Are you are considering investing directly with a private equity manager? If you opt to go direct, you will be tasked with selecting, managing and disposing the assets entirely on your own. It may be useful to review some of Commonfund Capital’s manager selection guidelines to help formulate your approach.
How strong is the manager’s senior team? These individuals will play critical roles in the underlying portfolio companies in which they invest, so top-notch talent is key. How is the next generation of the firm’s leadership developing? Does the firm have a culture of both excellence and ethics—caring not just about results but how results are achieved internally and externally?
Investment strategy ﬁt with your portfolio
Does the manager have a differentiated and well-articulated investment strategy? Is the manager a niche player, sector specialist or generalist? Is there a particular focus on industry, stage or deal size? Where does the manager’s strategy fit on the risk continuum, and does it make sense for the future? Does the potential return pattern fit with your institution’s tolerance for risk?
Prior track record
How have previous funds fared? Who is responsible for past performance— current or departed personnel? Verify and analyze the manager’s reported results.
Do the principals of the management firm have their personal funds at stake in the partnership, thus assuring alignment of interests between the manager and investors? How “hungry” is the manager? How is the general partner’s compensation—the asset management fee and share of profits (also referred to as carried interest)—computed and shared? Does the firm’s leadership focus more on fee income from larger fund sizes or on carried interest from investment success? What other fees does the manager earn?
Deal sourcing and due diligence capabilities
Is the manager able to select the best deals from a high volume of quality opportunities and not overpay, and/or does the manager create their own proprietary deals? Does the manager have the resources to conduct thorough due diligence on potential investments? Are such resources in-house or are they tapped into externally through consultant contracts?
What are the history, values, vision and size of the firm? How cohesive is the team? How long have the partners worked together? Do they promote an inclusive environment internally and within their portfolio companies?
Ability to add value to portfolio companies
Does the manager have the ability to add value through close working relationships with portfolio company CEOs, senior management and boards of directors? How has the manager worked with portfolio companies to optimize functions such as sales, marketing, finance, distribution, operations, human resources and other key areas?
What is the ability of the manager to find strategic and financial buyers for portfolio companies or take advantage of public markets? (This is similar to a public equity manager’s “sell discipline.”)
What is the general partner’s approach to distributions to the limited partners? If they have distributed stock, was it possible to exit at or near the distribution amount?
What is the overall quality and timeliness of the manager’s financial reporting? Is the level of information sharing adequate for due diligence and monitoring? What is the quality of Web information? How easy is it to obtain standard or custom information?
Building and managing a high-quality private equity portfolio requires a significant commitment of resources and time. But, it can also prove to make an important difference to the returns of a portfolio and contribute to the mission of your organization.