Simple businesses for a VP+ career (industrials vs. software)
I've had fun mucking around in mid to large cap software for my associate years where you have like 10+ product lines and infinitely complex models. It's been great but I don't know that I want to do this forever. I feel like some of the other PE firms I see do massive $5bn+ TEV deals on industrials or distribution businesses with like two products where the only way to model it is some market share % estimate. How hard can that possibly be? Then you just slap whatever cap stack your cap markets team can get you on the business and call it a day, rather than endlessly thinking through different GTM and distribution approaches and new product velocity. Do I have it wrong or are industrials businesses super simple and a cheat code to living a better life than being a software jockey?
I always thought software was super simple as it’s the same business model across every company you look at. You never need to adjust your modeling other than for different products. In Industrials, the difference of modeling an A&D distribution business to a specialty chemical manufacturer or an automotive collision repair roll up platform is completely different and requires nuance. If you’re a $5B+ TEV distribution business, you likely have 5-7 products in 5-7 geographies serving xyz customers. You would have to think about how price vs. volume differs across each product or geography and if you’re doing something for A&D, you would need to model the shipset content by platform and split by geography given the differences in aftermarket spend. At the end of the day, every group has its own nuances and i think the intensity of modeling differs most by firm than group. I’m at a UMM / MF and I’ve worked with some firms that have much more simple models than us (for better or for worse).
Ha, fair point. Grass is only always greener in one's head.
Software growth investments are allegedly one of the easiest to model
price vs volume, supply chain dynamics / vertical integration, inflation expectations and working capital needs, geography, facilities consolidation and complex synergies realization, and in some cases the essentially limitless numbers of SKUs in industrials and consumer businesses ends up making the modeling, in my opinion, far more complex than software.
Curious if anyone has thoughts on services-oriented businesses. I imagine the modeling is simply forecast: project fee / hourly rate x avg. project duration and grow along with human capital (assuming its not a software powered or tech-enabled business). Do others view business services as a complex or difficult vertical to evaluate deals in?
Business services companies span every end market / industry vertical so hard to generalize with one formula, but as an example, you could model revenue many different ways (e.g., by geography, by project, by segment, by cohort, by end market, etc.). Most services investments also have M&A as a big value creation lever so need to be more precise with the modeling vs. just slapping $xM of EBITDA acquired per year at x multiple. I think where this gets tricky is the build to operating income as the cost drivers for services could differ significantly by all of the different revenue cuts.
I personally don’t think it’s difficult to evaluate services businesses as its fairly intuitive, but it really depends on the project-based or “re-occurring” nature of the end market.
Don't do this mate. Software is the easiest sector out there for modeling purposes.
A random industrial business will usually serve 3-5 different end-markets - i.e. auto, chemicals, oil & gas, construction, power, etc. So you have to get a sense for supply & demand for each of those end markets and which part of the cycle each is in. Then the pricing/margin patterns and payment terms/inventory intensity will be different by channel and market. And none of this data can be neatly organized into "cohort analysis" or "net retention analysis". It's some 60 year old grindy CFO sending you unintelligible, hardcoded raw transaction data by SKU and riffing on what they're "seeing in the market".
Then the cost structure and headcount assumption is never as simple as salesperson efficiency and R&D/G&A fixed headcount needs. First off, there is actual COGS which move around all the time and have different terms with customers (pass-through? time+material? commodities risk? inventory obsolescence?). Then the Opex is not even really fixed - can be cost to truck, warehouse, plant overhead, etc that move around all the time.
And then there is the actual capex and working capital investments that can be so high that they've bankrupted companies before.... I could go on.
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