How Investment Banks Source Deals?

Investment bankers are intermediaries in the capital-raising process. This means that most of the time, the deals which go through are not pitched by either party but by the intermediaries i.e., investment bankers. Since sourcing a deal is the first step that an investment bank can take towards the generation of revenue, investment banks have entire departments that are dedicated to the process. The performance of this department often has a direct impact on the financial performance of the bank.

Deal origination can be a complex activity since it requires the use of several skills. On the one hand, it requires an in-depth technical knowledge of an industry. On the other hand, it also requires an ecosystem with good rapport as well as selling skills.

In this article, we will have a closer look at the various techniques which are commonly used during the deal sourcing process.

Sourcing Team: Most bulge bracket investment banks have a dedicated team that is engaged in deal sourcing. They work on the principle of telesales, which means that if the number of calls being made increases, so does the number of deals which actually happen. The executives from deal sourcing teams are often famous for having an intricate network of informants within the industry. They are often known for wining and dining with the whos-who of the industry. They do this to ensure that the news of any potential deals reach them before they reach anybody else in the industry. However, having a dedicated sourcing team has a limited utility. In periods of economic lull, even the most advanced team is not able to source many deals. This is the reason why such teams are often used only by bulge bracket firms.

Freelancers: The smaller investment banks cannot afford to pay the salaries of a full-fledged sourcing department. Hence, they are known for hiring the services of freelancers. This means that freelancers can connect with these investment banks as and when they have a deal. Obviously, the commissions that have to be paid to these freelancers are higher than the salaries and bonuses of the sourcing staff. However, in these cases, the investment bank does not have any recurring overheads. This means that the banks pay only when they themselves get paid i.e., When a deal actually goes through.

Research Departments: Many large investment banks have full-fledged research departments wherein there are few resources who are dedicated to conducting simulations and what-if analysis. They try to imagine various permutations and combinations regarding the distribution of assets in the industry. Often times, during such analysis, these researchers often stumble on to deals, which are good for both the buyer as well as the seller. These researchers then provide these presentations to their sales teams in order to convince both parties to undertake a deal. There have been many cases where mergers and acquisitions have not happened because of the intent of either party but because of the diligent analysis of an investment banker.

Technology: Almost every industry in the world has been revolutionized by technology, and investment banking is no exception. There are many modern bankers who believe that human networking is an unreliable and expensive mechanism for deal-making. As a result, several of them have come up with online platforms wherein people from all over the world looking to make a deal can connect with counterparties.

These web portals provide a lot of information to investment bankers. Firstly, it allows investment bankers to identify the hot sectors where all the deal-making is taking place. Then, it also allows them to build a database of deals with good potential and then pitch them to their offline clients as well. It is quite easy for investment bankers to obtain the contact information of important executives on these portals.

The fact of the matter is that web portals, applications, and other technological tools still aren’t used widely by the investment banking community. Since a web application is only as good as the people using it, these portals have still not become significantly important. However, going forward, the importance of these portals will increase by leaps and bounds. This is because they have a wider reach, are automated, and can match the needs of both parties quite effectively.

Trade shows: Events such as tradeshows are often used by investment bankers to scout for leads and improve the effectiveness of their deal sourcing department. Trade shows are a physical congregation of the entire industry. The decision-makers from various big stakeholders in the industry are often seen in one place. As a result, it is a good location for investment bankers to scout for potential acquisition targets.

The fact of the matter is that deal sourcing can be quite complex. The fact that there are no measurable KPI’s which can be used to track the performance of a firm and benchmark it with others makes the entire process difficult to manage. However, investment banks have their own informal methodology to ensure optimum performance by these teams.