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The Role Of A Private Equity Associate In The Investment Process

Private Equity Associate

Private equity associates play a key part in the investment process, and understanding what exactly that role entails is crucial for landing a private equity job and then (more importantly) thriving as an investment professional.

As a starting point, you must first understand how the private equity investment process works as a whole. Typically, ideas are sourced at the senior level. This can take shape in a variety of ways: ideas may be presented from investment banking relationships, industry connections, or sourced independently (so called “proprietary deal flow”) based on companies, sectors, or thematic investment ideas that private equity firms have been following and developing over long periods of time.

Next, the deal team will go through the due diligence process. The team will typically consist of a number of individuals, ranging in seniority, each with different responsibilities in the diligence and investment processes. For example, a deal team might consist of an associate, vice president, director, or managing director, and a partner who typically is responsible for coverage of an entire industry vertical and maintains connectivity with the firm’s investment committee, or “IC”. The goal of due diligence is to assess the investment opportunity and present findings to the investment committee with a recommendation on how to proceed.

Generally speaking, the private equity associate is responsible for all quantitative analysis, financial modeling, certain parts of business or operational due diligence, and putting together the investment memo and model for presentation to the investment committee. The mid-level private equity investors (e.g., vice president and director) are more likely responsible for overseeing this process (such as providing guidance and feedback on the creation of the investment memo) as well as overseeing important relationships with third-party advisors.

As an associate, it is important to understand the role of third-party advisors in the private equity investment process. This almost always includes consultants, lawyers, tax advisors, etc. and in specialized cases can include more niche experts such as environmental investigators or compensation and recruiting professionals. While the associate is usually not responsible for managing these relationships, the associate will be expected to interact with these advisors on a near-daily basis to provide them with necessary information, incorporate their feedback into the relevant modeling and analytical work, and relay any important conclusions to the rest of the deal team.

The associate’s work will generally start by going through the “data room”. This is a secure site (back in the day, this was actually a physical room) where the target company and its investment bankers put together key information about the company and its operation. This includes a wide range of information such as audited financial statements, copies of key commercial contracts, debt documents such as credit agreements and leases, as well as any other information that private equity firms might need to complete their due diligence process. As an associate, you will be responsible for going through the data room to identify any and all key pieces of information that might be relevant to the investment process. This will include reviewing historical financials as part of putting together a financial model and forecast, as well as pulling key documents that you’ll need to share with third-party advisors. For example, you will likely need to pull commercial contracts for your legal advisors to review, as well as relevant tax and financial documents for your accounting and tax advisors (such as those who may be putting together a “quality of earnings” report). To the extent there are additional documents your team may want that are not posted in the data room, you and the vice president may work side-by-side to coordinate with the company and its bankers to request additional information.

Next, the associate will be responsible for running the LBO model to forecast the returns of the targeted investment. At first, this may just be a formulaic exercise using projections provided by investment bankers in the confidential information memorandum (“CIM”). Throughout the investment process, however, this can become exponentially more complex. The associate will be responsible for updating the model to reflect evolving financing and due diligence expectations. For example, this may include revising the transaction structure to include the latest financing assumptions based on conversations with internal capital markets professionals or leveraged finance bankers. It may also include building various forecast cases and operating scenarios to reflect cost growth opportunities or cost take-out initiatives identified by third-party consultants.

Once the initial memo and model are completed, the deal will be presented to the investment committee. Generally, the senior-level executives will do most of the talking at IC, but as an associate you should be prepared to answer any questions that come up about specific quantitative figures or the model. After the initial IC, you’ll likely go back and update the model for questions that may have come up at IC (e.g., how do our returns change if we do a dividend recap, or what if we allocate half of our free cash flow each year to M&A?). As mentioned earlier, this may involve going back to the company and its bankers for more information.

Ultimately, if a transaction proceeds to close, the associate will be responsible for many of the administrative tasks associated with closing. This includes putting together a “funds flow”, which mandates how all of the funds associated with the transaction move between parties (from the private equity firm to the company, from the company to its old lenders, from new lenders to the company, etc.) At this point, the transaction is done! But as you’ll soon find out, this is where the real work begins.

During ownership, the associate will be responsible for monitoring and summarizing ongoing financial performance as well as working alongside management in evaluation of key financial initiatives. Some portfolio companies (particularly at larger firms with larger investments) will have developed internal financial capabilities; at smaller firms, portfolio companies may have minimal internal financial capabilities and rely heavily on the private equity firm (and the associate) to lead financial analyses such as the financial forecasting or the evaluation of new M&A opportunities.

As you can now see, the associate plays a vital role in the private equity investment process. The associate will be responsible for putting together all of the key quantitative analyses that decision makers are using to inform investment decisions – in many cases, these are decisions with billions of dollars of consequences. Make sure to double-check your work!

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