Overview of the Investment Process

This is a general overview of a typical investment process for a private capital deal. It may vary depending on the investment firm, but it will help you understand the types of activities involved.

1. Source investment opportunity

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

2. Signing a Non-Disclosure Agreement (NDA)

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

3. Initial Due Diligence

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

4. Investment committee review

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

5. The First Round Bid or Non-Binding Letter of Intent (LOI)

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

6. Further Due Diligence

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.

7. Creating an Internal Operating Model

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.

8. Preliminary Investment Memorandum (PIM)

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

9. Final Due Diligence

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

10. Final Investment Committee Approval, final binding bid and signing the deal

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.

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The above content has been kindly provided to Reach Alternative Investments from The Australian Investment Council. If you would like to know more about private markets, or the crucial work the Australian Investment Council does in being the voice of Private Capital, check out their website at www.avcal.com.au.

The information in this article has been compiled by the Australian Investment Council from sources we believe are reliable, all content is subject to their terms (found on their website at https://www.avcal.com.au/) and all applicable laws. The Australian Investment Council Limited makes no representations or warranties of any kind, express or implied as to accuracy of the content, information, materials or products included on this site, except as otherwise provided under applicable laws. Neither Australian Investment Council Limited, nor its affiliates, directors, officers, employees, agents, contractors, successors or assigns will be liable for any damages whatsoever arising out of, or in any way related to, the use of this site and any other site linked to this site. This limitation applies to direct, indirect, consequential, special, punitive or other damages you or others may suffer, as well as damages for loss of profits, business interruption or the loss of data or information.
The information in this article has been compiled from sources we believe are reliable. Reach Alternative Investments makes no warranty, express or implied, regarding accuracy, adequacy or the completeness of the information. We provide this information on an ‘as is’ basis. This disclaimer applies to isolated and aggregate uses of the information. Information can also become out of date fairly quickly. If you have obtained this information from a source, other than from Reach Alternative Investments, please consider it carefully as electronic data can be altered subsequent to original distribution. Please contact us immediately if you think that may be the case. Neither Reach Alternative Investments, nor its affiliates, directors, officers, employees, agents, contractors, successors or assigns will be liable for any damages whatsoever arising out of, or in any way related to, the use of this site and any other site linked to this site. This limitation applies to direct, indirect, consequential, special, punitive or other damages you or others may suffer, as well as damages for loss of profits, business interruption or the loss of data or information.
Always remember that all investments carry risk. You may lose or gain money. Past performance is also not indicative of future performance. Before making a financial decision, you should read the relevant Information Memorandum.

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