Modeling in HF vs PE vs IB

I was wondering if people could go in depth on the differences in modeling done in HF, PE, and IB. It seems like they have a lot of overlap in the type of modeling done, with more of a focus on LBO models in PE. What is the actual difference in modeling done in each job?

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Comments (12)

Jun 2, 2020 - 7:03am

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  • Investment Analyst in HF - Event
Jun 11, 2020 - 9:55am

Sure, I'll answer your question.

Starting with IBD, you tend to do the widest range of modeling in terms of analyses across Accretion/Dilution, DCFs, LBOs, etc... because senior bankers just love to throw random pages into a book to look smart in front of a client. However, the modeling itself tends to be very simplistic. The forecasts are typically based on assumptions handed to you by your MD, or the management team of the company, or perhaps consensus estimates if the company is publicly traded depending on the situation.

For PE, your modeling will be almost entirely focused on modeling LBOs. With that said, there tends to be a very strong focus on modeling out operating drivers to an extremely detailed level. For a consumer/retail company, that might go down all the way to individual SKUs. Modeling assumptions tend to be determined by the PE team itself and may work with their bankers and/or the management team depending on the situation, Additionally, for PE LBO modeling, there is also a strong focus on capital structure and determining the appropriate leverage levels and structuring of the debt.

For HFs, the modeling tends to focus mostly on building operating models and performing valuation analyses (this is a generalization, given the many different HF strategies, but is mostly true for long/short equity). All of the assumptions are going to be driven off of publicly available company and industry level data. You may get quite creative with this, alternative data is a big trend amongst HFs (the classic satellite images of parking lots example). These assumptions in your modeling are going to be the primary driver of your returns because that is where you are parsing out your variant view from consensus.

The above is a high-level simplification, can answer more specific questions if people have them.

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