PERCY SAYS… Deal flow is a crucial aspect of investments, both during the initial decision making process over whether to invest or not, as well as an indicator of how an investment is performing throughout the investment cycle. Understanding and knowing how to influence deal flow can be crucial to investors of all experience levels, and is a definite “must know” for those embarking on their first investments.
Understanding Deal Flow
Private equity funds and individuals are always on the lookout for potential investment opportunities, in particular the ones that are likely to yield high returns. Equally, private equity funds and individual investors also need to keep track of how an investment is performing, independent of the profit and loss accounts of the business.
Deal flow describes these two factors. In simple terms, deal flow is a representation of how many attractive investment opportunities are available. Deal flow is measured relatively simply by private equity funds, termed either “good” or “poor” – if only everything in the investment world was as simple!
The beauty of this being black and white is that it enables private equity funds to be clear and decisive in their decision-making. Having a measure in the middle of good and poor would cause confusion and leave private equity funds no clearer on whether they were looking at a good investment.
A simple tip for new investors is to understand that “good” deal flow means an investment is likely to deliver profitable returns, while “poor” deal flow is indicative of an investment that should be avoided.
Analysing Deal Flow
Private equity funds generally operate within a pre-determined framework and investment strategy. Given the continuing popularity of private equity as a means for securing a cash injection, deal flow has been able to remain “good,” even through the darkest days of the global financial crisis. This has seen the private equity market continue to grow, even in the face of falling markets and currencies.
The easiest way to define “good” deal flow is that a business is producing revenues to deliver equitable returns.
A Helping Hand
Many private equity funds utilise deal flow software to help them decide whether an investment is attractive or not. This allows private equity funds to play out a number of scenarios, and understand fully the potential level of returns, or the potential losses should deal flow become “poor” and an investment become unsustainable.
First time investors should always seek expert advice, and never rely solely on deal flow software to make a decision regarding an investment.