Much fuss is made over the value of proprietary deal flow, but it is a “red herring” when it comes to predicting deal performance, according to panellists at MulitpleX 2017, a conference hosted by London Business School’s private equity and venture capital club.
“People assume proprietary deal flow is a good thing,” said Matt Jones, a secondaries-focused partner at fund of funds Pantheon. “There is actually no strong correlation between sourcing and performance. It is a little bit of a red herring.”
“LPs love focusing on it, but it actually doesn’t make a huge difference,” he said.
Proprietary deal flow – investments negotiated outside of a traditional competitive auction process – are often touted as a selling point for general partners and a valuable point of differentiation, the rationale being that the lack of competition leads to a lower entry valuation.
Jones challenged this assumption: “Actually it can sometimes lead to higher prices,” he said, “because the seller in a proprietary situation will want to be comfortable that they are getting market-plus-one price, otherwise why would they sell?”
Zeina Bain, a managing director at Carlyle Group, echoed this sentiment, saying that among Carlyle’s most successful deals there was a mix of transactions sourced through both proprietary and competitive processes.
“Back in the day, a proprietary deal meant you could buy at a better price,” Bain said. “Nowadays you often have to bid up just to make sure they don’t run an auction process.”