By: Bruce V. Roberts, CEO, Carofin
Private markets now capture more capital annually than the public markets. In 2023, private vehicles raised more than $1.3 trillion in committed capital, compared with about $139 billion raised through public equity issuances, according to the Preqin Global Private Capital Report 2024. At the same time, privately backed companies vastly outnumber public ones.
When considering investing in a private company, identify and evaluate the risks; then determine whether the projected return is appropriate given the risk. It is also necessary to determine whether the opportunity aligns with your family’s investment philosophy, liquidity needs, governance standards, and tolerance for volatility. These seven questions provide a practical framework for evaluating a private investment.
1. What Does the Company Do?
What does the company actually do? This seems like a simple question. But is their pitch clear and concise? Management should answer it in a straightforward manner, simply and directly. If their explanation feels convoluted, pause.
Companies that don’t have a clear message invariably can’t develop their business efficiently or consistently build investor value in the process. Complexity at the outset rarely improves under pressure.
It should be able to address what’s compelling about the product and what problem it solves. Is theirs a disruptive technology? Have they found a cheaper way to deliver the product to their target audience? In essence, what sets their products apart, and are there significant barriers for competitors to enter the market?
Whatever the company does, the fundamental question is whether it can win share, keep it, and do so profitably.
2. Who Leads the Business?
In private companies, especially, leadership often determines the outcome.
Evaluate the team’s operating experience and performance through difficult cycles. What about the company’s senior management makes them logical candidates to pursue its primary business opportunity?
Is this their “first rodeo?” Have they scaled a smaller enterprise before? Have they defined roles and responsibilities? Does an independent board provide oversight? Do they emphasize timely and thorough reporting with their stakeholders?
Ownership alignment matters, too. Compensation driven primarily by salary or short-term bonuses can shift focus away from enduring value creation. Executives with meaningful equity tend to think like owners.
Take it as a given that the company’s future, and your family’s potential for a successful investment, is more dependent upon the management skills, industry knowledge, work ethic and moral values of the company’s leaders than any other factor.
3. Does the Financing Structure Match the Stage of the Company?
As a potential investor, it’s crucial to determine whether the company is seeking to raise capital in a form that is appropriate to the stage of the business.
Many entrepreneurs would rather issue debt securities to avoid diluting existing shareholders, even though the company will not be able to support debt. Only stable businesses with predictable cash flows can do so. Earlier-stage or companies with unpredictable revenues call for patient equity.
If it’s an equity stage investment, will the company eventually generate meaningful distributions, or does value depend entirely on a future sale? From the investor’s perspective, how much illiquidity can be tolerated? How long can the investor wait? Does the potential return justify the downside risk within a family’s broader portfolio?
4. Who Are the Customers?
Customers, or a lack thereof, are why businesses thrive or eventually fold. Almost every business plan projects the hockey stick revenue line, but can it truly acquire and retain real, paying customers is the question.
How large is the addressable market? Does demand hold up in downturns? Is the product essential or discretionary? No matter how brilliant it is, how many will adopt the new product or service and over what timeframe? Realistically, it’s usually a very small fraction of a designated market that will ultimately switch to a new product or service.
What motivates customers within the target market to “pull the trigger” and make a purchase decision? It is “fear” (something bad will happen if not purchased) or “greed” (I’ll be better off with this purchase)? Both are catalysts for acquiring customers. But, if the company doesn’t understand customers’ motivations, they may remain on the sidelines.
Consider that recurring revenue often increases predictability, though it requires ongoing support. Transactional revenue may produce higher margins but less stability. Focus on actual customer behavior and how well it aligns with the financial projections.
5. How Does the Company Deliver Results?
Execution risk can undermine even strong concepts. To evaluate an investment, it’s critical to have a fundamental grasp of bringing the product to market or delivering the service.
Asking how, why, what and who at each stage of bringing the product to market enables investors to get more than just the big picture. It serves to detail the building blocks that may translate into a successful business execution, as well as the critical benchmarks.
Among other aspects are a review of supplier concentration, capital expenditure needs, regulatory exposure, and key vendors or distribution partners. Technology companies in particular must protect intellectual property.
Of course, there’s no need to master every technical detail. However, identifying where strains in the business could occur and how management plans to manage them is always a useful exercise. Thorough diligence is essential, whether it’s document review, third-party input, and reference checks to reduce blind spots.
6. How Does the Company Make Money?
It’s often said that growth attracts attention. But margins sustain value.
Start with gross margin. Then examine cost structure, break-even levels, reinvestment needs, and operating leverage. How large must the company grow to sustain itself without additional capital? Do the projections seem reasonable? How much internally generated cash is available for future CAPEX and marketing?
Insist on clear explanations of financial assumptions. Any entrepreneur and/or management team must understand and be guided by the margins of its business, and investors should too, before making an investment.
If management isn’t fluent in explaining their financials — starting with assumptions through to the top and bottom lines, for both historical and projected — it’s a red flag. In fact, it may be time to walk away.
7. What Is the Likely Path to Liquidity?
Consider the potential ways to exit the investment before you commit your capital.
In the context of debt, it’s straightforward and defined in the documentation. The promissory note will have a maturity date for return of your principal and any remaining interest payments. Naturally, there’s always the possibility that your note will be refinanced before maturity.
With an equity investment, on the other hand, there’s no certainty when or if the investor will get his money back or a return on the investment. So, expect management to provide various scenarios of how that might occur. For example, exits might include an IPO or a sale to a private equity firm or a strategic buyer.
It’s critical to remember that, unlike public securities, there is no ready secondary market where they can be sold to a third party. Investors should expect to buy and hold a private investment for the duration of its stated term with the potential underlying risk of losing all their money in the event of a loan default or company bankruptcy. That said, private investments are less correlated with public securities markets and provide diversification.
A Useful Framework for Investors
Private investing isn’t about avoiding risk. It’s about making thoughtful decisions. Taking an interest in a private company comes with uncertainty. Your job is to decide whether you understand those risks and if the potential return justifies them. A solid review should look at strategic fit, time horizon, capital structure, transparency, incentive alignment, and downside protection.
When an opportunity fits your portfolio objectives, meets your governance standards, and offers returns that make the illiquidity worthwhile, it shifts from interesting to investable. This framework should help you make the call that’s right for you with clarity and consistency. It imposes discipline on the investment selection process, but it’s not a guarantee of success.
Private company investing rewards patience and realism. You are not searching for perfection. You are making decisions you can defend to your family, financially and strategically, years from now. By working through consistent questions, you temper enthusiasm, test assumptions, and align each opportunity with your written strategy, allocation limits, and liquidity plan.
