Deal Origination (Sourcing) Meaning
Deal origination is also known as deal sourcing. It refers to the process the firms use to source the investment prospects either by gaining knowledge in the market or creating the deal for themselves using the connection with the involved parties.
In simple terms, deal origination is sourcing investment opportunities by investment banks, private equity, and venture capital firms. Firms use the traditional approach and the new age online deal origination approach. Both methods aim to ensure a large deal flow volume to maintain a viable deal flow pipeline. However, the online deal origination approach gradually gains a major share in the current scenario.
Table of contents
- Deal origination is also called deal sourcing. The firms use the process to source the investment prospects by obtaining knowledge in the market or making the deal for themselves using the connection with the involved parties.
- It is the first and the most crucial step through which the firms pitch the advisory services, potential buyers of their advisory services, and the product offerings like mergers and acquisitions, capital raising, equity capital markets, debt financing, etc., and how they assist the potential clients.
- The most popular deal-sourcing strategies are in-house and deal-sourcing specialists on a contract/assignment basis.
Deal Origination (Sourcing) Explained
Deal origination is a process by which firms source investment prospects either by gaining knowledge of the deals in the market and finding out who is selling to make a competitive bid for the deal or by creating a deal for themselves through their relationship with intermediaries.
The deal origination process is 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 acquisitionMergers And AcquisitionMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion., 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 part of the deal origination team. The sample responsibilities of the deal origination platform are as per below: –
- Sourcing acquisition for the company in the range of $3 million – $20 million EBITDA EBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business's performance with that of its competitors..
- Execute coverage program of M&A deal sources.
- Identify industry and targeted geographies to promote private equity investments.
- Manage the acquisitionAcquisitionAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion. process, including deal origination, execution, negotiations, due diligence, documentation, and more.
Deal Origination (Sourcing) Explained in Video
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. Although a time-consuming task, deal sourcing is necessary 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 full-time for the investment firms and include experienced finance professionals with extensive knowledge of deal sourcing in markets and enjoy a wide network of contacts and a good reputation.
#2 – Deal Sourcing Specialist on Contract/Assignment Basis
Deal sourcing specialists on a contract/assignment basis are specialized firms/individuals who are freelance/specialized firms in this origination. The main task is to work with investment banks in sourcing clients usually paid on an assignment basis and not fully employed by the firm. Such individuals/firms typically work with multiple clients and have wide experience in deal sourcing.
Let us study the deal origination process and steps involved in the concept.
- Generation Of Idea – This is the first step where identification of potential opportunities takes place. They are identified and generated from different sources like networking, industry and market trends, referrals, internal sessions on brainstorming.
- Research – Then market research is conducted to evaluate the attractiveness and feasibility of the opportunity through assessment of competition, market trends, possibility of risk and change in preferences of customers.
- Networking – This involves maintaining a strong network among peer groups through industrial events, conferences, seminars, which will help in creating a professional relation and connect for profitable deals.
- Cold outreach – This is a process in the deal origination platform where possible deals can be directly identified from potential partners or targets.
- Screening – This is a very important step where the management should have the skill and knowledge to understand whether the opportunity is worth pursuing. There should be some predetermined criterias that will help in selecting the deal suitable to pursue. The criteria may be financial analysis, risk and return assessment, and alignment with organizational goals.
- Structuring and negotiation – Here, the deal is to be structured and negotiated. The required terms and conditions are pointed out through mutual understanding and benefit. The terms include financing options, valuation and other relevant details of the contract.
- Documentation – Then comes the documentation phase where all paperwork and legal formalities is completed to ensure that the process is accurate and compete as per the rules.
- Closing and post deal followup– Thus, all necessary documents are signed and post deal followup is made through ongoing monitoring and management depending on what type of deal it is. A lot of tracking, communication and interation is involved in the process.
The entire process needs a lot of skill, knowledge, industry expertise and strategic planning to ensure that good and profitable deals are identified timely so that the business has a competitive advantage over its peer companies.
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.
- It involves pitching the firm’s services to the client. However, it is imperative to understand the client’s need to make the right offer mutually beneficial to both parties.
- These deal sourcing professionals who provide deal origination services require strong analytical 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 of deal origination services, the investment firm uses 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 labor-intensive. It involves accessing the business owners in the immediate network, screening inbound leads, speaking to investment intermediaries, and proprietary deal sourcing.
- The probability of converting the information into a deal is minimal in this method. Also, with the growing competitive environment, access to industry-specific knowledge helps gain an advantage over others.
- Furthermore, it is difficult to determine the conversion rates of leads to deal completion in the case of this approach. That makes its performance with its peers in deal sourcing using this method impossible.
#2 – Online Deal Sourcing
Under this approach, firms use financial technology 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 scouting for buy-side and sell-side opportunities.
- These financial technology firms act as a plug-and-play solution and use 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 connect with buyers and sellers virtually easily. They avail of the services of these platforms by paying a periodic subscription. This fee is substantially less than keeping dedicated in-house teams and is more efficient.
- This approach, most importantly, allows a firm to widen its reach across geographical locations. Also, the process becomes fully automated due to the standardized mechanism used by online deal sourcing platform companies.
- Popular online deal sourcing platforms include Navatar, Dealsuite, Brookz, etc.
Let us understand the concept with the help of a suitable example.
Financial technology companies such as Navatar, Dealsuite, etc., allow 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 using their sophisticated technology platforms algorithm in connecting the right parties. Companies can specify their target industry, transaction size, location preference, 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.
Frequently Asked Questions (FAQs)
Deal origination in the context of private equity refers to the investment opportunities identified by PE firms, VC firms, and investment banks. It creates deals that are then pitched to potential customers. Furthermore, it is the first stage of a contract. As a result, a solid transaction origination basis is required for successful investing.
The deal origination process includes pitching buyers, creating leads, and maintaining relationships with intermediaries. To succeed in identifying investment opportunities for an investment firm, one must have a vast network of contacts, a good reputation, and be established as a creditable investment partner.
The deal origination includes:
Obtaining deals knowledge in the market so one can place bids.
We are creating deals via connections, along with one or more parties involved.
They create leads, manage relationships with deal sources such as investment bankers and vendor and buy-side intermediaries, and search buy- and sell-side opportunities.
This article is a guide to Deal Origination. Here, we discuss the most popular deal sourcing strategies and skills involved in this deal origination job and approaches to deal sourcing. You may learn more about investment banking from the following articles: –