Private Equity Director: The red flags that make investors walk away

Most founders think about private equity when they're ready to exit. The reality is, understanding how investors think about valuation, risk, and growth could transform how you build your business today, even if you never plan to sell. Katrina Engelbert is a Director at Pemba Capital Partners, a private equity firm with $2 billion in funds under management and investments across 36 companies. She sits on the board of five portfolio companies and has spent years evaluating businesses, structuring deals, and working alongside founders through the most critical stages of growth. In this conversation, Katrina shares what actually happens when a business gets evaluated by private equity, why the gap between founder optimism and investor skepticism creates friction, and what the bar looks like for businesses that want to attract serious capital. She also explains how AI is reshaping the landscape, why services businesses are suddenly being valued like software companies, and what founders need to know before they ever take a meeting with an investor. She explains: - Why founders and investors see the same business through completely different lenses - The revenue and profitability thresholds that make a business interesting to private equity - What actually gets priced into a valuation, and what doesn't - The red flags that make investors walk away, even when the numbers look good - How AI is changing deal flow, and why services businesses with automation potential are suddenly commanding software multiples - Why liquidity preferences and earn outs exist, and when they actually make sense - What changes when an investor comes on board, and why accountability lifts performance - The reverse due diligence every founder should do before accepting capital - Why every business owner should map out their strategy as if an exit is coming, even if they never plan to sell If you've ever wondered what private equity actually looks for, or whether your business is on the right trajectory to attract serious capital, this episode will give you the investor perspective most founders never get to hear. Timestamps: ### Chapters - **00:00:00** Introduction - **00:02:02** The Valuation Gap: Why Founders Feel Offended by PE Offers - **00:04:20** Red Flags That Make PE Walk Away Immediately - **00:06:03** Does Culture Actually Impact Valuation? - **00:09:39** What Gets PE Really Excited About a Business - **00:12:18** The AI Revolution: How It's Changing Private Equity - **00:15:31** Services Businesses Trading Like Software: The AI Opportunity - **00:18:35** Red Flags Revisited: Defensiveness and Unrealistic Forecasts - **00:20:47** Due Diligence Explained: What Founders Need to Know - **00:23:52** When PE Comes In: Revenue and Profitability Thresholds - **00:25:51** The Teenage Years: Why PE Targets This Growth Stage - **00:28:43** How PE Finds Deals and Why Inbound Inquiries Are Often Struggling - **00:30:12** Reverse Due Diligence: What Founders Should Ask PE Funds - **00:33:30** The Advisor Problem: When Your Lawyer Isn't M&A Ready - **00:34:50** Liquidity Preferences Explained: Downside Protection or Trap? - **00:37:56** Earn Outs vs. Management Ratchets: Aligning Incentives - **00:39:30** Life After Investment: How Everything Changes - **00:41:03** Rolling Equity: You Don't Have to Exit 100% We're just getting started! Subscribe for more conversations with founders, operators, and their advisers. Katrina Engelbert: LinkedIn https://au.linkedin.com/in/katrinaengelbert Pemba Capital Partners https://www.pemba.com.au At The Top Youtube: https://www.youtube.com/@atthetopwithben Instagram: https://www.instagram.com/atthetopwithben/ LinkedIn: https://www.linkedin.com/company/at-the-top-with-ben/ Spotify: http://open.spotify.com/show/1GTjCXqdQzQtZ33idMpQgo?si=C5gNvXDZSkWdxBz-mW13AA Apple Podcasts: http://podcasts.apple.com/us/podcast/at-the-top/id1893782299