It is increasingly difficult for fund managers to find proprietary deals at an attractive entry price that attract minimal competition. Pricing upon entry remains one of the most important factors in the success of an investment, with 62% of private equity fund managers seeing valuations as the biggest challenge, according to Preqin.
Managers have responded with more effective deal sourcing and relationship building earlier in the transaction life cycle. A decade ago, it was not uncommon for private equity houses to participate in auction processes in which receiving the “teaser” was the first time the house ever considered an asset.
This is no longer the case, with a clear relationship emerging between the amount of resources devoted at the origination and the rate of return. Research has found that, “private equity and venture capital funds that employ a proactive origination strategy have consistently higher returns, driven by both greater quantity and higher relevance of incoming investment opportunities.”
Origination encompasses both sourcing proprietary deals and, in competitive situations, uncovering angles that can give a house an advantage in its evaluation or business plan execution. The approaches that funds adopt at origination vary widely, from predominantly in-house to adviser-led strategies.
For the latter, EY has developed knowledgeable teams to address and serve the increasing proportion of non-core carve-outs arising from the market dynamics outlined above. Its Global Origination Team focuses on alternative investors: PE, sovereign wealth, pension funds and family offices; the team is involved in the origination and execution of buy-side and sell-side transactions across all aspects of the corporate finance functions.
Origination, fundamentally, is long term and painstaking, drawing on a wealth of focused, sector-based research that can be banked if it doesn’t bear fruit at any particular time and drawn upon later.
To be competitive against leading corporates, not to mention other increasingly diverse private equity participants, private equity houses need origination sources that are both global and granular. The best are able to determine the viability of an opportunity anywhere in the world, before it is available broadly.
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