Demystifying Due Diligence in Private Equity Investigations

The volume and breadth of opportunities available for investors have increased greatly; this is as a result of the maturation of private equity assets. Private equity entails a wide range of investment styles that include: venture capital, buyouts, distressed debts, infrastructure, real estate, natural resources, and mezzanine. Examining these strategies of investment requires you to have skills on the efficient gathering and analyzing of data.

Private equity fund investments are long-term in nature. This being the case, prospective investors conduct a detail-oriented and thorough due diligence processes. Resources required for the purpose of conducting due diligence vary by fund strategy, structure, and geography. When considering how you will staff your private equity program, you should consider two options: buy an outsourced staffing model or build an in-house staffing model. Both options contain multiple variations in regards to their creation and management. It is important to note that the creation and management of an investment program is a mutually inclusive endeavor.

There is a significant amount of due diligence that should be performed by private equity investors. Due diligence pertains a top-down macro analysis of the investment opportunity as well as a bottom-up manager analysis. A top-down analysis focuses on the prevailing economic environment of the fund. It includes an investigation of a fund’s criteria of investment in terms of geography, investment size, and industry segment. The bottom-up manager criterion focuses on the respective fund’s management capabilities, track record, third party service providers and tools of risk mitigation.

Top-down equity research

This criterion allows an investor to step back and look at the investment opportunity from a perspective. The first step of this process requires you to analyze the political, social and macroeconomic variables within a region or country. This allows you, as an investor, to establish if there are better growth opportunities for your investment. The identification of imminent risks in a particular market is a crucial function of this process. Normally, high risks are usually equated to high returns. This is especially the case in emerging markets. It is incumbent upon an investor to consider factors such as Gross Domestic Product and research on future estimates of an investment. By doing this, you will be able to take a well-calculated risk.

In business, certain sectors perform better than others. A top-down approach helps you examine the stakes in a well-performing sector; it allows you to discover general trends in a sector and helps you analyze the potential risks of that sector.

The top-down research process plays a crucial role when it comes to analyzing a company. It helps you determine whether or not to invest in a particular company. The process enables an investor to determine whether a business makes money consistently: in order to cover its expenses.

For this process to be effective, you must first start by analyzing macroeconomic, social and political factors. These factors provide you with a perspective that will enable you to make a well-informed investment decision.

Bottom-up manager analysis

This process helps you to establish whether a firm is equal to the task. It entails an investigation on a firm’s internal and external investments. The process also involves conducting research on a firm’s financial standing from a historical standpoint to the firms projected financials. You should establish whether the firm has proper operational and business processes. An investor should also examine the investment projections to establish whether they are reasonable. Reasonability of the projections is dependent on sector, geography, and industry segment of the investment.

An equally important aspect of this process is the examination of the firm’s tax structure and legal issues. In order to conduct the evaluation effectively, you must have a clear understanding of private equity structures. For example, can the firm accept foreign investments if it’s located in Russia? Secondly, you need to ask yourself how the investment will be taxed. For due diligence to be performed well, it requires that you have a close familiarity with private equity investing. These processes will require you to seek the guidance of tax and legal professionals.


Conducting due diligence is a difficult task since it is relatively new in the industry. The difficulties of conducting due diligence can be attributed to the difficulty of finding verifiable and quality information. Private equity firms and returns are not subject to scrutiny by a third party: they are not audited. Therefore, historic and projected returns are not conveyed in any specific manner.

A well conducted due diligence process should have an established structure and standard processes. This will enable you to make a follow up on your investment with minimum difficulty. For example, at corporate resolutions, they gather and analyze important information for clients. The main focus being on delivering reliable and credible information in regards to investments. Read more about how a private equity due diligence investigation is conducted.

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Melissa Thompson

Melissa is a mother of 2, lives in Utah, and writes for a multitude of sites. She is currently the EIC of and writes about health, wellness, and business topics.