Investment Criteria

Separate from different strategies, private equity firms typically have a specific set of investment criteria that they adhere all of their investments to. These criteria can take form of a variety of factors described below.


Revenue criteria depends on the size of the private equity fund, the stage of the fund, and the amount of leverage that the private equity firm is able to put on the company. Typically the revenue criteria for megafunds is less defined. Middle market private equity funds tend to focus on companies with as low as $50mm in revenue to as much as $500mm in revenue.


Private equity firms will generally require a minimum amount of EBITDA. Again, the larger the private equity investment, the larger the EBITDA investment. Megafunds will generally look at companies with EBITDA>$100mm in a typical buyout while the average middle market fund might look at investments with a minimum EBITDA of $10mm.

Transaction Size

After looking at minimum revenue and EBITDA for a company, it will look at the overall transaction size- or the total amount it will have to pay for the company. This transaction usually includes some sort of premium on the market price if the company is public.

Again this transaction size differs for megafunds and middle market funds. To give some perspective, the largest buyout ever was the $48bn LBO of Energy Future Holdings led by KKR, TPG, and Goldman Sachs. Though this was the largest LBO in history, it is not uncommon to see megafunds making transactions in the $1bn-$5bn range. Middle market funds typically target transaction sizes less than $1bn.

Equity Investments

In any LBO, a private equity firm must invest a certain amount equity along with debt to fund the transaction. Today, most lenders will require private equity firms to write an equity check of 30%-50% of the total transaction price.

As a result, many private equity firms will set targeted equity investments in their investment criteria. Private equity firms are looking for the most optimal leverage level for each particular business that they acquire, and private equity firms may lever some businesses more than others. This does not differ between megafunds and middle market funds.

Qualitative Investment Criteria

Many private equity firms will target specific qualitative criteria with their investments including-

  • Experienced management team
  • Strong cash flows
  • Positive industry dynamics
  • Track record of profitability
  • Sustainable competitive advantage
  • Established business model
  • Low capital requirements (Capex and NWC)
  • Significant growth and reinvestment opportunities
  • Operational efficiency opportunities
  • A specific industry
  • “Buy and Build”
    • A situation where the private equity firm can make strategic acquisitions to add to a portfolio company and add value
  • Cost synergies
    • Companies that have immediate places where costs can be cut to improve margins

Types of Private Equity Investments

Private equity firms invest and buy many difference types of companies. Some focus specifically on one type of investment, and each type of investment has different characteristics. Some examples include-

  • Family-owned businesses
  • Founder-owned businesses
  • Corporate cave-outs
  • Underlevered businesses
  • Distressed business
  • Expansion capital for proven businesses
  • Special Situations in private and public companies
  • Management buyouts
  • Growth capital
  • Seed funding for businesses that are not yet profitable
  • Mezzanine funding


Many private equity firms specialize in specific industries or even sub-sectors of industries. Some popular industries that private equity firms are focusing on right now include-


Some private equity firms specialize in investments in specific regions. The following are the most common investment regions-

  • Companies with operations only in the United States
  • United States headquarters with Global operations
  • Global Companies