Avoid acquiring or investing in assets associated with private equity firms due to the high risk. If an acquisition of an asset associate with a private equity firm is necessary, the asset requires extensive due diligence.
Extreme caution is necessary when considering acquiring assets from private equity firms. Private equity firms make investments seem profitable by cutting maintenance, research and development, human resources and many other expenses necessary for the investment to operate and thrive. Private equity firms gut investments which makes the profitability appealing and selling the investments before the cuts destroy the investment. Once the unknowing buyer acquires the asset, the lack of maintenance of infrastructure, lack of investment in research and development, and loss of key personnel, begins to show. The investments generally fail rapidly and require immediate financial and human capital. Often it is too late, or the funds needed, to fix the asset wipe out gains for decades.
Financial information - especially profitability - should not be relied on and should be excluded in the due diligence process.
Assess maintenance contracts before and after the acquisition by the private equity firm for significant reductions. If there are reductions, investigate to identify if the private equity firm has neglected infrastructure and other plant and equipment necessary to service customers.
Assess investment into research and development (R&D) before after the acquisition by the private equity firm if applicable. Cuts to R&D are generally the first focus of private equity firms and serial chief executive officer (CEOs). Such reductions are an indicator of the investment's imminent failure as these reductions starve the asset of its ability to innovate and compete.
Examine employee redundancies and terminations after the acquisition by the private equity firm to identify if any key personnel have departed. The departure of key personnel can be critical for an organisation and the impact may only surface after the asset has been handed over.