Private Equity and Venture Capital

01Purpose and scope

• This manual supports the course Private Equity and Venture Capital. It describes how professionals in these two asset classes spend their working days, from finding a company worth examining through to returning capital to the investors who funded the vehicle. Private equity usually means control or significant minority stakes in established companies, often bought with a meaningful amount of borrowed money. Venture capital usually means minority positions in younger companies, where most of the value depends on growth that has not happened yet.
• The scope covers the fund lifecycle as it is commonly practiced in the United States and in comparable markets. It does not cover public market investing, real estate funds, or the tax and legal structuring of any particular vehicle, because those details vary by jurisdiction and by the terms of each partnership agreement. Where a rule depends on where the fund is domiciled or where its investors sit, the current authoritative source is the relevant securities regulator, the tax authority, or the fund counsel engaged for that vehicle.
• Regulated activities need careful handling. This guidance does not replace qualified professional judgment, approved firm procedures, or the authorization required before you act for a client or a fund. Treat the examples here as illustrations of practice, and check any rule against your own governing documents before relying on it.

02Core principles

• Both strategies rest on the same basic bargain. Investors commit capital to a closed-end partnership for a long period, and the general partner is paid to find, improve, and eventually sell companies. Capital is called over time as deals close rather than all at once, and distributions come mostly from exits. The timing and route of a sale therefore matter as much as the price achieved.
• Alignment is the second principle. Management fees pay for the team's time and overhead, while carried interest, usually a share of profits above a preferred return hurdle, pays for performance. Good practice ties the team's economics to returns net of fees and expenses, and it keeps conflicts visible through disclosure rather than assuming they do not exist.
• Value is created in a small number of broad ways: revenue growth, margin improvement, debt paydown, and the difference between the multiple paid at entry and the multiple received at exit. Buyout teams lean heavily on operational change and on the cash generated to repay debt. Venture teams lean on growth and on backing companies whose outcomes are highly skewed, so a few large winners usually carry the portfolio. Knowing which lever a deal depends on is what separates a useful investment memo from a generic one.

03Planning and preparation

• Before any deal is sourced, the team confirms the fund strategy. That includes target sectors, company size or stage, geography, typical check size, expected number of holdings, and the reserve policy for follow-on investment. These decisions are written into the offering documents and the limited partnership agreement. Investing outside them can breach investor commitments, so the investment committee checks each opportunity against the mandate before anything else.
• Sourcing is the work of building a pipeline. Buyout teams often find targets through relationships with owners, lenders, and advisers, and sometimes through formal sale processes run by investment banks. Venture teams rely more on founder networks, referrals from other investors, accelerators, and their own research into emerging markets. A pipeline needs a tracking record for each company showing its source, the stage reached, the owner of the next step, and the reason for any decline.
• Preparation also covers the fund's operating calendar. That calendar includes capital call notices with their required lead time, quarterly reporting deadlines, valuation dates, and the annual audit. Missing a capital call deadline can trigger penalties under the partnership agreement, so the fund administrator and the finance team should own that calendar with named backups for each date.

04Recommended workflow

1. 1
   : Screen the opportunity against the mandate using a short written memo of two pages or less. The memo states the company, the proposed structure, the rough check size, and the reason the company fits the fund. Decline quickly where the fit is poor, and record the decline reason so the pipeline data stays useful later.
2. 2
   : Conduct first-round diligence with management. Meet the founders or management team, review historical financial statements, and build a simple model of revenue, costs, and cash. In a buyout, this stage includes an early view of how much debt the business can carry. In a venture deal, it includes unit economics, the monthly burn rate, and the likely path to the next funding round.
3. 3
   : Run detailed diligence on the areas that could break the investment thesis. This usually means commercial diligence on customers and market size, financial diligence by an accounting firm on the quality of earnings, legal diligence on contracts and intellectual property, and background checks on key people. Scope each workstream in writing so that advisers answer the questions the team actually needs answered.
4. 4
   : Prepare the investment committee memo with a base case, a downside case, and a clear statement of what must be true for the return target to be met. Include proposed terms, governance rights, board seats, protective provisions in venture deals, and the expected exit route. The committee approves, rejects, or asks for more work, and the minutes record the decision and any conditions.
5. 5
   : Negotiate and close. A buyout typically involves a purchase agreement, a debt package from one or more lenders, and sometimes a rollover of equity by existing management. A venture financing typically starts with a term sheet, followed by share purchase documents and amended investor rights agreements. The closing checklist tracks conditions precedent, the funds flow statement, and signatures from every party.
6. 6
   : Begin post-investment value creation. Agree on a first-100-day plan or its equivalent with measurable operating targets, set up monthly board reporting, and confirm the key performance indicators. Hire or upgrade the finance function where it is weak. In buyouts, teams commonly review pricing, procurement, and working capital cycles early, because those changes often produce cash quickly.
7. 7
   : Monitor the company, decide on follow-on capital from the reserve pool, and plan the exit. Review performance monthly or quarterly, update the valuation for reporting, and prepare more than one exit route, such as a sale to a strategic buyer, a sale to another sponsor, a public listing, or a recapitalization. Timing depends on market conditions and on whether the company is ready to be sold, so the plan should be revisited at each board meeting.

05Quality checks, risk controls and compliance

• Valuation is the most visible control. Funds that report under US GAAP generally measure investments at fair value using the framework in ASC 820, which relies on market inputs and a consistent set of valuation techniques. Many funds mark portfolio companies each quarter, use an independent valuation firm for hard-to-value positions, and keep a written policy describing who approves a change in mark and why. The methods and inputs should be documented well enough for an auditor to follow.
• Concentration and leverage limits protect the fund from a single outcome dominating the results. Typical controls cap the percentage of commitments that can go to one company, restrict the amount of debt at each portfolio company, and limit exposure to a single sector. The limits themselves are set by the partnership agreement and the investment policy, and the team reports any breach to the investment committee and, where required, to investors.
• Regulatory obligations depend heavily on jurisdiction and on the type of adviser. In the United States, advisers to private funds generally must either register with the Securities and Exchange Commission or qualify for an exemption, and rules on marketing, performance presentation, and custody have changed over time. Anti-money-laundering and know-your-customer procedures apply to investor onboarding. Treat this summary as a starting point and confirm current requirements with compliance counsel and the regulator's published rules.
• Information barriers matter in both strategies. Deal teams often receive material nonpublic information from target companies or from public companies in a sale process, and that information must not be used to trade public securities. Conflict policies should also cover side letters that give certain investors better terms, co-investment allocations, and transactions between the fund and affiliated vehicles. Where the fund sponsor holds other businesses, the team should document how opportunities are allocated.
• Tax treatment is complex and varies by jurisdiction, investor type, and structure. Questions about how carried interest is taxed, how tax-exempt or foreign investors are affected, and how fund level and portfolio company level taxes interact should go to qualified tax advisers and the fund's tax counsel. This manual does not provide tax advice, and no tax position should be taken without that review.

06Collaboration and documentation

• A deal involves several roles that must stay in sync. Deal leads and associates run diligence and draft the memo. Operating partners or operating professionals support value creation. The chief financial officer or finance lead maintains the models and the portfolio reporting. The fund administrator handles capital calls, distributions, and investor records. Outside counsel, accountants, lenders, and placement agents each have their own scope, and the team should name a single owner for each relationship.
• Documentation is the record that lets the fund show what it knew and when. Keep the deal memo, investment committee minutes, version-controlled models, the diligence data room index, closing sets, board packs, and valuation files together in a consistent structure. Investors receive quarterly reports with capital account statements and a summary of portfolio performance. Many managers follow an industry reporting template for these reports so that limited partners can compare funds more easily, and the template choice should be stated in the reporting policy.
• Avoid building separate versions of the truth. A single model for each company should feed the investment memo, the board pack, and the quarterly valuation. When the numbers differ across documents, someone must be responsible for reconciling them before they leave the firm.

07Measures and continuous improvement

• Performance is usually described with several measures that answer different questions. Gross internal rate of return and gross multiple on invested capital describe the deal level results before fees and carry. Net internal rate of return and net multiple show what investors actually receive. Distributions to paid-in capital, often called DPI, show how much cash has come back. Residual value to paid-in capital and total value to paid-in capital show the value still held. Because internal rate of return is sensitive to timing, an early exit can make a fund look strong even when the total dollars are modest, so teams should present both rate and multiple.
• Operational measures help the team manage the work between exits. Useful indicators include pipeline conversion from first meeting to investment, time to close, the share of investments that reach an exit, holding period, revenue or EBITDA growth at portfolio companies compared with the plan, and for venture portfolios, the burn multiple and the ratio of cash runway to the next financing. Each indicator should have a defined calculation and an owner, and the team should agree on how to treat write-offs and partial exits.
• Continuous improvement depends on post-mortems. After each closed deal, and after each significant loss, compare the assumptions in the original investment memo with what actually happened. Look at pricing, growth, margin, leverage, management changes, and exit timing. Record the lessons in a format the next deal team can search, and revise the screening criteria when a pattern repeats. The limits of this process are real: samples are small, outcomes take many years to resolve, and unrealized values are estimates that may change.

08Common mistakes and how to prevent them

• Overpaying in a competitive process is a frequent error. Teams sometimes chase a deal, raise their price late, and then underwrite the purchase with optimistic growth. Prevent this by setting a walk-away price in the investment committee memo before bids are submitted and by requiring the team to show the return at that price.
• Assuming the exit multiple will match the entry multiple is another common error. Market conditions can shift, and a business that grew quickly may be valued differently once growth slows. Model a lower exit multiple in the downside case and confirm that the investment still meets the fund's minimum return in that case.
• Underestimating working capital needs and capital expenditure also causes problems, particularly in buyouts with heavy debt. Build a monthly cash forecast for at least the first year, and confirm that the company can meet its interest and covenant obligations under the downside case.
• Drift from the mandate and exhausted reserves are less visible but damaging. A team may make a larger follow-on investment in a struggling company to protect an earlier position, using capital that was meant for stronger companies. Require a separate approval for follow-on investments, and track reserves against the plan at each committee meeting.
• Weak documentation and late valuation marks cause investor and audit problems. Set a fixed valuation calendar, document each change in mark, and keep the minutes that support it. Missing records are hard to reconstruct later.

09Practical checklist

• Confirm that the opportunity fits the fund mandate, sector, stage, check size, and concentration limits before spending diligence budget.
• Record the source, stage, owner, and decline reason for every company in the pipeline.
• Build a model with base, downside, and upside cases, and identify the assumptions that must hold for the return target to be met.
• Scope each diligence workstream in writing and review adviser findings against the questions the team set.
• Obtain investment committee approval with minutes that record conditions and dissenting views.
• Check the closing checklist for conditions precedent, funds flow accuracy, and all required signatures.
• Agree on operating targets, key performance indicators, and board reporting within the first month after closing.
• Review each portfolio company's cash runway, covenant position, and working capital at least quarterly.
• Reconcile valuation, model, and investor report figures before any quarterly report leaves the firm.
• Confirm with counsel and tax advisers any rule that depends on jurisdiction, investor type, or fund structure.
• Run a post-mortem on each exit and each significant loss, and update the screening criteria where a pattern appears.

★Learning sources

• Micro Degree: Private Equity and Venture Capital
• Micro Degree: Accounts Payable Management
• Micro Degree: Bank Reconciliation Operations
• Micro Degree: FinTech Fundamentals