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Considering investing in private equity projects? These are the key questions to ask before you sign

By | October 31, 2017

Looking to invest in a private equity project? Kristen Buik explains that if you are considering this type of investment, there is a level of due diligence that you should undertake before committing any funds.

Private equity

Questions to ask could include:

  • How does the business/investment work? If you don’t understand it, don’t do it.

  • Be confident that the person promoting can explain it clearly. If they can’t, be curious because it may mean that either they don’t understand it or they are hiding something

  • Is the business case realistic? Be confident that the business and financial assumptions made are realistic

  • Are time lines realistic? What happens if delays occur?

  • Have allowances been made in the financial assumptions to allow for contingencies?

  • What happens if bank support ceases?

  • Are contracts signed and executable?

  • What risk management strategies are in place?

  • What is my target return on investment (“ROI”) and does this investment measure up? Acceptable returns vary across different investments

  • Bank/term deposits – low ROI due to low risk (2-5% per annum)

  • Property/Shares – medium ROI due to higher risk (5-15% per annum)

  • Private equity/loans – high ROI due to high risk (20-40% per annum)

  • Is this an income or growth investment?

  • How do you get out?

  • How do you sell and who are the buyers?

  • How long is the investment for? Is it long term or short term?

  • In what form will your capital be invested? Different types of investments have different risks. You need to understand if it is in the form of shares or in the form of a loan?

  • What voting rights do you have? How does the investment fit with your overall strategy and goals?

  • Who is the management team in charge of the project? Have the management team invested personally?

  • Do they have a good track record in business?

  • What other projects have they run/managed?

  • What influence or control do you have over the appointment of that team?

  • For smaller projects, who are the other investors and how much are they investing to support project? Do other investors have capacity to support the project with additional funds if required?

  • Do they have expertise to manage the business if required?

  • What is the worst-case scenario? What happens to you personally if projections or assumptions are not met?

  • What impacts are there on you personally if business folds and loses money?

  • Is this a risk you need to take?

    Looking for more help with investments? Contact Altitude Advisory by clicking here.

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