Training · PE-1 · Lesson 03 of 08
The new investment process
The rule
Screening, letter of intent, diligence, then investment committee. Most deals die in screening, and the ones that survive are the ones where diligence confirmed the thesis rather than discovering it.
Sourcing
Deals come from banks running auctions, from proprietary relationships with owners, and from add-on opportunities for existing portfolio companies. Proprietary deals can be cheaper but are rarer; auctions are efficient but competitive.
Screening and first look
The team reads the teaser and confidential information memorandum, builds a quick model, and decides whether to submit a first-round indication of interest. Most deals die here: wrong size, wrong sector, unrealistic seller expectations.
Diligence
After a non-binding bid wins a place in the second round, the team gains data-room access and management meetings. Diligence covers commercial (market, customers, competition), financial (quality of earnings), legal, tax, IT and environmental workstreams, often with outside advisers.
- ·Commercial diligence: customer calls, market sizing, competitive position.
- ·Quality of earnings: adjusts EBITDA for one-offs and accounting choices.
- ·Legal and tax: contracts, litigation, structure.
Investment committee
The deal team presents a memo with the thesis, valuation, financing, returns under several cases, key risks and mitigants. The committee probes the downside. A typical bar: base case 20–25% IRR and 2.5–3.0x, with a downside that still returns capital.
- Upside
- 32% IRR / 3.6x
- Base
- 23% IRR / 2.8x
- Downside
- 9% IRR / 1.5x
- Severe downside
- 0% / 1.0x
Signing and closing
With approval, the firm submits a binding bid with committed financing, negotiates the purchase agreement and closes after regulatory approvals. The associate coordinates lenders, lawyers and advisers and keeps the model as the single source of truth throughout.
Hold onto this
- ·Build the model before the letter of intent so the price is a decision, not a reaction.
- ·Diligence tests the three assumptions that move value most, not every line in the data room.
- ·The investment memo argues both sides; the memo that only argues yes is a warning sign.
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Education, not financial advice. Figures may be simplified for illustration.