A buy side investment banker can enhance your deal flow by leveraging their extensive network, industry and research expertise, and proactive outreach strategies to identify and secure exclusive, off-market investment opportunities.
Private equity and corporate acquirers face intense competition for quality companies. Successful business owners are frequently contacted by potential buyers, increasing the demand for a limited number of quality acquisitions and raising the barrier for acquirers. Investment banking firms help lower this barrier by offering proprietary deal origination services and providing clients with a competitive edge in sourcing high quality potential investments.
Proprietary deal sourcing involves uncovering and acquiring investment opportunities that are not broadly accessible in the marketplace. It’s very much a “pick and shovel” type process requiring the deal team to conduct extensive research followed by strategic communication tactics to pique a prospective seller’s interest. This post will outline the types of proprietary deal flow investment banks generate, the benefits to acquirers, strategies used by investment bankers to create opportunities, and the associated costs.
Understanding Proprietary Deal Flow
Investment banks generate proprietary deal flow for buyers with a variety of motivations, but here are a few of the primary reasons potential clients would engage with an investment banker:
Add On Sourcing:
Investment bankers partner with private equity groups and portfolio company management teams to grow their platform companies by identifying and qualifying acquisition opportunities that can benefit from the buyer’s synergies, operational efficiencies, and shared resources.
Platform Sourcing:
Once private equity firms have developed an investment thesis for entering a specific industry or sector, buy side investment bankers source and filter relevant foundational investment opportunities, providing clients with new deals that can serve as a basis for future expansion.
Corporate Acquisitions:
Corporations use acquisitions as a strategic tool to achieve various objectives. These include market expansion, enabling them to enter new geographic regions and increase their customer base. Acquisitions also facilitate growth by allowing companies to integrate established businesses with proven success. Another key reason is to gain synergies through the combination of resources and building relationships, which can lead to greater efficiencies and cost savings. Additionally, acquisitions help in diversifying product or service offerings, reducing risk and opening up new revenue streams. Finally, companies may pursue acquisitions to consolidate competition, thereby increasing their market share and enhancing their competitive advantage.
Benefits of Enhanced Proprietary Deal Flow
Engaging with an investment bank for a buy side process allows the buyer to focus on their core business instead of spending time on researching, contacting, and following up with potential sellers. The investment banker presents highly qualified acquisition opportunities to the buyer, who then engages in discussions with prospective sellers to determine if they want to proceed with a deal.
In many industries, it can take numerous phone calls to connect with potential targets and present the buyer’s value proposition. This deal process can consume significant amounts of the buyer’s time. Not every call results in an acquisition, so buy side bankers maintain multiple simultaneous dialogues with prospective sellers, ensuring the buyer always has an active pipeline of acquisition opportunities.
Strategies Investment Bankers Use to Increase Proprietary Deal Flow
Market Research and Analysis:
Buy side investment banking teams excel at market research. They follow your investment thesis and goals to identify off-market companies that align with your geographic and financial interests. Investment banking analysts play a pivotal role in presenting batches of the best potential opportunities tailored to your needs and investment criteria.
Networks and Relationships:
Experienced advisors maintain extensive networks and many personal connections with others in the M&A industry, regularly communicating with other bankers, finance professionals, private equity groups, corporate development professionals, and business owners. Their strong relationships in the acquisition market ensure they know exactly who to contact within your sector of interest. The experience gained from previous searches allows the deal team to leverage best practices, making your search more effective.
Targeted Buyer Lists:
Buy side analysts and bankers collaborate to refine and prioritize target lists for their clients. They focus on the top research results and prioritize the best target companies, ensuring swift access to the most promising opportunities and potential best deals. The target lists are continuously updated and adjusted based on client feedback, ensuring a robust pipeline of opportunities throughout the search.
Effective Marketing:
By understanding your investment thesis, the investment banker crafts a compelling narrative that attracts prospective sellers. This story highlights the opportunity to partner with you, generating interest and engagement. Investment banking firms also develop supporting materials, such as templates and attachments, to reinforce the opportunity through effective marketing efforts.
Specialized Technology and Tools:
Buy side investment banking firms invest significantly in tools like deal sourcing platforms, market intelligence platforms, automation software, data, research and insights tools, and virtual data rooms. By engaging with a buy side banker, you gain access to these advanced tools, enhancing your search process and accessing a greater number of proprietary deals without increasing your own technology and research expenditures.
Types of Compensation for Buy Side Advisors
A buy side advisor’s fees are paid by the corporation or private equity firm they represent. Each engagement has specific terms and conditions outlined, but the fees typically will include the following:
- Retainer Fees: Monthly fees paid for buy side services, securing industry and sector exclusivity, and committing firm resources to the engagement.
- Success Fees: A percentage of the transaction value upon successful completion of an acquisition.
The Value of Hiring a Buy Side Advisor
Engaging a buy side advisor offers significant advantages over managing the acquisition process in-house. Buy side advisors bring a wealth of industry-specific expertise and deep market knowledge, enabling them to identify the most promising acquisition targets and structure deals that align with the client’s strategic goals. Their extensive experience in the sale process and specialized skills in valuation techniques and negotiation strategies ensure that clients achieve the best possible outcomes.
Additionally, these professionals take a proactive approach to risk mitigation by conducting a thorough due diligence process, identifying potential pitfalls, and providing strategic advice to navigate complex transactions. By leveraging their strong relationship network and advanced research tools, the buy side management team will maintain a steady pipeline of high-quality opportunities, allowing clients to focus on their core business activities, which may be particularly important for smaller companies.
Considering working with a buy side advisor? Learn whether it makes sense for you in our article, Should You Hire a Buy Side Advisor for Your Next Acquisition?
The Takeaway
Enhanced deal flow is essential for private equity firms and corporate acquirers to stay competitive, secure high-quality acquisitions, drive growth and increase overall long-term success. By partnering with a buy side investment banker, you gain access to exclusive, off-market opportunities and benefit from their industry expertise, extensive networks, and strategic approach. This allows you to focus on your core business while the investment banker ensures a healthy deal flow pipeline, mitigates risks, and secures the best possible deals.