Private Equity: How to Analyze a CIM Effectively?Subscribe
All, I work at a middle-market fund (started about 8 months ago here) and wanted to learn from someone qualified (associate level or above) who works on the buyside what the best and most efficient way to analyze a CIM is (Confidential Information Memorandum, for those who're not aware is a 40-50+ pg book that basically markets a company to potential strategic/financial buyers and is usually put together by an investment bank working on behalf of the client, the company.
It contains critical confidential information on the company's history, business model, operations, financials, management etc. i.e. anything an investor would need to learn about the company to be able to make an informed decision and submit a non-binding initial letter of intent if they're interested in buying the company.
We typically receive a flood of CIMs every week - some we can reject outright because we don't invest in a particular sector, but a lot of others legitimately sound like great businesses at first glimpse. I am normally intimidated by the amount of CIMs I need to read and analyze (and I'm sure everyone who works at a junior level at a fund has this problem) and haven't yet perfected a structure or a systematic slice-and-dice method that can make me more efficient at analyzing CIMs. My VPs have been helpful as resources on best practices, but we don't seem to have a formal structure because everyone obviously has personal preferences. SO MY QUESTION IS: WHAT'S THE BEST WAY TO DO THIS?
Mod Note (Andy): Throwback Thursday, this was originally posted 3/3/2012, user @Sil" pointed out this week that the comments in this thread are very high quality / helpful so I thought it would be good to add this to the frontpage.
How to Analyze a CIM in PE?
When working in private equity as an analyst one your main jobs will be looking through proposals for buyouts that you firm will evaluate as potential buyout candidates. These proposals are called CIMs.
What is a CIM?
A CIM is a confidential information memorandum is a document that investment banks prepare with companies in a sell-side M&A process. Sometimes this is also known as an offering memorandum or an information memorandum. The packet of information gives buyers information about the business, management and financials, and the market. The CIM can be more than 50+ pages long.
What to Look for in a CIM - Financials
Our users shared financial thresholds and metrics that they look at. Typically, analysts look at EBITDA figures and cash on cash returns.
My personal requirements are:
- Low capex - usually less than 5% of revenues
- Strong EBITDA margins - ~20%
- Revenue growth - CAGR of 10%+
- Sanity check of market size vs projected revenue growth
That should generally return strong IRRs. But really it should be based on your fund's investment criteria.
The most important thing is looking at financials obviously after screening for industry you would do. Look at their assumptions on EBITDA or cash and do a quick back of the envelope analysis on how type of returns you can get. You wouldn't want to waste time on stuff you can even get 2x cash on.
What Makes a Good Take Out Target – Qualitative?
I've been screening CIMs for a number of years now and the truth is that everyone has their own personal style. I prefer to review them at night or over the weekend when I can have a period of uninterrupted reading. I usually start by doing a 30 second flip through the financials to get a high level impression on size, margins, growth, and most importantly, ability to generate free cash flow. Then I go to the beginning of the book and just start reading.
I find the most important thing to identify is competitive differentiation - essentially what will enable this business to continue growing and win market share from competitors. I try to determine the value add that the company's products or services provide to the customer base and any barriers to entry - this helps me understand the company's margins both historically and through the projected period. I need to figure out the buying criteria, aka whether the company is competing on price, service quality, or some other metric. Finally, industry plays a very important role, primarily because it dictates the base rate that I can expect the company to grow at over the next five years.
There are obviously other things that come into play (recurring revenue, customer concentration, cyclicality, etc), but usually these things can all be determined based on the business model anyways.
User @red08" shared a good sniff test look through of a CIM:
I do a quick flip through the book:
- Company and the industry
- Financial metrics (rev and EBITDA growth, margins, capex, cash flow gen); quick comps for valuation range
- How they cycled
- Value-prop (reason to exist)
- Mgmt team
Then I go back to page 1 and start.
User @johndoe89" shared a detail review based on multiple years of PE experience:
- Financial Fit:I recommend starting from the financials in the back. If your fund is anything like mine, you will be pretty restricted in terms of the size of the cos. you can invest in. For eg, in our case, if the co. as below $5M in EBITDA, we would only consider it if the story was really really compelling (an industry or management team we knew well or had invested in before). This helps screen out a lot of companies that you're gonna be on the fence about if you start reading CIMs the traditional way from the front.
- Transaction Structure: Look at the transaction structure section next and jot down what type of deal is on the table. Generally its some generic crap like they'll consider all kinds of proposals but in some cases they'll explicitly say they're only looking for a majority buyout or only looking to bring on a minority investor. That can help save time if your fund doesn't do it.
- FCF Generation Ability: Always do a back of the envelope to compute the company's FCF profile (EBITDA-Capex). Shitty companies won't give you this calc but it'll only take 2 mins for you to realize from the EBITDA and capex numbers that the company doesn't generate much free cash, in which case you won't be able to put on too much leverage. You should generally have EBITDA and Capex given. If Capex isn't available, ask the bankers.
- Industry Tailwinds (or Headwinds): Spend some time reading through the industry and make sure the industry has strong tailwinds/ is growing at a high single digit rate. A lot of times you could be looking at a growing asset but in a shitty industry. In that case you really have to spend time figuring out the secret sauce because a shitty industry can bring down even the best company along with it. Generally stay away from those.
- Organic vs Acquisition Driven Growth: On that note, really scrutinize organic vs acquisition driven growth. A lot of companies (especially those previously owned by PE) make several acquisitions over the course of the fund's investment. Try to figure out what is the true organic growth rate for the platform company and attempt to segregate performance of the add-ons.
- Call w/ Bankers: Generally we always did a call with the bankers after going through the CIM and jotting down our questions. This quickly helped kill opportunities due to transaction dynamics that weren't discussed in the CIM. Not sure how it works at your fund but try to get these calls in asap after reading the CIM. It ll help you not waste time.
Finally, a classic bad associate habit is killing a deal because you just don't have the time and interest to work on it. I understand that. Just try and commit to developing a good legitimate set of reasons for killing one. Otherwise senior folks start to think you're trying to brush off work. Be careful about this one as it happened to one of my fellow associates.
Distressed Asset Confidential Information Memorandum
Distressed PE investing can require a different skill set and our users shared their thoughts.
Slightly different perspective, but as a distressed guy, I usually see these after the company's debt starts being offered at attractive levels. I usually model the company's capital structure and LTM financials quickly, then if interesting break out a few prior year financials for like for like comparisons.
After this, I tend to quickly flick through the CIM when I realise I don't actually know what the company does yet. It's very easy for me to read as I can just skip past all the growth assumptions and focus on the company's key value drivers and market positioning. I rarely spend more than 1 hour looking at a CIM.
Same here, but I'm also on the distressed credit side.
- sketch out the cap stack with all relevant terms, pricing, and cumulative interest exp
- sketch out last 3 yrs high level financials, then form expectations about the near & medium term (if im familiar with the industry or biz model)
- calculate cumulative leverage, FCF multiples, and interest coverage at each level of cap stack
- read the business description & and MD&A provided
- go back to the beginning and read through from pg1
Read More About CIMs on WSO
- CIM ( Confidential Information Memorandum) Production
- PE Case Study - LBO With CIM
- Need Help Formatting CIM
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