The Private Equity Toolkit

4Deal Selection—Eliminating the Wrong Deal

Key Topics in Chapter 4:

• Why killing deals is as important as doing deals
• How skilled investors overcome biases and minimize investment errors
• Why the best investment of your career might be a deal you never pursue
• Nine deal breakers you need to check for before proceeding on any deal

Introduction to the Deal Selection Process

The earlier chapters of the book presented my thoughts on thematic and opportunistic deal sourcing. I hope that, regardless of whether you learned anything new from the first three chapters, your own deal origination process is prolific, and going to work feels like drinking from the horn of plenty. I can, therefore, think of no better way to begin this chapter than to share my views on how to kill deals. That's right. Working on an abundance of investment opportunities is hardly sustainable: as soon as you become a successful deal originator, you develop a vital need for rapid deal elimination. You may remember my comment in Chapter 1 about having had to review over 100 deals every year with the hope of bringing only one to completion. As it turns out, my experience is not too different from that of others in the private equity industry.

Gompers et al. (2016) studied the investment process of 79 private equity investors with combined assets under management of over $750 billion. Among other things, the research examined the deal funnel experience of these private equity funds. The authors conclude ...