In today’s economic environment, PE firms face growing pressure from LPs to create value and distribute capital, especially as deal activity slows due to higher interest rates and cost of capital. GPs must find ways to improve performance despite fewer deals and longer closing times. To succeed in this landscape, PE firms can leverage data analytics to refine their sourcing strategies and benchmark performance, positioning themselves more favorably with LPs.
A key tool in this process is the Deal Origination Benchmark Report (DOBR), published annually by SPS. For over a decade, the DOBR has helped PE firms assess their deal origination strategies and make data-driven decisions. The 2024 edition offers critical insights that can help firms sharpen their focus and better communicate their strengths to LPs.
Refining Deal Sourcing Strategies with the DOBR
The DOBR provides a clear benchmark for firms to assess their deal sourcing strategies compared to industry peers. With Market Coverage (MC) remaining relatively flat and “deal fatigue” rising as the Percent Transacted (the percentage of sourced deals that close) has declined, PE firms must become more selective in their investment strategies.
For example, Target Market Relevancy—the percentage of sourced deals that align with a firm’s investment strategy—has dropped by 5% year-over-year. This decline points to a growing desire by investors to focus more narrowly on sectors and deals that play to their strengths. By targeting the right opportunities, firms can streamline their deal sourcing efforts, avoiding wasted time on deals outside their expertise, and ultimately generate better returns for LPs.
The DOBR also highlights sector-specific deal flow trends. Certain peer groups, like the Sector-Focused, Lower Middle Market, experienced significant year-over-year increases in deal flow (+36.2%), while others, like the Quasi-Generalist, Middle Market, saw sharp declines (-30.7%). These insights allow firms to pinpoint where they are sourcing deals efficiently and which sectors require stronger intermediary relationships.
Benchmarking for Competitive Positioning
Beyond deal sourcing, the DOBR enables firms to benchmark their performance against peers. LPs are not only concerned with whether their GP partners are sourcing deals effectively but also whether they are competitive within the market. The report helps firms compare their deal pipeline against median closed deals, offering insight into how they rank relative to others in the industry.
With deal activity slowing and the Time to Close increasing, firms need to show they are still closing deals efficiently. The DOBR allows GPs to compare their pipeline closing percentage to industry averages, helping them identify areas for improvement or highlight competitive advantages to LPs. For instance, if a firm’s closing percentage exceeds the industry average, they can demonstrate their efficiency in moving deals through the pipeline, even in challenging market conditions.
Using Data-Driven Insights to Create Value
Leveraging insights from the DOBR allows PE firms to optimize their sourcing strategies, refine their focus, and effectively communicate their strengths to LPs. By aligning their deal origination efforts with core strengths, GPs can run a more efficient pipeline, improve relationships with intermediaries, and close more deals that fit their investment criteria.
This level of precision and focus not only helps firms navigate the current economic environment but also reinforces their ability to generate value and return capital to LPs.
In a market where every advantage counts, data-driven strategies powered by SPS data and the DOBR offer PE firms the tools they need to stand out. By demonstrating a refined, competitive approach to deal sourcing, GPs can strengthen their positioning with LPs and ensure long-term success, even in a challenging deal landscape.
