The process of investing in a new private equity opportunity varies widely based on the company and the specifics of its transaction procedures.
Still, there are stages that are common in all private equity investments. Privately held businesses generally offer a variety of investment types for angel investors and those working through a venture capital firm alike. For accredited investors, understanding the common deal flow in private equity is critical to investing in these companies.
By understanding the rate of investment opportunities available, investors will have a barometer to gauge the company’s performance. A good deal flow ensures that the business is yielding steady returns and is actively cultivating new deals.
So what should you expect throughout the process private equity cycles through?
- Fundraising. The company will internally establish a target fund size and then work to achieve it through vigorous fundraising. Limited partners have the opportunity to help raise capital for a fund through pensions, endowments, etc. Furthermore, if the firm is well established, it will likely exceed its goals for a new fund.
- Acquisition search. Private equity firms are quick to begin scouting for potential portfolio investments once the fundraising process ends. These firms can generally reply quickly to inquiries and identify interest in their company.
- Investment in portfolio companies. A merger and acquisition transaction is needed as the private equity firm searches for potential portfolio companies in which it can invest.
- Corporate growth. In general, private equity firms boast aggressive growth strategies that allow them to grow quickly and aggressively improve the valuation of their portfolio.
- Divestment. Divestment creates liquidity for the private equity firm. In fact, the firm must quickly convert equity to cash through liquidating portfolio holdings since limited partners have a limited investment horizon.
- Capital gains. Aside from the money that comes from the portfolio, it is realized from capital gains as well based on the specific investment.
- Dispersal of funds. Partners will receive their share of the capital gain or loss based on the definitive investment return.
- Next fund. Generally, before any one particular fund is finalized, the company will begin the process of raising money for the next fund. Through consistent investment interests, the company is able to ensure consistent growth.
Though the process of evaluating and completing an investment opportunity varies wildly from each private equity investment company to the next, these are the basic steps that define the entire process. The sourcing of a private equity investment opportunity can be a complex process, but it’s often one that pays off!