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Private Equity Funding:

Private equity funding is the stage wherein a company is in a mature stage of operations and is
looking for additional funds for generally the following purposes:-

1. Expansion
2. Diversification into a different product/ service line
3. Meeting working capital shortages
4. Marketing expenditure/ brand building
5. Project financing
6. Purchase of additional assets
7. Adoption of new technology advanced way of functioning
8. Existing promoters are planning to liquidate their investments
But, not limited to the above mentioned purposes.

I. Since private equity is meant for a company in a mature stage, it is very important to
understand till date the working and operations of the company. Hence the actual
financials for the last three years essentially form the base to understand:

Quantitative factors:
1. How is the company performing financially currently?
2. How were the existing funds in the company utilized i.e. through ratios like ROI, RONW,
ROE etc?
3. How will the current funding required fill the gaps that the company has- capex
requirements, working capital, expansion etc. ?
4. To understand the margins of the company and to compare it with the peer group?
(EBIDTA Margin , Profit margins etc.)
5. To figure the level of efficiency of the company. ( Turnover ratios)
6. What are the reserves and surplus that the company has accumulated?
7. Work out a basic valuations of the company with these actuals to understand how much
is the company worth today.
8. What is the current capital structure of the company and what is current debt levels in the
For the above mentioned purposes a three to five year period of financials would be sufficient.

II. Other than this the company needs to provide a brief company profile with information of
the industry and it’s product line. This would help in the following manner:

Qualitative factors:

• To understand the industry prospects and what would be the expected growth horizons
over a period of 4 to 5 years.
• To understand the market presence of the products/services provided by the company and
what is the existing margins in these industries.
• To identify peer group companies and to understand how well the company is positioned
with respect to its peers in terms of market share, competition etc.
III. Once the opportunity is analysed in the above mentioned criteria, additional information
from the company is requested which could be pre or post signing the NDA and
Engagement Letter.

Additional information is requested to carry out further due diligence in the following broad

 Financial Due Diligence- Appraisal of the future projections of the company, Valuation
of existing assets & infrastructure, existing loans and its appraisals, liabilities- current and
contingent etc.
 Technical Due Diligence- The locational advantages, availability of raw materials, skilled
and unskilled manpower, technology expertise, break even analysis (if not achieved),
plant and machinery, warehouse etc.
 Economical Due Diligence- The demand and supply situation, market accessibility,
customer profiles, market growth rate, contribution of the industry to the GDP, nature of
the industry in terms of the perception of riskiness by banks, investors etc.
 Legal Due Diligence- Existing cases against the company, promoters or management,
employees, suppliers etc, working relationship with banks, suppliers, creditors- have their
payments been made timely etc. any pending litigations with any of the regulatory bodies
like RBI, SEBI, RoC etc.
 Marketing Due Diligence- Branding of the company, brand recall among the clientele,
top ten clientele of the company, marketing strategies for growth, expansion or
diversification, product mix of the company, competitive advantage etc.
 Employee Due Diligence- Studying the profile of the promoters and the management and
to understand how well they are positioned to handle the operations of the company, their
prior experience in this field of operations, their contacts in the industry etc.
 Environmental Due Diligence- How does the company work towards preserving the
environment, treating waste before disposal etc.

Other than above broadly mentioned points, there are many factors that are looked into by an
investor before taking an investment decision which are mainly industry and sector centric.

Private Equity Investors:

Private equity investors generally have certain industry preferences based on which they
choose companies. Some investors have sector or industry specific funds through which they
are positive in a particular industry and are heavily scouting for companies in that sector.
There are some PE investors who have a diversified approach wherein if they have invested
in a particular industry they avoid investing in another company of the same industry. The
identification of PE investors is also done based on their footprint i.e. the amount of
investment they do in a particular company and their total fund size. Also the time of
investment is equally important i.e. middle stage, later stage of the company and lastly the
level of profitability etc.

Hence there are majorly three parameters to identify PE investors:

I. Fund Orientation
II. Industry Orientation
III. Size Orientation
IV. Stage Orientation
V. Profit Orientation
The PE drivers
Internal factors:

• Financial History – A longer operating history gets a company a higher PE compared to

unknown businesses.

• Barriers to Entry – Companies that operate in Industries having barriers to entry are
given a higher multiple then the ones operating in an environment having no barrier to

• RoE and RoCE – A higher RoCE and RoE indicates operating efficiency and generates a
higher multiple compared to companies having lower RoE and RoCE.

• Free Cash Generation – Businesses generating a greater amount of free cash have
higher PE's compared to cash guzzling operations.

• Critical Mass and Size – Larger companies having reached a critical mass get a higher
PE compared to their smaller peers.

• Corporate Governance – An honest Management adhering to ethics, morality and

following clean and conservative accounting systems will have a higher PE.

• Dividend Policy – Market loves dividends and companies that give out large dividends
get a higher PE.

• Price Leadership – Corporations that have are price and influence the market price of
the product gets higher PE.

• Investor communication – Companies that embark on providing a great deal of

information to their shareholders and are bid up to higher multiples when compared to the
companies that do not provide adequate information to investors.

• Index component – Companies that are a part of the Index are given a higher multiple
compared to companies that do not form part of the index.

• Trading volume – Liquid stocks get higher PE compared to the illiquid ones.

Investment Planning

Finding the Due Diligence


Ideal Target Due Diligence

Business case Mutual Legal Mutual Realization
Short List
Benefit Financial discussion and and
Investment analysis Valuation final decision Finalization
Brief between the Stake

(2- 3 weeks)

(3-4 weeks)

(2-4 weeks)

(4-6 weeks)

(6-8 weeks)




(2-3 weeks) (3-4 weeks) (2-4 weeks) (4-6 weeks) (6-8 weeks)

Initial Review & Package the Company Evaluate Target Agree head of Terms Final Due Diligence and
Approach Strategy Select preferred targets Prepare Financial Model Legals
Offer  Provide further
 Understand the  Project manage information  Manage due
business and identify production of  Financial Model  Firm up funding diligence process
key value drivers for Acquisition Model  Valuation structure  Negotiate final legal
the blueprint and marketing  Evaluate Target  Agree Heads of agreement
 Select Management information  Tax Planning terms  Completion
Team  Identify and  Tax Planning
 Identify Potential approach potential  Integration Plan
Targets targets
 Determine financing  Request information
needs and optimum
capital structure

Tentative time frame= 3+5+4+6+8= 26 weeks = 6 to 7 months approx.