Sourcing Deals - Analyst

h3dgehog's picture
Rank: Gorilla | 557

As an analyst at a upper-mm PE shop, what are people's thoughts on deal sourcing? All the deals we have looked at come from bankers who are connected with the senior guys at the firm. However, I wanted to go out on my own to contact some of the lesser known banks to source some smaller deals that might have less competition in a buy-side process.

That being said, is this too ambitious as an analyst? Would I be stepping on anyone's toes if I were to reach out to a bank that one of my colleagues already has relationships with? What are the guidelines / etiquettes for deal sourcing as a PE analyst?

Comments (29)

Best Response
Oct 6, 2015

I had tried sourcing deals at a PE shop as well as an intern and the following would be my thoughts about it

  1. The thing about upper-mm PE shops is that usually most of the deals are from the larger banks where your PE firm probably have a relationship with. What I notice is that the senior people at PE shops tend to revolve around those banks that are constantly bringing them deals and will tend to forget about the other banks after a while.
  2. While there are definitely opportunities for you to reach out and reconnect your firm and the other banks, what I would recommend would be speaking to the senior people from your firm (especially the origination team / sourcing team if you have one) and ask them whether they are alright with it. Next, if you do not have a list of firms which the senior people regularly contacts, always build a list of banks which you think you have a shot of reaching out to and check back with the senior guy and ask for his opinion.
  3. It really depends on whether the senior guy is alright with you having a secondary contact at the same bank which he has a contact. It also depends on the bank on whether they prefer to have a single point of contact e.g. financial sponsors group.
  4. When you are emailing/calling the bank and arranging for an appointment, always keep the senior guy in the loop. On the day of the meeting, the senior guy would probably be the one doing most of the talking.
  5. Keep trying. My understanding for most PE shops is that for shops with no sourcing teams, sourcing is a very small fraction of the bonus of the investment team and no one is motivated enough to do it on top of their job e.g. they rather skip it and have more time for themselves. In addition, there is a very high chance that most of the banks that are not on your senior's guy radar have either poor deal flow or does deals that do not match your firms' investment criteria. This means that you will probably end up with more contacts but less than proportionate amount of deals.
    • 2
Oct 6, 2015

Great point. Now do I really have to keep my senior guy involved in all of this? The initial calls would be to give the bankers a general sense of what we are looking for (i.e. deal size, industry, sub industry vertical, etc). I would think that discussions around an actual deal / signing an NDA would require senior involvement.

Oct 6, 2015

I did leave out my senior guy initially and I ended up having some awkward emails by the MDs of various banks telling me how they have an existing relationship with my firm and do not require a meeting.

Oct 7, 2015

bump

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Oct 7, 2015

Bump, wondering about this as well.

Oct 7, 2015

talking about banking

Oct 7, 2015

The consensus is that it depends on bank size. BBs will give you top bucket in all likelihood, but smaller places may give you a cut of the deal. Marcus's answer and the replies in this thread do a great job of explaining it.

http://www.wallstreetoasis.com/forums/bringing-in-...

Oct 7, 2015

It depends on the region as well. There have been A1's (associates yr 1) in other parts of the world at BB's who have cleared very-high 6 figurs due to origination and closing a mid-sized deal. Also, it is not uncommon for certain analysts/associates with high-level relationships (who are also able to originate deals / warm up contacts) to be groomed early for MD positions. This includes skipping a few steps in the promotion track. For example, one person = 3 years analyst, 1 year associate ---> VP directly.

The best part is that you never see these rock-stars in the office either. At the ripe old age of 26-27, they're off jetting across the world in private jets, wining and dining their contacts, while the rest of us try to figure out why the excel model isn't balancing =).

And therein lies the fundamental business between sell-side and buy-side. Sell-side, IBD, is in essence very much a marketing / people-driven business. Buy-side is much more of a investor, due-diligence oriented role. This is why I think it's not always the case that PE > BB IBD. If you have strong relationships, or have strong capabilities in interacting with people, you may very well be able to make a lot more as a BB banker than you would be able to as a PE professional. PE is an investing relation driven business - it doesn't matter how good you are with people (as much). If you make astute business choices - you make money. If you don't, no one makes money.

Oct 7, 2015

Which groups are usually groomed for sourcing in addition to the usual number-crunching?

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Oct 7, 2015

It did not close unfortunately so he never got paid for it... however he did move up the ladder pretty quickly, faster than anyone I've seen actually. It was more than just sourcing a deal, though, it was more that he was super-good at his job and better than 99% of Analysts, and on top of that also managed to source a deal.

I would expect a % of the fee earned by the bank if a deal actually closes. I know at some PE firms (Audax for example) they give a "sourcing bonus" of around $50K - I would actually ask for more than that, somewhere around 5% of the fee, if I sourced a deal somehow.

Banks are pretty strict with promotion so you wouldn't instantly move up to VP or anything.

Oct 7, 2015

If anything you will be recognized.

Oct 7, 2015

If you sourced a deal as an analyst at a bank you would probably get some recognition and maybe top bonus. I wouldn't expect anything more than this. Actually sourcing a deal as an analyst is pretty unlikely.

The Prince of Wall Street

http://www.princeofwallstreet.com

Oct 7, 2015

I suspect on the rare occasion an analyst sources a deal, it's a one-off resulting from a family connection or something.

Oct 7, 2015

First things first, don't overstep. I would make sure it's fine with them that you start developing relationships whether with banks or industry management groups. They may want to keep that under their umbrella - I saw this happen at my old fund.

While you've mentioned intermediaries, I would still strongly suggest attending an ACG event. Likely there is 1-2 held in your area throughout the year.

Competitive or proprietary, before you get on the phone develop a pitch; who, what, why. Run this by the partners as well. They should be able to give you some pointers as to what you should [or should not] be saying. You want to be able to give concrete examples of the fund's expertise, relevant prior portfolio, strategy, etc.

Here's my approach to proprietary deal sourcing -- sourced $30mm growth equity transaction.

1. Identify target market (e.g. oilfield services providing seismic)
2. Speak with industry experts/operating partners to understand growth catalysts, business models, potential TAM, leading players
3. Read initiating coverage reports for relevant public co's, read management discussion in 10-k's
4. Build market map (both public & private co's) in Excel using CapIQ, Google, available research databases
a. Company name
b. Description
c. Location
d. Revenue estimates
e. Product or service categories
f. Management contact information (if available)
5. Rank businesses based off specific fund's financial criteria (prioritize)
6. Begin emailing - follow-up with phone call few days later if no response
7. ???
8. Profit

Pointers: Your goal at the end of the day is to sound confident on the phone - some idea of what's going on. Second, it may make sense to start with some of the smaller players in the industry to get a feel of what's happening on the ground. I found they tended to be friendlier and more willing to share industry information. Third, absolutely try to find out the companies financial information (revenue, ebitda, margins) without signing a NDA. Use tact. Some conversations won't lend themselves to this. Lastly, its a grind. There will be folks who won't ever respond, will be assholes, and others you'll remember forever.

Now grab yourself by the balls, unclench, and "reach" out.

    • 2
Oct 7, 2015

Thanks for the in depth response. I'll have to talk with them about the whole pitch process, they don't actively source deals as I said, but I did sit in on a meeting with an investment banker here just looking to establish a relationship with us and one of the partners went through their "who we are and what we do" kind of speech.

As an example of how we get deals, the one I'm modeling right now the management team actually found us via Google haha. Another we have on the table I don't even remember how we got it (I was hired when it was at LOI stage). The other three we have on the table came from investment banks and business brokers that contacted us. We have a pretty unique business model/philosophy so I think they attract deals simply based on that and their existing relationships and status in the field regionally. They're pretty laid back so this deal flow is acceptable to them; they end up doing 0-2 deals annually.

Regarding the sourcing process you outlined, we're not in a specific target industry like oil & gas. We're pretty broad, focusing mostly on manufacturing/industrial businesses but are very opportunistic (one of the deals we're looking at is for a financial services firm, for example). So I can't really adapt what you've wrote here as your process, though it's interesting.

I was considering contacting people that I already know at banks, PE firms, etc. to just meet with them, see what their deal flow is like, remind them to call me if they get anything, etc. I think I can do this without having a specific pitch in mind, because I already know them and some I'm friends with.

Oct 7, 2015

Understandable. My old fund was energy and industrials, with me sitting almost exclusively in energy. It was in my best interest to do this since a percentage of money not spent on advisers was siphoned off; reality was far from this. Obviously if fees aren't an issue, I'd say screw the proprietary process. It's a serious grind, but I still think this might be a valuable way to hunt for the gems. Two points: non-banked deals [tend to] outperform their auctioned equivalents. I'd avoid sourcing deals from other PE funds, tends to be more expensive and opportunity to optimize/cost cut less likely.

It would make sense to go after the low hanging fruit - people you already know. If you are looking to expand in the intermediary side attend an ACG event. Pretty good bang for your buck. There are also speed dating dinners (can't remember exact name) where a bunch of bankers attend side-by-side with PE funds. It's a bit more personal. Another option is similar to what you suggested: pull list of relevant bankers, email associate/VP, get on the phone, tell them who you are, ask them to send deals, keep relationship warm with follow-up every 1-2 months.

Oct 7, 2015

could use more insight on this as well.

Oct 7, 2015

That would undoubtedly depend on the size of the fund we are talking, what stage they invest at, and how much... ?

Oct 7, 2015

Below is for MM PEG I work in:

We generally generate deal flow in two ways:
1. Auctions
2. Proprietary Deals

1) To start getting auction deal flow, all you have to do is call up the various MM bankers in your market, go for lunches, pitch your fund and basically tell them to send deals your way that fit your investment criteria. At our shop, this is generally done by MDs and Directors.

Once you start seeing deals, you have to make sure that you do a good job so they keep sending you deals in the future. We usually try to get back to the bankers quickly, try to ask good questions, follow the process, be honest why we like or not like the deal, submit bids that are attractive (if we like the deal), etc. Closing a deal with a particular banker is the best way to earn their trust though and will ensure they send you all their deals that fit your fund in the future.

As you work on deals, you get to know the junior guys at various banks quickly and you can start building your own network that way. I find young guys will often give you better intelligence on what's really going on with a deal and if you can give some good info to your MD, he will respect you for that. This works both way. Sometimes you give a good piece of info to your buddy at the bank and he will also look good to his MD. I guess that's how young guys can help each other out.

2) Option 1 is the easiest way to generate deal flow but proprietary deals generate better returns (i.e. not as competitive). There are really 3 ways to source deals this way:

i) As our fund is owned by a major bank, we often get referrals from the commercial bankers - these deals are great because no other PEG sees them and we can often get exclusivity with a lower price quickly. To keep deals flowing from this source, we frequently pitch the commercial bankers on what's going on in the market and why they should refer deals to us.

ii) Personal network. Obviously, the MDs and Directors have a pretty good network, including accountants, lawyers, CEOs, etc. who call them up to talk about buyout ideas.

iii) Cold calls. We don't do these - don't need to right now. I have a few buddies who work at funds where the Analysts have to cold call and they hate it. Being in your 20's calling up CFOs/CEOs trying to set up meetings is shit work. I guess a necessary evil when you need more deal flow. Some funds put together massive lists of attractive buyout targets in certain industries and the Analyst then has to call each company on the list, usually pitching the fund as an expert in that industry, to try to set up a meeting to see how the fund could add value.

Maybe someone else who does cold calls could provide some more detail on their pitch.

Oct 7, 2015

Yes, this is probably legitamite. A small percentage of PE firms (<10%) use this sort of model where some of the junior people are used to source deals. It means making phone calls to small-to-middle market companies and asking to speak to CEOs to see if they are interested in a financial partner (i.e. buyout, etc.) Prospective companies are sourced from various directories and industry trade periodicals. Hit rate is extremely low. Once you have an interested party, more senior people in the firm are brought in to help you. Can be a nice developmental experience alternative to traditional associate role but many people don't prefer it because it involves a certain level of initiative and salesmanship and can get boring making cold calls all day.

I am not in this sort of role but had interviewed for a similar PE position before (which I did not take).

Oct 7, 2015
ibleedexcel:

Yes, this is probably legitamite. A small percentage of PE firms (<10%) use this sort of model where some of the junior people are used to source deals. It means making phone calls to small-to-middle market companies and asking to speak to CEOs to see if they are interested in a financial partner (i.e. buyout, etc.) Prospective companies are sourced from various directories and industry trade periodicals. Hit rate is extremely low. Once you have an interested party, more senior people in the firm are brought in to help you. Can be a nice developmental experience alternative to traditional associate role but many people don't prefer it because it involves a certain level of initiative and salesmanship and can get boring making cold calls all day.

I am not in this sort of role but had interviewed for a similar PE position before (which I did not take).

Absolutely right. Painful process but will get you familiar with how PE funds work and how to evaluate different types of opportunities.

In addition to cold calling large corporations looking for deals, some other things you could be doing are:
- Handed a list of no name banks and having to call them and start building a relationship so they show you deals
- Going through bankruptcy and distressed company publications/newsletters hunting for companies that may be on the block soon... and then cold calling those companies to see if they're looking to sell or start a process
- Do FactSet/CapIQ runs to see what companies are trading at low multiples and calling them to see if they're interested in a buyout
- Attending conferences to build relationships

It's a tough job but many PE funds require their analysts/associates to start this way to get their feet wet. Others have entire departments devoted to just sourcing deals and generating leads. Anyway, like ibleed said, it does require some initiative and salesmanship.

Oct 7, 2015

weird. won't post rest of comment...

Oct 7, 2015
Comment

If the glove don't fit, you must acquit!

Oct 7, 2015
Comment

If the glove don't fit, you must acquit!