Best Book(s) / Playbook(s) on PE Due Diligence / Value Creation

As a recent college grad, we see a lot of guides and materials on the mechanics of an LBO, how to model an LBO etc., but don't come across materials that explain how private equity firms go about conducting due diligence on potential investments. Understand that there is no one recipe/formula and this can range on a case-by-case basis. However, when dissecting a CIM, Management Presentation, dataroom, etc., I am assuming that PE investors have some rough framework or list they tick through in their minds. Part of that would include determining whether the target is a "good" business and, if so, ways to create further value whether through operational improvements, financial engineering, top-line growth, transaction structuring etc.

TLDR, we all know that a decision to LBO a company is not predicated upon the ability of a 25 year-old spitting out a 25% IRR in an excel model. Instead, the actual qualitative and quantiative analysis during the diligence phase is the real make-or-break. I'd appreciate if someone has any resources that would help break this down in detail. For example, if a company is looking at top-line growth, this can be achieved either through volume growth of existing products, launching new products, or price increases. If we were to just focus on price increases, how does a PE firm determine the maximum increase in price that would maximize revenue with no loss in volume/customers? I have my ideas but studying what others have done always helps.

P.S. I understand that this is not specific to PE but includes broader concepts from biz strategy, operations, economics etc., so a wide variety of material are welcome. Additionally, for those who like to remind us that we should resort to the search function, I have included two links below that I found helpful as a starting point. Feel free to comment on which of these books you have found most useful.

https://www.wallstreetoasis.com/forums/books-rele…
https://www.wallstreetmojo.com/top-best-lbo-books/

 

Hi, great question and its one I've been asking when I was prepping back then.

I've read or at least browsed all the books mentioned on this site (and links you shared) but I can tell you for sure none of them goes into the detail that you specified in the price example above.

The reality is that these individual value creation levers are usually 6-12 week engagements with specialist consulting firms, working alongside Management and the Sponsor. To reasonably quantify the reward and risks of that action, to the detail that you mentioned, takes considerable time/effort and its very business specific as well.

But back to your original question and trying to add something helpful - I'm in the process of writing (maybe a blog, or ebook etc.) a mega framework as its something I do for my own professional development.

It will be a "to the point" but robust / detailed framework addressing every single value creation lever I've seen in practice (going from revenue, cost, cashflows) and lay out specific diagnostic tools ("how to identify during DD phase"), and post acquisition actions ("how to implement").

its something I already do in my day job, so if you want you can PM me your email and happy to let you know when I have something "developed"

 
Most Helpful

I have made a google drive with 15 PE/VC books that all the forum users will find very useful. Some of these books deal with value creation, due diligence, and other nuances that the OP and others with the same questions may also find insightful-

[https://drive.google.com/drive/folders/1C7GjG6YUk_AkdJb37Eb7vdUvEVeEKsy…)

 

You are right, your question is not specific to private equity.

If you are interested in mastering due diligence and value creation, then the topics to focus on are:

1) strategy; 2) advanced accounting; 3) business operations.

The best books on these topics will not have "private equity" in the title, as most general private equity books do not have enough capacity to focus on these topics in sufficient depth. Therefore, you need separate resources to cover these specific areas.

My views are subjective. During various points of my career, I personally found the following books indispensable:

  1. Competitive Advantage: Creating and Sustaining Superior Performance by Porter
  2. The Innovator's Solution by Christensen and Raynor
  3. The Value Profit Chain by Heskett, Sasser, Schlesinger
  4. The Ownership Quotient by Heskett, Sasser, Schlesinger
  5. Fundamentals of Intermediate Accounting by Kieso, Weygandt, Warfield
  6. Creative Cashflow Reporting by Mulford, Comiskey
  7. How to Smell a Rat by Fisher
  8. Quality Investing by Cunningham
  9. Contemporary Strategy Analysis by Grant
 

That's a great list. I'll check it out and report back if I end up purchasing some of these. Thanks for your continuous contributions to this forum!

 

I found a great resource in The Private Equity Toolkit by Tamara Sakovska. Not as much in-depth breakdowns of deal mechanics per se, but a great primer into every aspect of the PE process. I'd compare it to Feld's Venture Deals in terms of scope.

 

I'm not sure there's any books per se. Firms each develop their own form of post-investment management (PIM).  Broadly speaking we can talk about PIM as 'General PIM' and 'Specialized PIM'. That is, there's just some basics that most / all firms should do, and then there's specializations that some firms develop that can set them apart.  You could say that General PIM consists of more distant oversight, including the tracking KPIs, managing via BOD, etc.  Hands-on specialized PIM goes much further and tends to do things like embedding operations professionals or imparting technical skills or knowhow to the portco. 

General PIM

  • Setting 100 day/1 year plans for the company
  • BOD presence
  • IPO support
  • Advocating for incentive and corporate governance system overhaul (mgmt. equity incentives)
  • Implementing KPI monitoring: selecting which KPIs are of focus, implementing accountability, addressing shortfalls)
  • Recruiting, mgmt team build-out
  • Supporting international / domestic expansion
  • Networking across the portfolio
  • Cashflow, sales growth focus/assistance

    Specialized PIM

  • Blueprinting together with mgmt. even before investing, crafting a post-investment vision, working with management actively to implement
  • Assessing mgmt. team members to replace, train or supplement
  • Providing M&A support (identifying and executing acquisitions)
  • Seconding fund employees to portco
  • Bringing senior advisors as coaches/BOD
  • Specialized training sessions (sales, IR)
  • Growth companies need “nuts-and-bolts” including marketing/branding upgrade, IT and ERP systems upgrade, accounting overhaul


    image-20230129114928-1
    This is from a PPT I put together in 2008, so it's likely quite out of date. Apologies in advance.
 

Aliquam et laborum nihil porro. Enim vero eaque ad quis delectus laudantium. Aperiam consequuntur velit consectetur possimus atque amet. Vel aut distinctio id perferendis voluptate placeat. Quod enim fugit quis rem tempora at. Corporis asperiores a velit quisquam ducimus perspiciatis.

Autem in odit esse veniam enim non. Similique possimus qui in corporis perspiciatis ut totam et. Laudantium autem nihil libero ut explicabo.

Amet in id aut molestiae incidunt omnis. Est odit omnis ut illo. Eveniet et velit incidunt.

Quaerat repellendus voluptatem ipsum dolorum. Exercitationem odio quo et rerum.

 

Quasi totam et voluptas. Error aut molestias aut vel explicabo. Enim autem libero earum necessitatibus. Qui in quo ullam facilis odit repellendus. Accusamus sed qui qui nesciunt. Ullam sit vitae et labore.

Maiores quas soluta at quisquam officiis aut eos. Vel occaecati in quia voluptatem et. Modi dolore iste molestias nemo itaque molestiae esse. Dolorum et occaecati enim qui qui quos.

Career Advancement Opportunities

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 99.0%
  • Warburg Pincus 98.4%
  • KKR (Kohlberg Kravis Roberts) 97.9%
  • Bain Capital 97.4%

Overall Employee Satisfaction

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 98.9%
  • KKR (Kohlberg Kravis Roberts) 98.4%
  • Ardian 97.9%
  • Bain Capital 97.4%

Professional Growth Opportunities

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Bain Capital 99.0%
  • Blackstone Group 98.4%
  • Warburg Pincus 97.9%
  • Starwood Capital Group 97.4%

Total Avg Compensation

April 2024 Private Equity

  • Principal (9) $653
  • Director/MD (22) $569
  • Vice President (92) $362
  • 3rd+ Year Associate (90) $280
  • 2nd Year Associate (205) $268
  • 1st Year Associate (387) $229
  • 3rd+ Year Analyst (29) $154
  • 2nd Year Analyst (83) $134
  • 1st Year Analyst (246) $122
  • Intern/Summer Associate (32) $82
  • Intern/Summer Analyst (314) $59
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
BankonBanking's picture
BankonBanking
99.0
4
Secyh62's picture
Secyh62
99.0
5
GameTheory's picture
GameTheory
98.9
6
CompBanker's picture
CompBanker
98.9
7
dosk17's picture
dosk17
98.9
8
kanon's picture
kanon
98.9
9
Jamoldo's picture
Jamoldo
98.8
10
numi's picture
numi
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”