In order to source deals, funds must (1) effectively market themselves and present their unique value proposition for potential investees and (2) have a thoughtful strategy for identifying future investments.
Networks, relationships, and partnerships with local intermediaries are all essential for developing a robust investment pipeline. Equally important is a well-established process for evaluating potential investments thoroughly and efficiently.
Ultimately, most critical, regardless of process, is that a fund manager maintains a robust pipeline that matches its clearly defined investment strategy and impact objectives and includes a large universe of potential companies—and that it pursues a clear process to identify future opportunities and track current relationships.
Regarding deal selection, there are two key questions to answer. (1) What criteria are used to select a company? (2) What are the characteristics of an ideal company? Factors to consider include the following:
- For sponsors or owners, who are the driving forces and what are their motivations for managing the business?
- What is the market opportunity for the business?
- Can the company deliver its products or services efficiently?
- How is the company organized? Does the company operate transparently?
- Does this investment align with fund mission or impact objectives (ideally grounded in an organizational theory of change)?
- How is the company currently performing toward impact goals? Can it optimize for higher impact?
Role of the Investment Committee
Each fund has a different relationship with its investment committee (IC), and each investment committee has different expectations of its involvement in the fund. The IC helps the fund make decisions about deal selection, ultimately authorizing the final process for due diligence and budgeting