Nadim Malik: Assessing Dealflow at Year-End

In the private equity world, if you’re not scrambling around trying to close a deal before the end of the year (as if for some reason the world would end if the close slips into January), this is when you spend some time evaluating what is working well and what needs to be improved in the coming year.

One area that often comes under the spotlight at year-end is dealflow. “How robust was our pipeline?” “How good is our dealflow?” You know you’re missing deals that you would have liked to see (thanks to peHUB), but what can you do differently without increasing internal resources?

There is a way to work smarter. You don’t want to see every deal, but you would like to see as many relevant deals as possible.

The first step is self-evaluation. Our research shows our clients that have been performing regular analyses on the effectiveness of their sourcing and how to become better for over a year, have improved their market coverage by an average of 25%. You can’t know how to become better, without first identifying the gaps

Second: the key is market coverage, not deal volume. This approach is far more eye-opening for our clients, because it enables them to review the granular detail on deal sources and their historical interaction with them, identify any gaps, and ensure that they have the proper share of mind with the appropriate relationships moving forward.

According to our database, there were 343 sell-side advisors that sold at least one company to a middle market PE firm in the LTM period ending Sep 2011. Interestingly 75% of these intermediaries did only one or two deals in that period. How good a PE firm is at identifying and covering these deal sources, which often represents quieter processes, will give them an advantage.

PE firms do not see the majority of relevant deals in their target market. In fact, top quartile form a deal sourcing market coverage perspective is 35.9% (see table below).

There is no secret to quality deal flow; there is no substitute for the time and effort it takes to build quality relationships. While this may disappoint some, it is a welcome challenge for others. If you want to know how it’s done well, ask the top quartile deal originators. They can tell you how they do it, although I’m not sure they’ll give you their entire playbook. I don’t blame them.

Five years ago there were approximately 40 PE firms with a dedicated business development person or team for PE deal sourcing. Today, approximately 200-250 PE firms have chosen to have at least one person in this role. Note to BD professionals: if you are doing a good job and can show it, your stock is rising!

If you didn’t have the 2011 you wanted, improve your dealflow in 2012. Don’t just look for ways to see more deals, focus on increasing your market coverage of relevant deals. It starts with knowing where things stand today, identifying the gaps, and having a road map that aims for excellence.

Nadim Malik is Founder and CEO of Sutton Place Strategies. Views expressed here are his own.