In Private Equity, Investment Committees can determine the life-or-death of every deal. How do deal teams best support them in doing so?
The IC not only approves or rejects deals but also ensures alignment with the firm’s strategy, investment allocations, and governance for diligence processes.
The multi-staged IC process is fundamental for fund managers and is closely scrutinized by LPs, who rely on the senior leadership team’s experience to allocate capital.
As a general rule, during initial IC meetings, deal teams usually present:
- the investment proposal, setting out the investment hypothesis, outlining the growth and post-acquisition strategy;
- key issues and risks, including regulatory concerns;
- the offer price based on valuation and leverage assumptions and expected returns; and
- due diligence plans, including a list of external advisors, proposed scope, phasing of diligence, and crucially, budgets for approval.
Subsequent IC meetings are usually designed to test that the initial investment thesis remains intact, discussing key issues and potential mitigants, and confirming the transaction structure and pricing.
Deal teams, responsible for sourcing and evaluating investment opportunities, typically have direct access to detailed diligence findings. In contrast, the IC usually relies on presentations and summaries from deal teams.
One of the challenges is balancing the need to distill the key data into actionable insights (without over-simplification to the point of distortion) vs. ensuring that the granular detail remain readily accessible should the IC require it.
From my discussions with fund managers, it is apparent that the IC process hasn’t undergone significant evolution in the last couple of decades and – with more and more data being available in modern day DD – this challenge is only getting more pronounced.
The most effective fund managers tend to cultivate an environment where the deal team openly communicates with the IC, providing in-depth insights into diligence findings and potential challenges. In some instances, one member of the IC can take on a more active role, providing oversight on the transaction from the outset.
Many fund managers I've engaged with are either transitioning or considering a move towards providing ICs with direct access – usually through an online portal – to interactive dashboards summarizing critical diligence insights. This enables the IC members to dive deeper into the underlying data through the portal, allowing them to get a snapshot of the key challenges in real-time, enhancing efficiency in decision-making.
Would this help your IC, or do you think this would result in information overload?
