Misguided Efforts: A Cautionary Tale

When I first started as a PE analyst, I constantly struggled with judging the amount of time I should spend on reviewing sourced deals. How much time is enough to really get a handle on the company’s revenue streams? How granular do I need my analysis to be on industry threats? With this anecdote I hope can help others that were in my position navigate a little more clearly.

Refresher: a typical analyst’s/associate’s responsibilities when it comes to reviewing sourced deals are generally to:
1) Pull all publicly available information on the company (in case of private company, read bank’s CIM or other available info)
2) Examine documents to understand business model and underlying growth opportunities
3) Build out operating model with recent historical and projected financials
4) Create an LBO model and run sensitivity analysis
5) Write summary/business outlook assessment

From both my experience and speaking with other professionals in the field, junior-level PE employees stress out so much about the ‘modeling’ component, they often overlook more serious underlying business issues: What is the core revenue generator for the company? Does this company have a defendable business structure? Is its market share growing or shrinking?

I definitely made this mistake when I started out, because I thought that as long as I had a beautifully organized and automated excel workbook with slick macros and tightly formatted columns, everything would be peachy.

On one of the first deals I screened, I rifled through everything I could find on this precision manufacturing company on the morning of the first day and then spent that afternoon and evening, as well as the next day and night building out great-looking and detailed models.

I had checked the figures and underlying assumptions so many times that I could rattle off nearly all the numbers off the top of my head. On the morning of the third day I handed in a copy of the business outlook assessment to my manager.

He glanced over the pages briefly and asked me, “How sure are you about these numbers?” I replied, “Very. I’ve checked them over multiple times last night and again this morning.” I felt myself almost smiling. I was sure I had killed it.

My boss spent the next 30 minutes grilling me on the business model. Not on inane things like its ROA or specific tax structure, but on deep questions about the business. Not once did he mention numbers. This shocked me!

Here I was, thinking that reviewing a potential acquisition was all about producing good-looking numbers and showing how profitable the transaction could be – but my boss was having none of it. Instead, his focus completely was why the business was performing the way it was and how it was changing over time. By the end of it, it was clear to see he was disappointed I had spent so much time working on the financial end of the model without understanding the core business. Coming from a corporate strategy analyst position, I was confused. I was here to make bank. PE was all about the numbers, baby!

For all of you guys out there interested in moving from IB to PE or those at IB internships this summer hoping to apply to PE firms in the fall, learn a lesson where perhaps I fell down early on: PE is all about finding value. It’s tempting to think that we should jump immediately to the dollars and cents of the issue, especially because much of what we hear about PE is in regards to IRR and exit multiples and EBITDA margins and the like.

What I’ve learned since I submitted my first business outlook assessment is that the process sometimes takes longer than you’d initially like it to, but hunker down and really wrap your head around those core value drivers.

Not only does this make you actually understand the company you’re analyzing better – which will allow you to produce a more coherent and tightly packaged model when you actually go to draw one up, but it will also allow you to grow in your thought process of what defines a successful company and whether or not a PE shop would want to directly invest.

Definitely for me, and maybe also for you to, is that it is difficult sometimes to parse information from understanding. When I surround myself with numbers, I feel like I’m making progress and learning, but often it is the opposite situation in which I make the largest analytical leaps.

What do you think is the best way to go about analyzing a deal in terms of quantitative/qualitative priorities? Was there anything you struck out so hard on (like I did) while preparing for your first deal? Sound off below!

 

I interned at a PE firm and one of the analyst's I primarily worked for had an accounting designation and background at a Big 4 firm. It's definitely possible and can add some value but the one thing he emphasized was that he had to teach himself a lot of the modelling skills on his own prior to joining the firm, so it's definitely possible from what I have observed.

 
Mps721:

I know it doesnt really have anything to do with the post but do PE firms find accounting degrees valuable?

I think the larger ones will. There is always a certain degree of accounting proficiency required, but in my experience PE firms generally rely on the controllers of the portfolio companies to do the auditing and then check it with an independent source.

Perhaps nowadays as the larger PE firms become more of money managers themselves, accounting/auditing skills will come more into vogue in their offices.

At the moment though, having accounting experience doesn't exactly give you a shoe-in position...

 
Best Response
NiuShi:

My boss spent the next 30 minutes grilling me on the business model. Not on inane things like its ROA or specific tax structure, but on deep questions about the business. Not once did he mention numbers. This shocked me!

Here I was, thinking that reviewing a potential acquisition was all about producing good-looking numbers and showing how profitable the transaction could be – but my boss was having none of it. Instead, his focus completely was why the business was performing the way it was and how it was changing over time. By the end of it, it was clear to see he was disappointed I had spent so much time working on the financial end of the model without understanding the core business. Coming from a corporate strategy analyst position, I was confused. I was here to make bank. PE was all about the numbers, baby!

For all of you guys out there interested in moving from IB to PE or those at IB internships this summer hoping to apply to PE firms in the fall, learn a lesson where perhaps I fell down early on: PE is all about finding value.

I do agree. Perhaps because I came from a fundamental investing background, my thought process when screening a deal is generally as follows: 1. Where are my exits? 2. Fundamentally, how sound is the business? 3. What are the key risks in the investment & business model? 4. Do we have the capability to mitigate these risks? Only after I have a decent answer to these questions, will I proceed to run the quantitative side of analysis.
 
NiuShi:
Mps721:

I know it doesnt really have anything to do with the post but do PE firms find accounting degrees valuable?

I think the larger ones will. There is always a certain degree of accounting proficiency required, but in my experience PE firms generally rely on the controllers of the portfolio companies to do the auditing and then check it with an independent source.

Perhaps nowadays as the larger PE firms become more of money managers themselves, accounting/auditing skills will come more into vogue in their offices.

At the moment though, having accounting experience doesn't exactly give you a shoe-in position...

Thank you!

Mps721
 

Nisi distinctio aut ut ad voluptatem nemo. Quod magni sint et sit ipsum architecto. Optio qui labore quia a. Dignissimos maiores est temporibus labore.

Animi cupiditate sit excepturi ullam sint autem. Quia quasi sint qui voluptatem dolorem non. Id vitae esse labore deserunt reprehenderit totam accusantium. Vero sint eaque culpa quis dolorem dolorem.

Quasi quia sint et ab tempore architecto consequatur. Tenetur qui eligendi ut excepturi omnis officia. Sint dolor ut quas ipsam. Cupiditate non at possimus dolore voluptatum quae maxime.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
kanon's picture
kanon
98.9
6
DrApeman's picture
DrApeman
98.9
7
dosk17's picture
dosk17
98.9
8
CompBanker's picture
CompBanker
98.9
9
GameTheory's picture
GameTheory
98.9
10
numi's picture
numi
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”