What defines the success of a firm’s deal sourcing efforts?
For over a decade, we’ve been in the business of helping PE firms improve their business development strategies. One thing is absolute: there is no one measure for deal sourcing performance, because each firm’s strategy is influenced by a unique investment ethos, market conditions, and people who comprise a firm’s M&A universe.
As a result, we’ve seen firms consider a variety of qualitative and quantitative KPIs when evaluating the efficacy of their BD program. Applications of data analysis and technology have given way to more precise measures of the true return on these indicators, so we’re taking a look at some of the more insightful tools, metrics, and rules of thumb that firms should consider when looking to measure their deal sourcing success.
Deal flow can be deceptive
One traditional approach employed by firms to gauge success is by tracking the volume of deals they are seeing over a given period, deducing that more deals equate to better utilization of business development resources. However, findings from last year’s Deal Origination Benchmark Report revealed that greater deal flow is not equivalent to better market coverage, or the fraction of deals seen within a firm’s target investment segment. In fact, while 2021 saw record-breaking levels of deal flow, firms only saw a median 15.8% of deals relevant to their investment criteria, while the top quartile of firms saw 24.8%. This counter-intuitive reaction to the boom in deal flow is due to firms becoming inundated by a disproportionately high volume of potentially relevant deals driving down the percentage of actually relevant deals seen that end up closing. Reports like the SPS DOBR allow firms to benchmark their market coverage against average and top performing firms in their peer group, helping put their results in context, which is critical.
Keeping the spark alive
Relationships are everything in M&A deal-making, so naturally many firms track the number of active intermediaries in their pipeline. However, high industry turnover threatens the integrity of CRM data and can lead to unproductive use of time and resources if contact information is not properly maintained. SPS Intermediary Analysis tools enable firms to combat data staleness by identifying the active professionals closing deals in a target segment, and even provides contact information for individual bankers. Carrie DiLauro, Director of Operations at Hamilton Robinson Capital Partners, echoes the significance of a well-maintained CRM platform for business development success: “A core input for any successful BD program, especially in today’s Great Resignation environment, is to keep your contacts updated. Salesforce tells us it takes 6-8 touches to make a sale. This is where a company can leverage the full potential of technology like SPS. SPS has added the ability to push relevant information to you, instead of the older ‘go searching’ method.”
The 80-20 rule in networking
While prioritizing pipeline build is crucial to maximizing chances of seeing relevant deals, some high-performing firms are taking this to the next level by recognizing the distinction between an advisor you know and an advisor who’s showing you deals. Here’s where Pareto’s Law comes into play: A few strongest relationships will generally drive the most results; but how do you quantify the strength of your connections? SPS client Charter Oak Equity has developed a unique KPI to do just that, tracking what the firm refers to as “Intermediary Conversions”, or the first time an advisor sends a live deal opportunity. By monitoring and prioritizing the relationships with the most momentum and impact, firms are able to make the most of their limited time and human capital.
Talk is cheap
Similarly, regular conversations with bankers are typically expected to move the needle, but time constraints require that individuals in deal sourcing roles prioritize the most productive relationships. While it’s tricky to predict or persuade another person’s level of interest, originators have data on their side to prepare a more targeted and efficient approach. For example, many SPS clients use our portal of over 90 thousand transactions to capitalize on timely, relevant data to inform smarter check-ins with target advisors, including who runs broad vs. limited processes using our proprietary Sell-Side Process Index.
So what does successful deal sourcing look like? The answer is different for every firm. And while there are no magic beans to grow the world’s best-ever business development strategy, we know that the best programs are built by firms who have conviction in their core principles, acknowledge the limitations of fixed business development resources, and leverage the data and technology available to them to fill that gap.