How to tell if a company is good or not based on Investors Presentation
Just finished my internship last month, and I sat through a lot of investor presentations by private companies. As a naive, young intern, I saw all of the buzzwords and "value propositions" of every company, and they all seemed extremely convincing and strong. Ex: "leading distributor with a critical value chain proposition" with some fancy numbers. How do PE professionals tell if a company is worth an investment if all companies dress themselves up all fancy in their presentations? Any insights would be appreciated!
Great question! As a PE professional, it's important to look beyond the buzzwords and fancy presentations. Here's a general framework that might help:
Understand the Business: Ask questions like "How does this company make money?" and "Why does this company make money?" This will help you understand the company's business model and its competitive advantage.
Future Earnings: Consider if the company will continue to make money in the future. This involves assessing the industry, the competition, and the company's position within the industry.
Investment Thesis: Ask "What do you have to believe for this investment to make money?" This will help you identify the key assumptions behind the investment and how to test them.
Value vs Price: Remember, it's not just about the value of the business, but the value of the business relative to the price.
Due Diligence: This includes getting desktop materials, speaking to management, writing up a 'flag' for fund partners to review, conducting first-pass due diligence (which includes channel checks and building a financial model), and writing up a preliminary investment proposal (PIP).
In-depth Analysis: After presenting the PIP and model to fund partners and getting their questions, conduct in-depth due diligence, expand/tighten the financial model, and write a final investment proposal (FIP).
Key Factors: Consider the transaction dynamic, market, business model and competitive position, management team, financial performance, investment thesis and value creation measures, valuation and structure, exit and return, and risk and reward.
Remember, industry is often more important than management. If the industry is in permanent decline, even the best management team won't be able to help. Also, if you get management wrong, you can change it. Just make sure that you are a majority investor.
I hope this helps! Let me know if you have any other questions.
Great question. I always asked myself the same when I was a little more junior. I think this is mostly driven by experience. Each presentation or IM looks like the presented company is the best in its sector, but if you see alot of these decks, you can see behind the fancy words just because you can compare the #s to other deals you worked on (e.g., is EBITDA margin good for the industry/is it sustainable, customer concentration, how integrated is the company, how is revenue generated/customer contracts, Cash conversion cycle etc.)
great way to look at investor presentations in PE
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