Authored By: Derek J. Taylor
Private market investing is often discussed in terms of access, returns, diversification, and the ability to invest in businesses and assets that are unavailable in the public markets. Those are important considerations, but they can obscure something more fundamental: when making a private investment, you are often choosing a business partner for the next five, seven, or ten years.
At Granite Harbor Capital, that reality shapes the way we approach due diligence.
Financial statements matter. Valuation matters. Capital structure, customer concentration, market dynamics, legal diligence, and downside analysis all matter. We spend considerable time understanding each of them. But experience has taught us that a financial model can only tell us so much about how an investment will ultimately perform. Models are built on assumptions, and circumstances have a way of challenging even the best assumptions.
When that happens, the quality of the people around the table becomes enormously important.
That is why our diligence process places significant emphasis on understanding the people and organizations with whom we may invest. We want to know how they built their businesses, what motivates them, how they make decisions, how they treat employees and customers, and how they have responded when things have not gone according to plan. We want to understand not simply whether they have been successful, but how they achieved that success and how they have behaved when success was harder to come by.
In many respects, the same core values that guide Granite Harbor—Always Do the Right Thing, Be a Leader, Collaborative Strength, Down to Earth, and Eager to Improve—also provide a useful framework for how we evaluate potential investment partners.
Due Diligence Is About Understanding the People Behind the Investment
There is a temptation in private market investing to treat diligence as primarily a process of verifying information. Revenue is reconciled, EBITDA is normalized, contracts are reviewed, market data is analyzed, and a financial model is constructed. Those activities are essential, but we believe good diligence should accomplish something broader.
It should help investors understand who they are getting into business with.
We therefore spend meaningful time in person with potential investment partners. Whenever practical, we want to visit the business or asset rather than evaluate it exclusively from a conference room or data room. We want to walk manufacturing floors, properties, warehouses, offices, and other operating facilities. We want to meet people beyond the executive who is leading the transaction and observe how the organization actually functions.
Those visits frequently provide context that cannot be captured in a spreadsheet. How does the CEO interact with the person operating a machine on the manufacturing floor? Does the leadership team understand what is happening several levels below them? Does management speak candidly about problems, or does every conversation return to the investment pitch? Does the condition of the operation reflect the attention to detail described in the presentation?
No individual observation answers the investment question, and we are careful not to confuse anecdote with analysis. But when those observations are combined with financial, operational, legal, and market diligence, they help us develop a much more complete understanding of the company and its leadership.
More importantly, spending time together allows the conversation to move beyond the transaction itself. We can better understand what drives the owners, what they are trying to build, what success means to them, and how they think about employees, customers, capital, risk, and their own responsibilities as leaders.
Those things matter because after the transaction closes, the investment presentation eventually gets replaced by real decisions.
How Someone Behaves When Things Go Wrong Matters
One of the most important parts of our diligence involves understanding a potential partner’s history, including the parts that did not work.
Most experienced business owners and investors have made mistakes. They have hired the wrong person, lost an important customer, pursued an acquisition that disappointed, underestimated costs, missed a budget, or made a strategic decision they would handle differently today. We do not view the existence of those experiences as inherently negative. In fact, they can provide some of the most useful information in the diligence process.
We want to understand what happened next.
Did the leader recognize the problem early and confront it, or allow it to linger? Did the organization communicate candidly with its investors, lenders, employees, and other stakeholders? Did management accept responsibility for decisions within its control, or was every disappointing outcome attributed to someone or something else? Most importantly, what did the organization learn and what changed as a result?
These conversations tell us a great deal about whether a potential partner shares our commitment to Always Do the Right Thing.
That value becomes particularly important when circumstances are difficult. It is relatively easy for everyone’s interests to appear aligned when an investment is performing ahead of plan. The harder test comes when interests diverge, capital is constrained, or there is no perfect answer. In those situations, contracts and governance rights are important, but character and judgment matter as well.
We want to invest with people we believe will communicate bad news as readily as good news and who will approach difficult decisions with a sense of stewardship toward the capital and people entrusted to them.
Leadership Is Part of the Underwriting
Our value of Be a Leader also influences the way we evaluate companies and sponsors.
Leadership, in our view, is not simply the personality or résumé of the chief executive. We want to understand whether leadership capability exists throughout the organization and whether the company is capable of functioning without every decision flowing through one person.
That requires looking beyond an organizational chart. During diligence, we want to meet members of the broader leadership team and understand how decisions are actually made. Who owns the key customer relationships? Who understands the operations? Who drives financial accountability? Who will challenge the CEO when necessary? If a key executive were unavailable tomorrow, could the organization continue to operate effectively?
We are also interested in how leaders respond to uncertainty. Private investments rarely develop precisely as anticipated at closing. Good leaders need conviction, but they also need the judgment to recognize when the facts have changed. There is an important distinction between being committed to a strategy and being unwilling to reconsider one.
That distinction becomes particularly important when evaluating an investment’s downside. A financial model can show us the effect of a 20% reduction in EBITDA, a higher interest rate, or a delayed exit. It cannot tell us whether the management team will recognize a developing problem early enough to do something about it. Understanding leadership helps us evaluate not only the likelihood of achieving the upside case, but the organization’s ability to protect capital when circumstances become more difficult.
Partnership Requires Collaborative Strength
Private market investing is rarely a passive exercise for us. We generally want to partner with people who value the resources, experience, and perspectives that different parties can bring to the table.
That is where Collaborative Strength becomes an important part of our diligence.
We do not expect potential partners to agree with us on every issue. In fact, a partnership in which everyone always agrees is unlikely to be particularly useful. What matters is whether disagreement can lead to a better decision.
During the diligence process, we pay attention to how management reacts when assumptions are challenged. Are questions treated as an intrusion or as an opportunity to improve the analysis? Can the leadership team defend its position while remaining open to another perspective? Does management surround itself with capable people who are empowered to disagree?
We ask ourselves the same questions. Our role as an investment partner is not to arrive with all of the answers. Often, the people operating a business every day will understand it far better than we ever could. Our responsibility is to bring our experience, resources, network, and perspective to the partnership in a way that can help the organization make better decisions and create value.
The strongest partnerships we have experienced are not defined by one party having all of the expertise. They are defined by people with different expertise working toward the same objective.
Stay Close to the Business
Being Down to Earth also has a practical meaning in our investment process: we want to remain connected to what is actually happening inside the business.
That begins before an investment is made and it does not end at closing. At the outset, whether we are hiring someone to work at Granite Harbor, or evaluating a potential investment partner for the Mariner Fund, we take the time to meet together, in-person, several times, and break bread. We talk about life, family, philosophy, interests, and anything else on our minds, get to know one another on a personal level, and understand that partner’s personal core values to determine if they are aligned with our values.
With our current investment partners, we physically meet quarterly to review the business, discuss performance, work through opportunities and challenges, and remain aligned on priorities. We also visit the physical locations of our investments at least once or twice each year.
Those meetings and visits are not ceremonial governance exercises. They are a continuation of the diligence process.
A quarterly financial package can tell us that labor costs increased. Sitting with the management team can help us understand why. A report can tell us that production has increased. Walking the facility can help us see whether that increase is sustainable, whether it has created a new bottleneck, or whether additional investment may be required. A management presentation can describe company culture, but spending time with employees and leaders in their own environment provides a different perspective.
This is particularly important because businesses evolve. The company we invested in two years ago is not exactly the company we own today. Employees change, competitors respond, customers evolve, new opportunities emerge, and risks that once seemed remote can become immediate.
Remaining physically connected to our partners and their businesses helps us understand those changes in context.
It also strengthens the relationship. Difficult conversations are easier and more productive when the relationship has been built over time rather than activated only when there is a problem.
Look for Partners Who Are Eager to Improve
Perhaps one of the most important characteristics we seek is closely related to our fifth core value: Eager to Improve.
Very few private companies are optimized when an investment is made. That is often part of the opportunity. A company may have an excellent product and customer relationships but underdeveloped systems. It may have strong margins but lack management depth. It may have significant growth opportunities but need additional financial discipline or sales infrastructure to capture them.
We do not necessarily view those imperfections as reasons not to invest. The more important question is whether the organization recognizes them and wants to improve.
We look for leaders who are curious about their own businesses. They want to know why margins changed, why one location performs better than another, why customers leave, why an employee is successful, and why a process produces inconsistent results. They seek information that can challenge their assumptions rather than simply confirm them.
That mindset also affects the way we think about operational value creation.
We prefer investment theses in which there are identifiable things that the company and its partners can do to improve the outcome. In an operating company, those opportunities might involve pricing, procurement, sales execution, management development, better systems, new products, geographic expansion, or disciplined acquisitions. In real estate, they might involve improved operations, leasing, renovations, expense management, or repositioning.
There is a meaningful difference between an investment that requires the market to create value and one where the people involved have tangible opportunities to create value themselves.
But identifying those opportunities on a spreadsheet is not enough. The management team must have both the capability and the desire to execute them. A leadership team that believes it already has all of the answers can make even a compelling value-creation plan difficult to implement. A team that is eager to improve gives itself—and its investment partners—more ways to win.
The Numbers Still Have to Work
Our emphasis on people and partnership should not be confused with substituting relationships for rigorous financial analysis.
Strong people cannot make an unsound investment attractive.
Once we understand the people, we still have to understand the business at a fundamental level. For an operating company, that means examining customers, suppliers, competition, pricing power, margins, working capital, capital expenditures, management depth, recurring versus transactional revenue, and the durability of cash flow. For real estate, it means understanding local market fundamentals, competing supply, replacement cost, capital expenditures, financing, operating expenses, and the asset’s competitive position. For private credit, it means understanding not only the borrower’s ability to service debt, but also collateral, covenants, capital structure, and recovery prospects if the original assumptions fail.
We also spend considerable time understanding where the projected investment return is actually supposed to come from.
If an investment only works because we assume a higher exit multiple, lower future interest rates, aggressive revenue growth, or another favorable market condition, we want to understand that dependence clearly. We generally prefer situations where a meaningful portion of the value-creation opportunity comes from things that management and the investment team can influence.
We then stress the assumptions. What happens if revenue declines, margins compress, a major customer leaves, financing becomes more expensive, capital expenditures exceed expectations, or the investment must be held several years longer than originally anticipated?
Ultimately, one of the most useful questions in our process is not simply how much money an investment can make. It is what has to happen for us to permanently lose capital, and what options will we have if we begin moving in that direction?
Answering the second half of that question inevitably brings the analysis back to the people.
Due Diligence Continues After the Investment
One of the biggest misconceptions about private market due diligence is that it ends when the transaction closes.
We view it differently.
Before investing, we are trying to develop the best possible understanding of a business, its leadership, its opportunities, and its risks with the information available at that moment. After investing, we begin receiving new information every day.
Our quarterly in-person meetings, annual site visits, regular financial reporting, and ongoing interaction with investment partners allow us to continually compare what is actually happening with what we believed would happen when the investment was made.
When those two things differ, the objective is not to defend the original underwriting. It is to understand why.
Sometimes the variance is temporary. Sometimes execution needs to improve. Sometimes an assumption was simply wrong. And sometimes the business has uncovered an opportunity that did not exist—or that we did not recognize—when the original investment was made.
Being Eager to Improve means being willing to learn from all of those outcomes, including our own mistakes. Good investors expect the companies they back to learn and adapt, and hold themselves to the same standard.
Private Market Investing Is Ultimately About Partnership
There is no amount of diligence that can eliminate risk from private market investing. Nor should that be the objective.
The goal is to understand an opportunity well enough to make an informed judgment about the business, the potential return, the downside risk, and the people with whom we will be navigating all three.
At Granite Harbor Capital, that requires rigorous financial, legal, operational, and market analysis. It also requires something less easily reduced to a checklist: time with people.
We want to sit across the table from potential partners. We want to visit their businesses and see their operations firsthand. We want to understand what motivates them, how they lead, how they collaborate, where they have made mistakes, and what those experiences taught them. If we ultimately invest together, we want to continue showing up—meeting in person each quarter, visiting the business regularly, asking questions, working through challenges, and looking for opportunities to improve.
Our core values help provide a framework for that process. We look for partners who will Always Do the Right Thing, particularly when the right decision is not the easiest one. We value people willing to Be a Leader and accept responsibility for difficult decisions. We believe in Collaborative Strength, because complex problems are rarely solved by one person. We want to remain Down to Earth and connected to the actual business rather than managing exclusively through reports and spreadsheets. And we want to work with people who are Eager to Improve, because neither businesses nor investors ever have all of the answers.
Financial models will change. Markets will change. Business plans will change. Over the life of a private investment, almost everything we initially underwrite will evolve in some way.
That makes the quality of the partnership particularly important.
For us, some of the most important due diligence therefore happens long before we ask what an investment might return. It begins by asking whether these are people with whom we want to build something—and whether we believe we will still want to be sitting around the same table when the decisions become difficult.
Disclosure: All information provided herein is intended for educational purposes only and should not be interpreted as investment, legal, or financial advice. Nothing contained herein is an offer or recommendation of the purchase or sale of a security. All private market investments carry certain risks that must be evaluated by investors in conjunction with their tax, legal, and financial advisors. Private market investments are often limited to investors that meet the SEC’s definition of Qualified Client or Qualified Purchaser. Prospective investors should review these definitions to ensure that they meet the applicable thresholds for the investment they are considering.