Does anyone have a framework they can share for constructing an investment thesis for a private business or sector/category? Appreciate any thoughts if you've done this type of work before.
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Based on the most helpful WSO content, here’s a structured framework for constructing an investment thesis for a private business or sector/category:
1. Thesis Statement
"We are investing in company X because we hope to achieve A, B, and C and then sell the company in 5 years for more than we bought it for."
2. Key Components of the Process
3. Critical Questions to Address
4. Industry Considerations
5. Tailoring to Your Strategy
This framework ensures a comprehensive and disciplined approach to constructing an investment thesis. For further insights, you can explore detailed discussions on WSO forums, such as https://www.wallstreetoasis.com/forum/private-equity/good-investment-th…</a">this thread on investment theses.
Sources: PE professional, what's your process while judging an investment?, My Investing Framework: How to Analyze a Company, Long term, concentrated, deep fundamental investing, "Good investment thesis/argument" - where can one find these?, PE professional, what's your process while judging an investment?
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What are you looking for? How are you trying to do it now? What is the bottleneck?
Assuming you are starting from scratch (i.e., you haven't identified a company you are trying to build a thesis around), think of the process like stacking assumptions and analyzing the implications of said assumptions At the foundation of your thesis, you want it to be based on something that is durable -- i.e., true in most all future versions of reality; for example, grid infrastructure, like transformers, are on average 40 years old (which is 15 years past the suggested useful life). From there, you think of the first-order implications of those factors, as well as the natural elements that accelerate them. In the grid infra theme, power demand is expected to increase, leaving utilities no longer just replacing transformers 1:1, but rather growing the total install base. Your natural inclination would be to say, "Well then, you should just buy the OEMs" -- priced in... First order analysis is good, but typically investing based on the first order takeaway is a poor strategy. That said, you should still analyze the key OEMs, which would verify the demand, given the now 2-3 year purchase-to-delivery backlog. From there, you should map the value chain, which should then enable you to find the downstream beneficiaries of the growing demand and tightening supply.
As mentioned, you are stacking assumptions, each of which needs to be discounted more heavily the higher up the stack you go. For the theme, I laid out the (consolidated) stack might look something like --
Grid Infra is aging, particularly transformers (fundamentally true)
Demand for power is accelerating for a variety of well-publicized reasons (high probability of remaining true)
OEMs have seen delivery backlogs stretch from a few months to 2+ years (decently high probability of remaining true)
Then it is about finding a.) 1-3 ways you can play the trend (in the case of transformers, maintenance, refurbishment, components, or decommissioning, and b.) finding the best companies within those categories at the best price.
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