

As a team, find 10 things your best past and existing portfolio companies have in common, OUTSIDE the basic criteria posted on your website.

4. Leverage technology

Private databases, CRM tools, data and analytics and more can help streamline your deal hunting process and turn over stones where few investors are looking. Anything to give you an advantage in building a proprietary pipeline of deals that fit your unique strategy. While Pitchbook, Crunchbase, and others are popular, something as simple as a basic CRM to schedule follow-ups with certain leads can help keep you top of mind with key prospects and referral sources.

Building a Brand

5. Identify your team’s value proposition

Many capital providers now will say they provide more than just capital, but not all of them provide the same value add. Beyond the money, are your GPs experts in marketing? M&A? Do they have a background in X, Y, or Z? Do you maintain an active ‘alumni’ or advisory network? Fill in the blanks as you see them, but make sure this value is known upfront on the website so that you self-select better deals.

6. Brand yourself to attract better opportunities AND LPs

The top funds get their pick of the best opportunities because the name recognition alone helps to boost both of their profiles. Thoughtful branding can also help attract the right opportunities specifically for your firm as well. If you are well known for a certain niche, or a particular deal structure, people who fit that profile will naturally gravitate to your fund, and those who don’t will be less likely to reach out.

Renown marketer Seth Godin calls this ‘finding your tribe’. Capital providers often turn their nose up at this marketing and brand stuff, thinking it’s what the companies should be doing — not them! This might have worked years ago, but the challenge is that there are far more opportunities today to evaluate, far more competition for deals, and it’s far easier to access capital providers online. All of this means GPs must move past the era of simply going off relationships and junior associate sleuthing to get the best deals.

A great way to do this is with a regular newsletter highlighting success stories, and always reminding potential companies and investors of your criteria, terms, etc.

The added benefit to this brand building is that it also means other investors are more attracted to your fund as well, just like the companies.

Challenge #2

Draft a 1-page newsletter highlighting 1–2 recent success stories and why your fund is the perfect partner in the current market. Rinse and repeat at a regular cadence (Quarterly, Monthly, Weekly)

7. Have a pitch day

Having your own pitch day, perhaps together with some key strategic partners is a great way to build the fund’s profile, and also give you an exclusive look at some great opportunities. Again, it puts you and your team in the driver’s seat to vet deals on your terms, and get to know prospects in a fun, engaging setting. Building a regularity to it, say annually, helps in building your fund’s profile with both companies and investors.

Pure Grit

8. Partner with a wider variety of referral sources.

  1. Business Partners and Deal Makers

Many GPs come from a background on the investment banking side and lean on those partners for deal flow. However, these partners will still shop deals across their networks to find the best package for them, not you. So while the deals come nicely structured, neatly packaged, and properly vetted, there’s less wiggle room on terms and pricing since there are others in line to say yes if you say no.

Some other providers to consider include independent accountants, commercial lawyers, or even wealth advisors who occasionally have owners looking to sell or raise capital for their business. Going a step further, you can enter arrangements with some of your best partners to have exclusive first or last look at opportunities as they arise, or you can hire them to find exclusive deals for you.

2. Other funds

Investors all have different criteria, so why not partner with those who can be complementary to your fund. For example, a debt lender and an equity investor could work together on deals to provide more capital at a lower cost to the company, and create a better deal for everyone involved. There’s also the opportunity to share deals that don’t quite fit back and forth between partners.

Again, the idea is to find a small group of investors where you align and/or don’t overlap in key areas.

Of course, this is a bit like finding the right therapist: Don’t be upset or surprised if it doesn’t work with the first couple of investors, you have to find the right partners for your fund.

3. Existing Portfolio Companies

Include a two-way referral bonus for portfolio CEOs who refer another deal to the fund. For example, both the existing portfolio company and the new company get some type of improvement in terms. Existing CEOs are always on the road promoting their companies to potential partners and investors, so there’s certainly an opportunity for them to know someone who knows someone who’s looking for capital.

The added benefit is it’s been proven that people tend to run in similar circles, so someone referred to you would hopefully be similar in many of the ways that made the first company a successful match.

9. Turn C-grade deals into A and B-grade deals

To truly achieve standout returns, you need the capability to take those less than optimal deals, polish them up, and turn them into world class opportunities. A great deal is likely going to have plenty of suitors willing to provide favourable terms and price your team out.

Furthermore, it takes more than plug-and-play strategies or financial engineering to get the expected return for most portfolio companies in today’s market. Private equity holding periods have become longer because of the amount of work that has to go into these businesses before the returns are feasible

Source: Goldman Sach; BCG

One of the best ways to do that is by partnering with others who can help get the business where it needs to go. Bringing in an advisory or consulting partner, or working more closely with the source who brought the deal in, can help provide the added elbow grease necessary to achieve the desired return on investment.

This is especially true for lending partners that are open to converting their loan to equity to realize a better upside.

Lastly, you can take your time building a relationship with a prospective businesses and set cetain milestones for investment, before doing a deal. This also gives you time to get to know all the little details that are tough to uncover in a shorter timeframe.

10. Stay networking

Perfect the art of actually keeping in touch, and reaching out to different people on a regular basis, outside of your usual partners. For many of us, LinkedIn has become more of a database rather than an actual ecosystem of connections that can help bring in opportunities. Make it a point to go to events, conferences, etc on a regular basis, and when you go, have a goal in mind. Ex: Don’t leave the room until you’ve collected three business cards.

Challenge #3

For the next 30 days, reach out to at least ONE person per day on LinkedIn who could be a potential referral source.

11. Cold outreach

Saving the best for last. At the end of the day, tough to argue against just picking up the phone, sending an email, or reaching out on social media. The key is finding novel ways to generate lists of prospects to connect with. Once you have a list, break out that CRM and follow up at respectful intervals to your most promising leads with something of value to them.

How We Help Clients

Finding Efficiencies

  • Materials: Pitch decks, website revisions, and promotional materials
  • Analytics: Developing quantitative scoring systems for opportunity ranking
  • Research: Backtest analysis on past deals to uncover unique insights, and market research to understand where tomorrow’s best opportunities will arise

Building a Brand

  • Strategy: Strategic planning and brand development
  • Content: Branded newsletter creation and deployment

Pure Grit

  • Sourcing: Exclusive outreach campaigns to source deals including warm outreach through our network and cold outreach
  • Diligence: Investment memos, screening, and diligence on new opportunities
  • Strategy: Strategic planning and turnaround plans for prospective opportunities, and revised growth strategies for existing portfolio companies. Includes 100-day plans for all engagements acquisitions
  • Exits: Finding buyers for existing portfolio companies

About Cadence and Rhythm

We help leaders solve problems related to growth, brand, and building relationships — including introductions to investors in our own growing network and proprietary deal sourcing. Why? Because we believe every awesome company deserves to become a household name. Get in touch with us at cnrstrategy.com.