Any decision by a GP to make an investment involves an assessment of the opportunity and an evaluation of the risks compared to the benefits of the opportunity. The information on which this decision is based has usually been gathered and critically evaluated during the due diligence phase within the team of executives working on the transaction. However, the amount of this information will usually be such that it needs to be summarised before it is presented to the investment committee or other decision-making body of the company. Investment Committee or other decision-making body of the GP will ultimately decide whether or not to make an investment. Conducting successful due diligence to confirm the validity of the underlying assumptions of a business plan will usually not be sufficient on its own. What is also required is the experience of the senior executives of a GP to add value to the due diligence process by critically evaluating the information gathered using their extensive business and investment experience.
The investment proposal is an important document as it provides not only a written record of the information considered in making the investment decision, but it also typically contains the central investment thesis, which continues to be the benchmark against which the success of an investment is judged during its periodic review by the GP.
The results of the due diligence process and the recommendations of GP executives should be distilled into a comprehensive written investment proposal that accurately reflects the potential of the target company and considers a number of financial and non-financial factors. These factors include GP's ability to execute and manage the investment. As part of this process, consideration should be given to whether the proposed investment meets the investment criteria and is consistent with the investment restrictions in the fund documents.
Investment decisions should be made by appropriately senior and experienced GP staff; normally these individuals form an Investment Committee. In the event of material changes to an investment proposal, further review, evaluation and additional approvals may be required.
It is good practise to use the underlying reports from which the investment proposal is derived as key source documents for the strategic review and evaluation of the portfolio company's performance.