HF/PE difference in 3-statement modelling
We’ll keep this very high level, as obviously both are different investing processes and different strat HFs are interested in continuing with a model across a plethora of different outcomes, whereas in the early stages of a potential PE PortCo it’s ‘can we hit minimum returns and make this work’. (Ofc sector also falls under certis paribus).
Question: for those that have done both HF and PE investing, what are the main differences when modelling a three statement? Are there ever any major differences in the way you structure the model? Ofc you’re sensitising for different things. But any light shed on how you think about things differently, even niches when building the model that you didn’t expirience in one or the other would be really interesting to hear! - Cheers
I don’t model B/S or CFS, I do an extremely bottoms up cost and revenue build, I want to know to a good level how much pricing/volume , fx/scope from top line translates into EBITDA
how much does the model guide your idea generation process? Trying to understand if it starts with the model or the model is just a way to quantify it
First of all:
Most names you simply model because they are part of your pre-agreed coverage.
I wasn't asked to discover new names very often.
AFAIK, at many MMs, PMs can't even randomly add new names to the book.
This has been my experience.
Second of all:
If I add a new name, it starts with the model (after some high level reading). Given people trade around earnings, I was taught that the numbers matter a lot.
Of course, it's an iterative process ... as you learn more about the company and industry, you tweak the model.
But I've also seen people first come up with an answer and then fudge the model until it was consistent with their gut view. This might be the more practical process for e.g. case studies / take home assignments under time constraints.
Would you say this is lowkey normal in the HF space? Or is this just a personal preference?
I think normal is that people have full models, but they neglect certain parts (BS, CFS) and just stop updating them. Depending on coverage, obviously.
I figured sense we're not getting stock calls correct based on CF or BS I imagine a model hasn't had their BS or CF updated for a couple quarters
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