Private equity deal origination involves finding, negotiating and securing potential investees. Since a firm seeks to invest in only 7-10 businesses for a particular fund, it is crucially important to select the right businesses. However, contrary to popular opinion, there’s more to private equity deal origination than just short-listing the hoards of entrepreneurs with new ideas knocking at the door.
One other important distinction is that the private equity deal origination process differs for different sized private equity funds. For a $10b fund, there aren’t many opportunities outside the public markets (and even then, the options are limited). For a $10m fund, there are innumerable opportunities, so deal origination methods are much different.
The channels for deal origination are as follows:
For larger funds, it is very difficult to originate proactive deals, as there’s so much competition with investment bankers looking to clip the ticket. At the mid-market end, proactive origination is more the norm. Firms like to think they’re differentiating themselves by originating private equity deals away from the brokers and bankers, but in reality, most low-value deals originate from proactive industry research. The advantages of not partaking in a process and not having to manage conflicts with intermediaries generally outweigh the extra cost of qualifying these cold leads.