Deal Sourcing Challenges in Private Equity

In the world of private capital markets, sourcing private equity investments has become both essential and increasingly challenging. While PE firms hold substantial reserves of dry powder, identifying high-quality opportunities remains a persistent stumbling block. Competition for desirable companies is fierce, leading to premium valuations, and due diligence has grown more extensive and resource-heavy. Consequently, despite unprecedented levels of available capital, deploying it effectively has never been more difficult.

A McKinsey article proposes five essential capabilities for capturing returns and profitability, one of which is "Sourcing Alpha." To achieve this, the article suggests that private equity firms need a high degree of creativity to craft attractive transactions, paired with a sophisticated capital allocation process (McKinsey, 2024). Furthermore, to adapt, firms must evolve their sourcing strategy from a narrow, sector-specific lens to a focus on cross-functional themes like digitization and decarbonization. (McKinsey, 2024). This requires fostering more fluid collaboration between investment teams and bringing in talent with diverse backgrounds. (McKinsey, 2024).

In addiiton, forming strategic partnerships is another powerful way to generate sourcing alpha, as evidenced by collaborations between venture firms and university labs or between credit managers and liability originators. (McKinsey, 2024).

Source:

https://www.mckinsey.com/industries/private-capital/our-insights/five-alphas-essential-capabilities-to-succeed-in-the-next-era-of-private-capital