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Private Equity Investment Process: PE Deals Step-by-Step"

Kison Patel
Kison Patel

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

CEO and Founder of M&A Science and FirmRoom

What is Private Equity?

Private equity is a broad class of investment wherein investors raise funds to acquire, restructure, and profit from private companies. Several different forms of private equity investment exist, but the commonality among all private equity investments is that the investments are made in private, non-listed assets.


Understanding Private Equity

The universe of private equity dwarves that of the stock market, even in the United States.

There are nearly 6 million companies in the US with employees and less than 1% of these are publicly listed. Examples of well-known private companies include Koch Industries (revenue of $125 billion revenue in 2021), Albertson’s ($70 billion revenue in 2021) and Cargill ($134 billion revenue in 2021).

The aim of private equity is to invest in this companies like these.

By investing in private companies, investors can avoid most of the regulatory scrutiny faced by publicly-listed companies. Privately held companies also don’t have to issue lengthy quarterly statements, and aren’t subject to as much shareholder pressure.

private equity data room

And because they’re not publicly listed, they don’t have an ongoing analysis of their stock market performance.

Private equity companies usually establish individual funds, which invest investors’ capital according to a pre-defined strategy.

private equity fund structure

The largest private equity houses have dozens of different strategies, but smaller firms may only have a handful of funds, which they use to invest their investors’ capital.

Their aim, as with publicly held companies, is to make as high a return for their investors (limited partners or LPs) and owners (general partners or GPs) as possible.

Private Equity Investment Process

The private equity investment process can take significantly more time than that of publicly listed firms.

Let’s suppose for argument’s sake that a private equity firm has created a fund whose aim is to invest in construction companies to capitalize on growth in the construction sector.

There are no more than a couple of hundred publicly listed construction companies in the US, but there are over 750,000 private construction companies.

Therefore, the research devoted to finding attractive companies that fit the private equity firm’s strategy can take a significant amount of time. Plus, given that there is no stock market from which to gauge a ‘fair price’ for the companies, private equity investors have to revert to different methods for their valuations (usually beginning with a multiple of EBITDA to arrive at a company valuation).

The timeline for the process looks something like the following:

1. Fundraising

Duration: 6-to-18 months per fund.

This process involves marketing the fund to existing and new investors. Firm

These will typically be private investors, family funds, pension funds, and others. The marketing material will outline the fund’s overall strategy and the track record of its general partners. It will usually outline the terms of the investment for the limited partners, although this can be changed for different LPs according to their own reputation and the capital being provided. The closing and terms of investment for each individual investor usually takes about 3 months.

See why 450+ PE/VC firms use FirmRoom to manage fundraising and engage LPs more effectively.

2. Deal Sourcing

Duration: 3-to-6 months per company.

Here, a private equity analyst searches firms that fit the fund’s investment thesis.

They glean as much information as possible about the private companies, often working from teasers and pitch decks sent by investment bankers.

Sometimes, where an appropriate company is identified, they make contact, attempting to establish the owners’ interest in an investment or buy-out. This would be followed by the signing of an NDA and disclosure of information by the company in question.

3. Due Diligence

Duration: Ongoing.

The fact that privately held firms don’t have to disclose as much information as their publicly listed counterparts makes due diligence extremely important, even at the early stages.

In their discussions with business owners, analysts will ask a range of detailed questions which amount to the early stages of due diligence. This PE diligence process will become more detailed, and structured, as the deal progresses.

FirmRoom, in hand with DealRoom, works with hundreds of private equity companies throughout their deals. Our private equity offering has been designed to work efficiently, having been specifically designed for the rigors of multiple due diligence processes running simultaneously.

Once the initial due diligence has revealed what appears to be an attractive investment, the due diligence process begins in earnest and looks something like the following:

Investment proposal and committee approval

  1. After the initial due diligence has revealed the company to be potentially attractive, the target company profile is assessed by the private equity company’s investment committee (usually consisting of partners and some specialist advisors). They make the ultimate decision on whether the investment should go ahead or not.
  2. Assuming the investment passes muster, the investment committee makes a first round bid to the target company, which should lead to a period of negotiation. This leads to the drafting of a non-binding letter of intent (LOI), to be signed by bother parties. This in turn will be followed by more extensive due diligence of the target company, which can take up to 3 months, depending on its complexity.
  3. As a typical private equity fund will be looking at several companies at once, the importance of using a PE Deal management platform becomes even more important. This enables the deal management team to remain on track in each of the deals, and to keep abreast of developments specific to each deal. Issues which can otherwise become lost in the process, such as call notes and follow-up pieces of information can be maintained in a deal’s specific data room.

4. Internal Operating Model

Duration: 1-2 months

The internal operating model is created by the private equity fund team, who use the target company’s revenues and costs, obtained during due diligence, to make detailed projections for the potential investment.

The common key drivers analyzed by these teams include raw material costs, volume, price, and number of customers. The model which which emerges is used to estimate the future financial performance of the target firm, and to model the changes required to achieve the desired return.

5. Preliminary Investment Memorandum (PIM)

Duration: 1-2 months

The preliminary investment memorandum (PIM) is a 30–40-page document which summarizes the investment opportunity to the investment committee. It includes all of the same sections of a normal investment memorandum, albeit with more detail on how it can specifically contribute to the private equity firm.

After this, a more detailed and final due diligence process is carried out, enabling the firm to sign off on the investment, or not, as the case may be.

6. Management of Acquired Company

Duration: 4 to 6 years

Having used due diligence to develop a clear picture of the company which has been acquired, the private equity firm will aim to leverage the findings to create an internal operating model - how the investment will be managed over the 4 to 6 years of ownership by the PE firm.

In many cases, this will involve adding capital in undercapitalized areas (e.g. acquisition of new equipment), staff rationalization, and changes of strategy.

During the management period of the company, it may be liquidated, depending on how it performs and whether attractive offers are received. There may also be calls for further investor capital commitments, or the company may be merged with other companies within the fund as part of a bolt-on strategy.

During this period, some distributions may be made to investors from the income generated by the acquired company.

7. Exiting Investment

Duration: Minimum 3 months.

Technically, an investment by a private equity firm can be exited or liquidated at any stage during its ownership.

However, this tends to happen after the operational and financial changes have begun to take effect, typically after at least 2 to 3 years of management.

Spurs for liquidating the investments could be the receipt of a bid that maximizes value or unplanned shifts in the firm’s market or overall economy that force a strategic rethink.

The private equity fund will distribute income generated by the liquidation among investors and carryholders.

Private Equity Deal Example

Blackstone’s $26 billion acquisition of Hilton Hotels in 2007 remains one of the most well-known private equity deals of the last two decades.

Made at a time when signs were already beginning to emerge that the US economy was faltering, and the stock market appeared frothy, many wrote the massive investment off as an overvaluation by Blackstone. Ultimately, it paid off in ways that even Blackstone couldn’t have expected.

One point to note here is that the deal was slightly unorthodox in a few ways, not least because Hilton Hotels was a public company when Blackstone made the acquisition. It brought the group private (hence, it still qualifies as private equity). Blackstone acquired Hilton Hotels at a price which was 40% above its stock price value in an all-cash leveraged buyout (LBO), bringing a global hotel brand to Blackstone’s large portfolio of hotel assets.

The Wall Street Journal noted that the deal was being made at a time:

“when the market is full of talk about tightening conditions for leveraged deals.”

Straight after the acquisition, Blackstone got to work on restructuring the asset. This began with a restructuring of Hilton Hotels’ large debt pile, most of which was maturing in 2013.

In addition to arranging with banks to extend the maturity to 2015, Blackstone took advantage of most banks’ urgent need for liquidity by negotiating a ‘haircut’ on the terms of these loans - ultimately reducing paying $800 million upfront on debt of $2 billion, adding over a billion of value to the Hilton Hotels transaction in short order.

Furthermore, more loans amounting to an additional $2 billion were converted into preferred stocks.

It was a financial engineering masterclass from the world’s largest private equity firm. By late 2013, with the global economy having a far rosier outlook, Blackstone took Hilton Hotels public once more, at a valuation of $7 billion higher than what it originally acquired the asset for.

In total, when all of the liquidations in the firm are accounted for, it made an excess return of over $14 billion on the acquisition, proving the power of the private equity model when combined with clever financial engineering and operational improvements.

Types of Private Equity Investments

There are 8 recognized strategies in private equity. These are as follows:

  1. Venture Capital (VC): A strategy which focuses on early-stage businesses, with longer holding periods and higher risks associated with individual investments.
  2. Growth Equity: A less risky form of venture capital, where companies are already relatively stable, but require capital to achieve their growth ambitions.
  3. Leveraged buyout (LBO): A common strategy, which involves the combination of some of the fund’s own capital combined with most of the debt.
  4. Real Estate Private Equity: A strategy that focuses on specific forms of private equity - hotel real estate in the example of Blackstone and Hilton Hotels.
  5. Infrastructure: An increasingly common strategy among private equity firms who can combine with governments in PPPs (public-private partnerships).
  6. Fund of funds: A strategy which involves the private equity company investing indirectly in companies through other companies’ funds.
  7. Mezzanine Capital: A strategy, which is ultimately a hybrid of debt and equity financing.
  8. Distressed Private Equity: This is where the private equity company acquires stressed companies and rescues/restructures them to restore value.

Private Equity Deal Flow

A private equity firm is only as good as its deal flow.

The term ‘deal flow’ refers to the companies within its investment scope, and ultimately how the private equity firm evaluates and executes deals with these companies.

Remember at the outset of this article, we mentioned how there are several million firms in the United States. Only a small proportion of these represent investible companies from a private equity perspective, so gaining access to the good ones and bringing them into the investment radar (i.e., making them part of the company’s deal flow) is essential to creating value.

To see how we help PE companies stay on top of their deal flow management, check out a transaction management software in our tech family, DealRoom.

Privte equity deal flow DealRoom


It bears repeating that the universe of investments in private equity is vastly superior in dollar terms when compared to the S&P 500, NASDAQ, or NYSE.

This reality means that it’s a treasure trove of investments for investments. It doesn’t mean it’s easy to capitalize on those opportunities; if it were, private equity funds wouldn’t currently be sitting on several trillion dollars of dry powder.

Ensuring that a private equity firm keeps a good deal flow and continues to generate value is the focus of FirmRoom’s deal management platform. Talk to us about how we can help your private equity investment process today.

Frequently Asked Questions (FAQs)

How is a private equity deal structured?

Private equity deals are structured to ensure that the General Partner (GP) has paid a price which enables them to generate the required returns through a combination of financial, operational, and strategic decisions.

What is deal flow in private equity?

Deal flow in private equity is the process through which private equity companies identify, evaluate, and close deals for the companies that fit their investment thesis.

How does deal sourcing work in private equity?

Deal sourcing in private equity tends to be a combination of using the private equity company’s network, along with desk research, and ongoing contact with investment bankers and brokers.

Key takeaways
  • Private equity is a far larger slice of corporate America than publicly listed companies: Over 99% of American companies are private.
  • The fact that most information on private companies isn’t publicly available increases the challenge of due diligence.
  • With private equity funds’ deal flows typically involving several targets at once, strong deal management platforms ensure nothing falls between the cracks.

Contact M&A Science to learn more