Skip to main content

Focus Matters: An Untracked KPI for PE Firms

· 4 min read
Ali Dastjerdi
Ali Dastjerdi
CEO @ Raylu

Focus Matters

Focus Matters: An Untracked KPI for PE Firms​

In the world of private equity (PE), the prevailing belief is simple: as long as you pick the right opportunities to invest in, you will be a top-quartile fund with excellent returns. The logic behind this is straightforward—almost all deals, except a small handful of truly proprietary opportunities, are seen by every fund. The best funds bid the right price to win deals on the best companies.

The Hidden Challenge​

But here's the catch: not every fund truly "sees" every opportunity. Sure, you receive the data room, and an analyst performs at least a quick review of every deal—but how many diamonds in the rough with outsized return potential die well before they reach the Investment Committee (IC)?

It's not just that firms prematurely passed on deals that ended up driving returns for other funds. They also spent an enormous amount of mental energy focusing on deals that ultimately went nowhere. Most ICs pride themselves on being objective in their evaluations, but human bias forces everyone to think in relative terms. Did you really back the best if it's just better than the other options you saw?

The Investment Funnel​

Everyone knows that PE funds work through a funnel, with thousands of opportunities getting a cursory look and only a few dozen ever going to IC, backed by a massive amount of research. However, the nuanced point is that it matters how good your investment team is at deciding which opportunities get a glance versus a deep dive. There is a finite amount of focus any fund has. Yes, the investment team can always push harder and work more hours—but real focus and proper decision-making are finite resources. The best funds triage that focus effectively, only on what matters most.

Introducing the Deal Focus Score​

I propose a new KPI for PE: the Deal Focus Score.

Deal Focus Score = 1 - (premature passes + excess diligence) / total opportunities seen

Different funds have varying processes for evaluating opportunities and progressively digging deeper, but a general heuristic should be:

  • Premature pass: Any deal that was eventually done by a well-respected competitor that did not reach an IC discussion.
  • Excess diligence: Any deal that could have been passed on faster. A strong indicator is if the eventual pass reason was something known early on.

The Power of Focus​

Optimizing for the Deal Focus Score forces every member of the investment team to make a series of incremental judgment calls on what deals matter. You can think of the Deal Focus Score as a powerful proxy for investment judgment for associates, principals, and junior partners who "invest" with their focus. Given the difficulty of long time horizons and the low number of using fund return metrics like MoM or IRR to evaluate the effectiveness of an investment team, the Deal Focus Score is a highly compelling way to motivate and continually develop the proficiency of an investment team.

Tracking and Improvement​

By tracking and improving your Deal Focus Score, you ensure that your team is not just busy but effective—focusing their finite resources on the opportunities that truly matter and optimizing their decision-making process along the way.

Conclusion​

In conclusion, focusing on the right metrics can transform the way PE firms evaluate and capitalize on opportunities. The Deal Focus Score is a step towards refining this process, ensuring that valuable deals are not overlooked and that resources are allocated efficiently. By adopting this KPI, PE firms can enhance their investment strategies and achieve sustained success.