A PE fund’s refusal usually says more about the fund than about the company

It was late in the evening, and we were sitting in a newly opened bar in central Warsaw. A friend of mine, a partner at a private equity fund, ordered his third beer and said he was very tired of saying no. I asked how many companies he looks at for every one his fund eventually invests in. He said about a hundred. I have changed the details so that neither the fund nor the person I spoke to can be identified.

So saying no is his main job. The entrepreneur on the other side of the table does not see this and takes the refusal as a verdict on his company. When, after the third refusal, he cuts the price by 15 percent on his own and starts fixing something in the company that was not the reason, he is paying for information he never obtained.

A well-known study published in 2016 confirms the scale of this selection. Paul Gompers, Steven Kaplan and Vladimir Mukharlyamov asked 79 private equity funds, with more than USD 750 billion under management in total, about their practice. Out of every hundred companies it initially considers, the average fund examines fewer than 24 in detail, signs an agreement with fewer than 14 and closes a deal with six. My friend’s fund is pickier than average. In both cases more than ninety companies out of a hundred are turned down, because that is what the ordinary work of a PE fund looks like.

The hard data comes mainly from the US, because equally detailed statistics are lacking in Europe. The mechanisms are the same, but the proportions in Poland may differ.

Refusals that say something about the fund

The calendar is the easiest thing to check. A PE fund usually has a life of ten years, and it can spend the capital entrusted to it by its investors on new acquisitions for roughly the first five. In the second half of that period it has to grow the companies it bought and sell them. In its seventh year it no longer has time to buy a new company, scale it up and sell it at a profit, so it will reject even an excellent company. The year the fund was set up and the date of its last investment can be checked before the first document is sent. An older fund that has not bought anything for eighteen months has most likely finished its investment period. It then talks to the entrepreneur mainly to know what is happening in the market.

The portfolio also decides refusals. A fund that holds a competitor in its portfolio will neither buy the company nor finance it, because it would harm its own investment. Sometimes it lost an auction for a company in the same industry three months earlier. It then knows exactly how much it was prepared to pay for a similar business and judges the next one by the same yardstick, usually to its disadvantage. The entrepreneur will not hear any of these reasons, because the fund would have to reveal its strategy.

There is also a reason the entrepreneur learns about least often. Fund teams are small. A partner runs three, at most four, projects at a time, and each takes him about two years. When his hands are full, he turns down good companies and knows they are good. That is exactly what my friend was tired of over his third beer.

A PE fund needs someone to run the company after the deal. According to the study by Gompers and his co-authors, almost 58 percent of funds themselves recruit people for the management of the company they are buying, before or after the deal. Such recruitment takes time, however. An owner who wants to leave the company without a successor in place means extra work and risk for the fund, and toward the end of its investment period the fund cannot afford that.

The company may fall outside the fund’s mandate, meaning the investment rules agreed with its investors. It may be too small or too large, or operate in a different industry or country. The entrepreneur wants to sell a minority stake, while the fund buys only majority stakes. The conversation then ends for reasons unrelated to the quality of the business.

Decisions are also affected by the excess of uninvested capital in the market. According to a Bain & Company report, in mid-2025 buyout funds, meaning funds that buy controlling stakes in companies, had about USD 1.2 trillion available, of which almost a quarter had been waiting to be spent for at least four years. The pressure to invest is therefore real. Yet the same excess of money drives up prices in auctions, so more cautious funds pull out of them more often.

Refusals that say something about the company

A PE fund works out the price backward from the rate of return it has to show its investors. In the study by Gompers and his co-authors, funds targeted 22 percent a year on average, most often in the range of 20 to 25 percent. Fewer than one in five of them valued companies using the discounted cash flow method. In practice two measures count: the average annual rate of return and how many times the fund multiplies the amount it put in by the day it sells the company. An entrepreneur who brings a valuation based on a multi-year cash flow forecast is therefore speaking a different language from the fund.

When choosing a company, the surveyed funds put the business model and market position first. Close behind, roughly on a par, come the management team, the fund’s ability to increase the value of the company, and the price.

Further reservations come up during the quality of earnings review, when the buyer’s advisers check how much the company really earns. Most often they find revenue booked too early, the owner’s private expenses in the company’s costs, and costs described as one-off that recur every year. Each such adjustment lowers EBITDA, that is operating profit plus depreciation and amortization, on which the valuation depends. I wrote about this in my pieces on the EBITDA bridge, meaning the summary of adjustments to earnings, and on due diligence.

Customer concentration also calls for caution. A customer accounting for more than 15 percent of revenue prompts the investor to examine the commercial contract with that customer in detail. When one customer accounts for more than 30 percent, many investors walk away, and the rest value the company a dozen or so to thirty-odd percent lower than a business with diversified sales. The dependence of the business on its owner works in a similar way. The buyer estimates how many customers would leave with him and lowers the price or makes part of it conditional on the owner staying in the company for two years. Finally, the fund has to know on the day it comes in to whom it will sell the company in five years. If it cannot see such a buyer, it does not invest.

How to read a refusal

The reason for a refusal often shows in the way it is delivered. A short reply after ten days, in one general sentence, most often means a mismatch with the mandate or some other constraint on the fund’s side. Withdrawal after a meeting with the management team, preceded by detailed questions about margin or customer losses, concerns the company itself. Someone at the fund has spent time on it, so such comments are worth taking seriously. The fund can be asked what would have to change for it to come back to the table in a year. The answer costs it nothing. A fund with a calendar problem will then say that the reason lies on its side, and a fund with substantive reservations will list them.

Refusals stop saying something about the fund when several of them come after meetings with the management team and each concerns the same thing, for example margin or a single customer. They are then a verdict on the company, and lowering price expectations or fixing that area before the next attempt is a sensible decision.

Industry reports do not describe how entrepreneurs react to successive refusals. At Capital One Advisers we hear about it often, and the pattern is similar every time.

The entrepreneur takes the first refusal calmly and concludes that he has gone to the wrong fund. The second makes him look for the cause in himself and cut the price, even though nobody asked him to. After the third he stops believing in a company he has considered good for twenty years, because three people turned him down in two-sentence emails. The fourth ends with him taking offense at the market. He decides that funds understand nothing and puts the sale off, usually for two years.

Those two years cost money. The sales director, who realized during successive meetings with investors that the company was for sale, loses his sense of stability and leaves. The contract with the largest customer expires and is renewed on worse terms. Market multiples may fall by two times EBITDA in that period. After two years the entrepreneur comes back with a weaker company to a weaker market, and this time the refusals really are about the company. Taking offense at the market is the most expensive reaction to a refusal I have seen, because during two years of standstill both the company and its negotiating position weaken.

A collapse after the letter of intent costs the most

A refusal before talks begin costs the entrepreneur little. A collapse after signing a letter of intent, the preliminary agreement on price that gives the buyer exclusivity to examine the company, costs a lot. By then the entrepreneur has already sent the other interested parties away and paid his advisers.

Axial, a US deal platform, analyzed 75 such collapses in 2025 in small transactions involving PE funds and other investors. In 25.3 percent of cases the cause was problems found in due diligence outside the financial results themselves, for example in commercial contracts or pending proceedings. In another 21.3 percent the company’s actual profit turned out to be clearly lower than declared. Together, the examination of the company therefore accounts for almost half of the deals that fell apart after the letter of intent was signed. Since 2023 the share of collapses caused by overstated earnings has doubled, while the share caused by a lack of financing has halved. Buyers walk away less often than they used to for lack of money, and more often because they found something in due diligence.

A price adjustment mechanism at closing is almost universal today, but it changes the price very little. SRS Acquiom, a US firm, analyzed more than 1,570 deals closed in 2020–2025 and found such a mechanism in 92 percent of the agreements. Where the adjustment was settled, it lowered the price in 51 percent of cases and raised it in 38 percent. The average reduction, however, was 0.76 percent of the deal value. Such an adjustment mainly evens out working capital, meaning the money tied up in inventory and receivables after deducting amounts owed to suppliers. Only problems found in due diligence change the price in the letter of intent materially. A dispute over a new price often ends with talks breaking down, and according to Axial failed renegotiations caused another 14.7 percent of collapses.

A price dispute can be resolved through deal structure

Many of the buyer’s concerns about the company’s future can be addressed through the structure of the agreement alone, without rebuilding the business.

A dispute about future results can be settled by making part of the price depend on whose forecast proves right. Such a contingent payment, known as an earn-out, requires a precise definition of the metric and agreement on who runs the company after the deal. I have written about this separately, and I stand by my warning that it is the most common source of later disputes. If, on the other hand, new capital goes into the company to fund growth, the fund can pay it in tranches, as successive stages of the plan are completed.

When the buyer fears that the business will weaken without its owner, the owner can reinvest part of the proceeds in shares of the new company. He then loses together with the fund if the plan fails. This usually involves anywhere from a dozen or so to forty percent of the proceeds. The shares the owner takes up, however, rarely carry the same economic rights as the fund’s instruments. The fund as a rule reserves priority in distributions for itself, for example through preference shares or interest-bearing shareholder loans that are repaid before profits are distributed. For the seller, the place in the queue for future payouts therefore matters more than the size of the stake.

An owner who wants to keep control can sell a minority stake. The dispute then moves to the provisions of the agreement on who can block which decisions. The parties can also agree on an exit route in advance, meaning call and put options over the remaining shares, with the method of calculating the price written into the agreement. Missing financing is sometimes supplied by the seller himself, who defers part of the payment and in this way lends the buyer money. A company too large for one fund can be bought by two funds jointly. The buyer can also pay more in exchange for preference shares that give it priority if the plan fails.

The objection that the company is too small loses force when the business can become a platform, meaning the first company to which the fund adds further businesses from the same industry. According to PitchBook data, such add-on acquisitions accounted for 72.9 percent of all buyouts in the US in 2025.

Each of these structures requires both sides to be able to discuss it. An entrepreneur who sees an earn-out proposal as nothing more than an attempt to cheat him, and a buyer who cannot say what he is protecting himself against, will not reach agreement. At such a table it helps to have someone who has sat on both sides.

Choosing the investor and the list of recipients

The right type of investor depends on the owner’s goal, yet many entrepreneurs start with a list of fund names. In a competitive process the highest price is usually paid by a strategic investor, who calculates how much the company will add to its own business. In the example from the article on four valuations of one company, a strategic investor that was not yet in that line of business offered 12 times EBITDA, and a PE fund 8.5 times. A second strategic investor, already running a similar business, offered only 5 times. The owner pays for the premium with integration into the buyer and often with the loss of the brand. A family office, an entity that invests the wealth of a single family, holds companies for ten or twenty years and keeps the people and the organizational culture, but usually pays less.

Paying out a partner or growing the business can be financed with debt, including mezzanine, which is financing that sits between a bank loan and equity. The company can be bought out by its management or bought by an outside manager who will run it himself. There are also investors who build portfolios for decades and do not plan to sell. The stock exchange provides capital and liquidity at the cost of disclosure and pressure for quarterly results, while selling a minority stake reduces the risk of an owner who keeps control.

From a list of twenty funds, eight may have finished their investment period, four may hold a competitor in their portfolio and three may have no partner available. That leaves five. A process run on the full list then looks like a market failure, although the mistake was made when the list was drawn up. For an analyst with access to transaction databases, checking when a fund was set up, when it last invested and what it holds takes about two days of work.

At Capital One Advisers we start even earlier, by diagnosing the owner’s goals. We establish what kind of investor to look for and whom to cross off before the first document is sent, because fund contact details alone are public. Then we prepare the materials on the company, design the deal structure and negotiate the agreement, sometimes until the last moment before signing.

Advisers differ, however, on how wide the process should be. Some send materials to twenty funds, because they count on a bidding contest and treat fifteen refusals as a cost. Others choose five recipients, because a shorter list better protects confidentiality and spares the owner a series of refusals. Which choice is better depends on how many realistic buyers the company can count on and how much news of a planned sale would hurt it.

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