What is the primary purpose of a term sheet in private equity?

The primary purpose of a term sheet in private equity is to outline key terms and conditions of a proposed investment. This document serves as a foundational agreement that details critical aspects of the investment deal, such as the amount of capital being raised, the valuation of the company, the rights and obligations of both parties, and any other significant conditions that may govern the investment.

A well-structured term sheet enables both the investors and the company to have a clear understanding of the expectations and commitments of each party, facilitating smoother negotiations and helping to prevent misunderstandings down the line. It acts as a roadmap for the deal, allowing stakeholders to know what they are agreeing to before moving forward with more legally binding agreements.

While analyzing financial statements and finalizing investment strategies are essential parts of the investment process, these activities take place before or after the term sheet is created. Similarly, presenting a portfolio to potential investors is an aspect of fundraising but does not relate directly to the purpose of a term sheet itself.