Private equity firms raise funds all the time. Currently, there are over 2000 equity firms actively seeking funds, and they depend on services like Corporate Resolutions for their work in private equity due diligence. Each fund will give you a very attractive package, on the face value. Closer inspection will reveal some of the things that fund managers will not tell you. That is why due diligence ought to debunk every one of them. This article will map out what a good equity fund manager should have by pointing you in the direction.
Commercial due diligence
Everyone will be interested in this part of the process. The focus is on the numbers. Also, how attractive they are to your eye. However, ignore the number; focus on how the fund manager arrives at the numbers. Interrogate the ratios, specifically the IRR, EBITDA, and ROI. Do not stop there. Look at the short-term and long-term performance of the fund. New private equity managers may not have a track record as a firm, evaluate key staff’s record of accomplishment. Look at the revenues streams and their stability, cost structure, macroeconomic environment, and ESG.
Strategy due diligence
Private equity funds depend on a foolproof concept to make money. While the idea can be immaculate on paper, how well it is implemented is the most important component. The art of due diligence involves crosschecking the strategy vis-à-vis the fund performance. The fund manager should explain gaps between the two. If the results far outweigh the strategic target, you still need answers because you don’t want to be a victim of scams. It is also good to compare strategies from different firms to get an idea of what is working. Look at the terms, too.
Operational due diligence
If you are looking to buy into a firm, operational efficiency is a key component of due diligence. Some people buy a company, invest in the operational efficiency, and then sell at hefty profits. The art of every business process is what makes up business operations. Some of the business processes include procurement, customer service, marketing, etc.
The integration of the processes into a workable organizational fit is an asset for investors. It separates potential from reality. When conducting due diligence on this, you have to critically evaluate every process, look for potential wastes, find opportunities for savings, identify unexploited potential, among other things.
Key-personnel due diligence
Equity management is a team effort. You need a cohesive, complementary, and experienced organ to implement a business plan or strategy. Look out for contracts for key staff to ensure that they last throughout the contract period. Honesty is critical when it comes to due diligence, too. When the team is sloppy with details, you should be concerned. If a key staff has potential baggage, lacks provable experience, or provides misleading information during sales a presentation, don’t ignore these red flags.
Due diligence is a broad endeavor that should focus on the goal. Attempts to be too thorough might defeat the whole essence of the process. Identify the key areas of interest, and give them the best review. Align your equity manager options with your values and goals.