by Brian DeChesare Comments (55)

From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 2 – The Deal?

From Cold Call to Closed Deal: How a Private Equity Investment Comes Together, Part 2 – The Deal?“No, no, and no again,” shouts John, the Founding Partner.

“This is a crap deal in a tiny market with a Founder who wants to leave in 12 months? She stays, or we don’t even take another look at this. This business is worth $0 without her.”

David jumps in before you can say anything.

“We don’t know how serious she is about leaving. And don’t you think the LPs might like seeing a new industry that we haven’t invested in before?”

“Are you crazy?” John blurts out, “The problem is that she doesn’t know what she’s doing, which is much riskier than if we knew for sure, either way. And there’s no way the new Limited Partners will get behind this – they know jack about technology and don’t feel comfortable with the industry.”

“You realize she’s willing to sell at a 50% discount, right? We could still get a solid return.”

“50% of $0 is $0.”

Everyone turns to David, waiting to see what his next retort will be.

But he comes up with nothing and sits there with his hand to his chin, tapping his index finger on the table and waiting for another response from John.

“If no one has any other business, this meeting is over. Back to work.”

As everyone else shuffles out of the conference room, you sit behind and wait for David to leave first. He rolls his eyes at you and leaves without saying another word.

Meanwhile, on a Yacht…

Nancy, CEO of IonX Solutions, stands silently on the deck looking up as James, her new business partner, shouts orders at the crew below.

“So, James,” she says, “I’ve been thinking of what role I could take on at your next company. I’m happy to continue as CEO, of course, but I’m open to other…”

James cuts her off before she can finish.

“Yeah, I’m not so sure about that anymore. It was just an idea, I didn’t think you’d take it seriously.”

Nancy opens her eyes wide. “What? But you know I’m selling IonX to go do this with you, right?”

James chuckles and fires back, “Oh, really? So who’s the buyer? No other company would buy it, and no investor in their right mind would buy it if you left. They’d make you stay or they’d never invest.”

Nancy turns her back to him and gazes at the ocean. Still facing away from James, she speaks up once again.

“They’ve agreed to let me leave in exchange for a lower price. So I’m moving on and joining you as soon as the sale is done.”

James laughs and casts a smirk across his face before he replies.

“Yeah, I’ll believe that when I see the money in your bank account,” he challenges, “Besides – even if I wanted to give you a position here, fundraising is taking forever in this market and investors don’t seem interested.”

“Then I can invest with the proceeds I’ll get from the sale of IonX. I’ll move this forward even if no one else wants to.”

James looks down at his Blackberry, dashing off a few quick messages and pretending not to hear her. Then he looks up and walks over to Nancy, gently resting his arm on her shoulder.

“If anything changes, we’ll be in touch.”

Back to the Grind?

You’re about to start cold-calling once again, when the phone rings and you hear a familiar female voice.

“Hi, it’s Nancy from IonX,” she says meekly, “I just wanted to call you back and let you know that I’ve decided to stay on as CEO. And I still want to sell, so could you let me know what information I need to send you guys?”

Due Diligence

News of this reversal has spread around the office, and others are wondering why you’re spending so much time on a clunker of a deal when there are so many… promising companies to cold call.

But as long as no one else is putting in the hours, they’re not telling you to stop.

You’re requesting everything imaginable from Nancy and her management team: historical financial statements, customer data, sample customer contracts, and a lengthy list of IP for the lawyers to sort through.

And you’ve made some discoveries that might just get this deal done – if someone at your firm will listen to what you’ve found.

Just as you’re about to get started creating 5-year projections for the company, David once again walks into your office unannounced.

“So what have you got for me?”

“Well,” you say, “It’s around 70% recurring revenue, so even if Nancy gets hit by a bus and all their sales reps jump off cliffs, revenue only falls by 30%.”

“That’s great,” he replies, “So there’s a significant chance of the company losing 30% of its value. Good to know for the investment committee.”

“They’d love 70% recurring revenue with any other company.”

“Yeah, except no other company has a Founder with more mood swings than a teenage girl.”

“Her mood could also swing us into a big discount.”

David sighs, puts his hands in his pockets, and walks over to gaze out the window in your office, facing away from you as he responds.

“Some people here are… starting to have doubts about what you’re doing. They wonder why you’re pursuing this. And with the new fund in place, we’re also bringing a new associate on-board so we have more… resources.”

Your eyes widen as you respond, “So now we’re getting a new associate after we no longer need the extra help?”

“I hear he’s very well-connected,” David explains, “And that his father travels in the same circles as some of the new LPs.”

“Is this a warning?” you reply, standing up and facing David as he turns around and meets your eyes with his gaze.

“Not at all,” he denies while smiling at your sweaty hands, “Just a courtesy call. And do make sure you say hi to Martin when he starts here next week. I think that’s his name, anyway.”

Partner Approval?

The Partners are assembled around the table, and you’re standing in front of them navigating through all the slides you’ve created for IonX. The lights are dim and you wonder if anyone will doze off before you reach the climax of your presentation.

“Even with conservative assumptions,” you reassure them, “We can get a 25% 5-year IRR because the margins are so high. And if she sells at a higher discount, we might get closer to 30% returns.”

You pause on your returns analysis slide while everyone else squints and stares at your work, looking for the hole that will sink your investment recommendation.

“You’re assuming a 10% growth rate each year, how can you possibly call that conservative?” John, the Founding Partner, questions.

“They’ve been growing at 15% the past few years and have 70% recurring revenue from long-term contracts with customers. So it’s not as if they need to go out and sell to completely new customers each year… and the market is only around 25% saturated at the moment, so there’s plenty of room to grow.”

“What happens when that growth rate drops to 5%, though?”

“We could still get 15% returns even with that, if you look at this sensitivity…”

David cuts you off before you can say anything else.

“Forget about these imaginary growth rates, let’s talk about your exit assumptions. Who do you think will even buy the company in the first place, and why would they pay 7-8x EBITDA for this business?”

You flip to your next slide and start to go through recent software M&A deals, pointing out that some multiples have been above even 10x – but that doesn’t satisfy David.

“How can you call those deals ‘comparable’? They’re all much larger companies with at least $100 million revenue in broad markets. That’s like saying a date with your buck-toothed sister is the same as hooking up with Scarlett Johansson.”

Now you’re starting to regret introducing your family to everyone at the last holiday party. But a personal attack deserves a rebuttal.

“Even if you lower the exit multiple to 5x we could still get a 15% return – and higher if we get that discounted price.”

Everyone turns to David and he and John glance at each other, waiting for the other one to speak up first.

“The numbers look decent and it’s not the worst deal I’ve ever seen, but we need to understand the market and the potential buyers better,” John concludes.

Deal or No Deal?

Back in your office, you flip between your YouTube window, your inbox, and the spreadsheet of companies you need to follow-up with.

You hear your door crack open and you get ready to feign stress in case your favorite visitor walks in once again, but it turns out to be someone else scurrying by.

In the clear, you call Nancy back.

“Hi there,” you start out, “Good news for you: the Partners here are much more interested now, and we’re ready to move forward if we can get some more information from you.”

“That’s good,” she replies in a monotone voice.

“Is something wrong?”

“You’ve been asking us for lots of information, and it’s a huge distraction for my managers. They’re starting to wonder what’s going on and if the company is being sold, and I haven’t even told them anything yet.”

You slide open your desk drawer and pull out your stress relief ball, squeezing it a few times before you start to toss it up and down.

“I understand,” you answer, “But that’s just how our business works – we can’t invest in or buy a company without doing our due diligence first. I realize it’s a distraction, but when you work with private equity firms…”

“Just tell me what else you need. Let’s get this over with.”

“We need to know more about the market and what other companies have been acquiring lately – we’re new to this industry and haven’t been able to find much data…”

“Isn’t it your job to find data? What else do you do all day in those spreadsheets?”

You toss the ball across the room, hitting the window with the full force of your throw.

“Sorry about the noise, someone just walked in,” you lie. “Yes, we do have data. But you’ve been in this market 10 years, so you probably have more data.”

“OK,” she says after a long pause, “But I’m getting less and less confident about this deal and I’m not sure how much longer I can keep my managers in the dark. I hope this doesn’t fall apart because of you.”

“Limited” Partners?

Meanwhile, the LPs are growing more disillusioned by the day. The Partners had gone around raising a new $750 million fund a year ago because they claimed to have found so many new opportunities.

But since then, the market has taken a nose dive and no one wants to do deals – and the LPs are wondering why your firm is letting so much cash sit there unused.

Technically, the LPs don’t have any say in the management or operations of your firm (hence the “Limited”), but they still look at your investments and may choose not to invest again if they don’t like what they see.

John calls David into his office for a quick chat.

“They want to see something from us soon,” he offers up, “And I want to see something from you soon.”

No closed deals and no exits in 3 years – if that wasn’t a slump, what was?

David pulls out his list of prospects and runs down it from the top, explaining why each one might be a great investment.

“That’s nice,” says John with a smirk, “But you know as well as I do that all of those are at least 9 months away, even if we jump into due diligence right now. You could get pregnant and have a baby in that amount of time.”

David wipes a bead of sweat off his forehead and continues looking down at his list before placing his hand on his chin and looking up at John.

“Then the only other option is IonX,” he admits. “Not exactly the bombshell we want, but at least it will show we’ve made some progress and aren’t just resting on our laurels.”

“Who’s the buyer? And how do we convince the pension funds to go along with this?”

“There are more buyers than I can count,” David retorts, “All we do is flip it to another firm and pitch it as an add-on acquisition – here’s a list of all the funds that have been active with consolidation.”

John puts on his reading glasses and looks at the list, and then lets his eyes wander over to the missed call list on his phone from the eager LPs.

“And I suppose you have a magical list of better comps in the space as well?” he lets out with a laugh.

“Right here,” David replies, presenting the data to John as if he were awarding him the Nobel Prize.

John looks through the stats and pauses for a few seconds at the bottom of the list before looking up at David once again.

“Good data,” he says, “But I wonder: how did you get this on short notice, and why are you now suddenly in favor of this deal?”

Say What?

As you’re poring through the data Nancy has sent over and double-checking all your assumptions in the model, David walks into your office for his 3rd unannounced visit in the past week.

“Good news,” he chimes, pulling out your chair and sitting down with his arms propped up on your desk.

“John’s behind this now, and so are the rest of the Partners. We’re going ahead with the deal and will start bringing in the accountants and lawyers and negotiating the agreement.”

Your mouth drops open as you squint at him for a few seconds, searching for the proper words.

“So… um… what exactly changed? They seemed not to like the market or the potential buyers…”

David cuts you off, waving his hand in your face.

“It’s not an issue – we have enough data on the market and everyone’s comfortable with the numbers.”

“So you just happened to conjure up the right data to convince John that this is a solid idea?”

“Of course not,” David says, leaning back in his chair and folding his arms against his chest.

“I called Nancy myself and told her that all the Partners were committed to the deal now. She just needed someone a little more… senior. And some… reassurances. Once she had that, she was happy to hand over all the data.”

You look down at your desk drawer, searching for your new Eggshell with Romalian type business cards. In case David whips out his Bone with Silian Rail set, you have an ace up your sleeve.

“Well, that’s great news,” you lie, faking a smile and sipping from the Red Bull can on your desk. “Just let me know what else I can do to help.”

David stands up and walks toward the door, and then turns his head around to face you once again before leaving.

“Oh, I will. We’re bringing in all the troops now, so you’ll have to coordinate that. And by the way, performance reviews and bonuses are coming up in a few weeks – hopefully you’ll do better than the new guy! You have said hi to Martin, right?”

The Rest of the Series:

Check out parts 1 and 3 below in case you missed them:

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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  1. Hi,

    I’m going to be a senior at a non-target school and I have an internship this summer at Northwestern Mutual. The position is titled wealth management intern. I have been doing a lot of research and have found that most people are saying the financial representative internship at Northwestern Mutual is not worth it.

    Do you know if the wealth management internship is a good one? I don’t have any prior experience in the finance industry and I want to break into it. What would you recommend I should do next? I want to line up some semester internships next for my senior year. Where would you suggest are good to apply to help break into this industry?

    1. Avatar
      M&I - Nicole

      If you don’t have other internships on hand now, I’d suggest you to take the internship. If wealth management is something you’re interested in, you may want to check out the CFA. You may want to look at wealth management firms around your area. You may find somewhat relevant to your interest.

      1. Thanks, that was helpful!

        Just a quick question, is the CFA required if I want to go into PWM or asset management?

        If so, when do most people start taking Level 1?

        From what I have seen there are mixed reviews on how beneficial it can be? Would you suggest to take it to break into either PWM or asset management?

        1. Avatar
          M&I - Nicole

          A CFA is not required for some roles, while other roles require candidates to have a CFA so it depends on the interviewer. However, if you want to do PWM or AM, having a CFA is definitely a plus. People usually take level 1 when they first start working. No, I’d probably take it while you already have a job. If you’re experienced and choose to do PWM/AM, then its best to start doing the CFA as soon as you can assuming you have the time.

  2. I’m sorry but although this was entertaining, I work in PE and it is NOTHING like this. We don’t source or get involved in fund raising as we have dedicated marketing teams for that.

    Also why is the firm doing so badly? Sounds like the worst firm possible.

    1. It’s a story. It’s intended to give a flavor of what the finance industry is like. If it were 100% accurate it would be so boring you’d want to jump off a tall building.

      And plenty of firms struggle… just think about all the firms and funds that go out of business, especially in a poor economy.

      1. It seems is plenty of tall building where you live because it is always your favourite choice of suicide! NYC? :)

  3. Brian, you should write a book.
    I’ll buy both e-Book and Hardcover.

    1. Haha thanks for the suggestion – we’re actually turning this into a web series, so you’ll get to watch it in film format very soon! I enjoy writing screenplays more than novels.

  4. Could you do a post on climbing the career ladder in private equity? If you look at the websites of many firms, you will see a large number of pre-MBA associates, and only a few post-MBA senior associates, vp’s, etc. Clearly, a lot of people who are working in private equity pre-MBA are not able to stay in the field after business school. What are the typical destinations for all those people who can’t stay in the industry? Surely not a return to banking?

    1. I’ve thought about it but would need to interview someone closer to it / someone who actually climbed up the ladder. Generally you cannot return to banking easily, it’s either stay in PE, move to another firm, or go to portfolio company.

      1. Thanks for your reply. That would be an interesting story. If you look at the websites of many PE firms, about half the investment team is made up of pre-MBA associates. I just don’t see how it is mathematically possible for all, or even most, to work in private equity for the long-term.

        1. They don’t – most leave or get forced out, hence the pyramid structure and up-or-out.

  5. Avatar

    I need my next fix!!! When is the third part coming out???

    1. A few weeks, it’s already written but I’m tied up with a crazy schedule and a few other things + want to publish a few other commonly requested topics in the meantime

      1. Avatar

        FYI: the comment was merely a compliment, take your time :))

        1. Avatar

          Dear Brian,

          One more thing: If I am not mistaken you offered successful Anex Advantage Candidates free access to your the advanced financial modelling unit. Is this offer still up?

          Kind regards

          1. Yes got your email before we will respond shortly

  6. Hi,

    When PE headhunting starts (December or January) atleast for the mega funds, is it usual to ask them for applying to an international office? If yes, then how would you suggest approaching this situation? Thanks!

    1. Not sure about that but I would just ask them directly upfront.

  7. Hi, would you please do an issue on Series 79? I am starting in July, and the company informs me to take the exam after 3 days of training. Is it a difficult exam?

    1. I hate exams and would rather jump off a cliff than write about the Series 79, so no. But it is more difficult than you expect, see the recent article on summer training for tips.

  8. Hi Brian,

    great posts and stories!!!
    I love your site and respect your hard work and valuable information.
    Looking forward to hearing from you soon!!!

    1. Thanks got delayed on applications but will reply soon

  9. Hi. I asked this on another thread but figured this was the more recent so you would probably check this one sooner.

    This question applies to top tier hedge funds. I am currently applying to top MBA programs in an attempt to move careers from M&A advisory at an accounting firm (which I will have been at for two years) to leverage my way into a hedge fund. I have passed the first level of the CFA and will hopefully have the 2nd level out of the way before B-school. Will going to a school like these give me a legitimate chance to make it in with a a CFA if I have no prior asset management experience. Looking at these business school websites, their average salaries for graduates in hedge funds is around 115k, would I be able to expect these offers with my background (being 27 with no prior experience)? I know its a very subjective question, but assuming I do the things necessary to put myself in the situation…

  10. Hello,

    On another note, what do you believe are the best books on valuation?

    1. Investment Banking by Rosenbaum and Pearl. It’s literally a text book though, so don’t expect stellar reading.

  11. Great story, very accurate. I work in PE and I still dont get why these kids cant understand the “cold calling aspect”…like its hell on Earth.

    1. Its not ‘really’ cold calling, you arent bothering a housewife at dinner to sell her life insurance. You are calling to speak with CEO’s while they are at the office to discuss their strategic growth options (or other depending on strategy) for their company.

    2. Is starring at Excel all day better? Ya, because “modeling is SO fricking fun!” Or how about formatting power points?? Seriously? If you take the time to look at the big picture wouldnt you much rather enjoy being a dealmaker/ origination and relationship manager? Talking to business owners and CEO’s all day long about strategy?

    You do realize that is exactly what MD’s in IBD do RIGHT?

    1. It’s all boring. That’s why I had to make this story about the characters rather than Excel, otherwise I’d just jump off a tall building.

      1. LOL…good choice!

    2. Fair enough. I guess when you put it that way it changes my perspective. A lot of us “kids” have had terrible cold calling internships that have scarred us for life, lol.

  12. I just found your sight and have a dumb question. Are entry level positions at hedge funds called equity research analysts?

    1. Usually just analysts

  13. Hi,

    Do you have any insight on the amount and quality of work that the major PE firms are doing in India? Is working in PE in India in a Carlyle or KKR worth it? Thanks!

    1. I would assume poor based on how they’re doing in China: so probably not a great idea, not 100% certain though

  14. Great post as always, I thoroughly enjoyed it. Although I have to ask, why is PE the pinnacle career? I know this is a fictional story, but its based on truth. Cold calling prospects in the hopes of getting lucky and getting grilled by associates? May as well work at Northwestern Mutual…

    1. Again, this is not 100% representative of what you do. It’s intended to give you a flavor of the industry. It is true in the sense that the work is really not glamorous at all, though. Why do it? Well, where else are you going to make $200-300K by calling people and doing Excel?

  15. You definately should try publishing a book, fiction ofcourse. I would also appreciate it if you could tell us what its like for analysts at mega-funds

    1. We are actually turning this into a screenplay / series of scripts and a web series as I like video more than books. For analysts at mega-funds it is very boring because you just do a lot of modeling grunt work all day – not as much sourcing or interaction with management.

      1. Thank you.Looking forward to the screenplay

  16. This was fantastic! Can’t wait til number 3..

    Had a question though, do PE analysts really need to cold call? The reason I am asking is because I am currently interning at a PE firm and they seem to get 10-20 Informational Memorandums a week.


    1. There’s almost always some element of cold calling / sourcing unless you’re at a mega-fund – yes, you do get IMs from bankers but the best deals are the ones that are the most difficult to find. If bankers are shopping it around, it’s probably not that great a deal.

      Sometimes they happen anyway, but at many firms you are expected to go out on your own and find companies.

      It’s exaggerated here for dramatic effect (they probably wouldn’t get that annoyed just because you didn’t call enough places), but you are indeed responsible for at least some sourcing at many firms.

      1. Oh I see, Thanks for the reply.

  17. Ha, this is great (and pretty accurate)!

    1. Hah not sure about the accuracy, if it were truly accurate the story would be quite boring (had to insert more drama), but it definitely gives a flavor of PE.

  18. Why do people want to go into private equity is the same as investment banking ? How do you people expect to enjoy that money when you are working non-stop. Most of my friends who had any sanity left these jobs within a few months. I don’t care if you got money, if you can’t spend it and enjoy it you are no better off than someone on welfare except someone else not your economic situation is your master.

  19. Hmmm…maybe reading this series will make people think twice about PE being the best exit opportunity.

    1. Hah, people believe what they want to believe, it’s impossible to change peoples’ thoughts about anything. I’m doing this more for my own amusement and to turn it into a production later on, and to give readers a flavor of what it’s like in the industry.

  20. Avatar

    Love it again, thanks alot!

    1. Just wait til part 3!

      1. Avatar

        Don’t let us wait to long! ;)

        1. Yeah next 2-3 weeks. It’s actually already finished but might make a few changes.

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