Deal origination is a labour-intensive process, especially when conducted through traditional methods such as accessing business owners in the immediate network, screening inbound leads, engaging with investment intermediaries, and proprietary research for investable deal leads.
Studies show that a mid-market PE firm spends over 6,000 man-hours per year (3 personnel) to complete only 1 out of the 80 leads it reviews. This, in our view, is not sustainable; and as with many industries today, African private equity (PE) is facing an environment that is being transformed by increased competition and digital innovation.
The Status Quo
African PE has seen steady growth in recent years. In 2016, the total value of fundraising reached US$2.3bn, with about 920 reported PE deals between 2011 – 2016. Furthermore, the number of fund managers active in Africa continues to increase. The combination of a steady growth and entrance of new players has invariably led to increased competition for investment targets.
Another factor directly impacting deal sourcing on the continent is the physical location of fund managers. Most PE funds are not headquartered on the continent – and in cases where they are, there is a tendency to cover other countries outside of their country of residence. To manage this logistical challenge, PE firms that rely heavily on traditional methods of deal origination must embark on multiple trips to target countries. When combined, these factors tend to lead to an increased spend on deal origination per deal, or an overall higher transaction cost per deal for African funds, compared with peers in more developed markets.
Typical PE Screening Funnel
Going Digital with Deal Sourcing
The current mix of deal origination sources as highlighted above presents fund managers with perennial challenges. An understanding of these challenges is what has led us to rethink how African investment leads are originated; particularly in the mid-market (US$5mn – US$50mn) where competition for deals is most prevalent.
While deal origination platforms are not a particularly novel concept in more developed investment ecosystems, its introduction into the African investment space is. Orbitt uses intelligent data matching capabilities to provide Africa-focused investors with:
- Broader but focused reach
- Matched deal leads
- Data and automation
- Measurable deal origination KPIs
The Future is Digital
Deal origination and the investment process are very human-centric activities, especially in high contact societies like some African countries. With that in mind, the need for traditional human intervention will remain a fundamental aspect of Africa’s investment ecosystem. As with most industries that are being transformed by digital innovation, enhancing the deal origination process through smart deal platforms could prove a key differentiator between average and exceptional investors in Africa.
This article was originally published here.
To download the full deal origination white paper, please click here.
Orbitt is a digital deal origination and processing platform focused on Africa, and an AVCA Member since November 2017.
 Source: 2016 Annual African Private Equity Data Tracker – African Private Equity and Venture Capital Association« Back to Afri-Spective: An Inside Look at Private Equity in Africa