The deal funnel is a part of the decision-making amongst PE investors and it was studied recently by academic researchers. The analysis showed that out of one hundred investments or deals considered, the average PE investor deeply investigates fewer than 24. Of those fewer than 14 will sign an agreement, and a close will be made on only 6 deals. The researchers also compared the deal funnel at different types of private equity firms and found that larger and older private equity firms pass a greater fraction of their deals through to the next stage.
They said that there could be two reasons for that. First, larger and older private equity firms may just have higher quality initial deal sourcing and hence do not need to weed out as many deals at all stages. Alternatively, the larger fund sizes may reduce the stringency of the deal funnel.
Smaller and younger private equity firms generally tend to source more proprietary deals. This likely reflects smaller target deal sizes, said the researchers. Firms that invest in large and mega deals are less likely to be able to generate proprietary deals given that their targets are probably more likely to be sold in an auction process. Finally, younger private equity firms tend to utilize their executive networks more frequently.