4 Questions To Ask Every Private Equity Firm
Receiving an offer to join a private equity firm is a noteworthy accomplishment, given the competitive landscape. You could be tempted to promptly accept the offer without doing your due diligence. However, neglecting this pivotal step can result in future disappointments. For that reason, let’s discuss good questions to ask private equity firms.
Question #1: How large is your fund?
It is crucial to ask about the size of a private equity firm’s fund as it directly impacts the attention your company will receive. If the firm boasts a multibillion-dollar fund and your deal is relatively small, anticipate less attention. Board meetings may be infrequent and partner involvement may be less consistent. Access to strategic resources for business growth might also be limited. On the other hand, if your deal constitutes a substantial share of the fund, expect heightened attention. You can consult a management consulting firm to see what suits you best.
Question #2: What is your target return profile and strategy?
To gauge your alignment with a private equity firm, ask about their target return profile and strategy. Understanding the pace at which they expect your business to grow is crucial for aligning goals and personal economics with the investor’s risk approach. For instance, if your plan involves significant liquidity extraction with an eye on future upside through rollover equity, an aggressive investor may be suitable. However, if you aim to retain a majority stake and bring in a minority investor for moderate growth, a less aggressive investor may be a better fit.
Question #3: How many investments will the partner have active at one time?
Asking the private equity firm about the number of active investments a partner handles concurrently is crucial to managing expectations. Partners overseeing multiple portfolio companies divide their attention. Knowing their bandwidth upfront helps you gauge the level of commitment you can expect. If a partner juggles 10 or more portfolio companies, anticipate limited availability. On the flip side, being one of five ensures a more open and accessible partner.
Question #4: How will follow-on investments work?
Understanding the terms of follow-on investments is critical for financial planning. Companies often need additional funding, and clarity on how the private equity firm handles follow-on investments is essential. Ensure pre-emptive rights to protect against dilution and have a say in the decision-making process.
Bottomline
When considering private equity firms, diligent questioning is paramount. These inquiries pave the way for informed decisions. At Alpha Advisors, we prioritize transparency in our private equity consulting services, ensuring our clients possess the essential insights to choose the right private equity firm.