When investors ask what the return is before they’ve actually investigated a deal, we joke that they’re doing due diligence backwards. Anybody can put a beautiful number in a PowerPoint. The first question should almost never be about the return.
Instead, ask who’s running the business, how the promoters have invested in the deal and whether they’re putting in their own cash, what the valuations are, what the exit strategy is, how you’ll actually get your money back, and what the waterfall for investor returns looks like. Once you’ve looked at those pieces, you should be able to work out the return yourself. Keep your own number in mind, then ask the promoters what they expect and use it to gauge how realistic they’re being.
Key points
- Leading with “What’s the return?” is due diligence backwards.
- Start with management, sponsor investment, valuation, exit strategy and the return waterfall.
- Estimate the return yourself, then compare it with the promoter’s number as a reality check.
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