If fundraising is successful, we can enter the second activity of the managerial process, where the second activity is represented by investing. The label investing is honestly quite intuitive and simple because investing means simply investing money, the money of investors. And as you know, closed-end funds and venture capital funds have 10 years of time to invest their money. But if we want to understand something more, the label investing is not so easy. Because investing means two very different activities. First of all, investing means to decide if it makes sense to invest or not in a certain company, and this activity is named decision-making. But if we decide to invest in a company, a second activity starts, and the second activity is named deal-making. Deal making means negotiating the contract of investing with a certain company. Just to give an example, let's imagine I scout, identify a certain company. I consider this company very good and I want to invest. This is decision-making, but it's a completely different story to design the contract to invest in this company, where designing the contract means, for example, to calculate the amount of shares we have to buy, to set up the rights and the corporate governance rules. As you can imagine, it’s a very tough activity, and even if the decision was positive, what can happen is that in the deal-making basically we stop the decision to invest. But now the focus is to understand how the the decision making process work. Some authors and practitioners really love to say, not only, decision-making, but also deal flow, just to give the idea that the decision making process has got the aim to generate, hopefully, a very huge flow of deals the PEI can consider to invest in. The decision making is based on very different steps. In every step there is a different involvement of the different players working in the vehicle of PE. If you remember, in a vehicle of PE, we have managers, or general partners that are the key players and actors, but we also have a technical committee helping the general partners do their job. As well, we have an advisory company advising the general partners to do their job. So in the decision-making process, we have different involvement of these different players working in a PE firm. What is the first step? The first step is represented by origination. Origination means to originate (create) ideas of investment. Typically origination is based on two different drivers. The first driver, is basically related to the fact that origination is spontaneous. Because since you are a PEI, and the entire business system knows that you have a lot of money, a lot of people, every day, are going to come knocking on your door suggesting an investment to you. Your capability to be able to screen through the throngs of proposals is important. What proposal really makes sense? On the other way around, origination is based on proactive activity. Proactive means that general partners have to run and walk into the market and scout potential businesses; and definitely, they are paid to do that. In origination, general partners, however, are supported by the advisory company and the technical committee also because the advisory company and technical committee could originate businesses. At the end of the process of origination, a second activity starts. The second activity is the activity of screening. Screening means screening all the proposals, or dossiers that the PE firm received and finding which kind of dossier and/or proposal really makes sense. Just to give you a very rough idea, the anecdotal evidence says that in considering 100 proposals that a PE firm receive, screening means canceling 90 proposals. It’s a way to say 90 proposals are rubbish. Only 10 really make sense to be investigated in. The screening activity is completely driven by the general partners. They are paid precisely to do that. The output of the screening is a very small number of proposals and dossiers that makes sense to investigate in, and now, we start another activity, which is activity number three, which is represented by due diligence and valuation. Due diligence and valuation means to analyze the business plan, to check numbers, and to investigate if the business idea really makes sense. Yes, it means doing that. It’s time consuming. It's not easy. That's the reason why we need a screening activity before. We do not have time to run valuation and due diligence on 100 dossiers. It makes sense to run due diligence of valuation only on 10 out of 100. The valuation and due diligence is devoted to exclude other proposals that don't work. The outcome of valuation and due diligence is a small number of proposals where it makes sense to run the so-called rating assignment. Rating assignment means to give a rating to the dossier the PEI received, where rating assigned is fundamental to understand the level of risk, but it could also be relevant in case we have to collect money through debt. For example, in a leveraged buyout, where the SPV has to be financed using debt, to know the rating in advance is fundamental, because if the rating is not good, we have to stop activity. After the rating assignment, we have to enter activity number five, where activity number five is negotiation. Negotiation is driven by the general partners and it's a negotiation with the company where basically, the idea is to understand if there is room to run the investment. For example, a very relevant topic related to negotiation is based on the value of the company. If it's very distanced, The idea of the value, between the general partners and the company, honestly becomes very difficult to go on. If the negotiation is successful, we get to the last phase, or activity which is the decision to invest. The decision to invest is made by the board of general partners, or the board of directors of an AMC, where all the managers have to meet, and they have to decide if it makes sense to invest money. Obviously, to invest money doesn't mean to give money to the company, but it means to start the second phase of the activity of investing, where the second phase is deal-making.
