Private Equity Investment Process

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    Blog posted on : 16-11-2020

    Private Equity Investment Process

    Private equity firms put a lot of effort into raising funds. Generally, PE firms have their PE professionals who go out in the market and seek opportunities for investment. Sometimes reputed firms receive investment pitches from start-ups and mature companies that are looking to grow their business. But as is expected every investment pitch doesn’t get the investment it needs.

    In the article below, we will discuss the process that occurs at private equity firms when it receives an investment pitch.

    •  Deal sourcing

     Generally, private equity investment professionals seek investment proposals for the firm. If they receive proposals from outside their network, it is first vetted by a professional at the firm. Firms prefer to seek investment proposals from their network. If it comes from outside their network, they prefer it to be from someone they have worked within the past. They also admire working with companies who show a high level of professionalism while introducing their partners or director.

    • Initial contact

     A typical firm receives thousands of investment proposals. Private equity investment professionals can identify the proposals that are most likely to get the investment. There are many criteria that a firm considers while choosing a proposal to go with. During this time, the professional may also speak to a partner to understand their views and see their interest in the proposal. A proposal may get rejected for many reasons. For instance, a firm may not want to invest in a competing company, else the firm will fall short in its funds.

    •  Non-disclosure agreement

     If the firm finds a suitable proposal, it may seek further information about the business, which may happen through a presentation or teleconference call. Finally, if the firm finds an interest in the investment, it signs an NDA with the investment bank. This restricts the bank from sharing information related to deal with anyone except for the purpose of the transaction.

    •  Sharing information memorandum

     Once an NDA is signed, the company shares an information memorandum/ Confidential information memorandum ( CIM) with the fund. The memorandum contains financial and investment details which the fund reviews. A CIM acts as a single source of information for the transaction and a decision –enabler for the fund.

    •  Meeting the management

     If the fund feels comfortable with the memorandum, it calls for a meeting with the management team. This is an essential step if the proposal came from an intermediary like an investment bank and it will be the first meeting between the management and the fund partners. It is essential to include management leaders from all key functions of the company besides the CEO. A technology-based business must include CTO, a people-based company must have chief human resource officers, and finance and the market should always be part of the representing team.    

    •  Due diligence

      Private equity investment professionals at the fund conduct due diligence to validate the information obtained in the previous stages and during the meeting.

    • Preliminary investment note

    Once the investment team at the fund has conducted the due diligence, it consolidates its findings along with information from the Information Memorandum to show its stand on the proposed investment. The note will have a comment on the attractiveness of the investment proposed by the company. This is also the stage where the fund will seek approval for making non-binding commitments to the company.

    •  A non-binding letter of intent

    This is the stage where the PE fund expresses explicit interest in making an investment in the company and the manner in which the investment is likely possible.

    • Final Investment Memorandum

    The investment team at the fund will prepare a final investment memorandum for getting internal approval for the investment. The memorandum will contain all the information presented in the preliminary information memorandum, findings of the due diligence, and its implications on the transaction structure. The memorandum also lists the steps that will follow after the investment. The Final Investment Memorandum will be discussed between the fund partners and the management team. At last, approval will be given for the investment and conditions in which the investment will be made. At this stage, designated officials get the authority to sign the term sheet and become nominee directors on the board or join the management team, etc.

    •  Signing the term sheet

     The term sheet has all the information mentioned in the non-binding letter of intent. However, this time it is binding for the fund. The sheet mentions the time frame for which the firm will remain committed to the company and the conditions in which it will withdraw its investment.

    •  Deal closure

     Once the deal is finalized and involved parties have signed the term sheet. Mostly paperwork is left, which includes obtaining various permissions from various ministries, making changes in a memorandum, etc.

    Once all the requirements are fulfilled, the fund will make the payment to the company and secure ownership of the shares and/or purchase assets.

    Become a high –potential private equity investment professional

    Private equity industry offers lucrative job opportunities for investment professionals. But as you might imagine, to excel as a private investment professional, you will need a strong knowledge of the above process above along with proficiency in technical skills. CPEP or Chartered Private Equity Professional certification from the United States Private Equity Council demonstrates your strong knowledge of the private equity investment process and in-depth understanding of the tasks performed in the investment process. If you’re aiming for a career in private equity, taking this certification will go a long way in securing you a position, by helping you stand out to the firms.