How Your Deal Sourcing Process Can Improve Your Fundraising Prowess
I have spoken often about the five key pillars by which LPs evaluate new managers – strategy, team, track record, deal flow and fund parameters. Today, I want to touch upon an often-neglected pillar of fundraising: deal flow. At Sixpoint, we have found that managers miss out on the opportunity to talk about this crucial component of LPs’ diligence – the replicability of their sourcing process and the interplay between sourcing, returns and fundraising.
After all, if I were to ask a focus group of ten GPs if their deal flow is proprietary, I would get twelve affirmative responses. The reality is, however, that in today’s hyper-competitive private equity market, LPs no longer expect that the majority of your deals will be truly proprietary. Proprietary sourcing channels are out there, of course, and you are ahead of the game whenever you find one. However, LPs are realistic and realize that they can’t expect every deal to follow that mold. What most GPs miss is that LPs are primarily focused on two things: how do you drive value through your sourcing process? And how do you ensure the replicability of that process? A sound process on these two fronts is enough to give comfort to LPs.
With that in mind, the best thing you can do to prepare yourself for questions around your deal flow is to be realistic about the true strengths of your sourcing process. Beyond that, focus on what your angle is and how you use your sourcing channels to find deals that are uniquely a fit for your firm. Perhaps the sheer volume of deals you review enables you to be more selective. You may have the luxury to do fewer sponsor-to-sponsor transactions as a result of casting a wider net. Alternatively, you may focus on smaller banks and brokers, realizing that they often run less competitive processes for highly undermanaged and undervalued assets and the way you maintain relationships with these intermediaries or “market to them” is what differentiates you. Every GP says they only look at deal books to learn and never buy from Harris Williams or Houlihan but only use them to sell. Even if it’s true, that story line is saturated. LPs want to see constant reflection and improvement in your sourcing efforts – using data driven approaches to refine which channels you target, optimizing top-down vs. bottom-up sourcing processes, and developing an “edge” in how you present yourselves to prospective investment targets.
Ultimately, LPs don’t mind seeing competitive processes and “traditional” channels in your sourcing strategy. What they look for is harmony between your sourcing strategy and your target deal types – how you use your sourcing capabilities to find deals that are the best fit for your firm. Remember, sourcing and value creation go hand-in-hand, so it is also okay to admit that you sometimes pay a higher multiple for attractive assets if you truly have a differentiated angle to drive value or if the assets you look for have growth to support your paying up. LPs don’t like surprises, so the biggest thing they are trying to learn about your sourcing process is whether they can count on you to consistently find deals that put you in a position to succeed and properly deploy their capital.
Have a great weekend.
Sixpoint Partners, LLC, is a registered broker/dealer, member FINRA (http://www.finra.org) and SIPC (http://www.sipc.org). Sixpoint Partners Asia Limited is licensed by the Securities and Futures Commission (http://www.sfc.hk).