How do you build models? PE to HF transition
Do you use a template?
When people talk about "sell-side models" can you get sell-side analysts to actually send you a functional Excel model?
I can only compare and contrast to PE - in PE, we will get a data room, say, for a software company, and put every contract in a waterfall, and make a bottoms-up build for a company. How can you do this for a public company?
Do you mainly use DCFs to assess whether or not a company is a good purchase or not?
make up the growth assumptions and slap on a multiple that justifies your pitch. seriously though - my personal view is that modeling in public equities is greatly overemphasized. Great tool to sanity check things and understand drivers of a company but so much price action is influenced by the narrative. Obviously you should have your model set up, but the lack of visibility as a public markets investor makes it tough to go to that level of depth and get things right based on models
And yes you can get sellside to send you their excel models. Many are overcomplicated (I don’t blame them). A handful are littered with mistakes. Everyone’s different but I typically build one from scratch based on the lens I want to view the company and based on the assumptions I want to test in a clean manner.
Your modeling is generally limited by the level of detail in the company’s disclosure and in their guidance metrics. Typically if you go much deeper than that, you’re actually losing rather than gaining fidelity.
The other point is that everything in the HF world is back of the envelope. Everyone is doing rough scratch math to get to the right directional answer in 30 seconds or less. So an overly complicated model makes it very difficult to actually change assumptions to re-run the model in your head.
Any decent HF analyst can rerun the model to change the most important assumptions in his head and tell you what it spits out. If you build a PE-style model, that’s next to impossible because of the number of drivers you’ve flowing through your model.
Former investment banking analyst of mine went from Silverlake to a top HF. He said that when looked at the models at the HF, he thought it was a joke because it was so simplistic compared to PE models.
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