A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

FISCAL AND OPERATIONAL ISSUES

3.2.4

Investments

The typical investment process into private equity assets can be split in three steps, as il- lustrated in figure 38:

Figure 38: Investment process into private equity assets

1. Pipeline management

2. Investment phase

3. Exit phase

Copyright CACEIS, 2009

1. Pipeline management Pipeline management phase includes due diligence, which is a key point in private equity, and consists of maintaining a list of target companies or properties, their business plan review, by analysing the following major factors that can influence the success of the in- vestment: • Company and management background – history and development; • Operating and ownership structure of the company; • Product or services – competitive advantages; • Markets: Size, growth and competition; • Expansion strategy; • Prior equity financings, if any; • Amount of capital required and its proposed use; The due diligence process covers evaluation of the product/services, the management team and their background, technology, markets, competition, financial plan as well as the exit opportunities. This process is followed by the formal investment approval 45 , often com- pleted by a term sheet summarising the principal terms of the investment and dispatched among interested parties. If the business fits into the investment philosophy, the GP will initiate meetings with the company’s management in order to determine the strategy and the operating plan in greater detail and will start contemplating the investment itself.

2. Investment phase The investment phase includes the following aspects: • Deals and transactions; • Risk management controlling, including compliance on investments; • Monitoring of the cash flows and drawdown; • Income collection and distribution of proceeds; • Reporting, such as financial statements and/or investor reporting.

Before starting detailed negotiations, the GP appoints investments advisers, such as audi- tors, lawyers and/or consultants in order to conduct the financial, tax, legal and technical due diligence and to understand the target company and its industry if the case may be. All the information collected will be used during the negotiation phase.

45 It should be noted, however, that there can be due diligence for project investment proposals that are screened by the investment committee and then dropped.

page 62 | A thorough understanding of PE