What to look for in a private equity investment

  • Identify some of the most important aspects of private equity investment
  • Explain how to do due diligence on the investment
  • Describe how to protect the investor from it going wrong
What to look for in a private equity investment

In these interesting times Family Offices are having to work harder to ensure the capital they are safeguarding is performing to its fullest potential.

They are having to rethink the range of assets they are potentially willing to target as new investment opportunities, while continuing to defray the risks of their existing investments and still ensure that they can deliver the best returns.

For those Family Offices, and financial advisers, looking to commit to an investment policy involving private equity, the below is what you should be focussing on.

The target

The first thing to focus on is the target. You need to be clear about what opportunities are going to be the best to pursue.

The drivers behind this decision-making process are going to vary based on your chosen investment strategy, but common to all investment strategies should be an almost monomaniacal focus on the exit and mapping a path to such exit.

When mapping your path to the exit, it is important to bear in mind that a successful exit starts with a successful entry, and the foundation of a successful entry is great information coupled with clear investment criteria.

Simply put, before deciding whether to invest, you need to have carefully assessed the target company against your investment criteria, and you need to have selected the correct investment criteria. 

To my mind, the most important criteria are identifiable easy wins and having a strong management team.

If you, in conjunction with your advisers, have thoroughly researched the context within which the target operates, you are more likely to understand the likely strengths, weaknesses, opportunities and dangers that the target will face.

Prior to investing into a target you should have identified simple ways you will accelerate the growth of the target.

Your assessment of whether there will be easy wins will likely be framed in the form of financial and legal due diligence. For example, an important driver in your decision-making process will be whether the deal is based on solid financial data.

It might be slightly reductive, but if you are looking for an exit where you achieve a multiple of 3x the money you put in, you need to ensure that the base case model, driven by the business plan, supports this. 

When making your assessment, it is vital to thoroughly test the information you are being given and parse the data for anomalies.

If your model is based on an extrapolation of the best year the target has ever had, you are going to come unstuck when there is the inevitable regression to the mean. 

Management team

As mentioned, key to your investment plan should be a strong management team. In particular, a strong managing director with a clear vision of the best way to implement the agreed business plan, and a prudent financial director who has a grip on the financial detail of the business.