Selecting a Private Equity investor

Selecting a Private Equity investorA lot of businessmen would have raised money or are planning to raise money from a private equity investor to expand their business. I am giving below a list of points to watch out for as you go through the list of potential investors.

Remember that a Private Equity investor is the business of making money from money and therefore his interest will be primarily in getting a substantial return in as short a period of time as possible. He is as interested in doing a deal as you are. You need his money and he needs your company to get a return on his money.

1. What do they bring to the table other than money

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It is very important for you to select a PE player who brings more than simply money to the table. PE players specialize in industries and you should expect them to get you introductions to other players in your business as well as in the circles that may influence your industry. Watch out for “spreadsheet” specialists who will pound away on their computers to deliver valuations to themselves and you!


2. Do your own due diligence

Just like a PE player will conduct a due diligence on you and your business before he makes the investment. Make sure that you also do your own diligence on the background of the PE player as well as the investments he has made. If you can talk to one of their investee companies, you must do so to understand from a counterpart on their experience with the PE player you are contemplating to give a piece of your business
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3. Study the term sheet terms very carefully, you will be in a hurry to get the investment

Most promoters do not read the fine print of the term sheet. It is only later when the conditions of the term sheet start to be implemented does the promoter realize what he has signed up to. By then it is too late.

4. Use a lawyer you trust to get your agreements done. The detailed agreements are critical
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The PE player will generally work with the big law firms. Use a lawyer you trust who can guide you through the maze of the legalese in all the agreements. Understand how multiple agreements are linked together as well as all the terms you are signing up to including guaranteed IRR’s, tag along, drag along, QIPO and similar such conditions.

5. Don’t get pushed into growing your business at a rate that your PE investor wants

Finally, make sure that you grow your business at a rate that you can manage without putting stress on the business or your management team. If your PE player pushes you to grow faster than you believe you can, it is better to push him back earlier than to get caught in a difficult business situation.
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The author Ashutosh Garg, Chairman of Guardian Pharmacies and a member of YPO Delhi and the author of the bestselling books, Reboot. Reinvent. Rewire: Managing Retirement in the 21st Century; The Corner Office and The Buck Stops Here.


(YPO is a global community of chief executives dedicated to becoming Better Leaders through Lifelong Learning and Idea ExchangeTM. The YPO platform provides more than 24,000 members in more than 130 countries. For more information, visit www.ypo.org.)