Life in PE when Things are Going According to PlanO
This week I thought I might do a little writing on my time in. Specifically, I'd like to compare and contrast life in when a fund's portfolio companies are performing well with life in PE when a fund's portfolio companies are performing poorly.
To be clear, I can only provide the perspective of an Associate, so I've never been in a position to have money tied up in a fund. I imagine the stresses of being a Partner are far different than those of a pre-MBA Associate, given that your net worth can change drastically based on whether or not your portfolio companies meet or beat their forecasts.
With that said, let's dive into today's post in which I'll focus on life as an Associate when one's portfolio companies are performing well.
Let me give some background to those among you who aren't as familiar with the way afirm operates. When a newly minted Associate joins a PE shop, he / she is assigned a set of portfolio companies to cover. Generally, portfolio coverage revolves around the following responsibilities:
- Monitoring financial performance - this entails receiving monthly financial statements and forecasts, digging into the details to understand what's driving growth and profitability, and identifying potential problem areas
- Attending Board meetings - unless you're slammed with a new deal or attending to issues at another one of your coverage companies, you'll get to attend most quarterly Board meetings. Board meetings are a great way to get to know your management teams better and dive deep into strategic issues facing the company. Not to mention a decent meal on the company dime
- Quarterly valuations - perhaps my least favorite part of PE, but a necessary evil. Once a quarter, you'll be tasked with updating a valuation of your coverage companies. This includes running a , public , and precedent transaction analyses. The results of the valuation lead to potential write-ups or write-downs of a company's book value
- Ad-hoc analysis and misc. projects - you'll occasionally have the opportunity to work on side projects with a company's management teams. This might entail running some numbers for the CFO or doing some market research
- Evaluating and pursuing add-on acquisitions - you'll see plenty of potential add-on targets during your stint as an Associate, though few move beyond the early stages
Sounds like quite a bit of work, right? Well, the answer to that really depends on two things. How active are you pursuing add-ons and how well are your portfolio companies performing?
If you aren't actively pursuing add-on acquisitions and your portfolio companies are performing at or above their forecasts, then your coverage work will be fairly light and most of your time at work will be focused on new platform acquisitions. Your interaction with your portfolio companies will center around high-level coverage of financial performance, quarterly board meetings, and valuations.
Depending on your fund's strategy, you may find yourself actively pursuing add-on acquisitions for your coverage companies. This is especially true if the portfolio is performing well. I had the fortune of covering a group of healthy companies that were, for the most part, consistently meeting or beating their forecasts, so I spent a great deal of my time in coverage analyzing add-ons.
Frankly speaking, life when one's portfolio companies are healthy is somewhat boring from the perspective of the Associate. While it's certainly fun to attend upbeat Board meetings and work with Partners who are in high spirits every time a new set of financials rolls in, it gets routine. Companies living up to the hockey-stick projections they laid out in their CIM is great if you've got Carry, but not so great if you're looking for a unique and challenging experience.
After you get a couple of deals under your belt, the work involved can become reasonably routine. You get a book, you build a model, you go through diligence, you hash out legal docs, and close. Obviously it's a lot of work, much of it is interesting, but it's still a fairly straightforward process. Yes, the companies you look at can vary a great deal in terms of their industry and business model, but the X's and O's of acquiring a healthy company remain the same.
So, what happens when your coverage companies aren't meeting expectations? That's where things can really get interesting. That's where tempers start to flare and routine processes start to go out the window. While I never had the (mis)fortune of covering a poorly performing company, I've got plenty of friends in the industry who have.
I'll cover some of their stories along with an overview of life in PE when a portfolio is underperforming in my post on Thursday.