Monday, February 23, 2009

Deal Sourcing

It's interesting to note that many firms have active PE groups that don't just invest in PE funds, but rather also use the funds as a method of deal sourcing and precursor for bigger deals. For example, this strategy can be used to establish a position in a big fund to find out what they are buying.

A good example is the progressive financing of growing companies. For example, smaller mezzanine firms traditionally play a bridge financing role and their acquisitions are prime targets for bigger firms with more capital (like Omers, CPP or OTPP) who can help create more value for the company, taking it to the next level. Large investment banks or funds also acquire companies on their own accounts and are good places for deal sourcing for companies to buy.

These PE groups take a position to find out what a fund is buying and decide if they want to co-invest on the deal and take larger positions. By piggy backing off the funds, they can eventually decide if they want to take bigger chunks of deals.

In the distant future, one strategy you would expect is that they might only allocate a small portion of its money to PE funds and use them to get good insight on potential deals and incrementally increase the number of their own deals and they don't have to pay as much carry to fund the managers and can keep more of it for themselves.

Deal sourcing in this market is very important for firms as M&A activity is fairly low. Any firms which depend on deal sourcing for business will have to network more and resort to more proactive methods in order to have more deals coming in the door as the market cools in order to bolster their bottom line.

Although this area might not be as glamourous as it was only a year ago, it is certainly just as necessary and important for the restructuring or divesture of company assets.

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