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July 5, 2021

Deal Origination From a PE investors Perspective

PE firms have a very different approach to sourcing deals compared to strategic buyers. In an old-fashioned way of thinking, PE firms often view strategic buyers as overpaying in deals. While strategic buyers have this notion that PE firms don't know what to do with companies and are wasting their potential. But these kinds of stereotypes are slowly fading away, and both worlds are slowly meeting in the middle. Helping us understand how PE investors source deals is Jay Jester, Partner at Plexus Capital, LLC.

"The way that the deals are structured is not how you're going to differentiate yourself from everybody else. At the end of the day, you have to lead with trust." - Jay Jester 

PE vs. Corp Dev

According to Jay, the real difference between strategic buyers and PE firms comes down to timeframe. Because of the fund structure of PE firms, they can't think too far ahead in terms of developing the acquired company. Whereas a strategic buyer can look 10 to 20 years down the road and valuate the company to that extent. 

In addition, because of how the deals are structured, how they incentivize the seller will also be different. 

Sourcing Deals

So how do PE firms source deals?Jay breaks PE sourcing into three categories; a brand building exercise, customer focus, and setting up a system.

Brand building exercise

In its simplest form, the brand is the relationship between the company and its customers. PE firms need to build their reputation from every transaction and person that they interact with. It's all about building trust and relationships. 

One strategy in building your brand is to sit down with the execution team, origination team, and capital team, and develop a consensus message of what you do. It has to be simple, but enough to separate yourself from everyone else. 

According to Jay, there is so much commonality in terms of the valuation of PE firms. Math around deals are very standardized, LOI and numbers look the same, and management incentive packages are functionally similar. It will come down to relationships and how they perceive your values as a company. 

Customer focus

As a PE firm, you have to have a deep understanding of your customer's needs. You have to figure out who your customers and partners are, and speak their language. Know what they are interested in and individualize their experiences because not everyone cares about the same things.

It will take a lot of one-on-one relationships, and there is no way around it. Building good relationships is crucial for PE firms.  

Build out your System

Creating a system for your pipeline doesn't have to be complicated. It just needs to be organized. How many funds do you need to raise? How many deals do you need to do? What does that look like in the current market? How many LOIs have been signed out of all the management meetings that you did? How many of those did you do deep diligence?

All this data can tell you what kinds of deals you need to prioritize and how many people you need in your business development team. 

Red Flags

As mentioned above, relationships are extremely important. So when you see huge misalignment in character and values, you need to walk away from that deal. Also, when the other side is rushing you to execute on a deal, that's a red flag. While time pressure is important, you really can't make good investment decisions if you are rushed. 


At the end of the day, building relationships with people is the most important part of private equity sourcing. You need to build a good reputation so people trust you, and you need to know how to cater to your client's needs to keep them happy. 

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