Is Your Firm A Top-Quartile Deal Originator?

Everyone knows to strive for top-quartile performance when it comes to fund returns. But what about deal origination?

Until very recently it would not have been possible to know what top-quartile deal origination looks like. This September, Sutton Place Strategies, which was  founded in 2009 to help private equity firms improve the effectiveness of their deal sourcing, launched the industry’s first Deal Origination Benchmark Report. Some of the top-line results are shown in the table below.

The report was inspired by client requests and created with their input. It is the first of its kind to quantitatively benchmark a firm’s deal sourcing efforts against its peers, enabling our clients to answer the question, “Where do we rank in the industry when it comes to deal sourcing?”

The report compares the “market coverage” of a private equity firm, which is the percentage of completed private equity transactions with a sell-side adviser in its relevant size range and sectors that the firm had the opportunity to review, against all private equity firms as well as its peer group (sector focused, generalist, etc.). The results are based on the input of Sutton Place Strategies’s more than 60 clients whose deal data and investment strategy qualify for the report.

Why market coverage instead of the more conventional approach in private equity of measuring deal volume? Increases or decreases in deal volume can often mirror robust versus quiet M&A markets, rendering them less meaningful as an indicator of deal sourcing effectiveness. By tracking the percentage of closed relevant transactions seen by a private equity firm, regardless of whether it’s a robust or quiet M&A environment, a firm can assess if it’s truly improving its share of mind with the appropriate deal sources.

In addition to comparing market coverage, the report also enables firms to benchmark themselves when it comes to several other meaningful deal sourcing metrics. These include market coverage of boutique deal sources, market coverage of the most active intermediaries, and improvement over the last six and 12 months.

Finally, the report provides each private equity firm its Deal Origination Benchmark Report score, or DOBR score, on a scale of one to five. The DOBR score is derived from the ranking of all private equity firms’ normalized market coverage, which takes into account the effect of size and difficulty of a firm’s target market, as well as relative performance improvement.

Most firms would agree that quality deal flow is their life blood. In order to execute the right deals, you first need to see the right deals, which is becoming harder and harder. It’s not surprising that the business development profession has really taken off in the last few years. Look at any of the sister industries to private equity, such as investment banking, legal, consulting, etc. The marketing professionals are consistently the top compensated professionals at these firms. Note to business development professionals: Your stock is on the rise!

Not only is it critical to a private equity firm’s success, deal sourcing effectiveness is rapidly becoming a major area of focus and forward indicator of performance in the eyes of limited partners when considering a general partner for investment.

In conclusion, private equity firms can increase relevant deal flow by using a more meaningful set of metrics that measure deal origination effectiveness and identify any blind spots. Becoming or remaining a top-quartile deal originator has great benefits to GPs and LPs alike.

Nadim Malik is a founder of Sutton Place Strategies, a provider of data and analysis to help private equity and mezzanine investors improve their deal flow

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