Building Proprietary PE Dealflow In Today's Market


Too much money, too few deals

The private market continues to turn heads in the face of abnormal market conditions. There is an excess of undeployed capital filling GP pockets, or dry powder, estimated at $1.8 trillion according to a review done by McKinsey, while available dealflow has been dropping continually since 2014. The resource hike and deal slump have cultivated competitive private equity deal sourcing.


Investors have confidence

While that 1.8 trillion could seem quite daunting for LPs expecting a return, it sheds light on the confidence that investors have in the rapidly evolving asset class. There are a few things that GPs can do to optimize the portion of that dry powder being deployed with their fund, and avoiding the steep purchase prices that come with too much money chasing too few deals.

Partnering with investment banks allows the GP  to increase dealflow in competitive markets; however, this partnership comes at a lofty cost to the buy-side. Since intermediaries are moderating the limited supply of promising deals, their cut of the acquisition process can mean big costs for a fund. Good for intermediaries, bad for GPs.

A good proprietary deal is like a diamond in the rough

Consider the diamond industry. There is an infrastructure put in place by industry leaders that control the supply of diamonds from source to consumer. This intentional bottleneck heavily influences the price that the consumer pays, by creating perceived scarcity. While intermediaries can bring an excellent opportunity to the table with minimal effort by the buyer, having the ability to generate proprietary PE dealflow internally can significantly impact the performance of a fund.


It doesn’t have to be this way

According to new academic research from Harvard Business School and Chicago’s Booth School of Business, about 56% of closed deals have the potential to be self-generated. If a fund were to establish the necessary business development processes and tools to attract primary sellers, they could obtain about 56% of their deals without having to work with intermediaries. This means significantly larger profit margins for investors and the firm.

The value is in creating non-consensus deal flow       

Theoretically, deals are priced cheaper because handshake PE dealflow is regularly traded at significantly lower multiples compared to auction dealflow. The firm can get ahead of the game without entering bidding wars with competitors.  

The maximum value is created by seeing opportunities that the rest of the industry has not. This can enable the firm to develop a unique competitive edge against competitors that are sourcing the same type of deals from the same auctions. Think about the attention that a sharp handmade leather briefcase commands when compared to a standard bag from Office Depot. The latter is much less unique and can be acquired by anyone interested, while the first requires expertise and connections to get ahold of. Deal trades can be considered in a similar respect. Best practices for strategic growth should be identified in order to support the PE dealflow transaction.

Business development must be strategic, credible, and measurable.
— Axial

Strategy is deeper than your neighbor’s investment thesis

Before a firm begins to actively search for prospective investments, identifying desired company characteristics to define what type of acquisition the firm is looking to make is essential. Most advice coming from industry leaders details the importance of identifying a firm's “sweet spot.”

“Variables such as the private equity firm’s geographic footprint, target ownership, the type of control it seeks to exert and the primary investment thesis,” Bain Consulting experts concluded in their Forbes article. “Our analysis has found that deals within a firm’s sweet spot consistently and significantly outperform opportunistic deals that stray from it.”

Probably don’t need to hire Bain to tell you that, right?

You’ll have to dig deeper

While you do need to find the sweetspot, it’s simply is not enough to define your sweetspot by geography and investment types. That’s too broad a swatch. Looking deep within the high performers in your portfolio, the lower performers, gathering specific data points that may correlate to success vs failure can describe a much more specific and valuable sweetspot. You can then work with that information and modern technology to go find new deals. Why spray and pray? If you have the capacity to call on 1000 companies per year, might as well optimize your hit rate for companies that fit your sweet spot.


With too much money going after too few deals, you have to be deliberate about the ones you chase. Identifying a list of attributes for high-performers based on your experience minimizes the tendency to become distracted by out-of-scope deals that might not ideally fit the firm. The “sweet spot” that many advisors are recommending simply scratches the surface of characteristics that need to be specified.

The more specific factors you use to identify your “sweet spot,” the more effective your business development efforts will be. Business development is an investment in and of itself, you must maximize your returns like anything else.

A firm-wide culture of business development

Before the search extends beyond your office, all business development efforts must be approved and supported by upper management. Without upper management support, the boots on the ground staff doing the day to day work does not have the proper guidance and encouragement in order to reap the benefits of intermediary avoidance, support from all members of the fund is required.

Bill Tobia at LLR Partners said it well when discussing the critical role of CFOs throughout the firm,

“It’s a virtuous circle: the more you can help people, the more they’ll want you to be involved. The more you’re involved, the more you’ll learn about the organization. The more you know, the more you can apply that knowledge to the task of creating a more resilient and profitable company.”

What is not measured cannot be improved

Keeping track of success and challenges throughout the business development process can make or break your attempt to generate proprietary dealflow. What is not measured cannot be improved, and when you are revamping processes to achieve a leaner, more profitable business development operation, continual iteration is pertinent. To measure the activities for effective operation, investors are dependant on data from CRMs, and its aggregation on platforms like Malartu.


What first impression does your firm leave?

What they say about first impressions is true across many fronts, including company seller and GP firm interactions. In a conversation with Kristy DelMuto of LLR Partners, we discussed how marketing techniques that define the face of the fund have become increasingly important within the PE space.

“If your fund wants to differentiate itself in the increasingly competitive PE industry, PE websites can no longer be hastily designed as an afterthought. Maintaining and growing your digital user base and engagement is a continuous effort, not something that you do once and never come back to again. Many companies have grown their digital base by shifting their marketing towards an inbound marketing strategy.”

To learn more about the value that a revamped marketing strategy brought to LLR Partners, take a look here.

Transforming your firm into a proprietary dealflow machine requires a multi-pronged approach to business development.

Generating the right content paired with effective distribution ensures that the content you make reaches your audience. By leveraging paid ads you can beat the competition and reach your customer first.  Strategic cold calling gets the important conversations started, and relationship building develops increases trust. Conferences and platform acquisitions help to give the firm a face and expand your network. Social media monitoring can be used to spot companies that are ready to sell before traditional discovery methods might reveal.

When executed properly, the variety of tools work together to draw in the right companies that are serious about making a deal with the firm.


So how can you transform into a proprietary deal machine?

In our next post, we will share a modern approach to setting up dialers and the best strategies to employ for reaching the right companies and maximizing your hit percentage.