Modeling Differences on the Buy-side

Hey all -

I've been actively pursuing HF opportunities on and off since b-school, and am at an advanced stage in my current process. They just asked me to send over a model, and while I have a catalog of models I've made over the years, I'd really like to put my best foot forward here. 

Do you have any advice in terms of what the buy side might expect from a model that might differ from my time on the sell side?

Are there any obvious missteps/mistakes that you folks see from sell side models that I should avoid?

Are there any buy side models that have made their way into the public domain that I should look at?

Any help would be very, very appreciated. 

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Comments (6)

Funniest
Feb 25, 2021 - 9:45am

Depends on the strategy, but I'm guessing you are looking at L/S funds? I've always found sell-side models (i) too complex, (ii) having too many tabs and driver sheets, and (iii) rarely incorporate any sensitivity drivers. You see this on the earnings calls when the sell-side guys start asking questions like "Hi (insert CFO name here), it's (analyst) from Citi, great quarter guys, just a quick one on how we should be thinking about modelling tax rates for Q3 next quarter?" And you know the buy side guys are falling asleep listening to those questions but we know they matter to you sell-side guys for your models so we understand haha.

What I find is that you want a model that (i) anyone can easily understand, (ii) where the key P&L drivers are laid out, and (iii) you can tab between 3 cases (upside, base, bear) to see impact on EPS/cash flows in each case. Remember, your PM might be a guy who last updated an excel model in 1985 so what you don't want is a great idea to get passed over because your PM was lost in the 100-tab model and decided the case was too complicated.  

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  • Analyst 2 in AM - Other
Feb 25, 2021 - 10:18am

LOL @ earnings call reference, that phrasing is too familiar. As someone in AM, this makes me feel better. Question on modeling assumptions though: do you recommend setting up generic model templates by sector when prepping for case studies, or should it truly just be done on a name by name basis? And what is the best way to determine base/downside case assumptions by sector?

  • Associate 2 in PE - Other
Feb 25, 2021 - 12:20pm

No, don't make pre-built templates. Every company is different and will have some nuance, even within the same sector. Especially early on in your career you should try to do as much scratch modeling by hand to learn the most. As you gain experience, your models will probably all start to funnel down into critical outputs you like to see. 

Feb 25, 2021 - 1:04pm

I never use templates, but in my view there are only 5 things you need to have a view on: (1) your revenue drivers; (2) opex split by fixed/variable costs so you have a view on operating leverage; (3) working capital swings so you understand cash in/outflows associated with revenue assumptions; (4) capex - and how this will expand going forward; and finally (5) target cash balance the company will run with - I usually make this as a % of revenue and drive debt issuance/repayments off this....generally I like to know if dividends/buybacks/capex expansion will need debt funding and hence lead to higher leverage.

Main focus should be on items 1 and 2 as those are the biggest drivers of earnings and where you will have the most room for debate in an investment committee.  

Feb 25, 2021 - 11:49am

At least the analyst said "great quarter guys" - always a good start (even if stonk is down 50% after-market)

Instagram: @dickthesellsider | Substack: dicktoad.substack.com

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