Guides
Your insider guide to private equity
How to determine the credibility of a private equity firm
I was once at a business networking event, and upon mentioning that I work for a private equity firm, the counterparty’s face stiffened and hurriedly said his goodbyes. This was unusual as business owners are generally curious about our industry and like to chat.
Later, I discovered this individual had a bad experience with another party claiming to be private equity. Some less-than-reputable characters have jumped on the bandwagon and started calling themselves private equity.
How do you separate the wheat from the chaff? The easiest way is to ask someone from an established firm – the private equity industry in Malaysia is small, and most of us can tell you whether a particular firm is reputable.
The second way is to ask about their investment track record, sources of funds, and whether the funds are secured. A reputable firm should have no trouble referring you to businesses they have worked with in the past.
On funding sources, they will have already raised a committed pool of capital from institutional investors. Typical investors include pension funds, sovereign wealth funds, and family offices.
Due to the lack of track record, some newer private equity firms do not have readily committed capital. They will attempt to raise funds from investors on a deal-by-deal basis, which means that even if you sign a term sheet with them (after going through weeks of diligence and negotiation!), the investment may not close should they fail to secure investor funds.
This does not mean that reputable individuals do not run newer firms. Rather, there will be additional uncertainty in receiving the much-awaited investment at the end of the process.
Once you determine the credibility of a private equity firm, how do you evaluate whether it will be a good fit for your requirements?