Hi All,
How important is it in REPE to know how to create a Excel model from scratch, complete with waterfall structuring and sensitivity analysis, VS. being very familiar with any model if handed to you? I think I'm fairly comfortable using an advanced model once I can play around with it for 10 minutes. I understand the assumptions to make, and the triggers and the levers I can pull to show if a deal works and doesn't work. I've tweaked already-built models to my own liking and have used it to put in offers on deals of my own and to communicate with other GPs and prospective LPs.
However, I suck at building a model from scratch. I've taken several courses on how to do this, but I can't for the life of me memorize the individual formulas and create one with a blank workbook. I understand in theory what the formula should be but don't remember all the clauses that needed to go into it (especially around modeling Debt!)
I'm wondering if I should just take the L with trying to learn how to build a model from scratch or focus on my strengths and practice deal-structuring with models that already exist.
Any advice would be much appreciated. Thanks in advance.
You should absolutely be able to build a model from scratch.
Yes, you need to fix this. My advice, print out a complete model or save as PDF. Then open up a clean excel sheet and start building. Struggle with each cell and the formulas, links, and references. You essentially have an answer key, when you get all the same results given same inputs, you are done! Resist as much as possible going to the spreadsheet to look at formulas, only do so in a last minute pinch. Seriously, HARDCODE the number then keep going, go back and try again, last last last option is looking at the formula in excel.
Do this for all the main models you want to learn and you will be a pro. Note, it will take time and be frustrating, but will be fun when you solve the model. It is worth saying, you should understand the model and it's concepts before doing this, but it sounds like that is not the issue.
SB'd. This is very helpful advice, thanks a lot!
Yes you should know how but don’t overthink it. The same model with indexmatch formulas can be done with simpler functions but it’s helpful to know and be familiar with the more advanced functions.
I would start off with something like an acquisition of a 10 unit apartment building with some vanilla 75% senior financing, project income and expenses with standard assumptions, and see what the value is in 5-10 years and what you should do with the asset. You don’t need to dive into waterfalls right away when you can focus more on the basics.
Yeah maybe I'll just take it slow at first and build from there. Thanks!
How do you simplify further than INDEX(MATCH())?
It wasn't a literal statement
It’s odd in a way. You will literally never be creating a model from scratch in your job, yet the ability to do so is important for understanding how models work and also for passing some modeling tests in the hiring process.
this
This is spot on, but I will say, if you have the ability to do complex models and structures you will have the confidence to propose or consider varying structures and complex deals (esp. with partnerships and return distributions but also portfolio mngt). This could be very valuable at high levels of the industry or if attempting to 'go out' on one's own. Just knowing that it can be done and how it is done will literally let you think about deals more creatively.
This. Depending on the shop, you will be handed an institutional level model that will be the bread and butter for every deal you work on. 99% of the time, this model will be recycled and standardized. Your work will consist of working in this model and being able to update and play with key assumptions/inputs.
Knowing how to model is only critical for being able to interview well. As many others have said, you will most likely never build a model from scratch.
To that point, I would like to ask a follow up question: How important is being able to build a model for your second job? Is it assumed that you know something, or are there still interview modeling tests?
It's pretty typical through associate-level positions. After that I'd be surprised if anyone saw one.
This isn't true....maybe if you're an analyst that focuses on just one product and/or deal type but if you have any sort of variety in your workflow this is false. Just thinking back to some of the deals I worked on over the last year was a ground-up life sciences development, heavy value-add multifamily bridge deal, Opco / propco behavioral health portfolio financing, bridge financing for a mixed-use train station, gas station development deal structuring metrics around the lessor's target financial returns, 3-phase development deal requiring a land loan, horizontal financing, and vertical financing, conversion financing for an existing office into apartments, etc, etc. etc.....
Tell me what models you have on file that would work for any / all of those deals...
To add on to that....every deal I've ever worked on required some sort of supplemental analysis that required building a model in Excel to come up with an optimal decision
Sure, every deal is different. That doesn't mean you should be building a model from scratch for each one.
Usually you are rebuilding/tweaking significant chunks of an existing model, or building out new sections for supplemental analyses. That's different from building a sophisticated model from the ground up (I'm not saying you shouldn't be able to, you absolutely should, but the reality is you SHOULDN'T have to do it very often).
Of all those you mentioned except the opco/propco and gas station.., yeah, institutional shops should have templates for all.
"gas station development".... weird flex, but OK
The idea that someone working on that wide of a variety of product types and strategies is in any way normal or typical is incorrect. That's pretty cool that your experience has been so varied, but most people, especially those beyond the analyst level, are specialists.
Second, a good model is adaptable - especially when it comes to your financing examples - and supplemental analysis is not the same as the overarching underwriting model.
disagree I model non-agency mbs deals from scratch very often
Building one proves that you fully understand it. You can say that you do but, in the the interview process its the only way for a firm to truly see if you do.
This is true. You don't need to know how to do indirects or sumifs to know how to build a model from scratch. At the end of the day, it's all monkey math, so you should be able to build a less efficient model that is directionally correct if you understand the underlying finance w/out being any good at Excel.
Thanks for the input everyone! It's a good thing I'm at home and have more free time now....
Being able to build a model from scratch is essential to being able to consider outside-of-the-box scenarios and identify when a model is broken. For example, if you have a model for an apartment development, and want to add in a ground lease, you will need to rewrite large chunks of the model. You will also need an intimate knowledge of Excel modeling to see if anything breaks in the process. Being able to use existing models is the first step, but being able to build a model is essential for continued career growth.
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