Hi all,
I'm a month into my new PE gig, having done 3 years in strategy/CDD consulting previously at a tier 2. Thought this would be useful for those in a similar position to where I was c.6 months ago, and for me to reflect on in 6/12 months time.
Fire away!
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Congrats on new gig.
How did you go about preparing and recruiting for MM PE job?
Also, is it in NYC? And was your previous job in NYC?
Congrats! Coming from IB background, could you please let me know how to best prepare for the commercial part of the interview process? - Assessing the investment opportunity from the IM, opps and risks, business model, understanding the market .. everything that is important. - any materials that might help preparing for this commercial part
The best way to prep for these is to look at consulting case interviews - there's a huge bunch of these online. If you can do well in these, then that's a great foundation for a PE interview.
To review the IM, I find the best way to approach this exercise is to use a typical CDD framework. It’s a great way to structure your thoughts when discussing the commercial viability of a business.
Here is the high-level structure that I used for IM reviews in interviews, and was a 'cheat sheet' to make sure I covered key points in the case interview. I’m coming at this from looking at a lot of growth stage tech businesses, but it is also applicable more broadly.
Market Size:
TAM – what is the absolute market available for the product? Can be difficult to assess accurately if the target is creating a new market/significantly disrupting one but gives you a directionally correct view of the opportunity available.
‘Whitespace’ available – how much of that market is available for the taking. E.g. for enterprise SaaS, how many potential customers do not yet have a solution to a problem.
Is it a fragmented or consolidated market? Could make market entry harder if consolidated, whereas more of an opportunity in a fragmented market.
Market drivers and dynamics
A few examples might include:
Economic - How will the business be impacted during recession? Luxury goods will struggle, but compliance tools could fare better.
Social - sustainability is a great current example of social pressure driving business.
Regulatory - any key regulatory changes that will support/hinder the business? E.g. Regtechs have benefited from being able to support banks' KYC/AML requirements
Seasonality - how will this impact upon revenue & cash in the business?
Competition
Who are the competitors? What key customers do they have?
Key thing here is to understand key USPs of the business – how is it better than the alternatives?
Does it have a defensible moat?
Barriers to entry
Product
Product market fit – what problem is it solving
Platform stickiness (including switching costs)
Disintermediation risk & opportunity
User experience.
Pricing vs competition
Customers
Who are the target customers + buyers within the org (if a B2B product)?
Buying behaviour / key purchasing criteria. Need to understand the buying cycles for this type of product - longer might mean greater stickiness, but could make sales into key customers more difficult if they've recently gone through a procurement round.
Management team
Not much you can gain from the IM alone, but make sure to point towards understanding that management team is key - especially in a minority stake investment.
Value creation opportunities
Revenue enhancement. Think about the Ansoff matrix here (existing vs new customer base/existing product vs new product). This might mean product development, increased sales activity, international expansion etc.
Cost Reduction. Reorg and process efficiency are a couple of good examples here. You may want to bring in a management consultancy with fees at risk to deliver cost cutting objectives.
Risk mitigation - how can you derisk the business? Could tie into revenue enhancement re. new markets + products.
Business plan assessment
In most IMs there will be a 5 year business plan - normally with a very optimistic hockey stick in revenue growth. It's important that these are believable in order to underwrite the valuation.
What is the difference in reporting quality between the financial statements/information you were working with in CDD compared to PE at the new job? I'm curious about the quality of the data that a MM PE fund would work with.
Also, what were your expectations related to all of those things compared to how they actually turned out?
The reporting quality varies hugely from target to target, and this appears to be the same as for when I was in consulting, however broadly speaking it will depend on:
how the deal has been sourced - if we originated it then the quality may well lower than if the target was in a process ran by a sell-side advisor, who would have supported in cleaning up forecasts etc.
the size of the target - smaller targets may have had been done by the owner/founder on the back of a fag packet one evening, whilst larger businesses are more likely to have a team putting these things together and formal sign-off process with the board.
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