How the Modern-Day Equity Firm Analyzes Potential Investments

Life in private equity might seem glamorous and hugely lucrative, but behind all the stories of profit are immense analytical skills that aim to find out whether a deal really is viable for a company.

Suffice to say, those that are able to successfully use these skills are the ones which boast the big balance sheets. Those that aren’t able to vet a deal successfully, won’t last within the industry very long.

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It’s because of this that we found an interview with Marc Leder really interesting. Leder, the co-CEO of Sun Capital, participated in an interview in which he was asked just what he looked for in those companies that he was looking at investing in. Here, we’ll take a look at some of his answers.

Factor #1 – The underachieving company

There are some private equity firms out there which will only target companies which are performing exceptionally well and making huge amounts of profit. This is all well and good but naturally, these companies cost astronomical amounts to invest in initially.

Instead, Leder looks out for those firms which are underachieving. Failing that, he’ll try and seek out a company which is clearly challenged and needs fixing to restore it to glory. The company could be struggling for a number of reasons; whether it is a lack of investment or poor management.

By taking on companies of this ilk, it means that they are cheaper to invest in but also, the potential rewards can be much bigger if they decide to sell in the future.

Factor #2 – Can operational expertise make a difference?

This is probably something which separates the experienced private equity group, from those that are just starting out. In the case of Sun Capital, this is the definition of experienced and for this reason holds a strong operational presence with some impressive individuals.

In the case of this factor, Leder has to see that the target company will benefit with these individuals at his disposal. Again, if the company is underachieving there’s a very good chance that they will make a difference, but Leder also has to see if his employees have experience in dealing with the problems and industry which they are considering.

For example, Sun Capital have invested in a lot of restaurants over the years. For this reason they possess fantastic experience in the field, meaning that they can instantly make an impact when they invest in a business in the industry.

On the flip side, if they don’t have experience in a particular niche, it makes it much harder to make a difference through that “operational expertise”.

Factor #3 – The existing management team

Finally, there is great consideration placed on the existing management team that is involved within the business. There has to be evidence that this team can quickly adapt to the new changes, so that both parties can collaborate and make that crucial difference.

Contrary to popular belief, private equity isn’t about a firm implementing a completely new management structure. While some individuals might be deployed to aid with management, on the whole it’s left to the existing team who already know the business and can probably make a difference in quicker speeds.