Proprietary dealflow is ‘overrated’

LPs ‘love to focus on it’, but uncompeted deal processes do not lead to better returns, say dealmakers.

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.”