How to Underwrite Private Market Deals

The first failure in private market underwriting often happens before the numbers are even reviewed: investors confuse market enthusiasm with investment quality.

A polished founder, top-tier branding, glowing press, a waitlisted allocation, big-name angels, institutional logos, or a fast-moving round can all create the impression of quality. None of these, on their own, are tangible underwriting variables.

A deal can be well marketed and still be structurally weak, overvalued, poorly governed, or misaligned with the investor's return threshold.

A disciplined allocator should start with basic but non-negotiable underwriting questions:

• What is the entry valuation on a fully diluted basis?
• What revenue, margin, or strategic milestones are required to justify that entry price?
• What comparable companies or transactions support the valuation?
• Is the company priced on current fundamentals, forward growth assumptions, or narrative-driven scarcity?
• What is the realistic exit path: M&A, sponsor sale, secondary sale, IPO, continuation financing, or perpetual private holding?
• What assumptions must be true for that exit to occur within a reasonable time horizon?
• What are the likely dilution events between entry and exit?
• What happens to ownership and value in a downside or flat-growth case?

This is where a brief scenario analysis should come into play. A robust underwriting process should model at least three cases:

• Base case: reasonable execution, moderate growth, standard dilution, realistic exit multiple
• Upside case: strong execution, favorable market timing, premium exit outcome
• Downside case: missed milestones, extended time to liquidity, compression in multiple, additional capital raises

The allocator should then ask:

• What is my gross multiple on invested capital (MOIC) and net MOIC under each case?
• What is my expected internal rate of return (IRR), given likely holding period?
• What assumptions drive the sensitivity most: revenue growth, margin expansion, dilution, or exit multiple?
• Is there enough upside after fees, carry, and friction to compensate for illiquidity and execution risk?

If the answer depends on heroic assumptions, it is not disciplined underwriting.

One of the biggest blind spots among international investors entering U.S. private markets is structural misunderstanding.

Many investors think they are underwriting a company when in reality they are first underwriting a vehicle. And the vehicle may have a greater impact on realized returns than the underlying company itself.

This is particularly relevant in SPVs, feeder funds, nominee structures, Series LLCs, offshore blockers, layered syndicates, and other pass-through arrangements frequently used to facilitate access.

Two investors can gain exposure to the same company and end up with very different economics, rights, reporting access, and liquidity outcomes depending on the structure through which they invested.

Before evaluating the company, LPs should ask:

• What exactly am I buying: direct equity, beneficial interest, membership interest, feeder interest, or another claim?
• Is my exposure direct or indirect?
• Are there multiple layers between my capital and the underlying cap table?
• Is the vehicle acquiring common shares, preferred shares, SAFEs, convertible notes, or some synthetic exposure?
• Is there a master SPV or parallel feeder structure?
• Who is the legal owner of record?
• Do I have privity with the underlying issuer, or only with the SPV manager?
• What transfer restrictions apply?
• Are there lockups, ROFRs, company consent rights, or limitations on secondary resale?

This matters because investors often assume "I own shares in Company X," when in practice they own an interest in an SPV whose manager owns an interest in another vehicle that has economic exposure to Company X.

This distinction could impact all of the following:

• governance rights
• information rights
• liquidity rights
• fee leakage
• tax treatment
• enforceability of investor protections
• ability to participate in future rounds
• exposure to administrative or legal costs at the vehicle level

We suggest conducting a technical review of vehicle mechanics covering:

Capital structure

• What security is being purchased?
• What is the seniority of that security?
• What is the liquidation preference?
• Is there participating preferred, anti-dilution protection, pay-to-play, or other preference stack complexity?

Fee stack

• Are there setup fees?
• Annual administration fees?
• Management fees at the SPV or feeder level?
• Carried interest?
• Broken deal costs?
• Audit, tax prep, legal, compliance, banking, or wire fees?

Governance

• Does the SPV manager have sole discretion?
• Are there advisory votes?
• Do investors have removal rights?
• Who controls follow-on decisions, consents, waivers, and amendments?
• Can the manager sell, distribute, or hold indefinitely?

Liquidity

• Is there a fixed term?
• Are extensions allowed unilaterally?
• Can the manager distribute in-kind?
• What events trigger monetization?
• What happens if the underlying company remains private longer than expected?

In public markets, transparency is partially embedded into the system. In private markets however, transparency must be deliberately demanded.

LPs should not view reporting discipline as a nice-to-have. It is a crucial underwriting factor.

A manager, syndicate lead, or SPV sponsor who cannot explain the full structure, economics, and information flow clearly is not merely disorganized. They are increasing the probability of misalignment, monitoring failure, and negative surprises later.

Before wiring capital, investors should require clarity on the following:

• quarterly reporting cadence
• annual financial statements
• portfolio company operating updates
• capitalization updates where relevant
• valuation methodology
• disclosure of all fee layers
• treatment of broken-deal expenses
• reserve policy for follow-ons
• conflicts of interest policy
• side-letter rights, if any
• investor communication protocol during material events

A strong manager should be able to explain, within the first 30 minutes of a call:

1. What the investor is buying
2. How the structure works
3. Where fees are charged
4. What rights the investor does and does not have
5. How performance will be monitored
6. How and when liquidity may occur

If the explanation remains vague after repeated questioning, that ambiguity is itself a red flag.

Technical diligence questions around transparency:

• How is fair value determined between financing events?
• Does the manager follow a formal valuation policy?
• Are markups tied only to third-party rounds, or are they internally estimated?
• How are write-downs handled?
• Are portfolio updates standardized or selectively shared?
• Will investors receive look-through reporting where possible?
• What KPIs are tracked at the portfolio company level?
• Is there independent fund administration or third-party audit oversight?

Opacity compounds risk because it weakens the investor's ability to monitor drift, assess changes, and respond intelligently.

A common mistake in private markets is focusing entirely on the company while failing to diligence the person or institution bringing the deal. But in many private market structures, the sponsor, GP, or syndicate lead is not a neutral access point, which means you are not just investing in an asset.

You are investing in someone else's judgment, incentives, and process.

That means the allocator must ask:

• Who sourced the deal?
• Why do they have access to it?
• What is their edge?
• What diligence did they actually perform?
• What materials are original versus repackaged from the founder?
• How much capital are they personally committing?
• How do they get paid?
• What happens if the deal underperforms?

A sponsor with no real downside, limited capital at risk, and economics that reward transaction velocity over investment quality may be structurally incentivized to maximize deal flow, not investor outcomes.

Track record quality

Underwriting the manager should include:

• Is the track record realized or mostly unrealized?
• Are returns gross or net of fees?
• Are exits actually distributed, or simply marked up?
• Were successful deals concentrated in one vintage or strategy?
• Were prior wins due to access, timing, leverage, or repeatable skill?

Process discipline

• Is there an investment committee?
• Are there written underwriting memos?
• Does the team run downside cases?
• Are legal, technical, market, and commercial diligence separated or conflated?
• How are conflicts handled?

Alignment

• Is there meaningful GP or sponsor commitment?
• Are economics structured for long-term outcomes or near-term syndication volume?
• Are follow-on reserves handled responsibly?
• Does the sponsor benefit even if investors experience poor net outcomes?

While much of the underwriting process is standard across structures, there are certain things you should be considering depending on whether you are evaluating a blind-pool fund, a single-asset SPV, or a syndicate-led deal as each structure distributes risk, control, and information differently.

A. Traditional Fund

In a fund structure, you are underwriting the GP's ability to source, select, construct, and manage a portfolio over time.

Core diligence areas:

• track record across vintages and cycles
• sector specialization and sourcing edge
• portfolio construction discipline
• reserve strategy
• decision-making framework
• team stability
• governance and key-person risk
• fund terms, fees, recycling, and carry waterfall

Key questions:

• What does loss ratio look like?
• How concentrated are outcomes?
• What percentage of value comes from top holdings?
• How does the GP behave in down cycles?
• What is the pacing model for capital deployment?
• How are follow-ons decided?

B. SPV

In an SPV, you are underwriting a specific asset and the mechanics of the wrapper.

Core diligence areas:

• entry valuation
• terms of security purchased
• fee leakage
• manager discretion
• timeline to liquidity
• concentration risk
• dilution risk
• legal rights at the vehicle level

Key questions:

• What are the all-in net economics after SPV fees and carry?
• Is this a primary or secondary transaction?
• Are there information rights from the issuer?
• Can the SPV participate in pro rata rounds?
• What happens if the underlying company delays liquidity for years?

C. Syndicate

In a syndicate model, you are underwriting both the deal and the sponsor's ability to filter, negotiate, and monitor it.

Core diligence areas:

• sponsor credibility
• sourcing quality
• repeatability of access
• underwriting standards
• incentive alignment
• diligence package quality
• post-close communication

Key questions:

• What independent diligence has been done?
• Has the sponsor stress-tested the assumptions?
• What are they not sure about?
• How does the sponsor get compensated?
• How much of their own capital is in the deal?
• What rights, if any, are passed through to syndicate participants?

A "good deal" is not defined by prestige, scarcity theatre, or whether well-known names are in the round.

From a technical underwriting perspective, higher-quality opportunities tend to share several characteristics.

1. Repeat founders with credible execution history

Not just charismatic founders, but operators who have navigated scaling constraints, capital formation, and prior exits. A repeat founder with scar tissue tends to make better decisions around hiring, burn, timing, and capital allocation than a first-time founder optimizing for optics.

2. Capital efficiency

A company that has created meaningful progress per dollar of capital is generally more resilient than one that has relied on abundant funding to manufacture growth optics. Efficiency is especially important in environments where capital is no longer free.

Questions to ask:

• What milestones were achieved with prior capital?
• How quickly does burn convert into product, revenue, or defensibility?
• Is spend disciplined or vanity-driven?

3. Ability to recruit and retain strong talent

A company's hiring quality often reveals more than the pitch deck. Great founders can recruit disproportionate talent before the market fully understands the opportunity.

Questions to ask:

• Who joined early and why?
• What is employee churn?
• Is the company attracting operators or just enthusiasts?

4. Real moat, not cosmetic differentiation

A moat can be technological, regulatory, operational, distribution-driven, data-driven, or ecosystem-based. But it must be difficult to replicate and relevant to margins or market power.

Questions to ask:

• Is there actual defensible IP?
• Does the company have proprietary data, switching costs, regulatory barriers, or infrastructural lock-in?
• Is the moat durable or just temporary product novelty?

5. Timing aligned with structural shifts

The strongest companies often sit where capability meets inevitability: compute, energy, logistics, defense, AI infrastructure, industrial automation, supply chain resilience, applied software in regulated sectors, and other areas shaped by deep structural demand rather than transient excitement.

Questions to ask:

• Is this company riding a durable market shift?
• Is demand cyclical, speculative, or structurally embedded?
• What infrastructure dependencies support or constrain growth?

A strong deal is one where business quality, entry terms, structure, sponsor quality, and timing all work together.

Many family offices entering direct private markets from a relationship-driven or opportunistic angle have strong instincts but limited formal underwriting infrastructure. While this is understandable, once capital starts moving into concentrated, illiquid, privately negotiated transactions, informal intuition is not enough. A robust underwriting process should be consistent across every investment.

Each opportunity should be reduced to a written investment memo-covering the business model, market dynamics, competitive positioning, valuation, structure, governance, dilution, exit pathways, and, critically, the reasons not to invest.

Before committing capital, investors should be able to clearly articulate:

• What must go right
• What can go wrong
• Where the break-even point sits
• What return is being earned relative to illiquidity and risk
• Whether the opportunity is genuinely additive to the portfolio