How Often Does PE model?

Authored by: Certified Private Equity Professional - Vice PresidentCertified Private Equity Pro

PrivateTechquity 🚀GME🚀

It's called banking 2.0 for a reason...

"The obedient always think of themselves as virtuous rather than cowardly" - Robert A. Wilson | "If you don't have any enemies in life you have never stood up for anything" - Winston Churchill | "It's a testament to the sheer belligerence of the profession that people would rather argue about the 'risk-adjusted returns' of using inferior tooth cleaning methods." - kellycriterion

Analyst 2 in IB - Cov

Sounds horrible. What's banking 0.5?

Analyst 3+ in PE - Other

0.5 would be Corp Dev for the most part, varies depending on where you are.

Analyst 2 in IB - Cov

Sounds like you are in Tech PE. Is lack of modeling more of a situation for PE analysts or associates aswell

Private Equity VP Pay Guide

PrivateTechquity 🚀GME🚀

I genuinely can't think of a scenario where you're not going to have a lot of modeling as an execution-focused analyst or associate. If you went to a firm that's got a heavy sourcing model, for example Summit Partners, you'd be cold outreaching businesses more but that's the only way you don't end up with more modeling in your future in PE as far as I can tell. Even then, associates at Summit better know how to model once they bring a deal to the table (which is why most of them are former bankers).

Managing Director in IB-M&A

For anything that doesn’t get killed at the initial CIM review stage, you will put together a pack (company overview, financial overview, preliminary returns) that will be a typical LBO model with sensitivities.

As you get into the second round and start whipping up advisors and spending money, you will put together a more fulsome model. Typically a fully operating model (I.e. subscriber/sales headcount driven, market share driven, or vertical/segment specific revenue/cost builds) that build into the LBO model for returns and any financing specific builds (I.e. structured like prefs, etc.). So yes, a lot of modeling.

Authored by: Certified Investment Banking Professional - Managing DirectorCertified Investment Banking Pro

Analyst 2 in IB - Cov

Thanks! In your experience, how often do those CIMs come with a built-up model from the sell side and how valuable a model is in the pack you mentioned for PE seniors to make a decision (quality vs quantity)

Managing Director in IB-M&A

Most Helpful

Depends. Most processes have CIMs with 3 - 5 year forecasts as the initial first round launch. If we like the business from what we read, we will run a LBO model. Pretty simple stuff...dropping in mgmt financials and then add sensitivities, including operating sensitivities (revenue growth / EBITDA margin, etc.). And then there's the William Blair processes where they share the sellside model upfront, in which case (depending on the partner/principal/VP you're working with) you can go down in a rabbit hole and try to do some fancier stuff flexing operating assumptions in the sellside model to come up with a few cases.

Based on my experience, the purpose of the model pack is two-fold:
1. Partner already likes the business and has a sense of what it will go for (can still be a bit of a wide range). The model pack will include comps and returns sensitivities so we can determine what we want to bid and the "level of conviction" we need to get ourselves to what we think the "clearing price" may be.

2. Partner wants to dig further but doesn't have full conviction and want to run it by more senior partners (or a principal is running a deal and wants to run the deal by the sponsoring partner before we spend more time). Then the model pack will be heavier on the business overview / market overview sections and will be a walk through of what the business is, why we like it, what the financial profile is, and what the returns could look like, and what we think we should bid (or drop if price is higher than x).

Authored by: Certified Investment Banking Professional - Managing DirectorCertified Investment Banking Pro

franco

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