Investment fraud led to losses of over $4.6 billion in 2023. This fact shows why you need to ask private equity firms the right questions before investing your capital.
Market uncertainty has made 64% of commercial real estate investors hold their positions. Your due diligence process must be well-planned and give you a full picture. Limited Partners (LPs) like you provide the capital that General Partners (GPs) need for investments. Without your money, GPs would only have their own funds to work with. The questions you ask private equity investors will affect your investment outcomes by a lot.
Trust and shared interests form the foundation of relationships between fund managers and LPs. Bad answers from private equity managers can shake your confidence in a GP. The Burns + CRE Daily Fear and Greed Index reads 56 out of 100, that indicates cautious optimism for 2025. This mixed signal environment means you need to look even closer at opportunities.
These five key questions to ask private equity firms will help you assess their track record, reliable infrastructure, deal sourcing strategies, shared interests, and how they communicate. Your investment success comes from making informed decisions based on real data rather than assumptions.
What is your performance record across market cycles?
Image Source: Plante Moran
A private equity firm’s true capabilities and risk management approach become evident through its historical performance across different market conditions. Before investing capital, investors should ask PE firms about their track record through market ups and downs. The firm’s performance needs assessment across complete market cycles, including downturns, not just during favorable conditions.
Performance record of the firm
Private equity investments have outperformed public markets consistently over extended periods. A complete study spanning 22 years until June 2022 showed state pensions’ private equity allocations yielded an 11.4% net-of-fee annualized return. This return surpassed the public stock market equivalent by 5.6%. Private equity returns reached 21% in 2022, beating public markets by 36%.
The numbers look even better over a longer timeframe. Private equity generated an 11.0% net-of-fee annualized return during the 23-year period ending June 2023, surpassing public equity by 4.8%. These figures become more impressive because this outperformance came with lower volatility. Private equity’s annualized standard deviation of returns stood at 15.8% compared to public stocks at 17.5%.
Recent trends point to a potential decline in this outperformance advantage. Buyout funds still beat public markets across time horizons longer than five years in all regions. The trend in the last three years shows a slight downward movement, with 10-year returns dropping 3 percentage points in North America and 1.5 points in Europe.
Ask these specific questions about a private equity firm’s performance record:
- What has been your fund’s performance (IRR and multiples) across different vintage years?
- How does your performance compare to industry benchmarks in your specific strategy?
- What portion of your returns comes from financial engineering versus operational improvements?
A top-tier PE firm should show consistent outperformance compared to relevant benchmarks beyond just favorable market conditions.
How the firm handled downturns
A private equity firm’s true capability shines through its performance during economic downturns. Research on private equity market performance during three recent market stress periods revealed interesting patterns. During the early 2000s recession, 2007-09 global financial crisis, and 2020 COVID-related market events, private equity saw less substantial drawdown and faster recovery than public equities.
PE’s outperformance gap grows wider during bear markets. Cliffwater’s study of US State Pensions’ private equity performance showed PE beat public equities by 4.0% yearly over 16 years. This difference jumped to 6.6% during bear markets, including the GFC.
PE-backed firms proved their worth during the COVID-19 pandemic. These firms substantially outperformed their non-PE-backed counterparts with much lower liquidation rates (6% versus 30%) during 2020-2021. PE-backed firms in distress chose to restructure through formal creditor negotiations rather than defaulting to liquidation.
This resilience stems from several factors:
- Access to capital – PE managers with strong dry powder reserves gain competitive advantages during downturns. Companies backed by top-quartile PE firms in dry powder reserves received 10% more investment than non-PE backed firms during the Global Financial Crisis.
- Acquisition opportunities – Economic downturns create chances to buy undervalued assets. McKinsey’s research shows PE firms that bought more during the 2008 GFC achieved higher average return rates and raised more capital than their less active peers.
- Active management – PE managers help portfolio companies weather challenging conditions better than passive investors through operational improvements, cost-cutting measures, and strategic initiatives.
Questions about a firm’s downturn performance should include: “Can you provide specific examples of how you supported portfolio companies during previous market downturns?” and “What lessons from past recessions shape your current investment approach?”
Transparency in reporting past results
Understanding a private equity firm’s performance reporting methods matters as much as the performance itself. Private equity lacks a uniform way to report returns, making performance comparisons between firms challenging.
The industry moves toward better standardization. ILPA’s updated reporting templates aim to improve standardization, transparency, and comparability across geographies for private funds. The new ILPA Performance Template standardizes performance methodology with tables that capture cash flows and fund-level transaction type mapping.
The template features standardized reporting for performance metrics, including IRRs and TVPI/MOIC. It breaks out relevant gross and net figures with and without fund-level subscription facilities’ impact.
Market conditions push investors to look more carefully at performance reporting. Some limited partners place less emphasis on track records from the cheap money era due to higher-for-longer rates. A Hong Kong-based managing director at HarbourVest Partners noted, “The macroeconomic environment during the investment period of a 2014-2015 vintage fund was very different from that of funds raising today… So how returns have been generated in the past may or may not be repeatable”.
Quality reporting should show:
- Clear alignment between strategy and risks
- Explanation of how each risk is managed
- Assessment of risk profile and explanations of changes during the year
- Specific, tailored information instead of boilerplate language
Ask PE managers these questions about their reporting: “How do you calculate your performance metrics?” “Do you include fund-level credit facilities’ impact in your reported returns?” and “Can you share examples of how you’ve communicated underperformance to investors?”
Note that past performance never guarantees future results. A firm’s transparency in reporting past results shows its integrity and communication approach—vital elements for building trust in long-term investment relationships.
Schedule a consultation with our team to discuss evaluating private equity performance across market cycles for your investment strategy.
What systems and technology support your operations?
Image Source: Allvue
A private equity firm’s tech setup can determine how well it runs and affects your returns in today’s investment world. You should ask PE firms about their tech capabilities before investing your money. PE firms handle billions in assets, and the industry has put over $1 trillion into information technology since 2020. Their systems play a key role in everything from closing deals to keeping investors informed.
Private equity firm’s tech stack
The way a private equity firm uses technology tells you a lot about how sophisticated they are and their ability to create value. Modern PE firms need reliable data systems that bring financial, operational, and regulatory information together in one place. This helps them avoid the confusion that often comes with old-school methods.
New digital platforms have changed how PE firms work by:
- Creating one trusted source that combines data from different places
- Making decisions faster with live analytics and dashboards
- Taking care of routine tasks like entering data, creating reports, and checking compliance
Ask them: “How does your technology platform contribute to your decision-making process?” Their answer should show how their systems help them assess and manage portfolio companies better.
The best firms use advanced financial and data tools for both initial assessments and ongoing monitoring. These systems run vertical, horizontal, and trend analysis to work out financial ratios and measure borrower health. This means firms with better analytics can spot good investments that others might miss.
PE firms are putting more money into AI as they see its potential to reshape the industry. Since 2020, they’ve invested heavily in AI infrastructure, including computing facilities needed for advanced operations. Big PE firms are also leading major deals in data centers – like KKR’s $50 billion alliance with Energy Capital Partners for data centers and power projects.
Investor portal and data access
The investor portal is where you’ll interact most with a PE firm’s technology. Good portals let you easily access detailed investment information throughout your investment journey.
A firm’s investor portal should have these key features:
- Complete reporting tools showing investment performance, transaction details, and documents
- Dashboards you can customize to see cash flows, debt summaries, valuations, and performance metrics
- Tools to track portal logins, email opens, and other engagement data that helps with investor relations
Quality investor portals make things clear by giving you instant access to detailed financial and operational data. This openness shows that a firm values being transparent and responsible – qualities investors look for.
“Can I see a demonstration of your investor portal?” This question helps you understand if their portal has what serious investors need. Leading platforms like Juniper Square connect over 600,000 investor accounts across 2,000+ general partners, handling about $1 trillion in investor equity.
The portal should work naturally with the firm’s accounting systems to provide smooth service and consistent data. This connection ensures quick access to investor commitments and detailed information. The portal should also let firms control who sees what information.
Security and compliance infrastructure
PE firms face more regulatory pressure and scrutiny as cyber threats grow. Strong cybersecurity isn’t optional anymore – it’s essential for staying operational and financially stable. When asking PE investors about security, focus on both their tech safeguards and how they manage them.
A complete security setup should have:
- Strong encryption, multi-factor authentication, and role-based access controls
- Systems that watch for strange activity and possible breaches
- Regular security tests to find weak spots
- Plans for handling incidents and responding to breaches
PE firms must protect their operations and watch over cybersecurity at their portfolio companies. While each portfolio company carries its own cyber risk, the PE firm could face legal issues, costs, and reputation damage throughout the investment.
PE firms working in multiple regions need substantial resources to follow different regulations. Smart firms use compliance systems that work well in four key areas: compliance strategy and governance, risk management, data architecture and analytics, and firm culture.
Investors should understand how firms use regulatory technology (RegTech). This offshoot of FinTech helps PE firms handle compliance, adapt to regulatory changes, and cut costs. These tools can handle routine compliance work, speed up data processing, and lower the risk of breaking rules.
One of the key questions for PE managers should be: “How do you keep data secure and follow regulations across your operations and portfolio companies?” They should explain both their security measures and management practices.
To learn more about checking PE firms’ tech capabilities and how they might affect your investment returns, schedule a strategy call with Primior today: https://primior.com/start/
How do you source and evaluate deals?
Image Source: FasterCapital
A private equity firm’s approach to finding and assessing investment opportunities is a vital question you should ask before investing your capital. The way a firm sources and evaluates deals will directly affect your potential returns as an investor.
Deal sourcing strategy
Good deal sourcing gives private equity firms a steady flow of promising opportunities. Leading PE firms invest substantial resources to close potential deals, though promising opportunities on paper don’t always become smart investments. These firms need reliable systems to weigh risks against rewards during the sourcing phase.
You should ask these questions about a firm’s sourcing strategy:
- “What specific methods do you use to identify investment opportunities?”
- “How does your sourcing approach differ from competitors?”
- “What percentage of your deals come from each sourcing channel?”
Successful private equity firms use multiple approaches to find deals:
- Proactive origination – Leading firms reach out directly to target companies they find through market research, and focus on underserved markets that could grow fast.
- Growth monitoring – Advanced firms track growth indicators like headcount expansion, revenue trends, and market presence to spot companies that are scaling faster.
- Relationship leverage – Strong partnerships with advisors, brokers, and industry leaders create access to off-market deals.
- Data analytics – Modern firms make use of information and advanced analytics to improve deal pipelines and spot promising opportunities before others.
Research by David Teten from HOF Capital showed that the top 15% of private equity firms—including Battery Ventures, Great Hill Partners, Insight Venture Partners, and Platinum Equity—have dedicated teams with about 0.75 to 1.25 deal sourcers for each generalist investment professional. These specialized teams hunt for new opportunities by combining relationships, market research, and technology.
Proprietary vs. auction-based deals
One key question to ask private equity investors is how they balance proprietary and auction-based deals in their portfolio. This difference affects both acquisition costs and potential returns by a lot.
Proprietary deals happen when PE firms build direct relationships with company owners, management teams, and advisors to find investment opportunities without competing against other firms. Intermediated deals usually involve investment banks or M&A advisors and often lead to competitive auctions.
Proprietary deals offer these advantages:
- Better pricing – Less competition usually means better valuations
- Improved terms – More negotiating power when you’re the only buyer
- Relationship advantage – Time to build trust with management before buying
- Reduced transaction costs – Lower fees compared to intermediated deals
Top firms are moving toward proprietary sourcing as competition grows. PwC reports that the private equity market increasingly embraces proprietary sourcing to get better deals and avoid competitive pressure. Direct negotiations are becoming popular as firms try to get exclusive deals in crowded markets.
Tomos Mughan, SourceCo’s CEO, says: “Traditional deal sourcing is broken because it’s crowded and competitive. Proprietary sourcing is about connecting directly with owners who haven’t considered selling yet”.
This matters to investors because proprietary deals often bring better returns. Ask firms: “What percentage of your deals are proprietary versus intermediated, and how has this ratio changed over time?”
Track record of successful deal execution
Understanding how well a PE firm turns sourcing into successful investments completes the picture. Private equity investors typically look at thousands of potential investments to find the most promising ones. Studies show PE firms review about 80 opportunities for each investment they make.
Good deal execution starts with screening prospects to check their potential before spending resources on due diligence. This process usually includes:
- Looking at preliminary materials to check investment thesis fit
- Assessing the founding team’s experience
- Studying the competitive landscape and market size
- Having initial meetings to spot potential problems
After screening, firms do thorough due diligence—a vital step to ensure investment success. This involves deep research, multiple meetings, competitor analysis, and financial modeling to decide whether to invest, how much to invest, and at what price.
Here are questions to ask private equity managers about deal execution:
- “What specific criteria do you use when evaluating potential investments?”
- “Can you walk me through your due diligence process with a recent example?”
- “What percentage of deals that reach final due diligence actually close?”
- “What are the most common reasons you reject deals late in the process?”
Advanced firms use a two-phase due diligence approach: exploratory and confirmatory. They assess commercial aspects (market position and industry analysis), financial performance (verification and valuation), legal compliance, management capabilities, and ways to improve operations.
The best PE firms combine human expertise with advanced technology. Dan Kobayashi notes, “It’s not enough to rely on data; you need experienced team of people who understand the nuances behind those numbers”. PitchBook data shows that firms using both AI and human outreach are more successful at finding quality targets.
To learn more about evaluating private equity firms’ deal sourcing and execution capabilities and how they might affect your investment returns, schedule a strategy call with Primior today: https://primior.com/start/
How are your interests aligned with investors?
Image Source: Moonfare
The success of private equity partnerships depends on how well General Partners’ (GPs) and Limited Partners’ (LPs) interests line up. You need to ask the right questions about economic incentives. This will give you confidence that managers who handle your capital succeed only when you do.
GP co-investment and skin in the game
Private equity managers’ personal capital investment alongside yours affects their decision-making directly. GPs with substantial “skin in the game” make smarter investment choices because their own money is at stake.
The market shows deeper commitment through higher GP investments. One industry expert noted, “LPs want to see strong alignment and meaningful manager commitments in a tough market, even though securing this capital has become harder”. GPs show confidence in their strategy by investing substantial personal funds in the same vehicles as their investors. They share both risks and rewards.
Co-investments create another strong way to line up interests. These opportunities let you invest directly in specific deals alongside the fund, usually with no management fee and no carried interest for existing LPs. Top firms know that co-investments build stronger investor relationships and provide extra capital for attractive opportunities that might exceed concentration limits.
Ask potential managers these questions:
- “What percentage of the fund comes from the GP’s personal capital?”
- “How do you structure co-investment opportunities for LPs?”
- “Has your co-investment amount increased or decreased over time?”
Fee structure and performance incentives
The “two and twenty” model remains the industry standard for private equity fees. This structure has a management fee (about 2% of committed capital) for operating expenses and a performance-based incentive (around 20% of profits).
Carried interest (“carry”) represents the GP’s profit share, usually 20% of returns above a specified hurdle rate. This performance-based component motivates managers to generate strong returns instead of just growing assets under management.
Some challenges still exist. An industry report points out, “PE had been better at enriching its own managers than producing good returns for pension fund beneficiaries”. Information gaps, market changes, and new compensation forms can upset traditional alignment calculations.
Market conditions sometimes create different incentives. During the financial crisis, leveraged public pension funds split – some asked GPs not to call capital while others wanted investment in buying opportunities. Near-zero interest rates led some GPs to take too many risks to hit hurdle rates.
Key questions about fee structures:
- “How do your fee structures evolve throughout the fund’s lifecycle?”
- “What portion of your compensation comes from management fees versus carried interest?”
- “How do you ensure fees don’t create conflicting incentives?”
Preferred returns and look-back provisions
Your interests get extra protection through preferred returns, hurdle rates, and look-back provisions.
The preferred return—typically 8%—means you get a minimum specified return before the manager gets any profits. This key feature guarantees baseline performance before the GP receives incentive compensation.
Most funds add a “GP catch-up” provision after reaching the hurdle rate. This lets managers receive higher profit percentages (50-100%) until they reach their entitled share (typically 10-20%). After catch-up, remaining proceeds split 80-90% to LPs and 10-20% to GPs.
Clawback provisions add security by making GPs return distributions under certain conditions. More than 90% of GPs agree to return distributions if LPs haven’t received their preferred return. Over 80% will return contributions if they’ve received excess carried interest.
The distribution “waterfall” shows how cash flows split between you and the sponsor. European waterfalls pay 100% of cash flow to investors pro rata until they receive their preferred return and invested capital. American waterfalls let managers get disproportionate cash flow earlier, usually with clawback provisions.
Look for these features to protect yourself:
- Periodic clawback testing rather than only at fund dissolution
- Calculation of clawback when investments are predominantly disposed of
- Testing prior to fund term extensions
Ask these questions to understand how a PE firm’s economic interests match yours: “Can you walk me through your waterfall structure and clawback provisions?” and “How do you ensure alignment during both strong and weak performance periods?”
Schedule a consultation with Primior today to review private equity firms’ alignment mechanisms for your investment strategy: https://primior.com/start/
How do you communicate during challenges or failed deals?
Image Source: FasterCapital
Communication ended up being the factor that sets exceptional private equity firms apart from mediocre ones, especially during investment headwinds. Understanding a firm’s communication practices during challenging periods reveals their true character and dedication to investor relationships. This stands out among critical questions to ask private equity firms before investing.
Communication frequency and transparency
The frequency and transparency of a firm’s communication with investors deserve careful attention. Trust and confidence grow when exceptional firms provide regular updates that address investor concerns. Investors now expect their GPs to communicate more frequently and in greater detail since their own reporting requirements have expanded.
Ask potential partners:
- “How often do you communicate with investors during normal periods versus challenging ones?”
- “What specific information do you proactively share when investments underperform?”
Private equity firms must take initiative in sharing information with limited partners as the industry evolves. A study shows that 42% of institutional investors turned down a PE firm due to transparency and communication concerns. The study also found that 60% of institutional investors consider transparency a crucial factor in making decisions.
Examples of past underperformance
The firm’s handling of previous investment challenges provides valuable insights. Smart private equity managers know that their message to LPs and the broader market becomes crucial during tough times.
Take fundraising shortfalls as an example. Quality firms handle expectation adjustments with transparency. Some choose to hold “quiet” closes to build momentum before formal announcements. Others might revise targets downward and explain their reasoning to existing investors. Sophisticated investors prefer this approach since they “don’t want you hanging out there forever”.
Access to decision-makers and investor support
The level of access to decision-makers during turbulent periods matters significantly. Leading firms ensure their leadership remains accessible to investors during both good and challenging times.
Ask these specific questions when evaluating PE firms:
- “Who is my primary contact during challenging periods?”
- “What is your protocol for escalating investor concerns to senior leadership?”
Primior welcomes you to schedule a customized discussion about evaluating private equity communication practices for your investment strategy: https://primior.com/start/
Conclusion
Final Thoughts: Protection Through Proper Due Diligence
These five critical questions will make your private equity due diligence process more resilient and strategic by a lot. Getting the full picture protects your capital, even though it takes extra work upfront. This matters even more in 2025’s uncertain investment world.
Private equity beats public markets over long periods. Your success depends on picking the right partners. The best firms show steady performance through market cycles. They use sophisticated tech infrastructure, maintain their own deal flow, line up economic interests with investors, and stay open during tough times.
Market uncertainty brings both risks and chances. Teams that know how to handle downturns often spot unique deals when values drop. On top of that, firms with advanced data analysis tools can find hidden gems others miss. But these benefits only come when interests line up through smart fee structures and meaningful GP co-investment.
A firm’s true character shows in how it handles tough times. Great partners give quick updates, clear explanations, and let you talk directly to decision-makers when investments struggle.
Make sure any private equity firm gives solid answers to each question we covered in this piece before you invest. Getting the full picture matters more than making assumptions.
Want to see how these questions fit your investment strategy? Our team at Primior helps investors evaluate private equity opportunities. Book your individual-specific strategy call today: https://primior.com/start/
