Deal Origination also is known as the deal sourcing refers to the process which is used by the firms in order to source the investment prospects either by the means of gaining the knowledge present in the market or by the means of creating the deal for themselves using the connection with the involved parties.
What is Deal Origination?
In simple terms, Deal Origination is the sourcing of investment opportunities by Investment Banks, Private Equity, and Venture Capital Firms.
- Deal Origination is a process by which firms source Investment prospects which are done either by gaining knowledge of the deals taking place in the market and finding out who is selling so as to make a competitive bid for the deal or by creating a deal for themselves through their relationship with intermediaries.
- Also known as Deal Sourcing, it is the first and the most important step through which these firms pitch the potential buyers of their advisory services and their product offerings (Mergers and Acquisition, Capital Raising, Equity Capital Markets, Debt Financing, etc.) and how they can provide assistance to the potential clients.
The above image is a snapshot of the roles and responsibilities of those who are a part of the deal origination team. The sample responsibilities are as per below.
- Sourcing acquisition for the company in the range of $3mn – $20mn EBITDA
- Execute coverage program of M&A deal sources
- Identify industry and targeted geographies to promote private equity investments.
- Manage the entire acquisitionAcquisitionAn acquisition is defined as the act of taking over or gaining control of all or most of another entity's stocks by purchasing at least fifty percent of the target company's stock and other corporate assets. process, including deal origination, execution, negotiations, due diligence, documentation, and more.
Most Popular Deal Sourcing Strategies
The success of this Deal Origination is fundamental and most important to the success and survival of an Investment Bank. It relies on the past success of these firms and their execution capability and reputation in the market. Deal Sourcing, although a time-consuming task but a necessary task for keeping a full pipeline of a steady flow of deals for these firms.
Some of the most popular Deal Origination strategies adopted by the firm include:
#1 – In-House Deal Sourcing
Under this strategy, firms employ a dedicated deal sourcing team that works on a full-time employment basis for the Investment Firms and includes experienced finance professionals who are having extensive knowledge of Deal Sourcing in markets and enjoys a wide network of contacts and a good reputation.
#2 – Deal Sourcing Specialist on Contract/Assignment Basis
Deal Sourcing Specialists on Contract/Assignment Basis are specialized firms/Individuals who are freelance/specialized firms in this Origination whose main task is to work with Investment Banks in sourcing clients and are usually paid on an assignment basis and are not fully employed by the firm. Such Individuals/firms usually work with multiple clients and have a wide experience in Deal Sourcing.
Skills Involved in Deal Origination
- It involves pitching the services that the firm can offer to the client. However, along with that, it is imperative to understand the client’s need so that the right offer is made; which is mutually beneficial to both parties.
- These Deal Sourcing professionals require strong analytical skills and financial appraisal skills with a proven track record of strategic thinking and expertise in Deal Initiation service.
- Such firms/Individuals should possess extensive sector expertise to pitch the right note for their firms in front of prospective clients.
Approaches to Deal Origination
#1 – Network Approach
Under this approach, the investment firm makes use of its existing client network and reputation among the investor community to source new deals.
- It is the oldest and the most commonly used method of Deal Origination, which is still in use. However, this method is quite a labor-intensive as it involves accessing the business owners in the immediate network, screening through inbound leads, speaking to investment intermediaries, and proprietary deal sourcing.
- The probability of converting the leads into a deal is also minimal in this method. Also, with the growing competitive environment, access to industry-specific knowledge helps in gaining an advantage over others.
- Furthermore, it is difficult to determine the conversion rates of leads to deal completion in case of this approach, and that makes the company’s performance with its peers in Deal Sourcing using this method impossible.
#2 – Online Deal Sourcing
Under this approach, firms make use of financial technology companies to source deals through their platforms, which act as a matchmaker by facilitating Mergers and AmalgamationsMergers And AmalgamationsAmalgamation is the consolidation or combination of two or more companies in the same or similar line of business. Merger refers to the consolidation of two or more business entity to form one single joint entity with the new management structure and new business ownership. firms who are scouting for buy side and sell side opportunities.
- These financial technology firms act as a plug and play solution and make use of an intelligent matching algorithm to connect interested parties.
- With the Online Deal Origination approach, firms can easily analyze the conversion rates and performance management in securing deals.
- This approach also allows companies to easily connect with buyers and sellers virtually. They avail the services of these platforms by paying a periodic subscription. This fee is substantially less compared to keeping dedicated in-house teams and more efficient as well.
- This approach, most importantly, allows a firm to widen its reach, which spans across geographical locations. Also, the process becomes fully automated due to the standardized mechanism use by online deal sourcing platform companies.
- Some of the popular online deal sourcing platforms include Navatar, Dealsuite, Brookz, etc.
Deal Sourcing is an important and indispensable function performed by finance professionals working in Investment Banks, Venture Capital firms, and Private Equity firms. It is the first step in creating a deal and involves generating deals to pitch to potential buyers.
Firms make use of both the traditional approach as well as the new age Online Deal origination approach. Both approaches aim at ensuring a large volume of deal flow to maintain a viable deal flow pipeline. However, the online deal origination approach is gradually gaining major share through which deal origination is done in the current scenario.
Financial Technology companies such as Navatar, Dealsuite, etc., allows business owners, advisors, private equity firmsPrivate Equity FirmsPrivate equity firms are investment managers who invest in many corporations' private equities using various strategies such as leveraged buyouts, growth capital, and venture capital. The top private equity firms include Apollo Global Management LLC, Blackstone Group LP, Carlyle Group, and KKR & Company LP., and strategic buyers to post their mid-market sell-side listing and buy-side mandates through the use of their sophisticated technology platforms, which make use of the advanced algorithm in connecting the right parties. Using these advanced algorithms, companies can specify their target industry, transaction size, location preference, and industry criteria, etc. Thus, thereby substantially reducing the time taken in the Deal Origination process. It also improves the conversion rate through the automation of processes.
Deal Origination (Sourcing) Video
This has been a guide to what is Deal Origination. Here we discuss the most popular deal origination strategies, skills involved in this deal origination job, and approaches to deal sourcing. You may learn more about Investment Banking from the following articles –