Private Equity Deals: Step-by-Step Procedure
1️⃣ Deal Sourcing: As an intern or analyst, you’d be involved in secondary and primary research (cold calls, networking, equity research, meeting management of prospective targets) to scout targets in specific industries.
Financial intermediaries distribute teasers about firms that are looking for investors. Often, the company seeking investment stays confidential but the teaser highlights key financial data, products, and services for PEs to consider
2️⃣ NDA Signing: If the PE firm expresses interest in the teaser, they sign an NDA with this target firm to obtain the Confidential Information Memorandum (CIM). It includes the investment thesis, capital structure, financial projections, and other details they need to make a decision about investing in the company
3️⃣ Deal Due Diligence: The PE firm conducts background and industry research to verify financials and other key details and validate the ROI projections provided by the target company’s management. They may even contact an investment bank to gather more details to assess risk
4️⃣ Investment Proposal: The PE firm will then develop an investment proposal to share with their investment committee, where they’ll either provide updates of the deal up until that point, or they’ll actually seek out funding to use on paid services, such as consultancy services
5️⃣ First Round Bids: The target company receives a non-binding letter of intent (LOI) from the PE firm at this point. Here, the target company will weigh its options in terms of the bids it has received. Key points they’ll take into consideration include the legitimacy of the offer, price, the PE firm’s expertise.
The target firm offers more confidential details (operations, specific financial data, employee details for further due diligence)
7️⃣Operating Models: Details like cost of raw materials, pricing, number of clients/customers, and disclosed to help the PE get a more accurate estimation of costs for final acquisition
8️⃣ Preliminary Investment Memorandum (PIM): This 30-40 page document provides an overview of the target company's industry, valuations, and risks for the investment committee’s reference
9️⃣ Concluding Due Diligence: After the PIM approval the PE firm, target company, and the investment bank communicate regularly to address outstanding due diligence concerns so the PE can finalize financing plans.
🔟 Final Investment Memorandum (FIM): An FIM is crafted to clarify key points or concerns raised by the investment committee. The deal team involved will develop a valuation to secure the target firm that the investment committee will either accept or turn down.
11. Final Binding Bid: Once the investment committee accepts the FIM, the deal team delivers this final bid to the target who will refer all such bids to advisors and legal teams to finalize the best-suited bid.
12. The Purchase Agreement: After selecting a winning bid, the target company will communicate with the PE firm they have chosen, regarding the signing of contracts.
After further negotiation between the two sides, a Purchase Agreement is produced. And those are the steps, in a nutshell. What are some of the major private equity deals you can think of right now?
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