What Is Proprietary Deal Sourcing?

The term “proprietary deal sourcing” has been on the rise for years. But what is proprietary sourcing really? And more importantly, is it the right strategy for your firm?

A proprietary deal can take one of two forms: 1) a deal in which a firm is the only bidder or 2) a deal in which a firm is the first of multiple bidders and has a significant head start in terms of a relationship and access to company information.

Being first in line seems like the strongest play for dealmakers so why is proprietary sourcing taking a backseat to traditional sourcing strategies like events or bankers?

According to a quote from a leading mid-market fund in a  BCG report the problem is this: "Everyone is trying to find a proprietary deal, but we know that it’s nearly impossible once transaction sizes move beyond the lower mid-market.” 

After reading this quote, three questions come to mind:

1. Is proprietary sourcing even possible for middle market dealmakers?
2. What are the hurdles for dealmakers to establish proprietary deal flow?
3. And finally, what strategies, tactics, and technology are needed to truly be first in line for a deal?

Are firms able to raise funds citing proprietary sourcing?

Proprietary sourcing is an attractive option for dealmakers. Rather than relying solely on bankers (and paying finder’s fees) discovering a proprietary deal can mean better deals and higher returns.

This is very attractive to LPs.

Here are just 5 funds that have been raised by PE firms in 2022. When raising the rounds, they tout their ability to leverage proprietary sourcing to get their investors higher returns. It pays to boast proprietary deals among their portfolio companies.

1. Dallas Venture Capital - "DVC is known for its proprietary sourcing methodology through its extensive network of advisors that include CIOs, CXOs, industry experts, and technologists."
2. Rockets Capital - "Rockets Capital will have access to proprietary deal sourcing opportunities in the Smart EV industry value chain and the related ecosystem. The fund has already entered into agreements to invest in several leading enterprises in its target industries."
3. Monroe Capital - "This is a high returning business that we have pursued for the last ten years. We continue to search for specialized areas to leverage our core competencies and our proprietary sourcing capabilities to find attractive adjacencies in direct lending where we can generate discernable “alpha” for our limited partner investors."
4. KKR - "These capabilities are paired with KKR’s approach to proprietary sourcing, capital preservation, and active portfolio management to seek out long-term capital appreciation and attractive risk-adjusted returns."
5. CAZ Investments - "CAZ Investments' proprietary research and network identifies thematic investment opportunities across public and private markets. The CAZ team has access and reviews 1,500 private investments in a typical year, but usually invests in less than ten."

Proprietary deal origination sets a firm apart from the crowd, for now. But with the benefits of proprietary sourcing becoming more well-known, it’s likely to become the norm rather than the outlier.

Benefits of proprietary sourcing 

When competition increases, proprietary deal flow keeps your funnel active. It’s well-published that 2022 deals were significantly lower than the sky-high deal count of 2021. An uptick is not currently projected in 2023.

So how can a firm keep their funnel full even when macroeconomic factors are deterring deals? One way is by establishing internal proprietary sourcing strategies.

With a well-oiled system in place and the right technology in hand, firms and companies are equipped to weather any storm. A deal fell through? With a backlog of proprietarily sourced companies, you've built relationships with the right relationships to move quickly into the next acquisition even during economic downturns.

It's been stated previously, but worth repeating. The biggest benefit of proprietary sourcing is being first in the door. For under-the-radar middle market companies, the first firm to reach out to those operators has a distinct advantage. 

“(With proprietary deals), there’s no auction where you’re bidding back and forth against competitors. There could be value on the buy/terms, but the relationship is the biggest key. By the end of the deal, you don’t feel like you’re negotiating. You’re both working towards closing a deal that you’re partners in together.” -Jordan Wagner Co-founder – Manager, Deal Development at Exit Strategies

Even being first in the door, firms still need to implement impeccable external communications and internal coordination to get the most of a competitive advantage. Effective proprietary sourcing requires long-term strategy--potentially looking just outside the investment thesis to find smaller companies that could grow into a target company. Firms that are reaching out to those executives and building relationships by providing value to them will be able to close that deal when the time is right.

Challenges to proprietary sourcing

Setting up a proprietary deal sourcing process does not happen overnight. It takes focus, strategy, and funds.

For some firms the time and money needed hinder them from starting to find their own deals. The best deal sourcers hire full-time BD professionals. And hiring that resource doesn’t come cheap. 2022 data shows that the median salary for a private equity associate in New York City starts at $135,000 annually. 

Business development teams are on the rise, but the upfront costs drive some firms to lean towards the status quo. They are comfortable relying on their usual sources. If dealflow is currently active, that does not mean it will stand that way. Traditionally M&A sources can run dry or quickly become too expensive in an economic downturn.

For others, proprietary sourcing does not make sense for their investment thesis. There are VC firms investing solely in companies in their 3rd or 4th rounds of funding. With companies that are larger, and well-publicized, there is no real competitive advantage to proprietary sourcing. Those dealmakers–by design–will never be first in the door and happy to show up fashionably late to the party.

Is Proprietary Sourcing Worth It?

Now that we’ve defined proprietary sourcing, looked at the benefits and drawbacks, the question naturally arises, is proprietary sourcing worth it?

The answer: it depends. But if your targets include middle market companies, then the answer is overwhelmingly yes.

If your firm and company targets live in the middle market, particularly founder-run and family-owned companies, then proprietary deal flow is a must-have for two reasons.

1. Proprietary sourcing improves the deal close rate.
2. Proprietary sourced deals have higher returns.

According to data from CEPRES and Pitchbook, proprietary sourcing improves returns by 10-20%. What does that look like in action? $13 million more carry per deal.

Because of these two reasons, many predict that proprietary sourcing will become the new normal, rather than a niche strategy employed by a few high-performing firms.

In fact, a recent SPS Bain reported, “On average, participants in the survey said that 39 percent of their closed private equity deals came from a proprietary source. 

Soon firms won’t have a choice between traditional sourcing and proprietary sourcing if they want to compete with cutting edge firms who are already reaching out and nurturing direct relationships with business owners.

How Technology Powers Prop Sourcing

To do proprietary sourcing right, you need the right people and the right technology.

It’s impossible to boil the ocean of millions of companies, so thematic investors who target specific sectors succeed in proprietary sourcing. Deal sourcing experts know their space like the back of their hand, but even with an in-depth understanding of their field, deal sourcing can be time-consuming at best and seemingly impossible at worst without the right technology. 

Some dealmakers spend hours of their work day scanning LinkedIn and or Google trying to map the possible opportunities in a given sector, but with a deal sourcing platform, dealmakers can find the right companies in minutes.

Without a deal sourcing platform, proprietary sourcing quickly becomes a manual, ineffective task on your to-do list.

Corporate development teams like Help at Home and Air Techniques International search with Grata to ensure their expertise is put to best use. Their time is better spent approaching business owners, not spending hours scanning industry groups to find 1 or 2 companies that fit their ideal target company.

Firms like Normandy Advisors, Peterson Partners, and Ocean’s Leap decided that hours saved during the sourcing process are put to much better use in thesis research or reaching out to potential sellers.

Dealmakers in private equity, corporate development, venture capital, and investment banking have a wealth of opportunities within their networks but need a way to uncover those connections effectively.

Investment professionals looking to leverage the power of their networks to find new deals should consider a relationship intelligence CRM like 4Degrees. Designed by ex-investors, 4Degrees helps deal makers uncover new opportunities and nurture relationships that drive business by keeping your firm top of mind with finance professionals, management teams, and other potential deal sources.

Enhance your proprietary sourcing

Are you a dealmaker looking to invest in middle market companies? Then proprietary sourcing is for you. Learn more about how to get the right tech stack for the job.

Start searching smarter with Grata. Set up a demo.

Start leveraging the contacts you already have with 4Degrees. Set up a demo.

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