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What Is Deal Sourcing in Private Equity?

Are you looking for further clarification on the proper deal sourcing definition and how it impacts a private equity (PE) firm’s success? 

Deal sourcing is one of the most foundational elements in private equity investing. Identifying the right companies enables firms to act fast and close deals in a structured and predictable fashion. In 2021, U.S. private equity firms experienced the most active deal-making period in history, closing more than $600 billion in deals.

Keep reading to learn more about deal sourcing in private equity. In today’s post, we’ll be reviewing key topics like:

  • Deal sourcing definition
  •  The art of sourcing deals
  • Deal sourcing strategies 

Let’s start with the fundamental deal sourcing definition:

Deal sourcing in private equity refers to the process through which firms find attractive investment opportunities in the market. PE firms are tasked with “sourcing” – meaning uncovering – the best investment deals to expand their portfolios and increase their returns. 

Firms can build a steady flow of potential acquisition targets by employing various deal sourcing strategies. 

3 Deal Sourcing Strategies in Private Equity

The process of sourcing deals takes quite a bit of effort. While some firms rely on specialists or in-house resources, others have upgraded to artificial intelligence (AI) and machine learning to screen a high volume of private companies. 

A large portion of a private equity team’s effort in sourcing deals is dedicated solely to filtering transactions, many of which may never come to fruition. The vetting process is lengthy, but it can change the game for your firm when done correctly.

Three deal sourcing strategies for private equity firms include:

  1. Closely monitor growth and potential liquidity signals
  2. Use an AI-powered deal sourcing platform
  3. Build and maintain a strong brand presence in the market

Let’s explore each of these deal sourcing strategies in further detail below.

1. Monitor Growth and Liquidity Signals

It’s vital for PE firms to continuously monitor key deal signals such as rapid growth in revenues, expanding market share, and various liquidity signals like an older CEO close to retirement or a trend towards consolidation in an industry. The most effective PE firms not only build a dedicated outbound deal sourcing program and proprietary deal flow but also closely maintain and monitor it. 

Data shows that growth investors with dedicated deal sourcing teams almost always perform in the top percentile. These top firms constantly seek ways to improve their business development efforts while sourcing the best new private equity deals.

2. Employ an AI-powered Deal Sourcing Tool

Deal sourcing can be cumbersome, especially if your team does everything manually. But when you introduce the power of AI into your toolkit of deal sourcing strategies, you’ll significantly reduce the time spent sourcing deals and evaluating them for fit. 

Only one-third of the investment industry uses advanced technology such as AI to vet several private companies simultaneously. When sourcing deals, AI can find more prospective acquisitions than a human researcher could find in a similar timeframe. With machine learning capabilities, AI also builds an understanding of desirable traits to deliver better results.

We anticipate AI eventually becoming standard in private equity, considering it’s more efficient than sourcing deals manually.

3. Build and Maintain a Strong Market Presence

According to Pitchbook data, 70% of PE firms state that brand building is a top priority. Additionally, 91% claim the need for a strong, memorable brand has increased in the past few years, likely due to the massive increase in private equity firms that has resulted in more competition. 

Although many would jump to a trendy logo or website to create a stronger presence, a firm’s relationship-building capabilities ultimately set a brand apart. Your team must focus on fostering positive, consistent, value-added communication with your existing network and work to expand it. A robust communications ethic and brand presence will help your team stay top-of-mind, driving additional opportunities and referrals your way.

Sourcing Deals Requires a Modern Approach 

Sourcing an attractive investment opportunity requires a tremendous amount of work. Beyond the fundamentals we reviewed in the deal sourcing definition, private equity firms must stay ahead by sourcing, prioritizing, and evaluating new opportunities in real-time. Firms must use deal sourcing strategies like:

  1. Monitoring growth and potential liquidity signals
  2. Using an AI-powered deal sourcing tool
  3. Building and maintaining a strong brand presence

These methods of sourcing deals help firms sort through large numbers of potential and emerging opportunities their competitors can easily miss. If you’ve been looking for ways to improve deal quality and speed up your deal sourcing in private equity, request a demo of udu—an AI-powered deal sourcing tool. 

udu enables private equity firms and their portfolio companies to:

  1. Identify prospects faster than they could alone 
  2. Find opportunities that humans would overlook
  3. Automate various manual processes to shorten the BD cycle

See exactly how we can improve your ability to identify desirable acquisition targets and successfully expand your portfolio by demoing udu today.