How do you create a PE Market Thesis (LMM / MM)?
Going into IB very soon, but looking forward to seeing how PE sponsors approach things. Have been browsing through a few industry report collections, talking to a few independent sponsors, and see that there's a decent amount of value in finding sectors / segments not covered by any industry research firms and going after them for acquisitions. I've got a handful of sectors interesting to me by moving up and down the value chain from current PE platforms in unique spaces.
How do I go about turning these into a PE Market (not for specific target) thesis (for ex: proving fragmentation, market opportunity, broad value creation capabilities for average company of size / product mix)? I'm wording this horribly but would appreciate any guidance from ex or current PE investors. Any resources or guides I should be looking at?
If possible, would also be interested in learning how to take this to the next level regarding a potential target.
So far, have just been reaching out to CEO's of small-medium sized shops in the sectors of interest for a 15-20 minute chat and learned as much as I could of the sector / themselves as you can in <30 minutes, hasn't been that helpful. Would like to learn how to turn what I've found into something legible.
You haven’t done IB yet, and you are already trying to be the next Henry Kravis? Don’t get ahead of your ski’s.
Btw what you are doing by talking to CEOs and reading as much as you can sounds very much what a MBB consultant would do.
A large part of investing comes down to having good “judgement” which comes from experience.
To your question, no, there isn’t a shortcut to doing what you’re wanting to do. Enjoy IB and chill out.
definitely not trying to be anybody but find it kind of interesting, makes sense on the no shortcut
appreciate it
Wasn’t trying to be a douche with my response, btw.
If I were you, I would read industry primers on the sectors that interest you and get deeper and deeper knowledge of the ecosystem of said industry. This will also help you with your IB program if you’re joining an industry group.
Domain expertise is a key differentiator for certain PE funds. That’s why you see some really smart investors solely dedicated to very specific sub-verticals (e.g., Silver Lake).
There’s ultimately no right answer to your question. But spending time talking with management team and all that is great…but achieves marginal returns relative to the time expended.
I've had success building niche, actionable theses. Happy to discuss.
I have historically uncovered niche industries by either: (i) going to tradeshows, (ii) chatting with business owners (typically with the goal of understanding their pain points), or (iii) reading CIMs that reveal the industry directly or indirectly (e.g., a supplier).
From there, after some basic desktop research, if I find the industry interesting I simply put together a list of small business owners in the space and contact them directly to learn more about their business and industry. My emails are straight to the point and genuine - something along the lines of "came across your industry, find it fascinating, I see you've built a nice business, would love to hear about your origination story and how you've seen the industry evolve. For context I'm an investor and have interest in building or backing a business in your industry."
Chatting with business owners is where you'll learn the most, naturally, given the niche nature of the industry. From there you can begin to pick up on potential themes and develop your thesis. E.g., underserved market, white space, untapped cross-sells, etc.
could you potentially pm me, would love to learn more from you (can't pm you because of anonymous tag)
What would you like to know? I can type responses here in an effort to be helpful to others.
great thread thesis
Depends on the fund. As another poster said some funds do indeed spend a lot of time coming up with a market thesis (Silverlake, Accel KKR, Softbank) but these tend to be very large mega funds.
IMO, if you're in the LMM space most PE associates won't spend much time coming up with a thesis as much as they do just trying to find a good deal (e.g. a low price with a motivated seller and favorable financing). This is what differentiates financial buyers from strategic buyers. Strategic buyers make strategic purchases driven by a thesis. Financial buyers make financial purchases driven by financial engineering and a financial thesis ( 7x EV EBITDA multiple, >$5 M EBITDA, growth between 2 - 7%, etc.). They make purchases purely on the financial situation vs. trying to come up with a thesis. Most times at LMM / MM the only thesis is cost cutting and pulling as much cash out of the business to pay down debt incurred as part of financial engineering.
Networking is still important though for LMM / MM, but the networking is focused more towards networking with the goal of trying to find a good deal vs. trying to come up with a strategy. Just for example, a LMM fund will do 5 deals for $20 M each for a total of $100 M in EV and with that many deals you don't really have time to be an industry expert on all 5 deals vs at a larger fund you do 1 deal for $100 M for a total of $100 M in EV. In both cases you're deploying $100 M in capital but at the smaller fund you're spread a lot more thin to manage your portco so closely, but this has the benefit of there's less risk / deal.
Lol, find it funny people throw MS without giving a response why. If you disagree with me at least do me the service of letting me know why, otherwise I'm inclined to think you're just butthurt.
Agree with you a lot, work in MM in London and it is (frankly) driven more by a) Management team quality (or having an angle with an MBI candidate) and b) financials.
You could argue that is part of the thesis, e.g., chance to buy in a sector growing at 7% organically at a lower valuation because you have the management solution.
Also agree with you on the volume point.
Anyone who’s arguing there’s MORE financial engineering in MM PE vs. MF PE and LESS thesis driven investing is not a serious person.
Completely agree - don't have the benefit of stable/robust CF in LMM and to a degree even in MM vs. MF; much more thesis/growth driven and professionalisation to build the CF to be attractive for UMM/MF buyout (for context I’m coming from a European perspective where LMM is notably smaller than US LMM)
Where did I say that? LOL. That’s not what I said at all. Obviously MF deals are infinitely more complex which is what I implied but apparently not enough.
I’ve also seen lots of MM / LMM deals with mezzanine financing, preferred equity, earn out, seller’s note, etc. my point was that on smaller deals you just don’t have time to come up with a sophisticated market thesis, so if you’re gonna spend time on one thing in that space spend your time just trying to find a good deal albeit with a good price or good financing (e.g. preferred equity with a 15% hurdle rate before management participates).
Running a lottttt of expert calls. Run 10+ in a space, across different companies / competitors, talk to their suppliers and customers, and you start getting a feel for fragmentation, value prop, what can be improved, etc. Too much subjectivity / noise with each but the more people you talk to, the more you see common denominators.
Hey, thats a very good question and would like to pick up the thoughts of the community again.
I have developed a framework to test the attractiveness of a few industries that can serve as a guideline, baiscally using two sources:
- Stanford "A Primer on Search Funds" page 23 onwards (free available)
- Private Equity Toolkit Book (I think about $30 on Amazon)
These are two great resource to have get some structur arround the idea of preparing an industry thesis. However, the actual input and at the end how you put some meat / data to the stroy and make it sound logic to LPs / Parnters will come from expert calls / advisor calls / talks with excecutives and resarch of course.
At the end present It in a concise way with no more than 10-15 slides --> Remember, this is all about storytelling and also convincing others about your thesis.
Hope this helps and looking forward to hearing about other what practical tipps they have for example about bringing the thesis to paper / PPT-
In my opinion your investments should play to your strengths first & foremost. Private equity is more efficient than it used to be, and winning deals is difficult...even in the lower middle market.
Without a clear advantage, it's very difficult to win and deploy capital well. With the above in mind, we built our thesis out around our operating experience.
So how does that play out practically?
We can run diligence exponentially faster than a vanilla PE firm.
Where does speed matter? Distressed + spec sits.
So naturally, we gravitate there.
We end up doing a lot of deals that require someone to be able to understand a business from the ground up. A lot of finance guys will look at a company and exclude it for reasons we know don't make sense as operators. Say, net margins appear to be low...
We can quickly jump in -> realize that ~40% of the team can be cut without any real hit to performance. You can't do that unless you've done things like run the supply chain function end-to-end across a dozen companies, or had your hand in the ad accounts directly when managing digital marketing spend.
Over time, we've only become better at figuring out what fat can be cut on day 1. Cutting is always more predictable than trying to increase revenue, so we build expectations based around that...but usually we can drive substantial revenue improvements too.
Thanks for sharing insights again, been keeping reading your posts for a day, really stimulating! For people want to pursue a career even start his own career in LMM, would you prefer consultant than banker?
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