Introduction

When most asset managers start implementing structured Deal Management, they’re primarily worried about getting deals in an organized CRM type functionality. As a Credit portfolio manager, a Real Estate deal maker or a Fund of Funds manager you may be capturing these deals on a spreadsheet or in a CRM, analyzing every deal from experience.

Once you have a lot of complex deals, the process of figuring out which deals are worth pursuing, which fit your portfolio best and which fall within the Fund mandate becomes hugely subjective and often fails to identify the best deals to pursue.

That’s where Deal Scoring comes in.

What Is Deal Scoring?

Deal scoring is the process of assigning values, often in the form of numerical “points,” to each deal within the pipeline. You then score your deals based on multiple attributes, including the information that has been submitted to you, your portfolio requirements and value add to the portfolio. This process helps portfolio managers and analysts prioritize deals, respond to them appropriately, and increase the rate at which the best deals are executed.

Every deal maker may have a different model for assigning points to score their deals, but one of the most common ways is using data from past deals to create the value system.

How to approach Deal Scoring? First, review executed deals to identify what they have in common. Next, consider the attributes of deals that didn’t execute. Once you’ve looked at the historical data from both sides, you can decide which attributes should be weighted based on how likely they are to indicate someone is a good fit for your fund.

Why would you need Deal Scoring

The art of cultivating a deal from generation through final execution is a complicated and hugely expensive process. Even after a deal has been identified as “let’s do this one,” with much subsequent time and resources spent, it could slow down for months or totally die. Changing market conditions or a new provider may bring a slew of new deals, but (maddeningly) very few proceed all the way to fruition.

Without some kind of qualification the manager is wasting precious time and resources.

Conceptually every one on the deal team is always doing some kind of deal scoring, but it is often difficult to implement scoring as an automated process. The best asset managers are already implementing deal scoring with help from technologies.

A comprehensive deal scoring program provides clarity on deals in the pipeline: Instead of randomly pursuing every deal, the entire team can be focused on those deals that rank higher on the deal score chart. Consequently, analysts’ resources and efforts are most effectively utilized. A well developed deal scoring program can also identify missing information that would be required for a final decision.

Alignment of Fund Management with an Interactive Deal Calculator

Automated deal scoring is never an easy implementation. Depending on your business model and the deals in your database, this can quickly become complicated. To make this process a little easier on you, we’re going to walk you through the basics of creating a deal score, including what data you should look at, how to find the most important attributes, and the process for actually calculating a basic score.

The calculated deal score can then be used by asset managers to solve different business problems, such as optimizing their portfolios, focus on sourcing new deals, reenergizing old deals or even selling of deals that have not worked and freeing up capital.

Here are a few factors that would absolutely contribute to scoring models based on the type of data you can collect you get for your deals

Financial Information

Most deal scoring systems will lead with financial information that is critical to ensuring that the deal even fits the criteria. Some of those metrics could be Revenue growth over multiple year, minimum EBITDA, relative performance versus competitors, or other critical factors that have been determined to work for you.

Company Information

This could include such characteristics like an industry sector or even a sub-sector, when the company was started, ownership structure, geography or board composition. There could be many factors which are specific to the type of Asset Manager. For a FOF the Manager Quality is a very important factor, and may rate higher than every other every other characteristic. An initial commitment in a Private Equity Manager is essentially a bet on the “manager”. On the other hand a PE Deal maker may not want to rate the current managers if it plans to bring in a new team post deal.

Competition, Partners and Deal Intermediaries

How a seller hires and works with intermediaries may sometimes reveal more about the deal. There are intermediaries who are well prepared, have whetted the deal, the seller’s motivation, and want to get it done. Similarly partners in deal making may reveal a pattern of consistently good deals. Take a look at your deals which were eventually executed. You would find the correlation on why some intermediaries, partners or even competition that could help qualify a good deal.

Industry Information

There are some industries that go through periodic consolidation as they mature. Other industries may have have a constant flow of new deals. Having the industry dynamic mapped to a scoring methodology provides rich returns in understanding what could work. There is great value to an FOF manager to have the ability to target PE Funds concentrating on a specific industry when they start seeing a turn in the industry cycle. Some industries could see a sudden growth spurt – even if other parameters are outside the limits, you may not want to miss a deal: For example, SaaS companies are highly desirable and the deal team might want to ensure they are not overlooked.

Social Responsibility

Deals which have increased ESG scores are becoming more highly valued by investors. ESG is not only investing with a cause but about taking a good look at the underlying outlook, goals, and impact of a company in order to make more informed decisions. In Europe Asset Allocators are paying close attention to Deals with high ESG score.

Conclusion

There is a significant amount of data to “weed” through when implementing structured deal management, particularly when you are looking to identify good, quality data that can in turn signal quality deals. Deal scoring will not only lead to higher ROI’s from your deals but it is the most effective, efficient way to focus your efforts – and your analysts – on targeting the best.