Due Diligence in Private Equity Investments


Most people live their lives by two simple rules: don’t fix what isn’t broken, and don’t reinvent the wheel. However, for private equity firm managers like Marc Leder at Sun Capital Partners, the opposite is true. What they believe is that, when something is good, it can be better. And if something can be better, they are interested in investing in it. However, they must exert due diligence in doing this.

Understanding Private Equity

In very basic terms, a private equity investment is one that is not listed on public exchanges. It also isn’t the same as venture capital. Rather, private equity investments are about making huge financial decisions in which companies are taken over, or their debt is settled through buyouts, in return for control.

Private equity is risky. Often, the investment is illiquid, which means that now withdrawals can be made for at least a decade. They also have high expenses and the chance of losing it all is very real. This is why private equity investors tend to be high net worth individuals, people who can lose more money than most people will earn in a lifetime and still be fine.

Due Diligence in Private Equity

Because private equity deals with millions, sometimes even billions, decisions are never taken lightly. No investments are made without understanding exactly what the associated risks are. And while investors like Marc Leder take risks, they stay away from any real red flags. They ask important questions and do not feel like they should invest in anything, unless they feel right about it. After all, hundreds of companies look for private equity investors every month.

Good managers like Leder look at how companies can improve their operational processes. They look at the company’s management and whether they are able to sustain growth if it happens. Historic performances are a hugely important part of this, helping to determine whether a company truly has growth potential or whether its glory days are over.

At the same time, due diligence comes from the company in which private equity funds will be invested. Mark Leder encourages companies he is considering to meet with him so that they gain a greater understanding of what can and cannot be done, what they can expect from the investment and what is expected in return of them. Mainly, it helps them to determine whether they feel comfortable with their equity manager as well.

Private equity firms like Sun Capital Partners invest huge sums of money in companies that are often already doing very well. They do not decide to do that lightly. People like Marc Leder have a lot of responsibilities on their shoulders, turning a million dollar investment into a multi-million dollar one wherever possible. They are also the ones who have to deal with the backlash of failed investments, which are common. They must make sure that, overall, the private equity firm remains profitable for its stakeholders. This type of high risk, high return world is incredibly exciting, but only if it is managed properly.