What Is Proprietary Deal Flow? What Are the Challenges and What Are the Strategies to Overcome Them?

The Grata team has between 300-500 conversations with business development professionals a month. We know that the question top of mind for PE is this: how do I get my business development strategy to be more proactive? 

Here are some of the PE trends we've discovered and the channels that top firms are using to create proprietary inbound deal flow.

Proprietary Inbound Defined

Deal sourcing is the main function of PE business development teams and right now those teams face a false dichotomy. They think the options are between doing proprietary outbound deals that take a lot of time and effort or doing inbound deals deals that are faster and easier but have lower returns.

But there is another option. PBD (Proactive Business Development), with a focus on proprietary inbound deals.

As a former consultant I love 2x2s. So let’s break it down.

There are 2 dimensions:

1) You’re looking for higher returns.

2) You're looking to source deals efficiently.

There’s always a tradeoff, but the top firms are moving their BD teams to the top righthand corner with alternative deal flow channels. More channels, more diversification.

Can this really be achieved?

With PBD, yes. PBD includes the following channels.

Channel 1: Proprietary Outbound Deals

Proprietary outbound has been on the rise for a while. And different firms have approached their structure differently when it comes to outbound sourcing.

Two ways outbound deal sourcing is achieved: 

1. The firm has a dedicated BD team. The structure typically looks like a Managing Director or VP with a team of 1-3 more junior professionals.
2. Everyone at the firm does sourcing. In PE firms, deal sourcing is assigned to more junior professionals. In investment banking, it’s the opposite. Typically, everyone at the firm is looking for deals.

There are pros and cons to both of these structures. For the dedicated BD team, the negative side effect is that at some point during the deal, there’s usually a handoff process. That can make the due diligence process more complicated than if there was one single point of contact throughout the deal from start to finish.

For teams where everyone is expected to source deals, time becomes a problem. Working outbound is time-consuming and it’s hard to juggle inbound and outbound priorities.

The solution: The best firms take a long-term perspective on deal sourcing. If you’re expecting to do direct outbound to CEOs and in a month have a deal, that’s not realistic. Sellers are getting more sophisticated. They know buyers are out there looking for their business. The best firms are building actual relationships with executives.

What does that look like?

Here's an example. A CEO says they’re not willing to sell. If you stop talking to them right then and there, that's the end. Nothing achieved. If you maintain a cadence of communication, that relationship could led to 3 more meaningful conversations or even referrals. But that is only going to happen with a real relationship.

This applies to dealmakers in the lower middle market and upper middle market alike. You have to build relationship before process because auctions in the upper middle market are becoming even more limited. You need a relationship to get to the top of the list.‍

Channel 2: Work with Bankers and Business Brokers

Remember our trusty 2x2? 

Right now, banked deals sit in the bottom right corner. Easier process, but more competitive. How do you systemized banker outreach in a way where deals come to you?

As PE firms become more and more specialized, you can start building relationships with bankers by sharing knowledge. Sending up the bat signal, if you will.

You want to be top of mind for sell-side bankers when they start making their top 5 sponsors and top 5 strategics lists. The more boutique a bank is, the harder it is for them to run a broad process. PE firm thought leadership is the way to introduce yourself and stay in touch with bankers in your space.

On average, mid-senior PE professionals have relationships with 5-10 banks. There are 6,000 investment banks in the US. How do you see the other 99%? 

The get started you need to,

1) Know who is working in spaces relevant to you. Grata's Investor Search does exactly this.

2) Put these bankers into your CRM and create a schedule to reach out. Build banker conversations into the DNA of your firm.

Channel 3: Engage with Lawyers and Accountants 

In 2023, there is a large number of business owners retiring. They are going to their lawyer and their accountant and making plans. Those M&A advisors are in the know.

You want to stay connected to people in the know. Similar to building relationships with executives and bankers, you need to build in quarterly check-ins with M&A advisors specifically catering to your space.

The get started you need to find lawyers and accountants working in your industry and build relationships.

The result: A potential proprietary deal that comes directly to you. Building a referral program does not happen overnight, but one that is up and running is highly lucrative.

Channel 4: Connect with Investors

Investor referrals are much more common in venture capital than in private equity.

Virtually all VC deals are proprietary. How? VCs have relationships with investors who do bigger and smaller deals than their firm. The seed investor knows the Series A investor, the Series B investor and so on.

PE firms could benefit from similar structures with other investors.

Know investors in your industry all the way up the line. PE firms have similar chains that target different EBIDTA. Know who is investing above you and may have deals they need to pass along. Also it's handy to be the investor who passes along deals that may not be right for your firm based on size, but you know other firms would be able to do.

The best firms have regular check-ins with other investors. The investors above you can give you first access to companies they pass on.

How to Juggle All these Relationships

So you're adding more channels to find deals. One way is to manage them is in a clunky, manual way. I do not recommend that.

CRMs give you option to customize how you reach out to different groups--bankers, port cos, etc. Without the right technology, it will be harder to segment and you won't have a record of what communication has been sent.

But first things, first. Before you can reach out to different groups, you need to find out who they are. Before Grata, the different channels (executives, bankers, advisors, and investors) all lived in separate places. We’re the first ones to give PE firms the private market contacts (and the events they're going to!) all in one place. ‍

Grata is the business development hub that gives you proprietary data across channels. Set up a demo today.

‍

This blog is transcribed from Nevin Raj's appearance on The Private Equity Podcast. Listen to the full episode.