I have an interview coming up with a PE fund where they'll give me a CIM and an hour to come up with a recommendation to buy or not to buy the company. What's the best way to quickly read the CIM then come up with an effective investment thesis/deal recommendation for a 30 min conversation?
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Focus on whether or not the opportunity properly tracks the PE fund’s investment criteria and philosophy.
This is an underappreciated part of the case. If the sponsor is known as a consolidator - is there an opportunity for bolt on's in a fragmented market? Is the sponsor known for paying up for high quality, growing businesses with a longer holding period, or is the fund value oriented and price sensitive?
Reading the fund's investment overview / mandate and recent investments is the best way to gauge this and should give you a pretty solid framework of characteristics and red flags to look out for.
Say there's a fund whose stated check size was $50-$150mm (LMM buyouts). The case they gave you involved a top performing competitor in a growthy sector doing $25mm in LTM EBITDA. No matter how good the asset looks / there being an opportunity to enter in at a cheap, this investment would never work for the fund. Pitching an "invest" would make you look naïve, regardless of the quality of your pitch, Funds like to see you did your homework on them.
I mean I don't think you normally have to "pitch". The PE case is usually:
I think you hit all the main points you normally would (assessing quality of the business, opine on value / ability to pay, risks, industry, etc.) and caveat at the end "while this investment is attractive at x entry multiple, the investment is far beyond the typical check size for the fund'". And if you wanted to maybe win a brownie point or something "the required equity could be filled with coinvested capital from existing LP's".
You could even model that into sources and uses / returns, which would be relatively simple and I guess "impressive" coming from a banking analyst.
If too small, then recommending the investment as a bolt-on consideration for a current portco would be a great answer IMO. Especially if you were able to recall a specific portfolio company. However, you could also potentially seem silly if they were in completely different regions / had non-complementary customers bases or whatever.
Back to front... I always like to begin with the financials before being “clouded” by all the marketing at the beginning of the deck.
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I'll take a stab - I'm not very tenured (~1.5yrs in PE), but this is what I do: 1. Value Proposition - I spend some time really understanding the product or service the company provides and why it is valuable to the customer. Why do they use it? What would happen if they didn't? What are the substitutes? (Basically max $ per customer opportunity) 2. TAM / Market Drivers - I then look at how big the market is -> # of customers x number of annual payments x ASP or something of the like. Then I go into market drivers - what are the main activity drivers of the industry (example: buying new wood for decks is new housing starts, deck replacements, etc). I want to understand how these drivers are trending and how this will affect the market going forward. 3. Competition / Market Share dynamics -> I then want to understand the target market share/what are the competitors and what are the varying value props. Maybe I segment the market. Basically, I'm trying to understand how market share will trend going forward 4. ASP/Cost Structure -> Margins -> Next I look at the industry structure, competitive dynamics, which help me understand ASP and relative operational effectiveness (vs competitors) to help me understand cost structure (example could be logistics components of a value chain) to have a top down perspective on margin. Then you can look at the company's actual margins to see if I'm right (and get some questions / perspective). 5. Merits and Risks - I spend some time thinking about what are the merits and risks of the target. Suppliers, Customer concentration, management teams, trends, etc. Collate all these into a pros and cons list. Also do some thinking on company history/old acquisitions and what they added, etc. 6. Comps - if possible, I like to look at transaction comps and public trading comps to see what similar companies trade at 7. Financial metrics/projections - finally (after the qualitative diligence -> so I'm not biased by the #s when thinking) I take a deep dive into the financials, looking at metrics such as incremental profit margins, asset base, ROIC, cash flows, and historical revenue & margin stability to better understand how the business may perform going forward. I then build a simple model aggregating all of the above analysis with simple assumptions (revenue growth by segment, margin expansion by segment, multiple expansion (which is not preferred), capital structure (adjusted for volatility of free cash flows), and see what the returns could look like. I usually look at unlevered IRR and levered IRR. 8. Summary: finally I summarize all this information into a simple deck that includes an executive summary (quick overview, what we should do: thesis, returns, EBITDA, purchase price multiple, and capital structure), a merits slide highlighting all the good things, a risks slide highlighting all that could go wrong, and a "What Really Matters" slide that suggests what we should diligence further if we were to commit more time and $ resources to testing this thesis.