5 Elements of Private Investing: A Guide for Evaluating Investment Opportunities


Private investing can be a rewarding, yet complex, endeavor.  In this article, we explore a “first-pass” framework with which to cultivate a simple, straightforward understanding of a private security offering.  This is a  consistent, effective, and efficient analytical approach.  Read below about the five key elements of private investing, as discussed by Matt Brown and Bruce Roberts on the Direct Private Investments Show.  And view the episode on the show here.

You can’t digest all the various details of a given opportunity at once, but you can organize your review by focusing on the key factors which determine whether a given investment is right for you – or otherwise merits further analysis.  Understanding these elements will help investors evaluate potential deals and make more informed investment decisions.

Purpose — How will the proceeds be used?

A good place to start is with the use of proceeds, or how the money raised will be spent.  This can tell you a lot about the stage and strategy of the business.  Ideally, you want the funds to be used for purposes that will help build the company, such as buying equipment, expanding the sales team, or making acquisitions.  Be cautious of situations where money is being taken out of the business for personal gain or to pay back previous investors.

Issuer – Who is issuing the security?

The second element to consider is the Issuer, both at the corporate and management level.  Its vitally important to assess the basic nature of the Issuer, its owners and senior management since, collectively, they will have the greatest impact on the security’s performance.   Who is behind the business, and what is their track record?  Look into the stage of the business, the industry trends, and whether structured as an operating company or a special purpose vehicle (SPV).

Security – What type of securities is being offered?

Understanding the type of security the Issuer is offering you — whether it’s debt or equity — is crucial. Each represents a different obligation by the Issuer. Each comes in different forms, with significant differences and ramifications on how it may perform.   Review the summary of terms or term sheet which outlines the basic tenets of the deal.  This document isn’t legally binding, unlike the Private Placement Memorandum, but it should give you a clear understanding of the investment.  Make sure to have someone with experience in these transactions confirm that the investment aligns with your expectations.

Repayment – What determines the success of the investment?

Once the security’s structure is clear, it’s important to understand how the Issuer plans to repay the investment’s principal and its projected return.  Debt securities are generally repaid from the operating cash flow generated by the company’s ongoing business.  Equity securities, on the other hand, are typically repaid through some event, such as the sale of the company or by registering equity with the S.E.C., listing on a stock exchange and “going public” through subsequent sales on the open market.

Risks – What can go wrong?

Every security involves the risk that it will not perform as expected.  Assess the risks associated with the investment, which will vary depending on the deal and industry.  Key risks to consider include regulatory hurdles, macro-economic risks, management-related risks, the need for future capitalization, and the potential for fraud.  Thorough background checks and comprehensive database searches should be conducted on all parties involved to uncover any red flags.


Though not all-encompassing, these five key elements serve as a guide to an abbreviated process for determining whether the commitment of additional time and other resources is justified before undertaking a more detailed examination.  By using this consistent, effective and efficient framework, investors can concentrate on the most appealing securities.

Watch the full episode here or, if you prefer, read the companion white paper, “5 Elements of Private Investing.”

For a look at Carofin’s investment offerings, you can see them here.

Photo by Gildardo RH on Unsplash





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