Most deal screening processes systematically miss good deals

Many financial investors screen hundreds of investment opportunities to make one investment. To do this efficiently, one needs clear hard metrics of screening. Otherwise one gets bogged down in analysis rather than deal making. Deal screening is done mostly by juniors who also need objective target metrics. Otherwise it is difficult for them to screen. We find >90% of financial investors adopt this approach. I believe, they systematically miss good deals.

If you look at 100 deals offered in the market, each PE firm has a

rejection rate of 97-99%. If a PE firm rejects 99% of the deals, does it

mean everything else is crap? Clearly not. Our observation is that at least 75%

of the deals offered are done by someone else. That means there must have been

some logic in it. Clearly, the not all 75 deals may be good after all and perhaps there are only 2-3 good deals for the investor. Increasing its deal closure rate by 1-2 more deals per 100 screened opportunities would dramatically improve efficieny. How can this be done?

My view is that there is money in the process which is systematically overlooked. What

I mean is that deals that look strange at the beginning may become better later

on. (It also happens the other way around) As you invest time into a deal, you

learn more about it and can find levers to modify the deal to work for you. One way is to identify assets that are not valuable and carve them out. Another way is to adjust

payment terms to reflect better your interests. A third is to use partners

(co-investors) to improve things. Another is to ask other stakeholder (banks,

suppliers, customers, etc.) for contribution to the deal. A fifth is..… and so on.

Clearly, there are different fits between sellers and buyers. Not every deal is good for every investor. However I do suggest, that each investor could get a lot more deals out of the existing sourcing pipeline. What I suggest is re-think the deal evaluation process. Include more other aspects, such as deal-structuring elements into screening deals rather than just checking the boxes about the possible fit. 

Let me know what you think about this.