Investment teams cannot investigate every opportunity to the same depth. Nor should they.
An effective investment process therefore requires different levels of analysis at different stages. The objective is to progressively test the assumptions that matter, allowing weaker opportunities to be identified early while directing greater resources towards those that continue to demonstrate investment potential.
This is particularly important when opportunities arrive from multiple sources, including advisers, personal networks, entrepreneurs, managers and other investors.
A structured process can help turn that flow of opportunities into a more disciplined path towards investment conviction.
Deal Screening: Should We Look Further?
Deal Screening is the first filter.
At this stage, the objective is not to reach an investment decision. It is to determine whether an opportunity deserves further attention.
The initial questions are deliberately straightforward:
- Does the opportunity fit the investment mandate?
- Is the market potentially attractive?
- Does the business model make sense?
- Is the opportunity financially relevant?
- Are there obvious red flags?
- Is it worth committing additional time to the opportunity?
This initial screening should be proportionate. Its purpose is to eliminate opportunities that clearly do not fit while identifying those that warrant further investigation.
An opportunity that passes Deal Screening does not necessarily proceed directly to full Commercial Due Diligence.
There is an important stage in between.
Commercial Evaluation: Testing the Investment Case
Commercial Evaluation sits between initial Deal Screening and full Commercial Due Diligence.
Its purpose is to test the most important commercial assumptions before an investor commits significant time and resources to deeper diligence.
This is where the emerging investment thesis begins to face greater scrutiny.
Areas typically considered during Commercial Evaluation include:
- market attractiveness
- structural growth
- competitive positioning
- differentiation
- the business model
The questions become more demanding than those asked during initial screening.
Is the market opportunity as attractive as it first appeared? Is growth supported by structural factors? Is the company’s competitive position defensible? Is its differentiation meaningful? Does the business model support the investment case?
By the end of Commercial Evaluation, the investor should have a clearer understanding of four things: what appears credible, what remains uncertain, what could undermine the investment thesis and what requires deeper investigation.
This allows the investment team to make an important decision before undertaking full Commercial Due Diligence:
"Does the emerging investment thesis justify committing additional resources, or should the opportunity be passed on at this stage?"
That distinction matters.
The purpose of Commercial Evaluation is not to replicate full diligence. It is to establish whether full diligence is justified.
Commercial Due Diligence: A Deeper Examination
If an opportunity survives Commercial Evaluation, the investor can then commit the resources required for full Commercial Due Diligence.
The analysis now becomes substantially deeper.
Commercial Due Diligence may examine:
- customer demand
- market structure
- competitive durability
- pricing
- growth assumptions
- customer concentration
- scalability
- execution
- downside scenarios
At this stage, the distinction between a good company and a good investment becomes increasingly important.
"An attractive company is not necessarily an attractive investment."
A business may have strong products, capable management and an attractive market position, yet still fail to meet an investor’s requirements.
Valuation may be too demanding. Growth assumptions may be unrealistic. Execution requirements may be greater than anticipated. Customer concentration or competitive pressure may materially change the risk profile.
Commercial Due Diligence therefore needs to test not simply whether the company is attractive, but whether the investment thesis remains credible under closer examination.
From Research to Investment Conviction
Once an opportunity has progressed through Deal Screening, Commercial Evaluation and Commercial Due Diligence, the investment team should be in a position to form an investment conviction.
By the time the opportunity reaches the Investment Committee, the priority should no longer be simply accumulating more information.
The priority is clarity.
The Investment Committee should be able to address several fundamental questions:
- What is the investment thesis?
- What evidence supports it?
- What are the critical assumptions?
- What could cause the thesis to fail?
- What uncertainties remain?
- Are those risks acceptable at the proposed valuation and expected return?
This is where the work undertaken throughout the earlier stages of the investment process should come together.
Research has value when it improves the quality of the investment decision — not simply when it increases the amount of information available.
Applying the Right Level of Research
The investment process can therefore be viewed as a progression:
"Deal Screening → Commercial Evaluation → Commercial Due Diligence → Investment Conviction"
Each stage has a different purpose.
Deal Screening
Should we look further?
The first filter determines whether the opportunity merits additional attention.
Commercial Evaluation
Does the emerging thesis justify deeper diligence?
The investor tests the key commercial assumptions before committing significant additional resources.
Commercial Due Diligence
Are the important commercial assumptions robust enough to underwrite?
The opportunity is subjected to deeper analysis across the market, customers, competition, pricing, growth, scalability, execution and downside risks.
Investment Committee
Do the expected returns justify the remaining risks?
The evidence, assumptions, uncertainties and risks are brought together to support the final investment decision.
The Importance of Commercial Evaluation
For family offices and private investors assessing a regular flow of opportunities, the challenge is not to conduct the maximum possible amount of research on every investment.
It is to determine where deeper research creates value.
Commercial Evaluation provides the intermediate stage between initial screening and full diligence, helping investors concentrate resources on opportunities where deeper investigation is justified.
Ultimately, the objective is not more research for its own sake.
It is to reduce the uncertainty that matters most before additional time, resources and capital are committed.
Sponsored Content Disclosure: This sponsored article has been provided by Cohres. The views expressed are those of the contributor and are published for informational purposes only. They do not constitute investment advice or an endorsement by UK Private Wealth Magazine.