Estimating a company’s future growth is challenging. If it is a public company, gathering the data necessary for evaluating its performance is more manageable. However, private equity investors must employ various strategies to screen the businesses for portfolio development. This post will elaborate on how investors research private companies.
What is Private Equity?
Private equity refers to investment opportunities involving partial ownership of an unlisted company. When a company is privately held, it has fewer obligations to disclose its financials. Therefore, investors cannot use the usual company profiling and investment research methods that work well for public companies.
Private equity refers to a type of investment strategy and asset class that involves investing in privately held companies that are not publicly traded on stock exchanges. Private equity firms raise funds from institutional investors, such as pension funds, endowments, and wealthy individuals, and use those funds to acquire ownership stakes in private companies.
Private equity investments typically involve acquiring a significant portion or even a controlling interest in a company with the goal of improving its operations, increasing its value, and ultimately generating a profitable exit. Private equity firms actively manage the companies they invest in by implementing strategies to enhance operational efficiency, expand into new markets, optimize the capital structure, or drive growth through acquisitions.
There are professional private equity services that aid investors in collecting intelligence on a private company’s performance. So, fund managers can acquire more streamlined reports for decision-making.
Investors researching private companies often follow a comprehensive approach to gather information and assess the investment potential of those companies.
How Do Investors Research Private Companies?
1. Corporate Websites
Private businesses maintain an online presence through their websites. These sites contain intelligence on how a company’s founders started it and who their clients are. Investors will also learn about the target organizations’ products and services.
Several business websites include a dedicated page listing the domain experts working at the company. Other web pages give insights into the office culture, leadership, press coverage, business models, partnerships, and past projects.
However, investment research solutions will note that a private company’s website presents data in a glorifying or positively biased style. While the corporate portals offer valuable intelligence, they must not be the only data source when analyzing a private company.
2. Online Databases
Governments and independent research firms maintain databases with a native search feature. Nevertheless, they will be insufficient if you use them to get a private company’s details. So, it will be a trial-and-error approach involving multiple online databases.
There are free databases with PDFs showing companies’ filings from recent years. Still, paid portals provide more extensive records. Besides, the availability of these databases can vary across countries and provinces. Therefore, investors must integrate other data-gathering methods.
3. News Resources
All newspapers and related websites will focus on the prominent organizations in the country. Meanwhile, regional news resources will cover small-scale businesses. Industry magazines aim to list all corporations, big or small.
Journalists will mention events like when a company forms a new partnership or launches an initiative for corporate social responsibility (CSR). Likewise, there will be opinion columns and written accounts of interviews with a company’s representatives.
Remember, news websites are often less reliable than print editions due to the sensationalist nature of online media. Furthermore, online articles can undergo multiple edits or become inaccessible because of technical issues. When in doubt, go for the printed news resources.
4. Jobs and Employee Profile Sites
Companies put up job advertisements on sites like LinkedIn or Glassdoor. These sites help investors research private companies in two ways.
- All job vacancies include data on employee responsibilities and skill proficiency requirements. So, an investor can estimate which skill gaps the management wants to bridge through job advertisements. If a company plans to diversify its offerings or expand its business, its job ads will reflect the same.
- The employee profiles on the sites offer insights into how experience levels vary across team members at an organization. After all, there must be a balance between experienced and newly recruited talent to ensure stable growth. Investors must collect such intelligence.
Private companies enjoy certain freedoms when it comes to financial performance disclosures. However, this situation makes it challenging to evaluate them. Therefore, investors use multiple data sources and estimate the target companies’ risk and growth dynamics.
News, job portals, corporate websites, and online databases are the four significant components of gathering intelligence on a private company. Yet, the data quality varies for each source, highlighting the significance of consulting reputable investment researchers.
With the proper guidance, investors can successfully screen or profile privately held companies. They might also get the benefits of automated technologies for financial modeling. As a result, their investment strategies will improve, increasing return on investment (ROI).
It’s important to note that researching private companies can be challenging due to limited public information availability. Investors often rely on a combination of the above methods to gather insights, validate claims, and make informed investment decisions.
Overall, researching private companies requires a combination of industry knowledge, networking, and due diligence to identify promising investment opportunities.