Tag Archives: Due DIligence

Introduction

Private Equity (PE) consulting has been around for a while. Many consulting firms have practices offering private equity consulting services. It is interesting to note that even global consulting firms rely on offshoring to a great extent to deliver value to private equity clients on their most pressing issues. Offshoring reduces costs of consulting firms and some of it must be passed onto the clients (we hope!!). But what if all the advantages of offshoring could be passed onto the clients directly?

Read further to know more!!

Private Equity Consulting and Offshoring: Why it’s a match made in heaven?

Management Consulting as an industry has been around for more than 100 years on the back of its solid value proposition for clients. It brings in expertise, experience, political leverage, data sources, network, and usually signs business outcome-based projects with the clients. Usually, benefits outweigh the costs by 3X to 10X.

Private Equity Consulting and Offshoring

Private Equity Consulting and Offshoring brought together

Offshoring also picked up with the advent of the internet. As the work was possible with the help of the internet and advanced communication options, offshoring started to make sense for low-end jobs like call centers and data entry. It was followed by IT and now it is the turn of high-end research, analytics, and consulting jobs. The value proposition of offshoring is cost efficiency and scale. In most cases, offshoring also results in improvements in terms of quality and delivery apart from cost-cutting.

When we combine the forces, we have the impact of consulting with the cost advantages of offshoring, making it an unbeatable value proposition for clients in their marketplace. Management consulting overheads like weekly flights for consultants, high-end hotels for stay, and highly-priced consultants, all of which are paid by the clients are reduced by remote working and service delivery. At the same time, task offshoring to a group with all the expertise in a given industry brings a scale that can be taken advantage of, by smaller clients.

Business Outcomes for Private Equity Industry and the Services Offered

Major work streams at all private equity companies, big or small, comprise of following workstreams:

Fundraising and marketing or investor relations

Deal origination

Deal execution along with due diligence; and 

Portfolio management to get into the operational details of portfolio companies to make it more valuable

Private Equity Consulting Business Outcomes

Private Equity Consulting Business Outcomes

Magistral's Service Offerings for Private Equity

Magistral’s service offerings for Private Equity

Here is how Private Equity consulting helps in these workstreams

Fund Raising and Marketing/ Investor Relations

A fund is established when it has a healthy pipeline of potential investors apart from the existing ones. This is the area where most emerging managers struggle. The game does not even start if the firm is not able to raise the angel fund. However, like everything else in life, robust results need time and consistent efforts. PE consulting helps reach out to the investors and maintain a continuous touch-point to drive home the value proposition of the fund and thus enable successful fundraising rounds.

 

The services that help in fundraising are

Fundraising documentation

Fundraising requires a lot of documentation. Sometimes it could be enormous for an emerging manager. At the same time, it needs to be streamlined for established managers. Magistral helps prepare documents like Private Placement Memorandums (PPMs)/ Confidential Information Memorandums (CIMs), pitch decks, financial models and projections, teasers, and strategy and marketing documentation.

Investor profiling and reach-out

Funds specializing in different areas have different ideal profiles for investors or limited partners. Magistral helps in profiling and reach out to these investors. Magistral also has an in-house database that carries leads of more than 15000+ Limited Partners (LPs) and General Partners (GPs). It can also access databases of other players if the task needs it.

Design and Data Support

Magistral has an in-house design team that streamlines the PowerPoint designs and makes them consistent with the global marketing standards. It’s like we receive the content in raw form, sometimes scribbles from a notepad or whiteboard, and the output is a well-designed PowerPoint that could directly be sent to investors. Similarly, pitch decks and PPMs could also be designed to look more powerful visually. Likewise, data could be streamlined related to investors or CRM systems that the clients use.

Newsletters

Multiple touch-points with investors mark content like Newsletters, PoV documents, Industry reports, and market research. Magistral has experience working with hundreds of clients working on these assignments. It has access to resources like secondary sources, interviews with the panel of experts, and triangulations to come up with market sizes, etc. Worthy content establishes the authority of the Private Equity fund in the eyes of accredited investors.

Sustainable Investment and Impact Assessment

We have a specific service offering around ESG analysis, sustainable investments, and impact assessments of the current or potential assets acquired by the Private Equity firms.

Deal Origination

Deal origination services make sure that the focus of the GP is on the suitable targets and populate the deal pipeline with more appropriate deals, to be taken up as and when required. Picking up the right deals is the lifeblood of PE operations. It’s by picking up the right deals that a GP can offer superlative returns to its LP investors. Magistral helps with Deal Flow support and Inbound deal flow analysis.

The deal origination related services offered are:

Industry tracking and landscaping

A Private Equity firm needs to scan the environment for investing continually. It needs to track its key markets, geographies, and industry regularly to take advantage of emerging trends. Magistral has helped multiple clients in tracking industries like healthcare, SaaS, blockchain, cybersecurity, heavy engineering, and many others.

Potential target identification

A list of suitable potential targets is generated using secondary and primary sources. As per the investment thesis, the targets satisfy a host of customizable criteria like revenue, profits, employees, industry, geography, and being open for investments. Secondary sources include databases, whereas primary sources are industry associations, accelerators, angel investor groups, etc.

Target company profiling

Once the list is generated for potential targets, the next step is to shortlist the companies of interest and go for a deeper dive.  A target company is profiled for its business details, strategy, latest developments, management, SWOT, Porter’s 5 forces, and other customized information. Understanding the openness of the company for an investor on the board is also studied at this stage.

Target pipeline management

For deals to be continuously happening, the pipeline needs to be populated continuously. There should be deals in all stages of deal-making. That is ensured by filling the targets in the funnel on an ongoing basis.

ESG Analysis

ESG or impact analysis is more critical than it was ever before. It’s imperative then that Private Equity firms evaluate the deals for ESG fitments. A company that performs better on ESG frameworks is a more sustainable investment and makes a far-reaching impact on the society and communities it serves.

Inbound deal flow management

If a firm receives lots of inbound inquiries, there needs to be an agency to sort out the worthy opportunities from the non-serious ones. Magistral matches the opportunities with the GPs investment thesis and brings forward the best deals.

Summarizing and preparing IMs:

If start-ups send IMs, the same need to be summarized for discussion with the investment committee. Magistral summarizes the Investment memos into investcomms decks for quick and effective decision making.

Deal Viability Analysis: This involves getting into the nitty-gritty of a deal, identifying red flags both inside out and outside in, to make sure the deal produces the impact, which is the aim of the investment to start with. This is achieved from the exhaustive and comprehensive market and company research.

Deal Execution and Due Diligence

Deal execution and due diligence ensure the right investment decisions to produce significant returns, identifying risks for better planning post-investment or M&A.

Here the services are about providing all the foresight and intelligence to make the right decisions. The primary service offerings here are:

Target company due diligence

Here, Magistral takes access to the data rooms and analyses the information to produce highly relevant deliverables and insights. Due diligence includes financial, operational, and ESG related aspects of a firm. Magistral works with both Private Equity firms and Investee companies. It prepares Due Diligence Questionnaires (DDQs) and collects information from the investee companies, either directly or indirectly.

Industry Research

Here, industry research is more specific and has to do with the target company’s operations. The industry in which the target operates and details like trends, SWOT, Porter’s five forces, key competition, pricing trends, news. etc. are captured to provide a holistic view about the industry in which the target company operates

Detailed company profiling and competitive intelligence

In this stage of the company profile, details are captured from multiple sources like ex-employees, management, existing employees, vendors, competition, investors, and industry stakeholders. Also, information related to competition and their strategy is captured using primary and secondary sources.

Investment Memorandums

If the investment needs to be made with other co-investors, standard documentation is applicable like Investment Memorandum, Confidential Information memorandum, Pitch Deck, and Financial Models.

Modeling and Valuations

This exercise ensures that deal is made at the right prices so that there is a significant upside for the investment returns. Magistral has prepared 100+ financial models for valuations in industries like SaaS, tech, healthcare, IT, manufacturing, B2C retail, fashion, chemicals, and e-commerce. Here the information and assumptions required to prepare a financial model are captured from detailed discussions with the client. The models in which Magistral has expertise include and are not limited to 3 parts financial models, LBO analysis, DCF modeling, Real Estate modeling, precedent transaction analysis, comparable analysis, and impact analysis.

Portfolio Management and Fund Management

Portfolio Management aims at maximizing the value of the investment in a company by a Private Equity firm. This is achieved by supporting various tasks of the acquired company to reach more customers, hence improving revenue or reducing operations’ costs. Fund Management is about streamlining the functions of the fund itself to focus on the core tasks of investing and fundraising.

Here the services are:

ESG Compliance Monitoring

Magistral, after assessing the ESG maturity of an investee company, suggests a set of metrics monitored periodically after the investment is made. The data is collected on these metrics and reported to the board and management along with investors every quarter.

Outsourced CFO

Outsourced CFO services are relevant for both funds and the portfolio companies, specifically in the cases where the PE firm invests in start-ups or smaller firms. These companies may not be in a position to invest in a full-time CFO and thus may go for an outsourced CFO that is fractional and provides the operational and cost flexibility. Sometimes Financial Process and Accounting could be outsourced, while CFO could be kept in-house. These tasks include accounting, bookkeeping, administration, procurement, and preparation of financial statements

Outsourced Fund Administration

This service is specifically for funds and takes care of all the administrative aspects of the fund like fund accounting, expense monitoring, trade reconciliation, distribution waterfalls, taxes, fees, incentives, expenses, etc.

Strategy and Business Development support

After the investments, most PE firms focus on growing the revenues of the portfolio companies. This is done through a slew of interventions on strategy and marketing. Magistral supports these activities by providing services like consumer and market studies, new product or market development, lead generation, which is critical in the B2B space, and finding follow-on acquisition or buyer for the investee companies.

And this is how Private Equity consulting joins forces with offshoring to provide an unbeatable competitive advantage for our clients.

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

What is Due Diligence?

Due Diligence Definition: It is an exercise done to check the quality of an investment before committing funds to it. There are lots of claims that are made by an asset manager, a company founder, a real estate developer, or anyone else who is interested in selling the asset or a stake of it thereof. These claims need to be satisfactorily validated before the funds are committed to buying the asset or a part of it.

 

Due Diligence in Finance

Due diligence is a general term of analyzing the investment before committing the funds. Financial due diligence concerns with the assets that generate returns and are financial in nature like private or public companies, start-ups, hedge funds, real estate, and real estate funds.

 

What does due diligence consist of?

Due diligence for financial aspects validates the claims of the seller through a detailed study of the documentation supporting the sellers’ claims. The Due Diligence period depends on the size and the nature of the asset on which it is being performed. The speed at which the data is made available also impacts the Due Diligence period. A start-up which is a small set-up could be checked in say a few weeks’ time, whereas bigger corporates may take months before the exercise for the whole company is performed.

Due Diligence Process

The process sometimes may take long periods and may require expertise. An external consultant can be hired for a Due diligence fee to make the process more objective

Here are the steps that are required for a detailed Due Diligence exercise:

Establishing the purpose of the investment

The investor needs to identify the purpose of the investment to do due diligence on the relevant aspects of the financial assets. For example, an investor wants to invest in a start-up with an aim of explosive growth in the next few years, so that he could exit the investment with massive gains. Or another investor wants to invest in a Real Estate fund specializing in infrastructure to generate a regular flow of income. Establishing the purpose clarifies the areas where the due diligence should be focused on. This leads to the development of the Due Diligence framework

Identifying the focus areas for Due Diligence

Once the purpose is established, investors should identify their focus areas for due diligence accordingly. In the above example say for the start-up the future growth is very important. What are the factors on which the future growth would depend? These are the market in which the start-up operates, its competition, its product, the capability of the team, etc. Similarly, for the Real Estate investment, the quality of underlying assets is important so that the investor could be assured of regular returns. This leads to doing due diligence on the type and quality of investments done by the RE fund, contracts signed, leases, rent rolls, tenants, users, market conditions, and everything else that may have an impact on the RE yield, where the fund operates

Preparing Due Diligence Questionnaires

A questionnaire needs to be prepared for each focus area. The way it works is that one starts with a broad question and set of other supporting questions. The questionnaire is followed by the collection of all the relevant data and documents. The seller provides the due diligence documents through data rooms, that could be physical or virtual. Investors or their representatives go through the details of all the data and documents and ask for clarifications if that is so required. A Due diligence checklist is also prepared to find out all the relevant supporting documents. A Due Diligence Analyst keeps track of the documents in the data room and the actions completed.

Preparing Due Diligence Report

Once the study of all the data and documents is complete, the service provider prepares a due diligence report for the investors. It carries all the details about the investments, outcomes that could reasonably be expected from the investments, and red flags that the investor should be concerned about. Some reports clearly suggest if the investor should go ahead with the investment at all

Magistral Consulting has experience in conducting due diligence for start-ups, private companies, public companies, and funds. It covers all aspects of due diligence done by Private Equity, Venture Capital, Investment Banks, Family Offices, and Fund of Funds. Here are the broad types of Due Diligence

Types of Financial Due Diligence

Various types of Due Diligence performed by Investment Banks, Private Equity, Venture Capital and Family Office firms

Due Diligence of a Company

Due diligence for companies is typically done before investing in or Mergers and Acquisitions of companies. This is also done before buying a business. The areas covered in the process largely depend on the size of the company and the purpose of the investment. While doing due diligence for companies, the following are the areas that should be looked into

Financial Performance-Past and Forecast

This is very critical for bigger companies. As usually the investments are done for returns from stocks, which is directly related to the expected financial performance of the company. It also impacts company valuation and stock price. Past financial performance is pulled out and compared with regulatory filings. Also studied are the market, trends, cyclicity, inventory, and other financial aspects. P&L and balance sheets are dived into to find any outliers. This is compared with peers in the same industry to look for anything that may raise suspicion. Forecast assumptions are checked for validity. Departmental budgets are scrutinized for authenticity and to find improvement potential. Previous audit reports are seen for regularly repeated observations. Usually, for start-ups, this is not a critical factor, as they are still in process of streamlining the revenue sources. Still, for start-ups that are looking to raise funds beyond seed or Series A, it’s imperative to get into the details of financials.

Strategy

Another aspect of companies that need closer careful evaluation is their strategy. The growth rates of the markets, and product categories, it plans to expand into is closely studied. It is checked if the current portfolio of its products and services is the most favorable from cost and growth perspectives. Risks are also evaluated along with the competition of the company. In the case of Start-ups and smaller companies, growth rates, competition and trends are looked into closely to verify the assumptions made while valuing the company

Operations

various other functions of the company are also studied under this like Manufacturing, Procurement, Human Resources, Technology, etc. It is evaluated with a lens of efficiency and cost. This is to evaluate the scope of operational efficiency in case the ownership of the company changes hands. Again this is not so important for smaller or start-up companies.

Team

Due diligence on the team is very important for start-up companies. Their experience, skills, qualifications, and past achievements are looked into to have a comprehensive view of their capabilities and future potential. This factor is not that important in the case of large companies where this exercise is being done for M&A

Product

This is very important for SaaS-based tech start-ups. The product needs to be checked as to where is it in the development stage. If it is fully developed, whether its UI, features, etc. are working properly. If not how much time and effort will go into developing the product. Is there even a chance of whether the team will ever be able to develop the product? For bigger companies, the entire portfolio of the product is studied to find out winners

Customers

In the case of B2B health of the biggest clients is checked out to suggest the sustainability of the market for the company. In the case of the B2C demographic profile and its future changes are analyzed to understand any revenue impact in the future. For SaaS-based tech companies, the nature of customers is understood whether they are free, freemium, or paid and the average ticket price to understand the sustainability of the business in the long run

Due Diligence of Funds

Due diligence of funds is usually done by Fund of Funds, Family Offices, and other investors who are interested in investing in the fund. The process, in this case, is different from the  process followed in case of companies

Activities of Due Diligence

Major differences between due diligence of companies and funds

Here are the items that are looked at while performing due diligence for the funds

Fund Performance

This is true for both Real Estate and Hedge Funds. All the technical parameters related to the fund performance are looked at while making a decision.  This evaluates not only the returns that the fund has generated in the past but also the volatility and the risk taken to produce those returns. Funds’ performance is benchmarked with the indices that carry no investment risks

 

Team

Here the profile of Fund Managers is looked into. Their experience qualification and past performance are looked into while evaluating the team. This is again true for both Hedge Funds and Real Estate funds

 

Investment Focus

The investment focus of the fund is analyzed to see if it is in line with the expectations of the investor. If it is a hedge fund that its markets, stocks, and geography are considered whereas if it is a Real Estate fund then the Real Estate Class and geography are considered for the exercise.

 

Underlying Portfolio

This is slightly more important in the case of Due Diligence of Real Estate funds as compared to Hedge funds as the Hedge Fund portfolio churns more often, whereas the Real Estate portfolio is more or less permanent. The quality of the underlying portfolio is looked at for the potential of generating regular returns. If there are any red flags in any of the properties, the same is highlighted. Real Estate properties and assets are analyzed for price trends, forecasts, rent, value increase, neighborhoods, and future potential of the asset.

Markets

This is more relevant for niche Real Estate funds that are dealing in specialist RE categories like handicap hostels or Self-storage. The potential in the underlying theme is objectively evaluated to find out the potential of returns that could be generated in the future

 

Magistral has experience and capabilities in providing Due Diligence Services to global clients in the space of Private Equity, Venture Capital, Investment Banking, and Family Offices

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

 

What are Outsourced Investment Officer (OCIO) Services?

An Outsourced Investment Officer services or OCIO provide support in terms of research and analytics for investment decisions by a company, Private Equity or Venture Capital Fund, Hedge Fund, Family Office, or an Investment Bank. Simply put, An Outsourced Chief Investment Officer fills in for a regular Chief Investment Officer as and when required. Mostly it comprises activities that support a CIO in performing his services effectively.

When is OCIO needed?

Outsourced Chief Investment Officer services are designed for funds like Private Equity, Venture Capital, and Hedge Funds, and for Family Offices, Investment Banks, and M&A functions of Corporates

Need of OCIO Services

When it makes sense to outsource Chief Investment Officer?

 

It’s not possible to hire a full-time CIO in all situations. In many business scenarios, there is a requirement of a team that supports the CIO. This size of the team changes as per the deal flow. Some of these situations are:

-The fund is small and cannot afford a full-time CIO

-The fund is still raising and cannot onboard a full-time CIO unless the fund reaches its target close

-A full-time CIO is there but there are way too many investment decisions that need analysis and hence the requirement of a trained investing team

-A Corporate house is looking for a specific opportunity of M&A and does not want to hire a full-time CIO for a few deals here and there

 

What are the advantages of an Outsourced Chief Investment Officer?

Outsourced Chief Investment Officer makes an absolute sense when looked at from the cost perspective.  When outsourced to a low-cost country, OCIO could produce a benefit of a 30-70% reduction in cost by either outsourcing the CIO or the team or some of the functions and projects. A specific function where the in-house team lacks the expertise could be outsourced as well. Here are the typical advantages of outsourced CIO:

–30-70% reduction in the costs depending on the location from where the outsourcing takes place

–A plug and play outsourced Chief Investment Officer model where a CIO comes into play when required. If there is only one deal that has to take place in a year, it makes sense to hire a CIO for only as many days as required. Outsourced CIO fits in perfectly for this requirement

–A specific Skillset requirement: With complex investing scenarios and multiple complex options in investing, there are many niche skills that are required to make an investment decision. Outsourcing could be done for these niche skills whenever required

–Team Augmentation: This is the most important advantage of outsourcing the CIO. It’s not about replacing or hiring an outside CIO, it’s about augmenting the team under the current CIO. It may so happen that business requires enhanced analyst capacity due to increased deal flow or a few special one-time projects. Outsourced Chief Investment Officer Services fill in perfectly here and augment the team as required

Activities under Outsourced CIO

The activities that come under OCIO are either the overall decision analytics or a particular subset of activities that lump under the investment decision making process. Here are the activities that form the major part of Outsourced CIO services:

Outsourced Chief Investment Officer Services

Activities provided under OCIO services

Investments

Research and Analytics services for investments are performed under this service. The investment could be done in companies, stocks, funds, or real estate. Almost all the subset of activities could be outsourced. Here are the typical examples of the projects

-Finding out the right price for a company stock

-Finding out the valuation of a private or a public company

-Doing due diligence of a fund or a company before investment

-Originating deals as per the investment objectives of the fund

-Maintaining and populating the deal pipeline for future deals

-Profiling potential companies or investing

-Profiling various Hedge funds for investing in case of Fund of Funds

-Other Strategy, Research, or Marketing tasks

Portfolio Management

Research and Analytics services that are required for the smooth functioning of portfolio companies come under this. For Hedge funds, it will be continuously evaluating long-short positions. Here are the typical projects that could be outsourced:

-Valuation of portfolio companies

-Research support for portfolio companies

-Marketing and Business development support for portfolio companies

-Evaluating long term long and short positions of a long-short equity hedge fund

-List generation for a portfolio company to sell its products

-Lead generation for further acquisition or finding a buyer of the company

-Market entry strategy for a new market or a new product

-Annual business plans

-Key accounts management for major clients of the portfolio companies

-New product development and related market research for portfolio companies

Operations

Under these services are the activities that enable the smooth functioning of a fund. This comprises Middle and Back office operations outsourcing. Some of the examples of the projects undertaken are:

-Fund administration services

-Annual and quarterly audits

-Tax preparations

-Investor portfolio accounting, subscriptions, and redemptions

-Fee waterfalls

-Middle office outsourcing

-Back office outsourcing

-Trade accounting

-Exception handling

-Cash and Trade reconciliation

Under this multiple software also could be used to make sure many of these activities are automated and processes efficiently

Outsourced Chief Investment Officer Model

 

The way an outsourced CIO model works is by hiring FTEs offshore. FTE stands for Full-Time Employees/Equivalents. These are the offshore-based analysts who support multiple tasks related to investment research and decision making. Apart from hiring full-time resources, there are options for buying analyst hours or outsourcing a specific project.

 

Magistral Consulting has helped multiple funds and companies in outsourcing CIO related activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

 

 

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About Magistral

Magistral is a leading research, analytics, and consulting services provider for Investment Banks, Private Equity, Venture Capital, Family Offices, and Hedge Funds. It has more than 100 clients across the globe. If you need any of Magistral’s work samples or need to talk to any of its existing clients and referenced drop a line at www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

Why Private Investments are more important than they ever were?

Wealth creation has moved from ‘Post-IPO’ in public markets to ‘Pre-IPO’ in private markets. All indicators related to private investments are at an all-time high. Gone are the days, when institutional investors would invest in primary and secondary markets to stay in the security for the long term, for continued wealth creation and regular flow of dividends. Increasingly, experienced investment managers are investing in private markets, scaling the company, merge it with others, and take the bigger entity public to create wealth for themselves, while limiting the returns upside for retail and other institutional investors in the secondary market. Robust Due diligence exercise is imperative.

At least in the near future, it can be said that IPO will not be the source of funds for the companies also. It is going to be the private investors in the form of Angel, Private Equity, and Venture Capital firms. Companies are increasingly postponing their IPOs in favor of private investors due to less regulatory requirements, the savvy nature of investors to back maverick ideas, less number of stakeholders to manage, and industry-specific knowledge of investors that can be used for further scaling companies. But private investments from investors’ point of view are very different from investing in equities where all the data is available upfront. Due diligence of private target companies is a painstaking process. As part of due diligence, the following are the items that need to be checked before a private investment is signed and closed:

Founders and the Founding Team: We hear this often that a VC backs a ‘team’ and not a company. So when we talk about due diligence of early-stage investment, the team acquires the center-stage, in terms of investment decision making. There are a host of questions that need answering before backing a founding team. For example, whether one of the founders was sacked in the last job due to charges of sexual harassment against him? How founders behave with their teams when investors are not around? Are the educational and experience credentials claimed by founders correct and verifiable? Has someone spoken to the references provided? And so many more!!

When millions are riding on the personal conduct of a group of people, no investor would want to repeat a ‘Travis Kalanick’ episode. It is thus imperative to get into all the minute details about the founding team’s business and personal conduct.

Market and Industry of the Target Company: Another oft-repeated saying of the Alternative Investment industry is that ‘it is better to invest in an average company in a rising industry rather than backing an excellent company in a declining industry’. To be on the top of the industry trends and how it is going to unfold in the near to mid-term is imperative for risk aversion of the invested capital. An industry with all its hues of multiple sub-industries with cross-germination of tech into it needs a specialist intervention in terms of market research and forecasts

Past Financial Performance: The target company usually provides data on revenue and market traction. Although dollars coming into a bank account is a fairly straight-forward end KPI, there are multiple other market traction KPIs that finally ensure dollars in the account at some point in time in the future. These traction KPIs are industry-specific like the number of paid customers, freemium customers, free to paid customer conversion rates, claimed market share, etc. It would have been fairly simple if the company would have provided these numbers accurately. Sometimes clouds are deliberately maintained on data. One sees a month-on-month increasing number of customers, but what is not known is the percentage of paid customers amongst them or worst still, maybe the whole surge has come from free membership campaigns. Devil is in the details. Talking to market and tech experts along with customers will go a long way in ensuring the right investment decision.

Future Financial Performance: Future financial performance is usually a linear or exponential extrapolation of current performance or sometimes just pulled out of the hat to sell a rosy picture of the future. Many times, the company is struggling to meet expenses currently, but future forecasts graph takes off like a rocket headed into space. All these forecasts need to be taken with a pinch of salt. It’s worthwhile to check and challenge all the assumptions that have gone into coming up with the financial model and the forecasts. It is a factor that could literally make or break for your millions going into the private investment.

Customers: Proof of the pudding is in the eating. Customers talking well of a company is a good sign for investors. Also, customers vote with their dollars. Talking to them gives an idea about the customer journey, pain points, existing alternatives to product or service and what exactly would be needed for them to shell out those dollars for the product or service. This requires a specialist Market Research agency that has expertise in ghost shopping and customer surveys.

Employees: One of the first people who bought into a vision is the ‘employees’ of the start-up. A place that has happy employees speaks louder than any other credential for the founder. At the same time, a toxic culture will be quicksand that will absorb millions of dollars in no time, without a blip on revenue numbers. Most founders are not ‘Steve Jobs’ type visionary. They are average folks, who get stressed with day to day running of the start-up machinery, which takes a toll on them. How do they behave with their employees at that point in time is a fairly good indicator of an individual’s potential as an effective stakeholder manager currently and in the future? A research agency can provide honest feedback on this indicator.

Regulations: Are there any regulatory risks in the business, that will come into play after scaling up of operations? Thorough research and liaising with government agencies can go a long way in avoiding statutory and regulatory risks that might plague your investment in the future.

Other Investors: Old boys of the industry do remark that ‘VCs and PEs hunt in packs’. It is heard often. Other investors are more of a support than a threat. If they have voted with their dollars than it might be a good company. Also in situations of B2C tech where winners take it all or a small group of winners take it all, funding dollars make the difference between the winner and the laggards. Multiple investors backing a company will take care of those dollars, which means your own investment is safer. At this point, verifying the claim of the company about other lead investors, co-investors, and conversations going on needs to be verified by a neutral agency.

Magistral Consulting helps Private Equity, Venture Capital, Family Offices, and Investment Banks in performing due diligence for private assets. All these steps are taken care of, in our proprietary research method that is designed to eliminate potential investment risks. A concise weight-based evaluation metrics with clear recommendations about future potential and risks are delivered in aggressive timelines. As our delivery centers are based out of low-cost countries, it builds in significant savings in terms of research costs as well. To know more, please get in touch with info@magistralconsulting.com

The author is CEO of Magistral Consulting and can be reached at prabhash.choudhary@magistralconsulting.com for any clarifications and queries.

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