Deal sourcing is a constant grind and critical to a fund’s long-term success, a credence regularly reverberated by PE professionals. Access to the appropriate tools, complemented by the right data, is a requirement for any effective sourcing strategy. Michael Lewis’ celebrated book, Moneyball: The Art of Winning an Unfair Game, illustrated baseballs’ success in utilizing statistics and analytics to their advantage. So, why not apply similar data concepts to the intensely competitive realm of deal sourcing? To do this, first, generate scorecards for each intermediary, and second promote awareness of current market trends, based on your sector and criteria, and adjust your approach accordingly.
Just as Moneyball describes a baseball manager’s groundbreaking effort to engineer a competitive team using performance analytics, each intermediary should have a scorecard that relates to your firms’ target criteria. The following performance parameters should be analyzed for each card: 1. Process Index: What type of processes does the deal intermediary run (limited, moderate or broad)? 2. Success Rate: What percentage of deals closed that the intermediary brought to market? 3. Relevancy: What percentage of the intermediary’s closed deals were relevant to your firm’s target criteria? 4. Coverage: Of the relevant closed deals, what percentage did your firm see?
Integrating this scorecard with your current strategy will prioritize your time and resources. Furthermore, it shouldn’t be a time-consuming, manual task. Identifying and scoring each intermediary based on these four performance criteria should be programmatic and seamlessly updated, thereby giving you a competitive edge by directing your relationship building more astutely.
Complementing the scorecard, the second component involves dissecting current market trends and sector activity to evaluate their potential impact on your deal sourcing game plan. This involves a keen awareness of who the active intermediaries are, the location and the volume of deals that traded, and detecting potential new deal sources. To demonstrate these points, let’s begin with a review of the Healthcare sector as an example.
Over the two-year period from January 1, 2015 to December 31, 2016, the top five cities for Healthcare deals based on target company location include Atlanta, San Diego, Chicago, Toronto, and Nashville. Reviewing the data from an intermediary perspective, the top four locations based on the professionals that represented these Healthcare companies include New York, Chicago, San Francisco, and Boston. Richmond and Minneapolis are tied for fifth. Below are two charts examining the Healthcare transactions that traded by location, as well as the location of the professionals that closed those deals.
Based on this analysis, Chicago should be a significant focus in terms of your strategy. There are a number of Healthcare transactions that have traded in the Chicago metropolitan area, as well as a significant number of professionals that are closing Healthcare deals located in the area. Any successful deal sourcing strategy requires an understanding of both where the target companies are located, as well as the relevant sources of deal flow.
Now, to demonstrate the value in discovering potential new deal sources, let’s review 2016 closed transactions. According to SPS data, there were 151 new deal sources that were active in 2016. These new sources closed in aggregate 191 transactions. The chart below breaks out the top five sectors that saw the highest volume of deals closed by a new deal source in 2016. The most closed deal activity came from the Industrial sector with 33 deals completed. This is followed by Healthcare and IT (tied for second) with 30, Services with 29, Financials with 21, and Energy with 15 new deal sources, respectively.
For a strategy that concentrates its investments in these top sectors (Industrials, Healthcare, IT, Services, Financials, Energy), there is a clear advantage to identifying and proactively reaching out to these new intermediaries before other deal professionals have the opportunity. Moreover, having less competition can lead to lower entry multiples, which can ultimately lead to better fund returns. Finally, it is important to remain top of mind with these new sources as part of a long term strategy, as they bring more relevant deals to market per your criteria.
If you’re still not convinced of the importance of integrating data and analytics to current sourcing methods, perhaps LP due diligence is more persuading. As other sponsors take this message to heart and use data and metrics as a reporting tool, you could potentially be at a disadvantage. Furthermore, your firm could seem out of touch or dated in its sourcing approach. Combining similar data concepts from Moneyball with current marketing practices will help to prioritize your deal sourcing approach for your specific strategy, and put you on the path to win the World Series of deal sourcing.
Nadim Malik is the founder and CEO of Sutton Place Strategies, a provider of data and analytics for PE and M&A professionals to optimize their business development efforts. Catherine Daly, director of marketing communications, contributed to this article.