PE / Buyside Modelling
Sorry if this is a dumb question - just wondering what type of modelling is usually done / takes the most time in the buyside / PE? Reason I'm asking is that in the sellside, we spend a lot of time with mgmt on working on the operational model / assumptions and really fleshing out the model to granular line items (more complex than needed..)
When we give it to buyers in Phase I or upload in the VDR - how much / what type of modelling do the buyers spend the most time from the model we give?
I understand they may probably overlay it with some of their assumptions / inputs and make an IRR / LBO / valuation tab. However on the actual modelling front - would most time be spent on just DDing the various line items and assumptions / understanding how the model works? As imo the bulk of the work of making the 3 statement operational model and revenue / cost builds were already done by the sell side, and I dont think overlaying an LBO tab would take as much time as making the operational model from scratch
Sorry if a dumb question lol.. thanks
PE modeling, in my opinion, is much less "intense" compared to banking - where you're in an advisory role working with trash VPs who will want a perfect looking model with 7 toggles, which is obviously useless.
We only use models for 3 general purposes - 1) to make decisions, 2) for lenders, 3) for IC memos. For making decisions, a mini model is more than enough to determine if something is a good investment or not. For lenders, these guys don't know how to do diligence or think so you have to anchor your projections and make sure they can meet debt paydown / covenants. For IC memos, it's just optics and selling the idea to committee so you work backwards to hit your internal MOIC. With that in mind, you should be able to determine how to build the most efficient and effective model for those purposes. I've built models that have gone through lenders / IC in 2 days, and models that I've worked on for weeks (as you might expect, a waste of time).
In terms of operating build, we make our models simple with a handful of key drivers (key unit economics). Everything else is a simple assumption (i.e., growing SG&A as a % of sales or something). Again, modeling is not important or necessary to making good investment decisions and if you work in PE, hopefully that's the culture and requirements and not some hardo models that no one will look at.
The LBO model isnt as complicated as one would expect. Its just that at my shop we spend alot of time on unit economics, revenue and cost drivers and the assumptions behind it also if PF assumptions make sense. From that point after not a lot of analysis and everything flows down to FCF, pay down and return sensitivity.
Helpful response, thanks. When you say 'a lot of time on unit economics', could you elaborate on how you approach this?
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