Private Equity (PE) firms are constantly seeking unique opportunities to generate superior returns. Small PE firms often rely on traditional deal sourcing methods like brokered deals and referrals. While these deal sourcing methods are a proven way to find portfolio companies, a growing number of PE firms are turning their attention to off-market deals.
Off-market deals are under-the-radar opportunities that offer a compelling alternative, as they provide a range of advantages, including unlimited market, greater seller-buyer synergies, and faster closing. In this article, we'll look at the advantages of off-market deals for PE firms and explore why they should be a cornerstone of any comprehensive deal sourcing strategy.
What is an off-market deal: Off-market deals vs brokered deals
Off-market deal refers to a transaction where a business is not publicly listed for sale. Unlike traditional sales processes involving public listings and multiple offers, off-market opportunities occur through private negotiations between the buyer and seller.
These transactions are often kept confidential, with the business not advertised on public platforms or listings. Instead, they are typically marketed to a select group of potential buyers through direct outreach or word-of-mouth
Benefits of Off-Market Deals for PE Firms: Why off-market deals might be better to go after?
Off-market deals can prove to be a goldmine of opportunities for Private Equity firms and strategic corporate buyers. The reasoning behind why off-market sourcing can be more profitable can be summarized to:
- Unlimited supply
- Little to no competition
- Cost savings
- Finding hidden gems
- Better synergies
- Faster deal closing times
Unlimited Supply
The pool of potential off-market deals is technically unlimited, which means a wider range of potential targets and increased chances of finding a suitable investment, compared to on-market deals. Many businesses, such as family-owned businesses, or companies that are part of larger conglomerates, are privately held and not actively marketed for sale. Furthermore, these companies might simply not be interested in a public sale process, although they might still be a great acquisition target.
In addition, startups and early-stage companies often prefer to raise capital through venture funding or private placements rather than selling equity. Yet, these companies might be attractive acquisition targets for PE firms at later stages. Furthermore, strategic sellers, such as large corporations often divest non-core assets or subsidiaries through private negotiations rather than public auctions, making off-market deals something you don’t want to miss.
Little to no competition
By definition, off-market deals are not publicly advertised. This lack of exposure reduces the number of potential buyers who become aware of the opportunity. Many off-market deals are sourced through direct relationships with business owners, industry insiders or through tailored AI-based tools. This creates a barrier to entry for competitors who lack these connections or platforms. Sourcing off-market niche deals means avoiding an open bidding process. Fewer buyers can result in more favorable negotiation terms and potentially higher returns.
Cost Savings
Off-market deals often come with lower acquisition prices due to less market exposure. Sellers may be more open to negotiation as they haven't been exposed to multiple bids.
Hidden gems
Sometimes the best deals are not the ones that are looking to sell, but companies that were not considering it as an option. Such companies often exhibit stronger business performance, possess a strong product-market fit, and already have a loyal customer base, making them highly attractive acquisition targets. Brokered deals are often concentrated in specific regions or industries, while off-market opportunities can be found globally in exactly the cities, states or countries you’re interested in.
Also, it’s good to note that during economic downturns, many companies explore strategic options, including selling non-core assets or seeking partnerships, which can generate opportunities for buyers. These are great examples of hidden off-market deals.
Greater synergy
Off-market sourcing allows you to focus on specific industry sectors, locations, company sizes, and financial metrics – increasing the likelihood of finding a perfect fit for your investment criteria. Off-market acquisitions create a stronger fit since you don’t need to settle for “what’s out there”, but you can aim to look for exactly the perfect fit.
Faster Deal Closing
Less competition, less bids and direct negotiations can expedite the deal-closing process, reducing transaction costs and time to investment. In other words, the closing timeline is likely shorter and it can mean enhanced deal flexibility and negotiation power for the buyer.
How to find off-market deals? - Sourcing strategies
Networks and referrals
Traditional ways to find off-market deals include building strong industry relationships, partnering with industry insiders, and creating an internal deal sourcing team. Internal teams make connections within the target industries. Sometimes also partnering with investment banks can work in sourcing markets that are more niche. They will be able to conduct proprietary deal sourcing to find acquisition targets off-market.
Online platforms to identify off-market deals
Off-market deals are often discovered through advanced AI-powered platforms. Private Equity firms use tailored tools like Inven to identify potential targets from niche markets and from all locations globally.
At Inven, we believe in the power of off-market deals. We have over 300 companies relying on our platform to find those.
Inven dramatically speeds up the process of finding off-market deals. By applying simple filters like revenue, location, growth rate, and industry, Inven’s AI identifies companies in niche markets worldwide, without the limitations of industry codes. This curated list becomes your starting point for cold outreach and networking.
In addition, Inven's specialized Intent to Sell filter can pinpoint companies likely undergoing a generational shift or those held within a Private Equity portfolio for an extended period. This enables you to discover off-market deals with a higher probability of closing.
Off-market deal sourcing: Where to start
An off-market deal sourcing requires a systematic approach. Here's how to do it with Inven’s platform:
- Define Objectives: Clearly define the sectors and types of businesses that align with your investment thesis. This will help you focus your search and prioritize potential targets.
- Set up account: You can get access to Inven by booking a demo here. In the demo you’ll get to see how Inven works and how you can use AI to find those off-market deals.
- Set filters: Inven includes filters such as ownership (family-owned, private equity backer, private, public), business model (software, service, manufacturing, reseller), headcount, location, operating location, and a lot more. Ensure you find all the relevant companies globally that match your criteria.
- Outreach: After identifying potential targets, it’s time to do targeted cold outreach. Targeted cold outreach involves directly contacting potential sellers. Tailor your message to each recipient to articulate aligned interests and focus on building relationships. Develop a follow-up plan to maintain discussions.
- Due Diligence: Carefully evaluate each off-market opportunity to assess its financials, growth potential, and alignment with your investment thesis. Conduct in-depth financial analysis, market research, and due diligence on the management team.
Challenges and Considerations: What to take into account when sourcing off-market deals
Finding great off-market deals takes time and resources. Firstly it requires an understanding of what is a good deal, based on industry, size, revenue, and other relevant criteria. Second, it takes a lot of research, cold emails and phone calls, and connecting with the key people. Third, information asymmetry is a core characteristic of off-market deals. In this context, the seller typically possesses more knowledge about the asset's value, potential, and underlying issues. Buyers must conduct extensive research to overcome information gaps and assess the asset's true value.
To overcome these challenges, there are a few useful strategies and best practices. Having access to a reliable company platform makes it easier to identify and assess potential targets. The database should also include information on key people from each target company to facilitate convenient outreach to owners, CEOs, or CFOs.
To get past the information asymmetry, buyers have to develop a clear acquisition strategy and processes for assessing off-market opportunities. They typically require more in-depth due diligence to ensure a successful deal. Despite the challenges, the situation can create opportunities for buyers, as they may also face less competition, which allows for negotiating better deal terms.
Off-Market Deals: A Cornerstone of PE Success
The advantages of off-market deals are evident. By bypassing traditional brokered markets, Private Equity firms can access a vast pool of hidden opportunities. These deals offer the potential for higher returns, reduced competition, and greater flexibility in deal structuring.
While sourcing off-market deals requires a strategic approach, the rewards can be substantial. By incorporating off-market deal sourcing into their investment strategy, PE firms can enhance their deal flow, improve investment performance, and gain a competitive edge.
To unlock the full potential of off-market deals, consider utilizing AI-powered platforms like Inven to identify hidden gems and streamline the deal-sourcing process.
Book a meeting to see how Inven can help you to find off-market deals and transform your deal sourcing strategy.
