Activist Hedge Fund Case Study
Hi all,
I have a case study at an activist hedge fund coming up and am thinking about how I should structure my write-up.
The basic structure should be similar to a traditional L/S case study. I will obviously need to state an upside / downside ratio / upside / downside valuation. For a L/S case study I would take a very near-term valuation date for the upside / downside valuation given the typically shorter holding period (assuming an exit in say 1 year from now). I was wondering which valuation date I should use for the upside / downside valuation in an activist case study though, i.e. should I express the upside / downside vs the current share price using a valuation at the current date or at the targeted exit date (say in 3 years). Also, what holding period would one typically assume (probably more than a year, but less than the 5 years you see in PE, so 3 years might be good default).
Another point: given the longer holding period, should I build the model on a quarterly or annual basis (I would tend to use annual given activists do not simply trade on a quarterly basis from my understanding)
I know those questions might seem trivial, but I am not sure about them, so would appreciate any inputs (+ any general tips on activist case studies in general).
Really appreciate any help!
Thanks
Obviously base the target price based on your hold period. The price right now is known. You’re trying to bridge where the stock is now and where it ‘should’ be.
Focus on the catalysts to getting there. In this case, as an activist, you should have ideas for how you actively catalyze that value discovery. Spin outs, cost program, strategic options, levering up, stock buybacks etc. also know the governance protocol and how legally one would get on the board (staggered board, super voting rights, etc).
Thanks!
Any view on quarterly vs annually? I would probably forecast on a quarterly basis for the next 2-3 years only and then switch to annual. However, given the longer holding horizon vs L/S I am not sure it is worth doing quarterly forecasts at all.
Typically model 1-2 years quarterly and then annual from there.
How are you supposed to track how the business is performing vs your expectation if you don’t even have quarterly projections? How will you know if it’s trending towards what you think they’ll do on a full year basis? How will you incorporate their quarterly actuals into your full year estimate?
Dis they ask you to submit a model? A ton of HF math can be done back of the envelope. You can calculate the increment to 2y fwd EPS from a cost program in 5 lines of excel. You can calculate the incremental EPS accretion from taking on 1.5-turns of debt and buying back stock jn 8 lines of excel.
HF math is all about incrementals/decrementals.
Tbh, if you’re not nerding out over the case study, why even bother doing it?
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