Deal Flow

Deal flow is the output of an investor's sourcing work: the live pipeline of investment opportunities actually on the table, in both quantity and quality. It is measured, for example, by opportunities screened per quarter, the current pipeline and conversion rates along the funnel from initial screening through preliminary review to a signed term sheet. Those rates are why volume matters, since only a small fraction of companies screened ends in an investment. The pipeline is fed from several sources: approaches by M&A advisors in structured sale processes, the investor's own network of entrepreneurs, tax advisors and banks, systematic direct outreach using databases and sector lists, and referrals from existing portfolio companies. Composition is decisive, because a pipeline consisting mainly of broad auctions regularly produces higher entry prices than one with a high share of bilaterally sourced situations.

Deal flow should be distinguished from deal origination, the active process of finding and approaching targets that creates it: origination is the activity, deal flow the result. Because a fund's investment period is typically capped at five years, weak deal flow feeds directly into returns, as unused commitments may expire and capital already called but no longer needed may have to be returned. Conversely, too little choice creates pressure to compromise on price or quality, which only shows up in results years later.

The pipeline is usually managed in stages, from first screening through preliminary review, submission of an indicative offer and diligence to completion, with criteria and owners defined for each stage. The origin of completed transactions is also examined, since it demonstrates which sources actually deliver.