Which company a better buy or to invest in?

Dear all,

Normally in private equity firms, assuming that you have two companies to buy (different industry), what would be the key things that you will look at to determine which is a better buy?

Is it just more on seeing which industry has a better growth potential from industry standpoint, and how good the margin of the business and effectively the IRR for each investments?

Or do we look into other things/ratios as well? Appreciate if you guys could share some of your experiences.

Thanks!

 
Best Response

Pretty broad question and too lazy to give you a proper response since you can use the search function or check out this thing called Google.

You are looking for businesses that offer the following:

  • stable cash flows
  • highly financeable assets
  • synergy opportunities with your existing portfolio companies or a possible roll-up strategy in a fragmented market
  • corporate waste/excess and opportunities to reduce expenses to drive profitability (i.e. layoffs, management best practices, renegotiation of contracts)
  • exit opportunities and our opportunities for multiple expansion
  • acceptable IRR

You could also start with Porter's Five Forces and take a macro and overall industry perspective. All else equal you should choose the industry with the superior growth prospects but again there are so many confounding variables that you would have to consider (barriers to entry, emergence of competition, etc.)

Lots of good reading out there. Good luck

 

Short answer to this question is that ultimately the attractiveness of an investment is a function of the IRR (return) and the risk profile (the profile of IRRs across different scenarios).

And there is no right answer to how to judge different risk/return combinations.

So for example, you might have a low IRR in your base case and a very limited downside and choose that investment over one where you have a high IRR with 70% certainty but a 30% chance of losing all your money. Or if you are less risk averse, you might choose differently.

In the PE world, risk/return is driven by all of the things junkbondswap has mentioned above and more. In other finance fields, the drivers are different, but the trade-off is the same.

 

Thanks junkbondswap and PZ87 for your inputs.

Reason I was asking is because I'm curious on how private equity professionals perform their investment analysis on a qualitative level, apart from building the financial models to evaluate the potential IRRs on different scenarios.

Am I also right to say that most growth-focused private equity will look into

i) Industry growth essentially plays a vital role, (growth trends, margin trends, consolidation and how competitive or fragmented the industry is) ii) Is the company a market leader or follower in the industry space and how strong it is in defending its position. (Porters 5 forces comes into consideration) so on..

 

Ut eligendi optio ratione similique consequatur voluptas a. Velit qui aperiam officia perspiciatis. Nobis esse quo vel velit ipsam odio a in. Facere velit voluptas sed aliquid error.

Quos officia ipsa et quos. Cum voluptates aspernatur aut temporibus. Neque quia nemo laboriosam.

Career Advancement Opportunities

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 99.0%
  • Warburg Pincus 98.4%
  • KKR (Kohlberg Kravis Roberts) 97.9%
  • Bain Capital 97.4%

Overall Employee Satisfaction

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 98.9%
  • KKR (Kohlberg Kravis Roberts) 98.4%
  • Ardian 97.9%
  • Bain Capital 97.4%

Professional Growth Opportunities

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Bain Capital 99.0%
  • Blackstone Group 98.4%
  • Warburg Pincus 97.9%
  • Starwood Capital Group 97.4%

Total Avg Compensation

April 2024 Private Equity

  • Principal (9) $653
  • Director/MD (22) $569
  • Vice President (92) $362
  • 3rd+ Year Associate (91) $281
  • 2nd Year Associate (206) $266
  • 1st Year Associate (387) $229
  • 3rd+ Year Analyst (29) $154
  • 2nd Year Analyst (83) $134
  • 1st Year Analyst (246) $122
  • Intern/Summer Associate (32) $82
  • Intern/Summer Analyst (314) $59
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
Secyh62's picture
Secyh62
99.0
5
GameTheory's picture
GameTheory
98.9
6
CompBanker's picture
CompBanker
98.9
7
dosk17's picture
dosk17
98.9
8
kanon's picture
kanon
98.9
9
Linda Abraham's picture
Linda Abraham
98.8
10
numi's picture
numi
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”