During my 20+ years in the private equity industry, I have had significant involvement in new deal origination. There are many factors that help an individual or firm be successful at deal origination to be sure, including having a relevant investment strategy, knowing one’s target audience, plus having the right personality and delivering great customer service, among others.
Those factors are simply the prerequisites. Whether you achieve origination success in terms of capital deployed or deals closed is largely formula driven. The secret is to think of deal sourcing game as a funnel, and to win the game you have to fill the top of the funnel.
For Midwest private equity investors like Minnehaha Equity that want to close 1-2 new deals per year, we need to source at least 6 new deals per week.
If you want to close 5x more deals than us, then you need to fill the funnel each week with 5x more deals.
Allow me to explain. In my experience, a private equity deal flow funnel looks something like the following:
- 300 qualified deals received
- 150 CIMs reviewed thoroughly, perhaps including Q&A with the referral source
- 50 Indications of Interest submitted
- 25 management meetings (or calls) attended
- 10-15 LOIs submitted
- 4-5 LOIs signed
- 1-2 deals closed
Yes, there are ways to deviate from these ratios (e.g. if your valuation is higher than market, you’ll sign more LOIs!), and there are also ways to improve success rates at each level of the funnel.
But in my experience, 300 total “qualified deals” (meaning not email blasts, but either you get a teaser, CIM or someone reaches out to you purposefully), or 6 qualified deals per week, is required to hit our goals. Getting to those 6 qualified deals per week is what I mean by filling the funnel!
What actions do you need to take to get those 6 qualified deals per week? And what if your stats within the funnel are different? Both great questions, and the subject of future posts.
Which of the 150 CIMs will be the ones you close? Impossible to know until you invest the time. We believe in spending the time to read each CIM cover to cover, jot down notes and questions, think through the issues, and otherwise pursue each deal with depth. You can use AI for a 2-pager or financial model later, but don’t rely on shortcuts for this part of the deal.
If you are putting in the reps to build relationships, building awareness of your firm and its investment strategy, asking for deal flow, and tracking your progress, then you’re on your way to winning the origination game.
Minnehaha Equity LLC is a private equity partner to growing companies in the consumer, food, agricultural, industrial, and services sectors. We are based in Minnesota, and invest nationwide. Our founding partner, David Shuler, is an experienced investor, advisor, and business owner. We seek partnerships with companies in which we can offer both our capital and experience to help accelerate their growth. Learn more about us here.