How long does your research process take?
As someone who works in Private Equity, I'm curious how long those in the HF world typically spend reviewing an idea before you ultimately feel comfortable pulling the trigger on it (specifically those at shops that are more focused on fundamental, long-term hold ideas as opposed to shorter-term plays around quarterly results). I ask because I have a general interest in public market investing, so have been trying to spend my spare time researching ideas and building a small slug of investments in my PA. What I have found so far is probably no surprise, but in many ways building a thesis in private equity is a lot easier because we just sign an NDA and get direct access to management and can ask pointed diligence questions that elicit quick clarification around whatever happen to be the major drivers that we care about. We of course do plenty of extracurricular digging to better understand the industry, including with resources like GLG and the like which I'm sure are used in the HF context as well, but at bottom we are getting direct access to management and the ability to directly request information that provides substantially more clarity around the business.
In contrast, on the public side I am finding that it requires an exorbitant amount of time just to work your way through the last several years of filings, investor presentations and earnings transcripts (and I'm a pretty fast reader), and even then the view you get is far more obscured than in the private context (which goes without saying). Of course since this is just for my own account, I can't use my firm's expert networks to help get a quick shot of knowledge around the basic structure of an industry, but even still, it feels like in order to properly assess a company in the public context, you need to spend a significant amount of time just digging through filings on your potential target, and then need to do the same thing for its competitors, and potentially other players in the value chain to cross-validate your initial impressions about the attractiveness of the space broadly and the target company specifically.
All of this is a long way of asking a few questions:
A) How long do you typically take to work through an idea?
B) Am I missing something in terms of the general process?
Appreciate any thoughts!
2 weeks to flesh out an idea on whether you‘re on to something and then another 2-6 weeks to validate thesis.
I’ll just challenge your viewpoint a bit around how it is “easier” to invest when you have unlimited access to mgmt. Your job of actually investing correctly doesn’t actually get easier, it just SEEMS easier because you are basically pawning off the job of truth-finding to mgmt. You have to understand whether it’s in public or private context, management has biases and agenda just like the rest of us. Their job is to sell the story and fit the data around it.
Public investors have plenty access to mgmt to ask questions. The key is to tell who is biased or not telling the truth. You‘re also on equal playing field with other investors so the job is to be RELATIVELY closer to the truth, not absolutely. This plays out the same in PE auction processes. It’s great that you have plenty of time with mgmt, but so do the other bidders. So what’s different is that you are competing with other 100% “rational” bidders whereas in public markets there are all kinds of crazy emotional buyers and sellers.
Ultimately, any investment outcome comes down to getting the top 3 things right about the thesis and the risk. This is no different in PE. You don’t hit a homerun because you had granular data about IT headcount that you’ve verified can be cut by 10%. You win because 1. market went up 2. sector call was right 3. One or two specific catalysts were unlocked on the idiosyncratic name. In addition to working at a HF, I also acquire and run small businesses privately. It is a mirage to think that you can 100% diligence the truth by asking management and to think that more data improves your chances of winning. You win because you bet on the right sector, one or two major value unlock drivers, and use leverage/hope market is at least stable or up.
So, if you are looking to get into public investing, you need to shake this belief that detailed data leads to correct decisions. It is more about how you INTERPRET the broad arc of data that is widely available and come to a non-delusional, non-emotional conclusion. This is no different in PE.