Currently have a portco that is a heavy buy and build and has been on an LTM decline for the last few months. We baked in a ton of pro forma adjustments for most of these add ons over the last year in order to increase leverage and not put in equity, and apart from declining industry conditions (price deflation, etc.), we have not realized those pro formas over time which has contributed to declining performance. Now, as we are about to report to our lenders, our partner wants to bake in more pro formas (this time literally fake numbers) in order to tell a more rosy picture. Is this normal with everyone else’s portcos? Feel like pro formas can be a never ending game that you start playing around with / house of cards that could end up collapsing and not panning out over the long term. Because if the business does start performing well, you are now comping against unrealistic, propped up historicals
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I think you just learned what a pro forma is then. It's people trying to predict the future by using fake numbers, and then using that model as a guideline for how to operate an investment in a way that would provide the desired outcome. Normally, the underwriter would want to use realistic assumptions (to try and make the pro forma achievable), but if the Partner wants to make it "aggressive" and has a game plan to back that up (even if it's a shaky game plan) then it's fine. When I was in PE, I heard for years from the Partners of the firm that the assumptions have to be defendable but not necessarily true. Under those partners we made pro forma assumptions that were extremely aggressive and borderline fiction for lenders and equity partners, but we would still use the rosy model to fund the deals and we didn't have any serious problems with lenders or LPs. Lenders and LPs know that the model is probably juiced up, the same way buy-side investors know that bankers usually juice up the models for sell-side engagements to get business. It's all fake and if everyone was held accountable to every model they made, no one would have a job in PE/VC/Corp Dev.
Smile and enjoy the ride.
I'm sure that this varies by shop, but could you confirm your comment that lenders view models as juiced up (at least based on your prior experiences in PE)?
That's obviously my assumption when I receive a banker / sellside model, though my firm often really tempers growth projections when we share a model with a lender (often times, it's more conservative than our internal underwriting model). Realizing now that might not be the norm and we might be employing a very conservative approach to financing
Yeah just to be clear, this isn’t a model or projections. Talking about juicing LTM reported performance with fake EBITDA. That WILL eventually roll off gradually over time. And if performance continues to decline, you’ve run out of silver bullets to juice the numbers and performance looks even worse than it should. I know this is how the industry works but wanted others perspective
Bro said the quiet part out loud
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