Deal Sourcing Strategies for Investment Banks
Deal sourcing refers to the process of finding and identifying investment opportunities. Systematic deal sourcing is a crucial step in maintaining a continuous flow of deals for investment bankers to ensure buy-side customers’ satisfaction.
Investment banks need to ensure a large volume of potential deals is obtained in a given period. Maintaining a viable deal flow ensures that investment banks can provide their clients attractive and viable investment opportunities for further evaluation.
How do investment banks source deals?
The first step in deal sourcing is defining the acquisition strategy, which involves determining the goals of acquisition, such as strategic aims, need to reach new markets, or reduce competition through acquisition.
Next step is establishing a detailed set of criteria for a potential acquisition target. Investment banks define aspects like scale, ownership, market position, geographic presence, customer base, and financial performance. Financial indicators include revenue, profits, cash flow, and balance sheet health, among others. Based on this criteria, analysts combine a list of companies. This initial longlist goes through a more focused evaluation before moving onwards in the M&A process.
Traditionally, deal sourcing relied on referrals, networking, intermediaries, attending conferences, and word-of-mouth recommendations. However, with increased competition and the need for a more systematic approach, firms have evolved their strategies and incorporated additional resources and technologies.
Building strong investment bank-client relationships is essential for deal sourcing. Satisfied clients are more likely to recommend your services, which can lead to an expanded network and increased potential for inbound and outbound deals.
Key deal sourcing strategies for investment banks
Next we explore the options for traditional and more efficient deal sourcing strategies. Traditional deal sourcing methods involve direct outbound, relying on relationships and networks, intermediaries and brokers. Newer strategies combine traditional methods and relationships with dynamic data sourcing platforms.
Traditional deal sourcing strategies for investment banks
Traditional deal sourcing strategies typically involve manual methods and established industry practices.
Some common traditional deal sourcing strategies include:
- Direct outreach via email, LinkedIn, or phone
- Utilizing networking and connections
- Using intermediaries, brokers, or deal origination services
Next we explain these strategies a bit deeper before introducing advanced deal sourcing strategies.
Direct outreach
Direct outbound involves a team identifying potential deals directly from the market and through personal connections, and reaching out to them through email or LinkedIn. This type of deal sourcing relies heavily on the partners’ personal network and investor reputation. Direct deal sourcing can be a valuable strategy for investors looking to find unique and off-market opportunities, as well as more cost-effective compared to deals sourced through intermediaries.
Leveraging personal networks allows for more chances to access proprietary deals. These investment opportunities are not openly marketed to a broader pool of investors. Instead, they are offered to a select group, such as institutional investors, high-net-worth individuals, or specific investment firms.
However, outbound deal sourcing strategy also requires substantial effort, expertise, and resources.
Networking and personal connections
Investment bankers can identify potential companies by participating in industry-specific events or forums, conferences, seminars, and networking events. This allows for expansion of a network of industry experts and access to a wider range of industry or sector specific insights and opportunities. Discussions can lead to connections to potential acquisition targets and company owners ready to sell.
Personal connections and referrals by common contacts are a good way to gain an introduction. Relationship-driven deal sourcing can be an efficient strategy to start driving a deal forward. However, over-reliance on personal networks can lead to a lack of diversity in deal flow.
Intermediaries, brokers, or deal origination services
Investment banks can rely on deal origination to intermediaries or brokers. They act as middlemen, bringing together buyers and sellers, create a marketplace, provide market information, and facilitate transactions. They can advance the transaction process by handling paperwork, negotiations, and other administrative tasks, making it easier for both parties to complete the transaction.
Intermediaries scan opportunities, initiate first communication with business owners, and present opportunities to investment banks after initial shortlisting. Industry focused intermediaries often have in-depth knowledge of the market they operate in.
As an alternative to the internal deal origination team, investment banks can also outsource the first step of the process - identification and contacting potential companies - to specialized deal origination companies.
Advanced deal sourcing strategies for investment banks
Advanced deal sourcing strategies leverage technology, data analytics, and innovative approaches to social media and networks to find relevant companies.
Advanced deal sourcing strategies include:
- Leveraging data and smart deal sourcing platforms
- Using proprietary software
- Social media
- Collaborating with partners and companies
Leveraging data: Smart deal sourcing platforms
Business intelligence platforms and data analytics tools offer significant advantages in deal sourcing. Through them, M&A professionals can access vast amounts of information on numerous companies from a multitude of different sources. Platforms aggregate company registries, unstructured data like business news and social media, and financial data.
Various financial technology companies provide purpose-built deal sourcing platforms. These deal sourcing platforms, including Inven, provide investors a streamlined access to potential investment targets from all around the world.
Some research tools also provide more comprehensive insights to help investors surpass their competitors. They aid in understanding the relevance of information and interpreting data patterns, and offer analysis tools and visualizations about the deals taking place in capital markets, for example.
Proprietary software
Sometimes it can pay to develop or utilize proprietary software to streamline deal sourcing processes. Building a proprietary software, such as automated screening of target companies based on predefined parameters, ensures that the investor will have access to individual leads. Unlike open-source software, proprietary software's source code remains confidential and is accessible only to the software's owners. This can provide competitive advantage in finding leads that other investors have no visibility to. EQT Partners has its own software called Motherbrain, which is quite well-known in the industry.
Social media and online platforms
Social media offers analytics tools that can help investment professionals translate broad investing themes and trends into actionable insights. Through connecting with business owners and industry professionals on social media platforms such as LinkedIn, M&A professionals can expand their network and gain access to new deal opportunities. Furthermore, analyzing digital footprints of companies and their executives can discover potential deals.
LinkedIn Sales Navigator supports relationship building. While it is not specifically designed for searching acquisition targets, it's commonly utilized to identify and engage with potential leads. The tool offers filters in job title, seniority, location, industry, and connections, among others.
Partnerships and collaborations
It can be beneficial to establish strategic partnerships or collaborations with other investment banks, industry specialists, entrepreneurs, or technology providers to access a wider network of potential deals. Ongoing conversation with them can provide access to undisclosed information about company owners intentions to sell at some point in the future.
The future of deal sourcing in investment banking
Due to the dynamic nature of the industry, new trends are emerging, as market conditions and technologies evolve. Investment bank deal sourcing is likely to gain more efficiency in the future with an increase in the use of technology, special expertise teams, and collaboration.
Upcoming trends in the industry of investment banking
The first visible trend in investment banking deal sourcing is the rise of significance in technology solutions. Investment banks are increasingly leveraging technology to streamline the deal origination process and improve deal flow management. This includes using data analytics, artificial intelligence, and other purpose-built digital tools to identify and evaluate potential deals. In addition to identifying potential targets based on specific criteria, they provide better insights into future market trends and opportunities.
Secondly, investment banks are hiring teams of specialists with industry-specific knowledge to understand the individual conditions of each niche they plan to enter. This strengthens IBs’ outlook to specific markets and produces more accurate information on the targets’ position in them. Expert teams can bring insights into specific sectors, allowing banks to identify and pursue investment opportunities more effectively.
Third, collaboration with other, specialized investors and innovative startups could become more common among IBs in their search for more interesting leads. Fostering communication and building stronger relationships with limited partners and other industry professionals can result in a wider range of deal opportunities.
The role of artificial intelligence and machine learning in deal sourcing
AI applications have also increased their usefulness for investment banks’ deal sourcing. Machine learning and NLP algorithms process large amounts of data from various sources, identify patterns and connections between companies and industries, which leads to a larger pool of potential investments and more accurate results.
AI-powered technologies eliminate the need for manual desktop research and simplify the process for M&A professionals. They don’t need to access multiple websites to scout potential targets. AI makes deal sourcing more cost-effective while building a more extensive and accurate list of most relevant companies based on investor criteria.
Most advanced AI tools are reliable and simple to use. Inven analyzes millions of websites, registry data, and social media and consolidates all relevant data points into one platform. This makes it effortless for professionals to search for companies and discover deals within specific niches.
Using AI in deal sourcing offers various advantages:
- streamlined acquisition target search with less googling
- filtering based on company ownership information
- direct access to company decision-makers’ contacts
- finding similar companies to previous deals
Inven provides access to verified contact information of over 430 million professionals and financial data from 43 million legal entities, including revenue, EBIT, and balance sheet data.
How to source investment banking deals: Best practices
Sourcing investment banking deals successfully involves employing a set of best practices that yield favorable outcomes. Building a deal sourcing strategy on these foundations empowers M&A professionals to drive results:
1. Use a sector-focused approach
Adopting a sector-focused approach where your IB has profound expertise helps you stand out from other investors. Specific experience builds credibility among company owners and makes them more eager to open discussions with you. Understanding unique dynamics in specific industries enables targeted communication and more efficient deal sourcing.
2. Build and maintain strong relationships
Best practices in deal sourcing emphasize the significance of nurturing relationships with industry experts and partners. These connections act as valuable sources of referrals and exclusive deals. Building and nurturing strong relationships with industry players, clients, and other professionals fosters a reliable network for deal referrals and recommendations. These connections play a vital role in accessing exclusive or proprietary deal opportunities.
3. Capitalize on advanced technologies
In today's technology-driven landscape, capitalizing on advanced AI technologies and business intelligence is equally essential than great relationships. Integrating technology-based solutions to harness the world's data complements existing strategies. This ensures better informed decisions and enhanced likelihood of success and competitive edge.
4. Find a combination strategy that works best
The path to an effective deal sourcing strategy often involves exploring various combinations of methods. Trying out diverse approaches helps refine the process, ultimately leading to the identification of the best practices. Fine-tuning the strategy based on measured outcomes ensures that investment bankers continuously spot lucrative opportunities.
5. Do the timing right
Staying attuned to market trends, economic conditions, and industry developments helps to get the timing of outreach right. Recognizing the significance of timing and building relationships with founders and owners ahead of time makes it possible to seize opportune moments.
Conclusion
In conclusion, by combining the strengths of traditional relationship-driven strategies with cutting-edge AI and data-driven approaches, investment bankers can craft a powerful deal sourcing strategy.
Platforms play a pivotal role in streamlining the deal sourcing process. Embracing technology and tapping into the vast reservoir of data and intelligence will be the driving force behind success in the ever-evolving landscape of investment banking deal sourcing.
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