The Broken Process – Second Chances with Quality Assets

The Broken Process – Second Chances with Quality Assets 

When it comes to sourcing deals, you reap what you sow. This holds true now more than ever, with many firms reporting stagnating deal flow and closed deal activity that is swiftly following suit.  

On a late-April PE deal sourcing webinar titled Effective Deal Sourcing in a Slowdown, Andrew Morrow, Managing Director at Houlihan Lokey, described the state of M&A deal sourcing, saying, “In this environment, deals are harder and more expensive to finance. Diligence is taking longer, overall deals are taking longer to close. So, the quantity is down and length of time they’re in market is up.”  

Despite the stormy weather, there is a silver lining for firms that take a consistent, proactive, and creative approach to origination: Even in a slowdown, your historical deal pipeline could be a gold mine for fresh opportunities.  

It’s true that new opportunities are drying up since businesses are generally reluctant to transact due to unfavorable market conditions. But over recent months, a confluence of tightening financing availability, high rates, and a mismatch of seller and buyer expectations means it’s likely that many deals have ended up with stalled or broken processes – deals that you may have previously sourced and liked, but didn’t win. SPS can help you find those diamonds in the rough. 

In fall of 2022, we analyzed quarterly PE median deal flow against the percentage of those deals launched that eventually closed over recent years: 

“After a drop in deal flow in the first half of 2020 due to the pandemic, deals sourced steadily increased from Q3 2020 until Q4 2021, when a palpable decline in deal flow occurred. On average, since 2014 about 36% of deals sourced end up trading at all, though this proportion has slightly declined over time, and dropped to 30% at the peak of the pandemic as broken and stale deals amassed.” 

  • SPS: The Science of Deal Sourcing, 8th Edition, Sept. 2022 

Now faced with similar macroeconomic conditions and deal flow tapering off, it’s reasonable to expect that deals sourced over recent quarters will find a similar fate. In slow times like these, PE firms would be smart to take a trip down memory lane, revisiting deals they’ve already done the leg work to evaluate.  

Enter SPS Broken Deals analysis. The feature enables you to transform your historical deal pipeline into an active resource for broken processes and transactions that never traded. Leveraging our CRM integration and Pipeline Activity tools, you can mine your past pipeline activity for second chances with relevant opportunities that may still be actionable.  

  • Cross reference closed deal activity in your target market with deals you’ve previously logged to reveal potential broken processes. 
  • Create custom dashboards in the SPS Portal for broken processes that match your investment criteria. 
  • Receive Email Alerts on relevant deals from your pipeline that didn’t end up trading. 

Despite the confusing market sentiment, deal activity will eventually pick up. PE investors are sitting on heaps of dry powder and need to create liquidity, and sellers can only wait so long for valuations to bounce back up – factors that may drive demand for quality deals in the second half of this year.  

Private equity firms need to take a creative, discerning, and technology-driven approach to find the right deals in this market. Leverage SPS to start sourcing under-the-radar gems today. 

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