Let’s Learn Why Private Equity Due Diligence Is So Important

 

Have you ever heard the phrase, “I’m all about my business”? You probably have, and you probably already know that it means, in a nutshell, that its speaker is honest, straightforward, and doesn’t play proverbial games.

 

Fewer people are familiar with the term “due diligence,” though the two phrases virtually mean the same thing. Someone who is about their business almost certainly exercises due diligence out of virtue.

 

Due diligence something every human alive needs to grasp the concept of. Without going into extensive detail akin to a college textbook or entry in an academic research journal, here’s a short explanation of why due diligence is so necessary for living responsibly, acting with maturity, and otherwise being an adult.

 

What exactly is private equity due diligence?

 

Corporate Resolutions postulates that due diligence is an important concept in both business and law, though it applies to virtually everything in life. First, let’s look at two examples of due diligence used in simple sentences, then we’ll cover the items making it so important and why due diligence is especially important for investors – specifically private equity investment firms – and businesses when they’re hiring a top-tier manager or executive.

 

The pedestrian failed to exercise due diligence before crossing the road by not looking both ways.

 

Our company fired our last investment management firm because they threw all of our capital into a business that busted within months of initially placing the investment; if only they exercised due diligence like any other group of professionals would have.

 

What is a private equity investment firm?

 

Let’s get this out of the way – it’s not like private equity investment firms are everyday things, anyway. Private equity investment firms are allowed to pick and choose what investors it manages the capital of because they’re not public companies – a public company is one that trades its stock on exchanges, effectively allowing anybody with ample money to purchase them.

 

Whereas most investment firms place investors‘ capital into traditional investments like financial instruments – stocks, bonds, and options for example – real estate, or commodities like gold and corn, private equity investment firms restrict their scope of investments strictly to purchasing limited shares of various companies; by definition, these firms purchase less than 50 percent of all outstanding shares of such companies so they don’t have ownership of them – they simply maintain a stake in their operations.

Making a link between due diligence, investments, and hiring

 

Traditional investment management groups are able to look at financial statements and stock price history to determine the appropriateness of an investment. However, the companies private equity firms invest in almost never have audited financial statements. As such, they must thoroughly vet every claim such companies make to ensure investing in them is a good idea.

 

Another example of exercising due diligence is in hiring a new chief executive officer. If companies that are hiring don’t thoroughly vet potential new employees – especially ones that lead those companies – they can literally go out of business. Due diligence is obviously important in such a situation.