In this section you will learn more about:

• Objective of Sourcing
• Issues to Consider
• Documents

Objective of Sourcing

• Develop a list of potential investments that meet your Fund's investment strategy and guidelines, as per your Private Placement Memorandum.

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Issues to Consider

Which staff within your Fund Management team are responsible for sourcing potential investments, and how are the sourcing processes organized?

The two main approaches to sourcing potential investments are Inbound and Outbound.

1. Inbound: The Fund Manager receives an unsolicited potential investment. Inbound deals may come from the prospective Investee itself, or from agents acting on its behalf, such as investment bankers, lawyers, auditors, or consultants. The agent may wish to receive a sourcing fee if the Fund Manager decides to pursue the transaction.
2. Outbound: The Fund Manager actively seeks potential investments via the following approaches: Requests for Proposals, Industry Conferences, Investee Referrals, Co-Investments, or Market Surveys.
   1. Requests for Proposals (RFP): Fund Manager may make a formal Request for Proposals. The RFP may be made available via the Fund Manager's website, or may be mailed/emailed to specific Investees and/or agents.
   2. Industry Conferences: The Fund Manager may come into contact with a potential Investee at an industry or association conference.
   3. Investee Referrals: The Fund Manager may seek referrals from existing contacts, including existing Investees
   4. Co-Investments: The Fund Manager may contact other Fund Managers to inquire about potential co-investment opportunities
   5. Market Surveys: The Fund Manager may undertake a market or industry survey during which it may meet a potential Investee. Alternatively, the Fund Manager may read about a potential Investee in a market analysis report. Either way, the Fund Manager will likely employ either a Top Down or a Bottoms-Up Approach.
      1. Top Down Approach: The top down approach begins with international economic analysis to find those countries/regions whose economic policies, business outlook, and financial environments seem most conducive to profitable investment. Once the attractive countries/regions are identified, a microeconomic analysis is performed to determine which industries and what asset classes appear to be most attractive in the selected countries. Finally, asset valuations are performed to select the best individual investment within the most attractive industries and asset classes of those countries that are identified as most attractive for investment. 
      2. Bottoms-Up Approach: The bottoms-up approach begins by performing valuations of individual assets located in any country or region in an attempt to find those assets whose values are significantly different from comparables. Those that are significantly undervalued would be investment candidates. Fund Managers that use this approach construct portfolios that consist of those securities whose returns appear to be attractive relative to the risks being taken, regardless of the attractiveness of the asset class or industry that they are in, or the country in which they are located. The distribution of assets by class, industry, or country will be incidental to the valuation/price relationship, rather than being the result of a conscious effort to invest in areas that seem to have the best macroeconomic fundamentals. Indeed, this approach often results in taking contrarian positions because undervalued investments tend to be in industries, countries, and asset classes that are out of favor because the macroeconomic factors are (temporarily) unfavorable.

Does the sourced deal fit within the Fund's parameters? Parameters include deal size (in currency terms), sector, industry, stage, geographical location, management types, exit possibilities, and Investment Strategy as described in the Fund's legal agreements.

Use the deal pipeline tracking chart, and workflow software if applicable, to keep track of potential deals.

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Documents

• Materials involved in the outbound search process
• Documents and materials received from the potential Investee. These might include slide presentations, brochures, product samples, references, annual reports, audited financials, analyst reports
• Letter of acknowledgement sent to potential Investee, and other correspondence with potential Investee.
• Download this Suggested Deal Pipeline Tracking Chart.

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