Special situations / FIG / Balance sheet (ROIC not EBITDA) investing - what does this mean?
What does this even mean? I realize there’s probably content on this elsewhere but not sure I’m looking at the right stuff. I had a recruiter ask about special situations / FIG / balance sheet investing more focused on ROIC than EBITDA. What does that mean?
I do middle market and large cap growth technology investing with low leverage from a consulting background and I focus like 95% on P&L and 5% between cash flow and BS so the words the recruiter said were basically gibberish to me. Can anyone recommend some reading?
Follow up / bonus points question would be: how are the analyses different? What models do you run? Is the diligence process different and if so, how? Check sizes different all else equal? Etc.
Is this WP?
Sounds like insurance related investing. Ie; you are trying to optimize your return of equity capital to outpace your required payments to policy holders, etc. Most of the multi-asset megafunds (ie; likes of BX, KKR, Apollo, Ares, Carlyle, Brookfield, etc.) have groups that focus on this in some sort of way. Most notable transaction in the space is the Athene / Apollo transaction which has quite a bit of info written about it.
See attached for some additional background: https://www.mckinsey.com/industries/private-equity-and-principal-invest…;
Thanks. This was a good nudge in the right direction.
I think ROIC investing would be about looking at the company's net income (or NOPAT) and dividend paying ability. This is common for some entities that are interested in cashflow generation vs maximizing equity value (endowments, banks, insurance companies, etc.)
In a normal PE deal, you lever the business and use the cashflow to pay down debt and your target is to maximize the value of your equity at exit so your IRR.
In a "ROIC deal", your preference is for the highest net income and highest dividend payment, so you look at ROIC and Dividend Yield on your original investment. Leverage would increase your ROIC but would lower your dividend yield, so you try to strike the right balance between the two.
Modelling is the same, you just look at metrics other than IRR
I think the above poster makes sense, though I would disagree with the relatively lower focus on IRR. IRR and MOIC are still the key metrics at the end of the day by which you measure the investment.
Now, to your point, what you are describing is a matter of nuance - in a typical, non-FIG PE deal, ROIC is crucial as well (think about it as EBITDA less NWC change less CAPEX divied up by operating assets). The higher the ROIC, the higher your ability to pay down debt, the more value accrued to equity. No change in thinking there. The real change is the FIG context, which throws the whole leverage point out the window and refocuses all attention on equity. The best example is investing in a bank - you can't really lever it (it's already massively levered via deposits; you can optimize the cap structure below depos with different tiers of capital but that's for another day). So you buy into the equity at whatever P/B multiple you can, bank generates some net income (hopefully) and then you start collecting dividends. Your return drivers there are essentially return on equity (i.e. a ROIC-equivalent but linked to equity, not the entire capital structure) and the P/B at exit (plus whatever net income that wasn't spent on dividends accrued to equity). Very similar with insurance too, as someone else mentioned.
As far as I can gather, this type of investing is very asset heavy (whether FIG or otherwise) and it's generally not about high growth situations but rather stressed/ distressed type stuff. Can be quite exciting.
Btw, is this Warburg?
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