Updated July 20, 2023
Introduction to Deal Origination
The process of finding suitable investment opportunities for a client interested in making such an investment is known as Deal Origination wherein the investment advisor aims to put on the table a few good investment prospects and present the benefits and disadvantages of each of these prospects for the potential client and also propose the few possible methods of such an investment.
Explanation
Deal Sourcing is another term for the same process. Investment advisors act as an intermediary between the prospective investor and the investee and once he connects the two he receives his payment in terms of fees or commission. There can be many different start-ups that could be of interest of bigger companies because they may add synergies or diversify their portfolios.
Pitching for such possible investment avenues and explaining to the clients why it could be a good investment for them is the purpose of Deal origination. There can be various ways in which such investors can be made, such as M&A, Equity or Debt Financing, PE or VC investment, and so on.
Process of Deal Origination
Below smart art presents what could possibly be the process of Deal origination. There is no hard and fast rule as to what the process can be, but the steps are shown here cover most of the required steps:
- Determining Prospective Client: This can be a two way process. Either the client may approach and express his intention of getting to know the available investment opportunities, or it might be that the advisory firm may approach potential clients and understand if there is any such requirement. Once the requirement is established, the following steps are undertaken.
- Studying the Existing Business: Here the investment advisor will understand the industries or sector the business is in and conduct a company and industry analysis. It will find out the areas of improvement and suggest the same to the client, who will give a go ahead on the same so that the advisor can take it forward.
- Analyzing the Going Forward Strategy: Once the advisor receives a go ahead, it will formulate the way forward, such as whether the investment should diversify the portfolio of the client or add to the same or whether there is any other purpose of the investment. After discussing the same with the client, he will have a final purpose and how to go about it.
- Narrowing Down on Types of Investment: Once the purpose is defined, the advisor will know which all sectors and industries to look for and what kind of investment opportunity is desired. For example, if the purpose is diversification then the sectors to look for will be those other than the sectors in which the client is already having a stake while if the purpose is backward integration then again the advisor needs to look at a few specific sectors. Further, once the advisor is aware of the kind of investment desired for example whether an acquisition is desired or a VC investment is desired, then that kind of opportunity is searched for.
- Finding Investment Opportunities the Meet the Criteria: Selection criterion is defined in the previous step and then the suitable candidates are searched for either through online databases or through corporate connections and networks. A list of possible opportunities is formulated and ways to invest in these is determined.
- Presenting the Findings: Once the list of possible investments is prepared these findings are presented to the client and each of these is pitched to them by presenting their financials, growth perspective, appropriateness for a client portfolio, and so on. This is the step where the client has to decide looking at the presentation, what should be the next step for the advisors.
Strategies of Deal Origination
There are several boutique firms which act as an intermediary and keep track of the new start-ups or companies which are in need of investment. They have an updated database of the same. These firms have the expertise but not the information of investors. So investment advisors contact these firms once they know what kind of opportunities they are looking for. This kind of strategy is contracting out the research activity. This has its pros and cons. Pros are that it leads to a division of labor and gets expert research. The con is that as they don’t work only for one investment advisor, such an arrangement might lead to a breach of confidentiality.
Bigger investment advisors take up the challenge of maintaining their in-house research team which is delegated this task. However, this approach is expensive because this leads to a fixed expenditure, even in the lean period. So it is always a trade off. However, it leads to greater confidentiality.
Approaches of Deal Origination
There is the traditional approach which depends more on networking and corporate connections. Wherein the leads are provided through such connections and it has been existed since the emergence of the deal origination process. Although this method is tried and tested, it is slower.
Therefore now online methods using computer technologies is coming to the fore and gradually taking up the share of the traditional approach also. Axial being one such platform that helps advisors find investors and buyers.
Advantages of Deal Origination
Below are some advantages of deal origination:
- The investor might not be able to find the best investment opportunity on his own and therefore gains from this process by using the expertise of the advisors. Further, the process is delegated so the investors can use their time for what they are best at.
- Advisors get to analyze the kind of investment required and therefore can narrow down their search to the relevant radar instead of using the brute force approach which is time consuming, cost ineffective, and might not give a successful result.
- Companies that need to be invested in also get their due share because otherwise they may go unnoticed but by going through the intermediary, they might find an investor quickly. Therefore it is a win-win for all the parties involved.
Conclusion
Therefore, deal origination is the process of finding out investment opportunities which are relevant for the investors and that of defining the means of investment so that the client gets the best execution and in turn the best return on his investment.
The process is constantly evolving from being dominated by traditional approaches to moving on to online approaches. The strategies pose a trade-off between cost and confidentiality and ultimately it is the choice of the investment advisor, which is more suitable for them.
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