This is a general overview of a typical investment process for a private capital deal. This may vary slightly depending on the investment firm, but it will help you understand the types of activities involved in each stage.
Investment teams in private capital firms spend a lot of time sourcing and evaluating various investment opportunities. There are many ways a firm may come across an investment opportunity. This can be through the networks of members of the investment teams, research and cold-calling, internal analysis or through an investment bank.
Once an opportunity is assessed and the investment firm wishes to learn more about the company, they will sign a non-disclosure agreement either with the company directly, or with the investment bank (if the opportunity was sourced through them) to receive further confidential information about the company.
The investment firm will conduct in-depth research about the company, the industry it operates in, speak to advisors as well as complete financial analysis to understand the potential returns of making the investment. There may be a management presentation at this stage either between the investment firm and the company, or between the investment firm and the investment bank from which the opportunity was sourced, to provide an opportunity for the management team of the company to present an overview of their organisation and an opportunity for the investment firm to ask further due diligence questions.
Following the due diligence process, the investment firm will present a brief proposal to the investment committee about the potential investment to determine whether or not to proceed with the next stage of the investment.
Here the investment firm may provide the company with a non-binding letter of intent for the transaction or a first bid for the company to consider. The LOI may include a purchase price (or range), post-acquisition capital structure the investment firm’s experience and expertise and a value creation strategy. The company will consider this along with other potential bids and select the most credible offer, and consider other aspects such as compatibility with the investment team.
More detailed due diligence occurs at this stage, usually utilising secure, virtual data rooms to exchange information such as operations records, board reports, property agreements, documentation related to intellectual properties, financial information including audited and unaudited financials and employee details. This will enable the investment firm to identify critical issues within the company, and to ask further detailed questions to the management team of the company.
The investment firm will create a highly detailed revenue and cost breakdown which will assist with estimating the financial performance of the company and to give the investment firm a clear idea of the potential return for the acquisition.
The Preliminary Investment Memorandum (PIM) is a 30 to 40-page document that summarizes the investment opportunity to the investment firm’s investment committee. This usually includes an executive summary, company, market, industry and financial overview, risks and key areas of due diligence, valuation overview, exit, recommendations and proposed project plan.
If the Preliminary Investment Memorandum is approved by the investment committee, a final detailed due diligence is completed with an investment team focussed on this particular deal. The deal team typically interacts with the investment bank and the management of the company on a daily basis, as well as engage financial, commercial, and legal consultants.
Once the investment committee provides final approval, a final bid is submitted by the investment firm to the company, which is usually always binding. The bid will include a final buying price, financing documents from investment banks, and preliminary merger agreements. The company will consider all final bids and select the winning bid and work with them to sign off on the transaction.