The Folly of Proprietary Deal Flow

Ask any deal maker how they get “good deals” and more often than not, “proprietary deal flow” is one of their referenced sources to get them. What is proprietary deal flow? Most would probably say they have relationships in which they are considered the preferred buyer. A select few will outline more tangible sources of “good deals,” perhaps the scale of their capital base, specialization, geographic focus, etc. I for one, find the term “proprietary deal flow” overused and unhelpful.

In contrast Josh Wolfe, co-founder of deep-technology VC firm Lux Capital, describes his deal flow process differently, and more intellectually honestly. He says that he has no idea where (specifically the source and the topical area) his next great investment may come from but he is certain that his maniacal focus on consuming diverse content, incessant networking, and deep paranoia of not knowing / understanding concepts will lead to his next deal. I suspect most investors actually follow an idea sourcing method more similar to Josh than “proprietary deal flow” being their source of best ideas.

In this vein, yesterday I posted about management fee securitization. I came across it when trying to learn more about the burgeoning GP stakes business. I found it interesting and wanted to learn more about it. In the article I linked to in yesterday’s post, there was mention of a public company investing in GP stakes off its balance sheet called Pacific Current Group. Turns out this company, traded in Australia, has a growing GP stakes business, is trading well below net asset value of its GP stakes, and pays a ~4.5% dividend.

I didn’t strike gold but the point is that I would have never found this if I didn’t just pull the thread of things that interest me. It’s not proprietary deal flow, it’s right there out in the open, but virtually impossible to systematically screen for. To that end, I presume great investors constantly pull the threads that interest them as well as position themselves as fast-moving and differentiated counter-parties. The rest just rely on…proprietary deal flow.