Continuing my series of posts on the basic information you need to stand out at interview for a PE role (previous ones have covered valuations and GP/LPs), this is an overview on the role of the Investment Committee (AKA: the IC).
While a deal team will be responsible for doing the work of putting a transaction proposal together within a PE firm, the IC acts as the decision-making body which will test all the deal team’s assumptions and will probe for weaknesses in their arguments before signing off (or not) on the transaction. As such, IC meetings can be a gruelling ordeal for deal team members who need to be well prepared and confident in their arguments to avoid potential humiliation (which, of course, is not great for career progression).
An IC typically consists of senior professionals within the firm, including managing partners, senior investment executives, and subject matter experts. Ideally, the committee members bring diverse expertise, industry knowledge, and investment experience to the table and their insights help in assessing investment opportunities from different perspectives and ensuring a well-informed decision-making process.
The deal team responsible for the potential investment prepares a detailed investment thesis, including financial projections, risk assessments, and strategic rationale. This presentation serves as the basis for discussion and debate within the IC. It may require several IC meetings before the members feel that they have all the information required to make a decision.
The IC should cover issues including financial analysis (projected returns, exit strategies, and potential risks), the target company's management team, its competitive position, growth prospects, and market dynamics. They also evaluate the alignment of the investment opportunity with the firm's investment thesis, strategic focus, and overall portfolio diversification.
Other factors, such as regulatory considerations, environmental, social, and governance (ESG) criteria, and industry trends, are increasingly important in the decision-making process.
Ultimately, the committee votes on whether to proceed with the investment, considering the consensus of the committee members and the firm's investment policies. Some IC’s require unanimity to proceed, others will decide on a majority vote.
A well-functioning IC is integral to the success of a private equity firm. Of course, not all are well-functioning – this is a genuine quote describing of the opposite of how an IC should be conducted:
“More or less a joke where one partner tries to justify his deal to the other partners and advisors. It's really nothing more than a formality. The investment memo itself is obviously important, but the discussion typically deviates from the memo or it focuses on a singular point for an overly long period of time. I'd like to think this is because every investment committee member has spent at least a few hours studying the memo, but my cynicism leads me to believe that's not the case”.
If you find yourself working – or on an internship – in a PE firm where the IC fits this description, you may want to start looking for a job elsewhere!
While a deal team will be responsible for doing the work of putting a transaction proposal together within a PE firm, the IC acts as the decision-making body which will test all the deal team’s assumptions and will probe for weaknesses in their arguments before signing off (or not) on the transaction. As such, IC meetings can be a gruelling ordeal for deal team members who need to be well prepared and confident in their arguments to avoid potential humiliation (which, of course, is not great for career progression).
An IC typically consists of senior professionals within the firm, including managing partners, senior investment executives, and subject matter experts. Ideally, the committee members bring diverse expertise, industry knowledge, and investment experience to the table and their insights help in assessing investment opportunities from different perspectives and ensuring a well-informed decision-making process.
The deal team responsible for the potential investment prepares a detailed investment thesis, including financial projections, risk assessments, and strategic rationale. This presentation serves as the basis for discussion and debate within the IC. It may require several IC meetings before the members feel that they have all the information required to make a decision.
The IC should cover issues including financial analysis (projected returns, exit strategies, and potential risks), the target company's management team, its competitive position, growth prospects, and market dynamics. They also evaluate the alignment of the investment opportunity with the firm's investment thesis, strategic focus, and overall portfolio diversification.
Other factors, such as regulatory considerations, environmental, social, and governance (ESG) criteria, and industry trends, are increasingly important in the decision-making process.
Ultimately, the committee votes on whether to proceed with the investment, considering the consensus of the committee members and the firm's investment policies. Some IC’s require unanimity to proceed, others will decide on a majority vote.
A well-functioning IC is integral to the success of a private equity firm. Of course, not all are well-functioning – this is a genuine quote describing of the opposite of how an IC should be conducted:
“More or less a joke where one partner tries to justify his deal to the other partners and advisors. It's really nothing more than a formality. The investment memo itself is obviously important, but the discussion typically deviates from the memo or it focuses on a singular point for an overly long period of time. I'd like to think this is because every investment committee member has spent at least a few hours studying the memo, but my cynicism leads me to believe that's not the case”.
If you find yourself working – or on an internship – in a PE firm where the IC fits this description, you may want to start looking for a job elsewhere!