Technicals Needed for an Investment Thesis
Hi,
I have to produce an investment thesis on a company of my choice in powerpoint format for am internship at a PE firm (small shop). The instructions are:
We would like to ask you to prepare a short presentation about a company of your choice, private or public, that fits our investment criteria. You should include information on what is your investment thesis (business model, quality of revenue, mission critical nature of the product, attractive financials, KPIs, areas of expansion etc.) and what are the risks associated with the sector and the company. You can use powerpoint for format.
I am an undergrad with not much of a technical skillset regarding modelling. How would you structure slides if this were you? How many slides? Do I need to value the company using DCF and create an LBO or for a thesis is a less rigorous analysis e.g strategy, level of competition in market, swot etc enough?
Thanks,
Phatdosser
Wow, I can't believe you are an undergrad and tasked to do something that PE firms ought to teach you themselves (in my opinion, but I am old school).
If I were you, I would do the following:
1. Choose a public company as more research is available and you can accomplish more with your outside-in analysis
2. Choose a struggling business that has a clear long term potential (e.g. airport infrastructure). Go for an over-levered business, if possible. Why? Because old debt will go away and your restructuring thesis will be quite clear
3. Download a large number of broker research reports and go over them carefully. The more analysts beat it up, the better for you - but look out for long term potential in the business and something that will definitely be around in 10 years time
4. Read on the company / industry enough to be able to understand market landscape and their business model. Understand unit economics
5. Build a simple LBO model or get someone to take you through it so that you can do it
6. Assume the PE shop takes the company private, with c.30% premium to the average share price over the last 6 months
7. Compare that value to public companies (EV / EBITDA basis, not PE)
8. Compare that value to past transactions, ideally M&A and PE (again, EV/ EBITDA and not PE). Get your university librarian to help you access electronic databases for this info
9. Don't do DCF
10. In your LBO, assume a range of exit multiples and stay on the conservative end. Look at multiples over the cycle so that you can to determine what conservative looks like
11. In your LBO, assume a very simple capital structure. All old debt goes away, and you put a new debt - 2/3 tranches would suffice to demonstrate your knowledge
12. Think carefully through operating assumptions. What will the business accomplish during PE ownership? Better pricing? More sales? Cost cutting? Expansion? (expansion requires CAPEX)
13. Calculate returns. Target 22-27% IRR. It is more forgivable to be more optimistic in your operating assumptions rather than exit multiples.
14. Calibrate an investment thesis and general narrative. Why invest? What are going to do with the business? Do you have resources to achieve this? Why is it cheap?
15. Research the management team. Do they get it for an LBO? If not, say that new management will be required
16. Understand risks - political / legal / regulatory / industry / transaction execution / operational
17. Think through possible exit options - IPO / trade sale to a strategic / sale to a financial buyer. Why would this company appeal to anyone?
18. Write your power point and be super structured:
Good luck!
Gay
/ thread
OP, don't read below this incredibly helpful and thorough comment.
Great advice Tamara...just missing the side letter for his cut
Agree with your first comment as well.
Damn this is great.
Could you elaborate on point 11? How would all old debt go away and how would that take place? Could you ELI5 please?
Think about it like buying a house. I own a house with a 30-year mortgage on it. I buy it for $1MM and take out a $750K Mortage. 20 years later, I go to sell the house, and for simplicity's sake, there is $250K left on the mortgage. I go to sell the house and manage to sell it for $1.25MM. To pay for it, the new owner puts 25% down (so 312.5K) and finances the balance ($937.5K) with a bank loan. When the deal closes, the old mortgage is paid off, I walk away with $1MM in cash, and the new owner now has a mortgage on the house worth $937.5K. So the old debt is retired and paid off while a new loan is used to fund the purchase. That's basically taking a very simplistic view of what Step 11 is doing.
Yes, sure.
The debt documentation for existing loan facilities will have customary "change of control" clauses: if there is a change in ownership, the existing loans will need to be repaid. What we assume here is a public-to-private of a listed business. Therefore, we really don't care about what the old leverage is as it will be repaid upon deal closing.
The existing leverage won't go away if you buy a minority stake in a private business, however. A minority deal may not be regarded as "change of control". In this case, you will be buying into not only the existing investment thesis but also the currest capital structure (including leverage), with all its merits and drawbacks.
Actually given this instructions you could directly say that this is the prompt from L1 team
You forgot to mention that it must be focused on a European technology company and that this should take less than a few hours...
Be careful as there are not many people involved in such process and they want to see your way of thinking not how other think for you
EDIT: Supposedly they already hired 1 - Not sure if its true tho
the same posting popped up back in August and I can't find anyone that's interning there off cycle rn on linkedin. Bait.
Please dont copy-paste the instructions you are given - At least make an effort to rephrase it
Who cares he’s leveraging external sources. Plus he’s not asking for a direct answer he just wants guidance.
A classic example of why you don't post easily identifiable stuff online.
Bookmark.
i can't tell if the firm is serious about taking in an intern or baiting for deal sourcing
The same baiting for deal sourcing happened to me at an equity research boutique several years ago... thanks god I did not provide anything...
what happened? did they make you do a full pitch as well
This "baiting" is actually genius lol. A ton of free sourcing work and zero downside risk/obligations
Wow, that devolved into absurdity pretty quickly.
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