PE folks: What's your initial dilligence framework / workflow?

Simply as the title states: You get a brand new CIM in front of you. What's your go-to framework that you've found most efficient? Interested in hearing how this might differ by industry / seniority / familiarity / simple preference.

 
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  1. Is it a good industry? (porter's 5 forces)
  2. Does it have a good competitive position within that industry?
  3. What's my downside protection?
  4. What's my growth levers?
  5. How much can I pay to hit a 20% IRR w/ appropriate leverage assumptions?
  6. How am I going to exit this thing (are there strategics? IPO feasible? why would another PE firm want to own it?)
  7. Why should my firm be the one to own it? (important q to ask to avoid deluding myself into paying too much for this business by underwriting growth levers that don't exist)
 

Thanks this is helpful. This is a bit vague but do you have any advice on how to develop the investor mindset - for example I hear a lot of PE professionals talk about concepts like customer concentration, stickiness, operating leverage etc and I want to get good at thinking about these concepts when evaluating businesses. I haven’t been able to find any good guides/ sources to prep for these types of concepts so just wondering if you had any suggestions/resources. for context I’m hoping to recruit on-cycle in the fall and want to be prepared for case interviews

 

The firm should ask itself if it has an "edge" either in the type of investment, or the industry (or both). On the former - the firm should know what it's "circle of competency" is - turnarounds, growth, change management, international etc. It's pretty easy to read a CIM, do a few expert calls, and convince yourself that "new channels, customers, and products" are all viable growth vectors - when in reality they are extremely hard to achieve or non-existent.

Industry matters too. The more experience a firm has within a type of industry, the better. For starter, they can sniff out whether something sounds too good to be true and they understand industry dynamics. They also importantly have a network of executives / advisors they can tap into that will guide their diligence and post-transaction operations.

The world is and will continue to quickly move towards industry and transaction-type specialists in the PE world - my personal view is that any generalist MM/UMM PE fund will lose their edge over time particularly as the market gets increasingly competitive (PE, after all is just like any other industry subject to market forces that shape the landscape over time)

 

That’s my understanding as well. How do you gauge downside protection for equity - does the firm have liquidation preference? For debt, I can see the following: seniority of capital instrument; collateral; covenants to protect; and warrants to convert into equity

 

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