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!
Great post, thanks for the insight. It's easy to lose sight of qualitative values and get wrapped up in all of the models and numbers. Definitely makes for more thoughtful and nuanced analysis.
Good post, +1
Great post
I know it doesnt really have anything to do with the post but do PE firms find accounting degrees valuable?
lol this is true
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.
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!
+1 for Core value drivers.
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