Guide to Private Equity Deals and Process

According to private equity industry analyst Prequin, North America-based private equity AUM was about $4.02 trillion as of June 30, 2024, with just over $1 trillion in ‘dry powder.’ See Private Equity Statistics for broader market context. 

Onlookers still differ in their views on the medium-term implications for private equity. But there is broad agreement on one point:

With more than $1 trillion in dry powder, capital deployment pressure is rising, and deal activity is expected to increase over the next 24 to 36 months, particularly as valuation expectations reset and exit markets reopen. 

DealRoom works with many private equity firms at every stage of their deal process, from origination through due diligence to post-deal issues. This has given us a unique perspective on current industry movements as well as some broader insights.

In this article, we share some of those more general insights, aiming to give the reader a better understanding of what’s involved in a typical private equity deal.

While the initial evaluation of investment opportunities may seem quick, the materialization of private equity deals can take a few months or even a year.

The private equity due diligence process is a lengthy sequence of steps that involves extensive research and information gathering, analytics, discussions, and assessments. (Check out our private equity due diligence playbook)

Institutional and accredited investors allocate large sums of money to private equity investments. Holding periods for such funds are often long because investments require time to turnaround and exit.

However, private equity can be highly beneficial for many companies, such as startups. It offers them advantageous alternative liquidity options compared to conventional financing.

How Does Private Equity Work?

The typical private equity process follows a defined investment strategy that guides what firms choose to invest in and how to execute deals. This strategy is usually some variant of the following:

1. The private equity fund creates a strategy, usually based on a set of characteristics around the companies it will search out. These might include location, company size, financial position, industry vertical, or competitive advantage. The strategy would also include the typical investment size, the minimum investment required from each limited partner (investor), their expected payback, and the payback period. This is put in the documentation to pitch the fund to investors.
2. The private equity fund uses this documentation to raise funds for investment, usually conducting a roadshow (referred to in private equity as ‘capital calls’) with pension funds, family offices, insurance firms, hedge funds, and even other private equity funds. 
3. The private equity firm’s manager and the team dedicated to the fund in question will begin searching for companies that meet the fund’s strategy criteria. The process of finding a single company can take months, with most private equity firms contacting only one of 40 or 50 potential targets. 
4. When a deal is agreed to acquire a minority or majority share in a private company, the private equity company begins implementing its strategy. This often involves cutting costs or redirecting the company toward a new strategy they believe will drive greater growth. They will very often bring in more experienced managers than the newly acquired company has in place, ensuring that every part of the company’s operations is optimized to reach their target returns. 
5. The strategy will usually outline an exit plan for each acquisition, after which the private equity fund will seek out buyers for its investment. A typical exit would occur after at least five years, by which point cash flows have risen by a multiple of 2 to 3 times their level at the time of the initial transaction, thanks to operational and market changes.

Buy-Side vs. Sell-Side Private Equity Deal Process

From the outside, many private equity deals look similar. However, the process feels very different on the inside depending on which side of the transaction you’re on, and whether you’re investing in the deal or advising on it. See Private Equity vs. Investment Banking for more context.  

Buy-Side Diligence

Buy-side work goes deep. Buyers test the story from multiple angles, looking at:

• Financials
• Customers
• Operations
• Risk
• Growth

Nothing moves forward without first being assessed in detail. Early reviews often turn into detailed assessments, and new questions surface as findings come in. Diligence rarely runs in a straight line, as teams often need to circle back as assumptions are challenged and models change. 

Sell-Side Preparation

Sell-side work starts earlier than many expect. Sellers need to be ready with clean data, clear narratives, and fewer surprises once buyers engage. 

This phase is about anticipating what buyers will ask and which metrics require explanation. Sellers who prepare well set the pace and tone of the diligence process. 

Data room setup matters here. Documents require context. Version control and Q&A discipline are critical. A messy data room signals risk even when the underlying business is strong. 

Where They Overlap and Where They Diverge

Both sides of the transaction rely on the same core information, such as financials and legal documents, but they use them differently. 

Buyers explore, while sellers explain. Buyers pull threads, while sellers guide attention. 

Overlap happens in collaboration, Q&A, issue tracking, and document updates. Divergence emerges in the intent: Buyers look for the downside, while sellers focus on clarity and confidence.  

This is where a unified platform helps. The DealRoom M&A Platform supports both sides of the transaction. Buy-side teams use it to track diligence issues and decisions. Sell-side teams use it to prepare earlier and respond faster once buyers engage. 

With two sides pursuing different goals in the same deal, having a central platform to manage information and track requests keeps the process grounded and running smoothly. 

Key Stakeholders in a Private Equity Deal

Private equity deals involve more people than most teams expect. Each group plays a specific role. Misalignment at any point creates friction later. 

General Partners

General partners run the fund. They source deals and make investment decisions. They manage diligence and negotiations, staying involved after close through governance and value creation. 

Limited Partners

Limited partners provide the capital. They expect discipline and clear reporting. They seek effective risk management and prioritize long-term returns. They rarely touch individual deals, but their requirements shape how funds operate. 

Deal Team

The deal team handles the day-to-day work, including sourcing, modeling, diligence coordination, and obtaining internal approvals. They connect information across functions and keep the process moving under tight timelines.

Portfolio Company Management

Management teams at portfolio companies own the operating reality. They provide data and explain performance, helping to shape the equity story. Strong management builds confidence, while weak management raises concerns fast. 

Advisors and Consultants

Advisors bring an outside perspective on financial, legal, tax, commercial, and technical considerations. They validate assumptions and surface risks. Good advisors help clarify decisions. However, too many voices without structure can slow the deal. 

Lenders

Lenders finance the transaction. They assess risk differently from equity. Factors such as cash flow and covenants are important. Their diligence runs in parallel and can influence deal timing and terms.

What are the Phases of a Private Equity Deal? (Process in Detail)

1. ‘Sourcing’ and ‘Teasers’

The beginning of the private equity deal structure is called ‘deal sourcing.’ Sourcing involves discovering and assessing an investment opportunity.

PE deals are sourced through various methods such as equity research, internal analysis, networking, cold-calling executives of target companies, business meetings, screening for certain criteria, conferences and conversations involving industry experts, and more.

A teaser is a one- to two-page summary sent by a financial intermediary about a company up for sale or a private equity investment opportunity.

It does not mention the seller's name, but only provides a brief description of the business, its products and services, and key financials. Companies often hire investment banks to confidentially attract top private equity firms and strategic buyers.

Investment banks can provide software solutions, such as investment banking data rooms, to conduct a deal.

Read also:

Deal Sourcing: A Beginner's Guide to M&A Deal Origination

How to Develop an Effective Origination & Deal Sourcing Process

How to Have the Best Strategies for Advantageous Deal Sourcing

2. Signing a Non-Disclosure Agreement (NDA)

If a private equity firm is interested in the prospects from a ‘teaser,’ they will move forward by signing a Non-Disclosure Agreement (NDA).

‍Upon signing the NDA, the financial intermediary will provide the PE firm with a Confidential Information Memorandum (CIM). A CIM includes an investment thesis, financials, projections, and capital structure.

If an investment opportunity is sourced, the NDA is signed directly with the target company.

Consequently, the target company's management will provide confidential information about its business. At this stage of the private equity deal flow, the PE firm has sufficient information to decide whether to pursue the investment opportunity further.

3. Initial Due Diligence

In this phase of the private equity process, initial due diligence is conducted to form a better understanding of the target company.

‍It includes research and information-gathering on the company and its industry.

Another key piece of due diligence is estimating the return on investment based on the projections provided by the company’s management.

They may also contact the investment bank to learn about the company from their perspective and potential debt financing options available for the acquisition.

Usually, for this kind of work, companies use data rooms or specialized PE due diligence software, such as DealRoom, which combines both functions to streamline the diligence process. Here you can see the diligence requests examples:

4. Investment Proposal

After initial due diligence, the investment team prepares an investment proposal and presents it to its investment committee. The purpose of the first investment committee meeting often changes from one PE firm to another.

It can be a simple deal update or the initiation of a formal approval process. In the latter, the investment team is given the green light to spend a set amount on consultancy and other relevant expenses.

They may even submit a First Round Bid during this step, which we will discuss next.

5. The First Round Bid or Non-Binding Letter of Intent (LOI)

During this stage of the private equity deal process, the investment team will provide the target company with a non-binding letter of intent (LOI) for the transaction.

‍This is based on the specific criteria provided to them by the target company’s management. Often, a valuation range is mentioned rather than a specific amount. The target company and its advisors will then select a few bids and proceed to the next round of the auction process.

Some key points that are taken into consideration here include:

• Purchase price (or range)
• Post-acquisition capital structure
• Time needed to provide a binding offer
• PE firm’s experience and expertise
• Value creation strategy
• Credibility of the offer
• Compatibility with the submitting firm’s management team

6. Further Due Diligence

The private equity due diligence framework is back at work.

‍Here, the sellers provide more confidential information.

Many companies utilize virtual data rooms (VDRs) or DealRoom (which has a built-in data room) to collaborate, assign tasks, and exchange information.

This information includes, but is not limited to:

• The company’s legal and organizational entities
• Operations records
• Board reports, including meeting minutes
• Property agreements
• Documentation related to intellectual properties
• Financial information, including audited and unaudited financials
• Employee details
• Employee agreements

The PE investment team conducts due diligence by reviewing the files in the data room.

They will have follow-up calls with the target company's management for further assessments and clarifications.

On top of that, they will also brainstorm critical post-acquisition issues that the acquiring firm may face short- and long-term.

7. Creating an Internal Operating Model

An operating model is a highly detailed breakdown of revenue and costs.

It takes key drivers of the target business and assumptions into consideration. Key drivers may vary greatly from deal to deal. Some common ones include:

• Raw material costs
• Volume
• Price
• Number of customers
• Renewal rates
• Fixed vs. variable cost structure

Investors use this model to estimate the target firm's financial performance. This gives the PE firm’s decision-makers a clearer picture of the major factors driving the acquisition's return.

8. Preliminary Investment Memorandum (PIM)

The Preliminary Investment Memorandum (PIM) is a 30- to 40-page document that summarizes the investment opportunity to the PE firm’s investment committee.

The Preliminary Investment Memorandum usually consists of the following sections:

• Executive Summary -- important details such as the transaction, background, deal team recommendations, and the investment thesis.
• Company Overview -- the target firm’s description, products and services, history, suppliers, competitors, customers, organizational structure, and biographies of the key management, and more.
• Market & Industry Overviews -- market growth rates and trends.
• Financial Overview -- past and projected income statements, balance sheets, and analytics of cash flow.
• Valuation Overview -- analytics about the company, M&A transactions, LBO, DCF, etc.
• Risks & Key Areas -- probable risks to the industry and business that were identified by due diligence.
• Exit Details -- options when it comes to an investment exit and its timing.
• Proposed Project Plan -- recommendations to the committee on how to proceed with the project based on a valuation range and a budget approved by the investment committee.

Deal teams usually perform only the initial due diligence up to this stage due to high costs. Further legal due diligence is carried out later in the private equity due diligence framework.

9. Final Due Diligence

Once the investment committee approves the PIM, the PE deal team will then perform all the remaining and final due diligence. The investment team will dedicate its time only to the particular project at this stage.

Other PE projects will be either sidelined or delegated to other professionals within the firm.

In this stage of the private equity investment process flow chart, the deal team typically interacts with the investment bank and the target company's management on a daily basis.

‍They will send requests to the target company to address any outstanding issues, such as visit requests, calls with sales personnel, non-executive management, customers, and suppliers.

During this time, the investment team will manage consultants across various streams of the due diligence process, including financial due diligence, commercial due diligence, and legal due diligence.

Furthermore, they will begin negotiating with the banks on debt financing options, aiming to secure the best debt terms from a group of banks.

It usually takes between three and six weeks for the due diligence process in private equity from the First Round Bid to the Final Binding Bid.

10. Final Investment Committee Approval

Once all the steps in the private equity due diligence process are completed and the investment team is comfortable moving forward with the deal, a Final Investment Memorandum (FIM) is created.

The FIM addresses the additional due diligence conducted by the deal team and its consultants since the PIM was created, especially highlighting any key issues raised by the investment committee.

Furthermore, the deal team will recommend a specific valuation to acquire the target company. The investment committee will either approve or reject the valuation.

11. Final Binding Bid

If the FIM is approved by the investment committee, the deal team will proceed by sending a Final Binding Bid (or a Final Round Bid) to the target company.

This bid includes a final buying price, financing documents from investment banks, and preliminary merger agreements. The preliminary merger agreements will be discussed later with the seller’s lawyers.

The seller and their advisors will then spend at least a few days considering the bids they receive and ultimately choose a winning bid.

12. Signing the Deal

Once the seller, along with its investment bankers and advisors, pick a winning bid, they will work exclusively with that preferred party to sign transaction documents and contracts.

A Purchase Agreement (or Merger Agreement) and other documents will be prepared following negotiations between the buyer's and seller's lawyers.

Common Risks in Private Equity Deals

Most deal risk shows up where continuity breaks. This can include missing or unclear data, ownership gaps, or hand-offs between deal phases. 

Overreliance on Management Projections

Projections look confident on paper. Without testing assumptions, buyers risk pricing in growth that never materializes.  

Weak Data Quality

Inconsistent numbers slow everything down. Missing context can cause confusion, and teams spend time reconciling rather than analyzing. Poor data quality raises red flags even when performance looks strong. 

Poor Post-Close Integration Planning

Value creation starts at close. When integration planning waits until after signing, momentum is lost. Early wins disappear, and teams scramble instead of executing. 

Inadequate Tracking of Diligence Findings

Diligence issues surface across financial, legal, commercial, and other workstreams. When findings live inside emails or side notes, rather than in a central system, they’re easily lost and forgotten. Lost findings resurface after close. 

Knowledge Loss Between Deal Phase Transitions

Deals move fast. Teams change, and advisors rotate out. The difference usually comes down to how well information and decisions carry forward through the full deal lifecycle. 

The Private Equity Investment Cycle

The private equity investment cycle refers to the period in which the private equity fund manages the company. A typical holding period is three to five years, with the long-term average holding period for private equity funds being around four years.

However, the ‘harvest period’ - that is, the time at which the companies in the fund are divested and funds returned to investors - may be extended beyond five years if the conditions to sell are not suitable (or the business is performing so well that the private equity fund decides to continue to benefit from its cash flows). 

How private equity deals are funded

Private equity deals can be funded by almost every conceivable combination of private capital. As mentioned at the outset, the ultimate source of the funds could be anything from a university endowment fund to a rich aunt with an appetite for high returns on her investment.

Ultimately, all of this cash flows into the private equity fund, which is then used to fund the investments. A key point to note here is that the limited partners - the endowment fund, the rich aunt, and others - hand control of the investments over to the general partners, the private equity manager.

Thus, their reputation depends on how well they manage the invested funds.

Value Creation in Private Equity

Returns are not driven solely by the multiple. Value is built after the deal closes. 

Operational Improvements

Operational improvements target how the business operates each day. Small adjustments compound when applied daily. Discipline matters more than complexity. 

Pricing and Margin Expansion

Pricing rarely keeps up with reality. Discounts linger, and costs rise faster than prices. Strong pricing discipline and margin control create value without forcing growth.

Talent Upgrades

Leadership shapes outcomes. Strong executives set direction and discipline, but weakness at the top stalls progress across the business. Talent changes are a high-impact lever.

Technology Modernization

Legacy systems slow down decisions and fragment data. Modern platforms restore visibility and control. Technology supports scale when growth picks up.

Add-On Acquisitions

Add-ons accelerate growth and expand capability and reach as part of a private equity roll-up strategy, but execution matters. Poor integration destroys value. A clean strategy and early planning make add-ons pay off. 

Value creation succeeds when priorities remain visible, and execution remains connected after close. 

Post-Close Execution and Integration

The deal doesn’t end at close. Post-close execution and integration determine outcomes. 

Translating Diligence Findings Into Action

Diligence surfaces risks and opportunities, but those findings only matter if they drive action. Findings without ownership or timing do not stick.

Tracking Deal Assumptions Versus Reality

Every deal is underwritten based on assumptions about growth, costs, and strategic alignment. After the deal closes, those assumptions must be tracked. When reality drifts from expectations, teams need to react fast. 

Ownership Transition Challenges

Control changes quickly, but accountability doesn’t always follow. New owners set expectations, and management adapts. Misalignment here slows decision-making and creates tension. 

Early Stage Portfolio Monitoring 

The first months matter most. Performance requires early visibility. Issues compound when they’re overlooked or ignored. Consistent monitoring prevents small problems from becoming structural ones. 

Post-close execution works when diligence remains connected to action with clear ownership from the start.

Examples of Private Equity Deals

A large number of private equity deals close every day, especially when venture capital, growth capital, distressed assets, and other asset classes are considered. 

Private equity deals vary widely depending on strategy, market conditions, and timing. The examples below, including a leveraged buyout, a venture capital deal, and a modern private equity deal, illustrate how different approaches create value across the private equity lifecycle. 

The Leveraged Buyout Example: Blackstone Acquires Hilton Hotels for $26 Billion, 2007

If anyone ever doubted the blurred lines between M&A and private equity, it’s worth noting that Blackstone started life as an M&A advisory firm in 1985, using its advisory fees to move into private equity.

In 2007, Blackstone used a leveraged buyout to purchase Hilton Hotels. Blackstone leveraged almost 80% of the total amount ($20 billion) to take control of the famous hotel chain. It reduced operational inefficiencies at Hilton, sold underperforming assets, and reinvested in good locations.

When it sold the asset in 2018, it did so at a profit of around $14 billion. And all by initially just using $5.6 billion of its own equity.

Read our article on the largest and most recent leveraged buyout examples

Venture Capital Example: SoftBank Acquires a 34% Stake in Alibaba for $20 Million, 2000

Venture investing operates early in the private equity spectrum. Companies are still forming, and revenue is often limited. Profitability comes later. Success depends on conviction in the market and the team.

The acquisitions are almost never for anything other than a share of the company, on the basis that the equity investment in those fast-growing companies will lead to holding a share in a much larger, profitable company a few years down the road.

SoftBank’s investment in Alibaba reflects that mindset. In 2000, SoftBank acquired roughly 34 percent of a small Chinese e-commerce company for about $20 million. The decision was not about short-term returns. It was about timing and belief in how commerce would evolve in China.

The return reflected commitment. SoftBank stayed invested across cycles and risk. The payoff came much later. When Alibaba listed launched its IPO nearly twenty years later, it achieved a valuation of $231 billion - making Softbank’s share worth a cool $60 billion.

Modern Private Equity Deal Example: Thoma Bravo Acquires Sailpoint, 2014 and 2022

Thoma Bravo first invested in SailPoint in 2014, buying a majority stake from venture investors and taking the company public three years later. This early phase gave the firm time to work with the SailPoint team on product direction and go-to-market execution.

In 2022, Thoma Bravo returned with a full take-private deal, acquiring SailPoint for about $6.9 billion in cash. That transaction took the company off the public markets and gave SailPoint room to focus on long-term strategy without quarterly pressures.

Under private ownership, the focus shifted to deeper work on the product and pricing model. SailPoint operates in identity security, a segment where recurring revenue and strong customer retention matter most. With private backing, the team pushed further into subscription and SaaS offerings, which improve predictability and align value delivery with pricing.

The SailPoint story is unusual. Thoma Bravo exited its first investment via IPO in 2017 and then returned as a buyer in 2022. That pattern reflects long-term conviction. The firm saw continued demand in identity security and believed in SailPoint’s potential even after its public market run.

Taking SailPoint private in 2022 set up a multi-year ownership phase. During this time, Thoma Bravo worked with management on strategy execution and operational improvements that are more difficult to pursue under public-market scrutiny. 

By early 2025, SailPoint was preparing for another IPO, this time with stronger recurring revenue and greater scale, demonstrating how patience and alignment between sponsor and management can create optionality for future exits.

How DealRoom Supports the Private Equity Deal Lifecycle

Private equity deals break down when different tools are used to manage each phase. Information gets lost, and context disappears. The decision trail is lost. Teams forget why assumptions were made, and issues resurface because the earlier discussion is no longer available. 

One System From Origination Through Post-Close

DealRoom’s M&A Platform supports the full deal lifecycle in one place, from origination through integration. Teams don’t reset their process at each handoff, and the work carries forward without loss. 

Preservation of Deal Knowledge

Deals produce a trail of decisions and assumptions. Those details often end up in emails or slide decks. DealRoom keeps that context tied to the deal: what was decided, why it mattered, and what came next. 

Visibility for Investment Committees

Investment teams need clarity and visibility, not overwhelming document dumps. DealRoom surfaces open issues and key risks so progress is clear at a glance.

Accountability Across Teams

Every task needs an owner, and every issue requires follow-up. DealRoom makes ownership visible across teams and advisors so nothing drifts and issues get resolved. 

The goal isn’t process, but continuity from first look through value creation.

Frequently Asked Questions

What is a private equity deal?

A private equity deal happens when investors buy a stake in a private company or take a public company private. These deals often aim to grow the business and later sell it for profit.

How do private equity firms make money?

They earn returns by improving a company’s performance, expanding its market, and selling it at a higher value. Here’s how it works: profits are shared among the firm and its investors when the company exits.

What are the stages of a private equity deal?

The main stages are deal sourcing, due diligence, valuation, negotiation, and exit. Each stage builds toward closing the deal and planning how value will be created.

What is dry powder in private equity, and why does it matter for deal activity? 

Dry powder refers to committed but uninvested capital available for deployment by private equity firms. It matters because high levels of dry powder increase pressure to close deals, influence valuations, and often accelerate deal timelines as firms compete to put capital to work before fund deadlines.

What is the difference between a Letter of Intent (LOI) and a Final Binding Bid? 

A Letter of Intent outlines the proposed deal terms and exclusivity but is largely non-binding. A Final Binding Bid is a firm offer submitted after diligence that commits the buyer to specific terms, subject only to limited closing conditions.

What is the difference between private equity and venture capital?

Private equity usually invests in mature companies, while venture capital focuses on early-stage startups. Both seek growth, but private equity uses larger investments and often takes control positions.

How are private equity deals financed?

They use a mix of equity from investors and borrowed funds, known as leverage. This structure helps increase returns when the company performs well.

What is due diligence in a private equity deal?

Due diligence checks a company’s finances, legal standing, and operations before investing. It helps confirm that the deal makes sense and limits risk.

How long do private equity deals last?

Most investments last three to seven years. That period gives time for growth, restructuring, and preparing the company for sale or public offering.

What happens after a private equity deal closes?

After closing, the firm works with management to improve operations, increase earnings, and set goals for future growth or sale.

Why is due diligence so lengthy and complex in private equity?

Private equity diligence goes beyond financials. Firms analyze operations, customers, technology, legal risk, and growth assumptions to validate the investment thesis. The process is detailed because small risks can materially impact returns once leverage is applied.

How do private equity firms actually create value in the companies they acquire? 

Value is created through operational improvements, leadership changes, cost discipline, revenue expansion, and strategic initiatives like add-on acquisitions. The goal is to improve cash flow and scalability, not just rely on financial engineering.

What are the most common exit strategies for a private equity investment? 

The most common exits include selling to a strategic buyer, selling to another private equity firm, or going public. The chosen path depends on market conditions, company performance, and where the highest valuation can be achieved.

How does software like DealRoom specifically help private equity firms during the deal process? 

DealRoom’s M&A Platform centralizes diligence, communication, and deal execution in one system. It keeps decisions, risks, and tasks tied to the deal across origination, diligence, and close, giving investment teams and stakeholders real-time visibility into progress and open issues.