When investing in private equity, there are six key factors or “secrets” to consider to finding successful and more importantly, profitable private equity deals.
Secret #1- Find the Best Deals by Being in the Right Places
By establishing themselves as authorities in the private investing space and being in the places where great entrepreneurs congregate (online, at events, etc.), shrewd individuals and investors become privy to special situation investment opportunities that the general public doesn't hear about until much later.
Secret #2- Determine if the Firm or Project Is Solid
Before considering an investment in any private equity firm or project, it is critical to ensure that the projections are sound. Regardless of how “whiz-bang” the project appears to be, when performing due diligence on the project, astute investors require that the following three conditions are met:
1. There is a large and growing market for the type of project
2. The project has a viable exit strategy
3. The project has presented realistic financial assumptions
Secret #3—Assess Whether the Management Team Will Execute
A strong management team is almost always a sign of a strong business opportunity. If the opportunity wasn't solid, then these talented individuals would be smart enough to focus their energies elsewhere.
Secret #4—Understand the Exit Strategy
Investors in private equity firms reap rewards when the projects in which they invest have an “exit strategy” or “liquidity event” which primarily consists of a project being sold or refinanced. At this point (or soon thereafter if a holding period exists), investors reap financial windfalls from the event.
Secret #5—Conduct Due Diligence
Investors in private equity firms should always look at the investments of the fund to determine if it is right for them. Review the company’s business plan to make sure that your investing goals are in line with the goals of the fund. If the fund invests in real estate and you are more comfortable in Treasuries, the fund may not be for you.
Secret #6—Diversify Your Private Company Portfolio
How many times have you heard someone say, “Don't put all your eggs in one basket”? When it comes to any kind of investing, this is very good advice. Successful investors know that diversifying their investments can help reduce the impact that a single, poorly performing investment can make on their overall portfolio, or mix of investments. This is particularly true with private company investing. Private equity investing is inherently variable — with a relatively small percentage of companies building themselves to successful exits and investment harvesting. Most individual investors in private equity significantly under-diversify their portfolios — investing in one or only a handful of companies and thereby greatly increasing their risk profile.
If you keep these six items in mind, not only will you find successful private equity deals, but you will also avoid the bad and non-profitable deals. Happy Hunting!