Introduction to private equity

Private Equity is another form of private investing in which funds and investors engage in activities such as buying and restructuring companies. These companies are also not publicly listed on a stock exchange. The investments usually come from institutional investors since a lot of money can be blocked for a long period of time. There are many advantages that private equity can offer. Investopedia lists some of them here. They range from easy access to liquidity, financing start ups, and can also serve as a non-traditional growth strategy.

Bain gives a positive outlook about the PE industry, claiming that 88% of LPs say that they want to maintain or increase their investments in PE firms in 2021.

DD survey defined

A DD survey also sometimes referred to as a due diligence Questionnaire or DDQ is a collection of questions designed to help a company analyze various aspects of a company when making an M&A or investment or partnership decision. Of course, there can be several other reasons for conducting such a survey such as vendor due diligence. Therefore, each survey will be uniquely designed according to the purpose of conducting due diligence. Note that a DD survey is just one part of the bigger picture of conducting due diligence.

Although there is no standardised survey, the Institutional Limited Partners Association (ILPA) provides a comprehensive and updated questionnaire for limited partners in a downloadable format.

Sometimes, a DD report can also be prepared including a concluding section that contains recommendations, findings, and areas of concern, if any.

If you want to read about how to run a B2B survey for due diligence the right way, check our recent blog post here.

How a DD survey for private equity can help investors

A DD survey for private equity is one of the most essential parts of the commercial due diligence process. That is why we explain below the reasons behind it.

1. Steer clear of potential reputational damage and financial loss

The private equity industry is characterised by high risks and rewards. As mentioned above, deals require significant amounts of money and usually last for longer periods. If the DD survey for private equity is not carried out and the deal doesn’t work out it can lead to significant reputational damage. On top of losing money, the private equity firm loses their image and trust.

2. Improve the quality of investor portfolio

A DD survey for private equity if done the right way greatly improves the quality of investments in a PE firm’s portfolio. Additionally, a DD survey for private equity ensures that investor’s choose those investments that align with their long term goals. By highlighting risks involved, there’s a chance that they can be corrected before money is put up. 

3. Obtain a clear view of the relevant operational and financial risks

Laven.com mentions an alarming situation of what can happen when a due diligence survey for private equity is not conducted. In 2016, Andrew Caspersen, a managing principal at at a private equity advisory firm called Park Hill Group was sentenced to four years in prison. He had invented a fake investment fund with false email ids and domain names as a way to funnel money. Ever since the scandal, professionals in private equity have been searching for how they can improve and ensure the process of due diligence. Therefore, we can see how important a DD survey for private equity is. It helps a firm understand and avoid operational and financial risks. 

4. Help in Fundraising

A DD survey for private equity is a crucial task to improve the  success of fundraising for General Partners. If DD surveys can swiftly get rid of under performing investments from consideration, the firm can focus its energy on better ones. Additionally, they can also enhance the performance of the private equity funds that they are already managing. If they build a successful record of consistently high-performing funds, it improves their chances to fundraise.

5. Which investments to choose and which to walk away from

Business Insider claims that the average private equity investor reviews 80 opportunities for every one investment. This is a huge investment and doing a DD survey for private equity makes it easier to weed out certain investments and go for certain ones. This also results in time and money savings.

6. High stakes

The private equity industry always has some degree of uncertainty as well as high stakes. Large amounts of money can be stuck for a very long time with no recourse. A DD survey for private equity eases some of those risks and reduces uncertainty. If investors see a lot of red flags in an investment, they can avoid it and save themselves from loss. 

If you’re lost and don’t know what to include in a commercial due diligence survey for private equity, here are some questions to consider

• How many managers are likely to be involved in the fund?
• How much reliance is there on non-public information when selecting investments?
• When a manager buys a company or an investment, how long is he aiming to hold it?
• How can the fund’s investment duration be lengthened? Is it by a vote by LPs or only by the manager?
• How does the manager plan to add value to a portfolio company?  
• What is the manner of investing cash balances and who has the authority to approve transfers of funds?

If you still need guidance, we are here to help. At Grapedata we conduct a lot of DD surveys for private equity. GrapeData is a Tech enabled survey solution that specialises in B2B panels for commercial due diligence with a focus on hard-to-reach populations, such as decision-makers in B2B and niche B2C, in over 90 countries. We have over half a million contributors on our platform.

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