What is Deal Origination?

In simple terms, deal origination is sourcing investment opportunities by investment banks, private equity, and venture capital firms.

  • 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.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.read more, 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 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.read more.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.read more process, including deal origination, execution, negotiations, due diligence, documentation, and more.

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Deal Origination (Sourcing) (wallstreetmojo.com)

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.

Skills Involved in Deal Origination

  • 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 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

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Deal Origination (Sourcing) (wallstreetmojo.com)

#1 – Network Approach

Under this approach, 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.read more 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.

Conclusion

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 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.

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.read more, 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.

Deal Origination (Sourcing) Video

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: –

  • Investment Banking Interview QuestionsFinancial Modeling Interview QuestionsTop Interview Questions for Corporate FinancePrivate Equity InterviewLiquidity Premium