Investment thesis

  • Investment thesis

What is an investment thesis?

Why you need a solid investment thesis, how to write an investment thesis , step one: determine your minimum viable fund size, step two: pinpoint your investment focus, step three: portfolio construction , how to present your fund thesis to lps, investment thesis example.

Breaking into the venture capital ecosystem is both challenging and competitive. Having a great investment thesis is key to running a successful VC fund. Without a clear investment strategy and effective portfolio construction , your fund won’t get very far.

In this article, we’ll cover how you can develop a strong investment thesis.

In private equity and venture capital , an investment thesis (sometimes called a fund thesis or fund strategy) outlines how you plan to use invested capital to generate returns. Your investment thesis clarifies how you’ll make money for the investors in your fund—it’s a definition of what your fund will do. 

Your investment thesis may include:

Your fund size

The number of companies in your portfolio

The stages and industries of those companies

The geographies those companies are located in

The differentiated way your fund will support your portfolio companies

Your average check size

The amount of capital reserved for follow-on investments

The return profile for your fund, based on the size of the stakes you’re trying to take in each company and your estimated success rate

How the fund will set itself apart from similarly sized or focused funds

An investment thesis tells a story by describing how each of these elements work together. 

Your fund’s investment thesis explains how you’ll cooperate with, compete with, and differentiate from other venture funds. An effective fund investment thesis is realistic and sustainable. It aligns with your investment team’s network of professional contacts (which provides access to deals), untapped opportunities in new and existing markets, and your LPs’ investment interests. 

Your fund thesis also supports compliance with the “ venture capital fund ” definition under the Investment Advisers Act of 1940 , which is important if you plan to rely on the related regulatory exemption for private funds. 

Creating your own fund investment thesis involves determining fund size, investment focus, and portfolio construction. 

The size of your fund influences almost every element of your investment strategy: The number of companies in your portfolio, your check size, the amount of reserve capital you have, and the return profile for your fund. Fund size also affects the types of LPs you attract and helps determine your fund’s portfolio management fees, which then dictate the operational expenses you can realistically support. 

Competitive research

To determine your ideal fund size, start by researching funds with goals and benchmarks like yours to see how they’re faring. You may also want to research successful funds across a handful of different industries and sectors to see what works. You can learn more information about funds by subscribing to trade publications, reading press releases from funds when they close, or on social media.

Once you’ve settled on a fund size, the next step is to outline the stage, industry, and location you’ll invest in. Articulating your investment focus helps narrow your aim and convince limited partners (LP) with interests in these sectors and stages to get on board with your strategy. It also makes it easier for founders who meet your parameters to identify your fund as a potential investor—and discourages founders who aren’t a good fit from pitching your firm.

At what point in a company’s life cycle do you want to invest and offer guidance? If you’re interested in being a sounding board for early-stage companies who are just getting started, you might want to invest at the pre-seed , seed , or Series A stages. However, if you prefer to work with companies that already have steady revenue and an established business model, you’ll probably want to focus on a later stage. 

Ultimately, the stage where you can focus your investments will be a function of your fund size and the anticipated number of companies in your portfolio. So keep this top of mind when building out your minimal viable fund size.   

Which sectors are you interested in? Do you plan to target a specific industry—like healthcare, fintech, or real estate—or focus on companies across a handful of different industries? 

Where are the companies you’ll be investing in? What particular challenges and assets do they have because of where they operate? You may choose to invest in local companies if you already have a deep network of contacts nearby. On the other hand, if you’re open to traveling, or want to capitalize on emerging, international, or underserved markets, you may want to expand your reach. This may also apply if your fund’s investment thesis is based on industry, for example, so you may be agnostic to geography. 

Other considerations

Depending on your investment goals, you might have other criteria to look at, like a company’s social impact, environmental influence, or commitment to diversity, equity, and inclusion. 

A thoughtful portfolio is critical to running a successful fund and shaping your overall investment thesis. Your strategy for portfolio construction signals to LPs how you plan to allocate their capital across investments. Your fund’s investment portfolio is essentially the roadmap for the life of the fund. It spells out the number of companies you’ll invest in, the amount of capital you’ll pour into each company, your target ownership for each company, how much you’ll set aside for initial investments, and how much you’ll reserve for follow-on investments.

Portfolio construction is made up of the following elements: 

Investment focus

Diversification: Types of companies you’ll invest in and what percent of the fund will be for non-qualifying investments or investments outside the thesis

Check size: The amount you’ll invest in each company

Investment horizon: How long you have to allocate the capital and how long you’ll hold each investment

Expected returns: How much you expect to return on the capital invested

Investor requirements: Maximum or minimum contributions

A good rule of practice is to ensure that your investments align with your portfolio construction model before making each investment decision, and then actively thereafter. Set aside time to regularly evaluate whether your investments align with your model, and where to course-correct. If your investments deviate from your original thesis, you’ll need to adjust your model or reset your focus. This is particularly important to track if you include a specific investment thesis in your fund’s legal documents.

Learn more about how to create a portfolio construction strategy

Most VCs prepare versions of their fund thesis that go into different levels of detail, ranging from a one-sentence elevator pitch, like the example below, to a full pitch deck.

You should be able to sum up your fund strategy in one or two straightforward sentences. Here’s an example investment thesis from a hypothetical venture fund:

“Krakatoa Ventures is raising a $25 million seed fund to back U.S.-based startups focused on climate technology and earth sciences. The fund will capitalize a highly specialized network of climate scientists the general partners developed during their two decades of academic study in volcanology and climatology.”

→Ready to make a full pitch deck for LPs? Prepare for your next meeting with investors using our free pitch deck template and example pitch decks .

This example highlights a key aspect of a great fund strategy: It shouldn’t be a thesis that just anybody can go out and execute. Your edge, such as your personal experience and network, are integral parts of the plan. Articulate why you’re better positioned than anyone else to execute your investment thesis.

Rita Astoor

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Writing a Credible Investment Thesis

Only a third of acquiring executives actually write down the reasons for doing a deal.

By David Harding and Sam Rovit

  • November 15, 2004

private equity fund investment thesis

Every deal your company proposes to do—big or small, strategic or tactical—should start with a clear statement how that particular deal would create value for your company. We call this the investment thesis. The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. Many of the best acquirers write out their investment theses in black and white. Joe Trustey, managing partner of private equity and venture capital firm Summit Partners, describes the tool in one short sentence: "It tells me why I would want to own this business."

Perhaps you're rolling your eyes and saying to yourself, "Well, of course our company uses an investment thesis!" But unless you're in the private equity business—which in our experience is more disciplined in crafting investment theses than are corporate buyers—the odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29% of acquiring executives started out with an investment thesis (defined in that survey as a "sound reason for buying a company") that stood the test of time. More than 40% had no investment thesis whatsoever (!). Of those who did, fully half discovered within three years of closing the deal that their thesis was wrong.

Studies conducted by other firms support the conclusion that most companies are terrifyingly unclear about why they spend their shareholders' capital on acquisitions. A 2002 Accenture study, for example, found that 83% of executives surveyed admitted they were unable to distinguish between the value levers of M&A deals. In Booz Allen Hamilton's 1999 review of thirty-four frequent acquirers, which focused chiefly on integration, unsuccessful acquirers admitted that they fished in uncharted waters. They ranked "learning about new (and potentially related) business areas" as a top reason for making an acquisition. (Surely companies should know whether a business area is related to their core before they decide to buy into it!) Successful acquirers, by contrast, were more likely to cite "leading or responding to industry restructuring" as a reason for making an acquisition, suggesting that these companies had at least thought through the strategic implications of their moves.

Not that tipping one's hat to strategy is a cure-all. In our work with companies that are thinking about doing a deal, we often hear that the acquisition is intended for "strategic" reasons. That's simply not good enough. A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.

A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value. This point needs underscoring. Justifying a deal as being "strategic" ex post facto is, in most cases, an invitation to inferior returns. Given how frequently we have heard weak "strategic" justifications after a deal has closed, it's worth passing along a warning from Craig Tall, vice chair of corporate development and strategic planning at Washington Mutual. In recent years, Tall's bank has made acquisitions a key part of a stunningly successful growth record. "When I see an expensive deal," Tall told us, "and they say it was a 'strategic' deal, it's a code for me that somebody paid too much."

And although sometimes the best offense is a good defense, this axiom does not really stand in for a valid investment thesis. On more than a few occasions, we have been witness to deals that were initiated because an investment banker uttered the Eight Magic Words: If you don't buy it, your competitors will.

Well, so be it. If a potential acquisition is not compelling to you on its own merits, let it go. Let your competitors put their good money down, and prove that their investment theses are strong.

Let's look at a case in point: [Clear Channel Communications' leaders Lowry, Mark and Randall] Mayses' decision to move from radios into outdoor advertising (billboards, to most of us). Based on our conversations with Randall Mays, we summarize their investment thesis for buying into the billboard business as follows:

Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

Note that in Clear Channel's investment thesis (at least as we've stated it), the benefits would be derived from three sources:

  • Leveraging an existing sales force more extensively
  • Using the balance sheet to roll up and fund an undercapitalized business
  • Applying operating skills learned in the radio trade

Note also the emphasis on tangible and quantifiable results, which can be easily communicated and tested. All stakeholders, including investors, employees, debtors and vendors, should understand why a deal will make their company stronger. Does the investment thesis make sense only to those who know the company best? If so, that's probably a bad sign. Is senior management arguing that a deal's inherent genius is too complex to be understood by all stakeholders, or simply asserting that the deal is "strategic"? These, too, are probably bad signs.

Most of the best acquirers we've studied try to get the thesis down on paper as soon as possible. Getting it down in black and white—wrapping specific words around the ideas—allows them to circulate the thesis internally and to generate reactions early and often.

The perils of the "transformational" deal. Some readers may be wondering whether there isn't a less tangible, but equally credible, rationale for an investment thesis: the transformational deal. Such transactions, which became popular in the exuberant '90s, aim to turn companies (and sometimes even whole industries) on their head and "transform" them. In effect, they change a company's basis of competition through a dramatic redeployment of assets.

The roster of companies that have favored transformational deals includes Vivendi Universal, AOL Time Warner (which changed its name back to Time Warner in October 2003), Enron, Williams, and others. Perhaps that list alone is enough to turn our readers off the concept of the transformational deal. (We admit it: We keep wanting to put that word transformational in quotes.) But let's dig a little deeper.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. In search of effective transformations, people sometimes cite the examples of DuPont—which after World War I used M&A to transform itself from a maker of explosives into a broad-based leader in the chemicals industry—and General Motors, which, through the consolidation of several car companies, transformed the auto industry. But when you actually dissect the moves of such industry winners, you find that they worked their way down the same learning curve as the best-practice companies in our global study. GM never attempted the transformational deal; instead, it rolled up smaller car companies until it had the scale to take on a Ford—and win. DuPont was similarly patient; it broadened its product scope into a range of chemistry-based industries, acquisition by acquisition.

In a more recent example, Rexam PLC has transformed itself from a broad-based conglomerate into a global leader in packaging by actively managing its portfolio and growing its core business. Beginning in the late '90s, Rexam shed diverse businesses in cyclical industries and grew scale in cans. First it acquired Europe's largest beverage—can manufacturer, Sweden's PLM, in 1999. Then it bought U.S.-based packager American National Can in 2000, making itself the largest beverage-can maker in the world. In other words, Rexam acquired with a clear investment thesis in mind: to grow scale in can making or broaden geographic scope. The collective impact of these many small steps was transformation. 14

But what of the literal transformational deal? You saw the preceding list of companies. Our advice is unequivocal: Stay out of this high-stakes game. Recent efforts to transform companies via the megadeal have failed or faltered. The glamour is blinding, which only makes the route more treacherous and the destination less clear. If you go this route, you are very likely to destroy value for your shareholders.

By definition, the transformational deal can't have a clear investment thesis, and evidence from the movement of stock prices immediately following deal announcements suggests that the market prefers deals that have a clear investment thesis. In "Deals That Create Value," for example, McKinsey scrutinized stock price movements before and after 231 corporate transactions over a five-year period. The study concluded that the market prefers "expansionist" deals, in which a company "seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services."

On average, McKinsey reported, deals of the "expansionist" variety earned a stock market premium in the days following their announcement. By contrast, "transformative" deals—whereby companies threw themselves bodily into a new line of business—destroyed an average of 5.3% of market value immediately after the deal's announcement. Translating these findings into our own terminology:

  • Expansionist deals are more likely to have a clear investment thesis, while "transformative" deals often have no credible rationale.
  • The market is likely to reward the former and punish the latter.
  • The dilution/accretion debate. One more side discussion that comes to bear on the investment thesis: Deal making is often driven by what we'll call the dilution/accretion debate. We will argue that this debate must be taken into account as you develop your investment thesis, but your thesis making should not be driven by this debate.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. Simply put, a deal is dilutive if it causes the acquiring company to have lower earnings per share (EPS) than it had before the transaction. As they teach in Finance 101, this happens when the asset return on the purchased business is less than the cost of the debt or equity (e.g., through the issuance of new shares) needed to pay for the deal. Dilution can also occur when an asset is sold, because the earnings power of the business being sold is greater than the return on the alternative use of the proceeds (e.g., paying down debt, redeeming shares or buying something else). An accretive deal, of course, has the opposite outcomes.

But that's only the first of two shoes that may drop. The second shoe is, How will Wall Street respond? Will investors punish the company (or reward it) for its dilutive ways?

Aware of this two-shoes-dropping phenomenon, many CEOs and CFOs use the litmus test of earnings accretion/dilution as the first hurdle that should be put in front of every proposed deal. One of these skilled acquirers is Citigroup's [former] CFO Todd Thomson, who told us:

It's an incredibly powerful discipline to put in place a rule of thumb that deals have to be accretive within some [specific] period of time. At Citigroup, my rule of thumb is it has to be accretive within the first twelve months, in terms of EPS, and it has to reach our capital rate of return, which is over 20% return within three to four years. And it has to make sense both financially and strategically, which means it has to have at least as fast a growth rate as we expect from our businesses in general, which is 10 to 15% a year.

Now, not all of our deals meet that hurdle. But if I set that up to begin with, then if [a deal is] not going to meet that hurdle, people know they better make a heck of a compelling argument about why it doesn't have to be accretive in year one, or why it may take year four or five or six to be able to hit that return level.

Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it." Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?

The answer, of course, is to invest for the future. As part of the research leading up to this book, Bain looked at a hundred deals that involved EPS accretion and dilution. All the deals were large enough and public enough to have had an effect on the buyer's stock price. The result was surprising: First-year accretion and dilution did not matter to shareholders. In other words, there was no statistical correlation between future stock performance and whether the company did an accretive or dilutive deal. If anything, the dilutive deals slightly outperformed. Why? Because dilutive deals are almost always involved in buying higher-growth assets, and therefore by their nature pass Thomson's test of a "heck of a compelling argument."

As a rule, investors like to see their companies investing in growth. We believe that investors in the stock market do, in fact, look past reported EPS numbers in an effort to understand how the investment thesis will improve the business they already own. If the investment thesis holds up to this kind of scrutiny, then some short-term dilution is probably acceptable.

Reprinted with permission of Harvard Business School Press. Mastering the Merger: Four Critical Decisions That Make or Break the Deal , by David Harding and Sam Rovit. Copyright 2004 Bain & Company; All Rights Reserved.

David Harding (HBS MBA '84) is a director in Bain & Company's Boston office and is an expert in corporate strategy and organizational effectiveness.

Sam Rovit (HBS MBA '89) is a director in the Chicago office and leader of Bain & Company's Global Mergers and Acquisitions Practice.                                              

10. Joe Trustey, telephone interview by David Harding, Bain & Company. Boston: 13 May 2003. Subsequent comments by Trustey are also from this interview.

11. Accenture, "Accenture Survey Shows Executives Are Cautiously Optimistic Regarding Future Mergers and Acquisitions," Accenture Press Release, 30 May 2002.

12. John R. Harbison, Albert J. Viscio, and Amy T. Asin, "Making Acquisitions Work: Capturing Value After the Deal," Booz Allen & Hamilton Series of View-points on Alliances, 1999.

13. Craig Tall, telephone interview by Catherine Lemire, Bain & Company. Toronto: 1 October 2002.

14. Rolf Börjesson, interview by Tom Shannon, Bain & Company. London: 2001.

15. Hans Bieshaar, Jeremy Knight, and Alexander van Wassenaer, "Deals That Create Value," McKinsey Quarterly 1 (2001).

16. Todd Thomson, speaking on "Strategic M&A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 20 June 2002.)

17. Mike Bertasso, correspondence with David Harding, 15 December 2003.

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How to Write an Investment Thesis in Private Equity

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Recent years have posed significant challenges for M&A activity, with private equity deal volume experiencing a stark 46% decline compared to the previous year in 2022. Similarly, venture capital deals globally saw a notable 42% decrease in the first 11 months. Moreover, the mounting dry powder, surpassing $1 trillion USD in the US alone, underscores the urgency for firms to adapt their business strategies to thrive in 2023 and beyond.

Amidst this landscape, transitioning to a direct sourcing model alongside intermediary deals is imperative. However, economic uncertainties compel firms to further refine their outbound strategies to capitalize on opportunities efficiently. Dealmakers face the crucial task of optimizing their time and focusing on strategic investments that align with their objectives. Crafting a compelling investment thesis becomes paramount, guiding direct deal sourcing efforts and enabling firms to differentiate themselves in a competitive market.

Read on to discover how a meticulously crafted investment thesis can drive success in direct deal sourcing strategies.

What Is an Investment Thesis in Private Equity?

An investment thesis is, quite literally, a thesis statement. It's succinct, yet comprehensive enough to serve as your firm's guiding principle to both source and secure ideal investments. 

Imagine you're back in school and writing a term paper. Remember how a thesis was treated as a single defining statement that guided the development of your entire paper? The same is true of an investment thesis for your private equity firm. Unlike your term paper, however, firms often have more than one thesis because they often focus on multiple types of deals at once. 

Dealmakers' theses can also be broken down into two specific types: top-down and bottom-up. A top-down investment thesis is something that helps your team understand and seek out ideal investment targets when sourcing.

Top-Down Investment Thesis for Venture Capital Example:

‍ "This $10MM seed fund focuses on US-based cannabis startups that are furthering the industry through technology and infrastructure research and development that can leverage our partners' vast experience in the logistics and supply chain sectors."

Once your firm has identified an ideal company that fits its top-down thesis, it's time to create a bottom-up version. Far more direct and specific in nature, a bottom-up investment thesis includes everything from particular information about the target company including financial statements and forecasting, future business plans, funding strategy reasoning, industry trends, etc. as well as why your firm is the best choice.

‍ Bottom-Up Investment Thesis for Private Equity Example:

‍ "Smith Partners is seeking to invest a $20MM Series A round in Asclepius, Inc. to aid in their rapid growth and contributions to the advancement of the healthcare industry. Their dedication to modernization combined with SP's vast network of cutting-edge automation manufacturers and forward-thinking healthcare providers make this partnership particularly exciting."

A bottom-up thesis would then continue into specifics about the company, detailing financial and employee records, proprietary knowledge or advantages such as patents, and more about what your firm brings to the transaction. A final bottom-up thesis can take many different forms: e.g., a comprehensive document, presentation, or video.

The key to both a top-down and bottom-up investment thesis is specificity. Every thesis your firm creates should be valid only for your firm . The combination of geographic location, sector or industry, company stage or type, fund size, reasons behind the investment or focus, and your firm's specific differentiators should make each of your theses unique.

Steps for Building an Investment Thesis Framework

Creating an investment thesis framework will help your firm draft theses more quickly and make sure all of the necessary information is included. Answering the following series of questions is a good place to start building a framework for both top-down and bottom-up theses:

  • What is the goal of this thesis? This answer takes one of two forms: to find new target investment opportunities or to secure a potential deal. But before you can detail the rest of the thesis, you must know your end goal. ‍
  • What are the basic parameters of your ideal deal? Once you have your overall goal, sort out the basics first: overall available capital, company demographics (e.g., location, size, industry), etc. ‍
  • What are the influencing internal factors? What is your firm hoping to get from a deal that would fit this thesis? Do you need to bridge a valuation gap in your portfolio, for example? ‍
  • What are the influencing external factors? If you've ever gone through a thematic sourcing exercise, this will feel similar. While your thesis should not be nearly as large in scope as a thematic investing strategy, socioeconomic or industry trends can be a driving factor for why your firm is looking at this type of investment and should be called out in your thesis. ‍
  • Why your firm? While this is the simplest question, it's not only the most difficult to answer but also the most important. Your differentiator "what only your firm can offer to the industry or target company" and why you are particularly suited to this segment of the market (in a top-down thesis) or specific deal (in a bottom-up thesis) is the key to crafting a successful investment thesis in private equity. ‍
  • Why this deal? For a bottom-up thesis, you must detail why this deal should be transacted: - Why this company? Is it the founder that instills confidence? Do they have intellectual property that makes the deal worthwhile? How are their financials impacting this decision? - Why now? - What does the future look like and what are your plans post-transaction? - What is the eventual exit strategy? When would you plan for that to happen? - How does this deal impact your portfolio?

The framework you build from answering these questions can then be refined into a single statement or document that serves as your thesis. But be prepared to make iterations. You must continually refine your theses as you gather more data, learn more about your ideal investment, and the world continues to evolve and change.

Putting Your Investment Thesis to Work

Once your firm establishes a thesis, it's time to leverage it effectively. Remember, a well-crafted thesis serves as a guide for qualifying opportunities and determining their potential value. Integrating your top-down criteria into a robust deal sourcing platform facilitates market mapping, identifies relevant conferences, enables direct sourcing, and offers comprehensive insights into target companies and their competitive landscape.

With over 190,000 sources and millions of data points, Sourcescrub's deal sourcing platform has consistently enhanced research productivity by 42.8% and expanded deal sourcing pipelines by 36%. Let's chat to explore how we can assist you in developing and executing your investment theses in any industry landscape.

Originally posted on “January 10, 2023”

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How to create a clear private equity investment thesis

private equity fund investment thesis

Ben Harrison

President, Industries

For every dozen private equity deals, only one or two generate significant returns to their investors, according to Investopedia. The biggest reason why deals either fail to deliver or fall through altogether : Firms often neglect to deal with red flags early on in an agreement. To help determine whether a deal will be profitable, private equity firms must first establish a clear, concise investment thesis.

A private equity investment thesis is an evidence-based case built in favor of a particular investment opportunity. It opens with a two- to three-sentence argument showing how the potential deal supports a general partner’s fund investment strategy, then provides details that support that conclusion.

An investment thesis is required for all buy-side dealmakers. Beyond fulfilling a requirement, the detailed proposition serves to:

  • Crystallize the group’s tactical plan, putting strategy into action
  • Inform intermediaries, investors, and fellow partners what’s at stake if the firm does — or doesn’t — invest
  • Answer the variety of questions that arise throughout a typical transaction

Follow these next steps to create a winning private capital markets investment thesis and identify the best opportunities for your firm.

Detail macroeconomic factors

To create a successful investment thesis, firms must first answer global and niche-agnostic economic questions. This will help set the stage for the acquisition target to shine against a macro backdrop.

Start by listing any relevant current headlines , political and social developments, and even consumer trends that are affecting investments across the board. These news stories will remind investors what they and your potential portfolio companies (portcos) are facing today.

For example, you might list the U.S. Securities and Exchange Commission’s most recent proposals, e-commerce adoption, or European political volatility as factors that are affecting investments. Detail the way these factors are helping or hindering the private capital markets in general.

You should also list headlines that affect the acquisition target’s industry, sector, and subsector, and explain whether these developments favor growth for your private company. For example, if a general partner’s acquisition target was in the durable goods manufacturing space, the principal would include the U.S. freight transportation services index (TSI) as a macroeconomic factor in his investment thesis, and would describe how its recovery predicts smoother supply chains to ease investor worries. Similarly, you can explain in your investment thesis how your portco will be positioned competitively among its sector rivals.

Risks aren’t traditionally included in investment theses, but you can include them if they strengthen your macroeconomic analysis . You may want to include factors such as whether global or national conditions oppose the potential portco’s growth or the investment’s performance. You can also describe how your acquisition target would sidestep or weather those pitfalls.

Bain & Co. experts recently declared that macroeconomic instability is dealmaking’s number-one enemy . Position your investment thesis to shine by having a good handle on macroeconomic factors.

Detail microeconomic factors

The macroeconomic information you gather can help you drill down into more granular information about an investment opportunity . Narrow your proposed direction by including microeconomic details about company-level questions to your investment thesis. Try to answer questions such as:

  • Why do you believe the target’s founder or owner will lead the company to growth? Describe ways the current CEO demonstrates innovative, creative problem-solving and strong leadership.
  • What do the company’s financial statements reveal about the business’s record-keeping? Are the reports straightforward and easy to read? Before due diligence, investigate the business’s financials to uncover thesis-supporting insights.
  • What do the company’s financial statements reveal about the viability of the business? Are there clues as to how leadership has handled finances at key inflection points? How much variance does each metric — such as return on equity, profit, return on assets, and earnings per share — exhibit?
  • How has the company navigated cash flow surprises in the past? Surprises can include headwinds and windfalls, and an event like a spike in the company’s quick ratio must be handled with as much finesse as a cash shortage. What proof is there that the business keeps growing sustainably amid short-term volatility ?
  • How has the company used seed money? James W. Frick, former Vice President of Public Relations at the University of Notre Dame, famously said, “Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.” When you look at previous injections , don’t just analyze the company’s capital efficiency. Draw conclusions about what the team prioritizes, such as growth over client retention.
  • What opportunities are there for better cost management? Are there areas where the business is spinning its wheels and expending resources without gaining effective traction? Could certain actions — such as managing talent differently, renegotiating vendor agreement terms, or terminating a failed market expansion — efficiently address these areas ?
  • What’s the company’s reputation like? Consider hiring a market research firm to perform an exploratory branding assessment. Take it to the next level by gathering observations from clients, employees, and vendors. If any quotes prove highly relevant, include them in your investment thesis.
  • In what ways are competitors excelling or lagging? The ideal investment is in a market where rivals are failing to innovate. Does your target acquisition have what it takes to exploit market conditions faster and better than competitors?
  • What could go wrong? The best investment theses don’t deny risks but instead address them at an early stage. As you list potential pitfalls, identify ways the private equity firm’s management team can dodge or defuse these hazards .

Consider the professionals at Morgan Stanley , who use three questions to formulate the microeconomic portions of their investment theses.

  • Agility and defensibility — Is the company a disruptor or is it insulated from disruptive change?
  • Financial viability of the business — Does the company demonstrate financial strength with high returns on invested capital, high margins, strong cash conversion, low capital intensity, and low leverage?
  • ESG (environmental, social, and governmental) and the responsibility to do no harm — Are there environmental or social externalities not borne by the company, or are there governance and accounting risks that may alter the investment thesis?

Once you’ve compiled a substantial body of information to use in your investment thesis, sort the details by order of importance. Each deal’s details should be arranged differently since each investment is unique.

Establish and describe the trade setup

The final component of a good investment thesis answers the question, “So what?” It offers bold implications of the micro- and macroanalysis you just performed, and reveals what your next steps should be .

To describe the proposed trade, explain how the micro and macro factors will work together to increase carry for partners and returns for limited partners. Propound an entry point or “ setup price ,” and describe how you arrived at your proposed acquisition’s target price. Industries — and different private equity firms within those spaces — vary in how they calculate reasonable prices.

Keep in mind that the industry standard expects your firm to find the product of estimated earnings and your expected multiple. For example:

  • Estimated earnings × EV/EBITDA = target price
  • Estimated earnings × FCF/market capital = target price
  • Estimated earnings × Price-to-earnings (P/E) ratio = target price

In your investment thesis, explain why your firm uses a particular multiple and how it came to estimate future earnings . Be sure to include these details as a footnote or sidenote for more curious readers.

Once you’ve proposed a purchase price, describe why the buy side should value the business at that entry point. You may need to briefly repeat what you’ve stated in your micro- and macroeconomic research findings, but within the context of your financial investment.

You should also outline what will happen if you choose not to invest in a particular business. Will the current owners keep their stake, or will a rival scoop them up ? Will a competitor fumble the operational improvements or liquidate too early or late? Or will the competitor execute brilliantly, generate alpha, and solidify or even expand its limited partner pool?

Finally, you must weave in a capital plan to detail how your investors’ committed capital will improve company profits for either returns or reinvestments. The capital plan outlines some of the strategic moves and operational improvements you believe will generate short-term wins and future sustainable growth. It should include no more than three or four actions; for example, you could include initiatives like increasing dividends or paying down debt to put free cash flow to work.

To wrap up the investment thesis, discuss how the deal would work into and support the fund’s overall investment strategy. Detail ways your firm brings a competitive advantage to the deal. Have your partners demonstrated acumen with similar deals? List the reasons why you’re the company’s best bet for making above-market returns.

Summarize your investment thesis

Now that you’ve built a complete — but also quite complex — investment thesis, it’s time to develop a clear, effective presentation . General partners distill their investment theses into bite-size, portable overviews that are more memorable and digestible for their audiences. Concisely summarizing your thesis will:

  • Help busy readers better understand your thesis. For skimmers and scanners who want to skip around your thesis, a synopsis gives them a starting and ending point.
  • Steer future investments, further defining your role in your niche. If, for example, a particular investment thesis persuades limited partners and intermediaries to commit to an event-based investment, you may become a firm known for that type of strategy.
  • Provide you with a successful deal that you can use as an example during events like employee training, marketing, and roadshows. Imagine one of your vice presidents attends a trade event and meets an esteemed limited partner who expresses interest in your firm’s most recent deal. A quick investment thesis summary is the perfect way to explain the deal and further the partner’s interest.
  • Set up a memorial to look back on. As the investment’s time horizon approaches, your team should reflect on how the deal began and what twists and turns you and your portco navigated along the way. This exercise will help prepare your team for future scenarios and investment opportunities.

Examples of investment thesis summaries

Authors David Harding and Sam Rovit highlighted a summary of Clear Channel’s merger-specific investment thesis. The media company had decided to expand into outdoor advertising sales and needed to build its case and present it to stakeholders. Note the three concrete benefits the company describes in detail:

Clear Channel’s expansion into outdoor advertising leverages the company’s core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements . Second, much like the radio industry 20 years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to ‘roll up’ a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

This summary explains that the acquiring executives planned to generate returns by:

  • Using existing talent and preventing costs usually associated with successful deals
  • Applying skills and processes from one sector to improve the newly added operation
  • Combining assets or “ rolling up ” to share costs and benefits through a newly formed industry rather than fragmented sectors

Best of all, the summary uses a single paragraph to get the job done.

Here are a few examples from dealmakers in other private capital markets:

  • Private equity — Read the overviews of investment theses from Arcspring , Sun Capital Partners , WestView Capital Partners , and Safanad , a team that clearly communicates its commitment to private equity with real estate incorporated.
  • Real estate private equity (REPE) — CrowdStreet articulately summarizes how and why the firm invests, and it states its intentions by asset class and sector. The synopsis covers hospitality, industrials, health care, multifamily, office space, retail, self-storage, senior care, student housing, and life sciences.
  • Impact investing — The FSIG and Creatella investment thesis summaries are clear and give a high-level flyover of the model deal’s macro- and microeconomics.
  • Venture capital — Wavemaker Partners , Chloe Capital , and La Poste Ventures substitute corporate language with simpler and more digestible terms.

What to do with your new investment thesis

An investment thesis is more than a report: It’s the developing narrative of a successful deal. You’ll likely need to update your thesis and presentation more than once, and in a variety of ways, throughout the lifecycle of the investment.

Publish the investment thesis in your team’s internal deal management system, and assign permissions to those who refer to the plan often. Set up notifications so that you receive alerts whenever someone comments or edits the investment thesis. If your current deal management system doesn’t support this level of effective collaboration, contact DealCloud to request a demo today.

Remember: Successful deals start with successful investment theses. Don’t let investors wade into a transaction before taking the steps above to identify red flags and create an evidence-based plan that everyone can buy into.

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What Is an Investment Thesis?

Investing is a process. One important task an investor should perform before putting money into an opportunity is to develop an investment thesis. An investment thesis is a written analysis laying out the case for why an investment opportunity should generate a compelling return.

Here's a closer look at how to build an investment thesis and why it's essential to create one. 

A person analyzing an investment.

The importance of creating an investment thesis

Many people make the mistake of investing their hard-earned money into opportunities they don't fully understand. Maybe they received a tip on a hot stock at a party or got caught up in the frenzy of  meme stocks  and  cryptocurrencies on social media. Perhaps that investment has now lost value, and they're not sure whether they should buy more , sell , or continue holding .

An investment thesis can help solve this problem. By creating a thesis on why you believe an investment will deliver an attractive return, you can use it as a guide to determine your next step when the investment experiences a large decline or some disturbing news emerges. You can measure those factors against the original thesis to see if it remains intact.

If the thesis hasn't changed, you can continue holding or potentially increase your investment. However, if you found that the thesis is busted, you can sell your investment and move on.

How to write an investment thesis

It's important to take the time to write a well-thought-out and thoroughly researched investment thesis. That will allow you to easily make sense of it for future reference. Here are four easy steps for writing an investment thesis.

Identify the underlying catalyst at play

The first step in writing an investment thesis is to determine and then outline the catalyst driving your investment thesis. For example, are you interested in the long-term upside from a  secular trend  or  economic supercycle , or a shorter-term rebound from the economic  cycle  or a  bear market ? Write out the primary reason you believe this investment has attractive upside potential.

Assess how the investment is positioned within the catalyst

Next, look at how the particular investment opportunity compares to others that benefit from the same catalyst. Is it the largest  publicly traded company  focused on this opportunity? Smaller but with more upside potential? Does it align with a particular  long-term investment strategy ? Will it help you with  balancing your portfolio ? Write out why this investment is a solid choice to benefit from this catalyst.

Consider the biggest risks 

As the saying goes, the best-laid plans often go awry. That's why it's vital to consider what will happen to this particular investment opportunity if something goes wrong. Some examples to consider:

  • Can it withstand a recession ?
  • Could Congress enact legislation that would damage its prospects?
  • Is there a lot of competition within the industry?
  • Does it have too much debt, volatile cash flows, or an otherwise weaker financial profile?
  • Is the price high? Could that result in underperformance if the catalyst doesn't play out according to plan?

Consider and jot down anything that could negatively impact this investment.

Determine your conviction level

Finally, write down your expected return from this investment and how much conviction you have in its ability to achieve that return. Then, given the catalyst, its position within that catalyst, the risk/reward profile, and your conviction level, is it worth the investment?

By going through these steps and writing a detailed investment thesis, you can proceed with confidence. Further, you can reference it in the future to ensure your thesis is playing out as expected. If not, you can make changes to your investment.

Investment thesis examples

An investment thesis doesn't need to be that long. It just needs to contain the most important factors driving your decision to invest in a particular opportunity. Here's a simplified example based on my investment thesis for Brookfield Renewable  ( BEP -1.89% )( BEPC -2.52% ), one of my largest holdings:

Renewable energy is one of the biggest megatrends of our lifetimes. It will take the global economy three decades and more than $100 trillion of investment to transition its primary power source from fossil fuels to renewable energy.

One of the leaders in this energy transition is Brookfield Renewable. It has one of the largest globally diversified renewable energy platforms and an even bigger pipeline of development projects. Brookfield also has an extensive track record of creating value from the sector, including two decades of steady income and dividend growth , driving superior performance.

Brookfield is also well positioned to navigate the biggest risk facing the industry — access to low-cost capital to finance capital-intensive development projects — due to its rock-solid financial profile backed by a top-notch balance sheet. Given Brookfield's position within this megatrend and its historical success, I have high conviction that it can deliver market-beating total returns for years to come and would consider adding to my position on any meaningful price decline.

This example succinctly lays out the catalyst (the renewable energy megatrend), the investment opportunity's position in the trend (Brookfield is a global leader), its ability to withstand risks (Brookfield has a top-tier financial profile), and my conviction level (high).

An investment thesis isn't just for stocks ; you can craft one for any investment opportunity you're contemplating. For example, you might have the opportunity to invest in a new business venture or a private company. To write an investment thesis for a venture capital or private equity opportunity, you would follow the same outline.

Here's a simplified investment thesis for a new coffee shop:

People love coffee . Demand for the brewed beverage is on track to grow at a more than 8% annual rate through 2025, according to Statista. It also notes that, by 2025, 84% of coffee spending and 21% of the volume consumed will be outside the home. That growing market will benefit coffee shops.

This particular shop would be the first one in a trendy area of downtown that's undergoing a dramatic revitalization. While restaurant retail can be brutal, the group starting the coffee shop has opened several profitable locations around the city in recent years. Their past success, when combined with the coffee industry's growth, suggests this new shop should thrive. Because of that, you have a high conviction that this investment will earn a much greater return than if you invested the money in another retail opportunity. 

With this venture capital investment thesis we've:

  • Identified the catalyst: Growing demand for out-of-home coffee consumption.
  • Classified this particular investment opportunity's position within the catalyst: First mover in a trendy area.
  • Determine all the risks facing this venture: Retail is brutal.
  • Considered the conviction level: High compared to other retail opportunities.

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An investment thesis can make you a more successful investor

Thinking through and crafting a thoroughly researched investment thesis can help you make better informed investing decisions. While it's best to write one before you invest, you can also create one for existing holdings. The investment thesis will serve as a guide allowing you to measure whether the opportunity is living up to your thesis — suggesting you hold or buy more — or if that's no longer the case, and it's time to sell.  

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Writing a Credible Investment Thesis

by David Harding and Sam Rovit

Every deal your company proposes to do—big or small, strategic or tactical—should start with a clear statement how that particular deal would create value for your company. We call this the investment thesis . The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. Many of the best acquirers write out their investment theses in black and white. Joe Trustey, managing partner of private equity and venture capital firm Summit Partners, describes the tool in one short sentence: "It tells me why I would want to own this business." 10

Perhaps you're rolling your eyes and saying to yourself, "Well, of course our company uses an investment thesis!" But unless you're in the private equity business—which in our experience is more disciplined in crafting investment theses than are corporate buyers—the odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29 percent of acquiring executives started out with an investment thesis (defined in that survey as a "sound reason for buying a company") that stood the test of time. More than 40 percent had no investment thesis whatsoever (!). Of those who did, fully half discovered within three years of closing the deal that their thesis was wrong.

Studies conducted by other firms support the conclusion that most companies are terrifyingly unclear about why they spend their shareholders' capital on acquisitions. A 2002 Accenture study, for example, found that 83 percent of executives surveyed admitted they were unable to distinguish between the value levers of M&A deals. 11 In Booz Allen Hamilton's 1999 review of thirty-four frequent acquirers, which focused chiefly on integration, unsuccessful acquirers admitted that they fished in uncharted waters. 12 They ranked "learning about new (and potentially related) business areas" as a top reason for making an acquisition. (Surely companies should know whether a business area is related to their core before they decide to buy into it!) Successful acquirers, by contrast, were more likely to cite "leading or responding to industry restructuring" as a reason for making an acquisition, suggesting that these companies had at least thought through the strategic implications of their moves.

Not that tipping one's hat to strategy is a cure-all. In our work with companies that are thinking about doing a deal, we often hear that the acquisition is intended for "strategic" reasons. That's simply not good enough. A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.

A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.

This point needs underscoring. Justifying a deal as being "strategic" ex post facto is, in most cases, an invitation to inferior returns. Given how frequently we have heard weak "strategic" justifications after a deal has closed, it's worth passing along a warning from Craig Tall, vice chair of corporate development and strategic planning at Washington Mutual. In recent years, Tall's bank has made acquisitions a key part of a stunningly successful growth record. "When I see an expensive deal," Tall told us, "and they say it was a 'strategic' deal, it's a code for me that somebody paid too much." 13

And although sometimes the best offense is a good defense, this axiom does not really stand in for a valid investment thesis. On more than a few occasions, we have been witness to deals that were initiated because an investment banker uttered the Eight Magic Words: If you don't buy it, your competitors will.

Well, so be it. If a potential acquisition is not compelling to you on its own merits, let it go. Let your competitors put their good money down, and prove that their investment theses are strong.

Let's look at a case in point: [Clear Channel Communications' leaders Lowry, Mark, and Randall] Mayses' decision to move from radios into outdoor advertising (billboards, to most of us). Based on our conversations with Randall Mays, we summarize their investment thesis for buying into the billboard business as follows:

Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

Note that in Clear Channel's investment thesis (at least as we've stated it), the benefits would be derived from three sources:

  • Leveraging an existing sales force more extensively
  • Using the balance sheet to roll up and fund an undercapitalized business
  • Applying operating skills learned in the radio trade

Note also the emphasis on tangible and quantifiable results, which can be easily communicated and tested. All stakeholders, including investors, employees, debtors, and vendors, should understand why a deal will make their company stronger. Does the investment thesis make sense only to those who know the company best? If so, that's probably a bad sign. Is senior management arguing that a deal's inherent genius is too complex to be understood by all stakeholders, or simply asserting that the deal is "strategic"? These, too, are probably bad signs.

Most of the best acquirers we've studied try to get the thesis down on paper as soon as possible. Getting it down in black and white—wrapping specific words around the ideas—allows them to circulate the thesis internally and to generate reactions early and often.

The perils of the "transformational" deal . Some readers may be wondering whether there isn't a less tangible, but equally credible, rationale for an investment thesis: the transformational deal. Such transactions, which became popular in the exuberant '90s, aim to turn companies (and sometimes even whole industries) on their head and "transform" them. In effect, they change a company's basis of competition through a dramatic redeployment of assets.

The roster of companies that have favored transformational deals includes Vivendi Universal, AOL Time Warner (which changed its name back to Time Warner in October 2003), Enron, Williams, and others. Perhaps that list alone is enough to turn our readers off the concept of the transformational deal. (We admit it: We keep wanting to put that word transformational in quotes.) But let's dig a little deeper.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. In search of effective transformations, people sometimes cite the examples of DuPont—which after World War I used M&A to transform itself from a maker of explosives into a broad-based leader in the chemicals industry—and General Motors, which, through the consolidation of several car companies, transformed the auto industry. But when you actually dissect the moves of such industry winners, you find that they worked their way down the same learning curve as the best-practice companies in our global study. GM never attempted the transformational deal; instead, it rolled up smaller car companies until it had the scale to take on a Ford—and win. DuPont was similarly patient; it broadened its product scope into a range of chemistry-based industries, acquisition by acquisition.

In a more recent example, Rexam PLC has transformed itself from a broad-based conglomerate into a global leader in packaging by actively managing its portfolio and growing its core business. Beginning in the late '90s, Rexam shed diverse businesses in cyclical industries and grew scale in cans. First it acquired Europe's largest beverage-can manufacturer, Sweden's PLM, in 1999. Then it bought U.S.–based packager American National Can in 2000, making itself the largest beverage-can maker in the world. In other words, Rexam acquired with a clear investment thesis in mind: to grow scale in can making or broaden geographic scope. The collective impact of these many small steps was transformation. 14

But what of the literal transformational deal? You saw the preceding list of companies. Our advice is unequivocal: Stay out of this high-stakes game. Recent efforts to transform companies via the megadeal have failed or faltered. The glamour is blinding, which only makes the route more treacherous and the destination less clear. If you go this route, you are very likely to destroy value for your shareholders.

By definition, the transformational deal can't have a clear investment thesis, and evidence from the movement of stock prices immediately following deal announcements suggests that the market prefers deals that have a clear investment thesis. In "Deals That Create Value," for example, McKinsey scrutinized stock price movements before and after 231 corporate transactions over a five-year period. 15 The study concluded that the market prefers "expansionist" deals, in which a company "seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services."

On average, McKinsey reported, deals of the "expansionist" variety earned a stock market premium in the days following their announcement. By contrast, "transformative" deals—whereby companies threw themselves bodily into a new line of business—destroyed an average of 5.3 percent of market value immediately after the deal's announcement. Translating these findings into our own terminology:

  • Expansionist deals are more likely to have a clear investment thesis, while "transformative" deals often have no credible rationale.
  • The market is likely to reward the former and punish the latter.

The dilution/accretion debate . One more side discussion that comes to bear on the investment thesis: Deal making is often driven by what we'll call the dilution/accretion debate . We will argue that this debate must be taken into account as you develop your investment thesis, but your thesis making should not be driven by this debate.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity.

Simply put, a deal is dilutive if it causes the acquiring company to have lower earnings per share (EPS) than it had before the transaction. As they teach in Finance 101, this happens when the asset return on the purchased business is less than the cost of the debt or equity (e.g., through the issuance of new shares) needed to pay for the deal. Dilution can also occur when an asset is sold, because the earnings power of the business being sold is greater than the return on the alternative use of the proceeds (e.g., paying down debt, redeeming shares, or buying something else). An accretive deal, of course, has the opposite outcomes.

But that's only the first of two shoes that may drop. The second shoe is, How will Wall Street respond? Will investors punish the company (or reward it) for its dilutive ways?

Aware of this two-shoes-dropping phenomenon, many CEOs and CFOs use the litmus test of earnings accretion/dilution as the first hurdle that should be put in front of every proposed deal. One of these skilled acquirers is Citigroup's [former] CFO Todd Thomson, who told us:

It's an incredibly powerful discipline to put in place a rule of thumb that deals have to be accretive within some [specific] period of time. At Citigroup, my rule of thumb is it has to be accretive within the first twelve months, in terms of EPS, and it has to reach our capital rate of return, which is over 20 percent return within three to four years. And it has to make sense both financially and strategically, which means it has to have at least as fast a growth rate as we expect from our businesses in general, which is 10 to 15 percent a year. Now, not all of our deals meet that hurdle. But if I set that up to begin with, then if [a deal is] not going to meet that hurdle, people know they better make a heck of a compelling argument about why it doesn't have to be accretive in year one, or why it may take year four or five or six to be able to hit that return level. 16

Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it." 17 Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?

The answer, of course, is to invest for the future. As part of the research leading up to this book, Bain looked at a hundred deals that involved EPS accretion and dilution. All the deals were large enough and public enough to have had an effect on the buyer's stock price. The result was surprising: First-year accretion and dilution did not matter to shareholders. In other words, there was no statistical correlation between future stock performance and whether the company did an accretive or dilutive deal. If anything, the dilutive deals slightly outperformed. Why? Because dilutive deals are almost always involved in buying higher-growth assets, and therefore by their nature pass Thomson's test of a "heck of a compelling argument."

Reprinted with permission of Harvard Business School Press. Mastering the Merger: Four Critical Decisions That Make or Break the Deal , by David Harding and Sam Rovit. Copyright 2004 Bain & Company; All Rights Reserved.

[ Buy this book ]

David Harding (HBS MBA '84) is a director in Bain & Company's Boston office and is an expert in corporate strategy and organizational effectiveness.

Sam Rovit (HBS MBA '89) is a director in the Chicago office and leader of Bain & Company's Global Mergers and Acquisitions Practice.

10. Joe Trustey, telephone interview by David Harding, Bain & Company. Boston: 13 May 2003. Subsequent comments by Trustey are also from this interview.

11. Accenture, "Accenture Survey Shows Executives Are Cautiously Optimistic Regarding Future Mergers and Acquisitions," Accenture Press Release, 30 May 2002.

12. John R. Harbison, Albert J. Viscio, and Amy T. Asin, "Making Acquisitions Work: Capturing Value After the Deal," Booz Allen & Hamilton Series of View-points on Alliances, 1999.

13. Craig Tall, telephone interview by Catherine Lemire, Bain & Company. Toronto: 1 October 2002.

14. Rolf Börjesson, interview by Tom Shannon, Bain & Company. London: 2001.

15. Hans Bieshaar, Jeremy Knight, and Alexander van Wassenaer, "Deals That Create Value," McKinsey Quarterly 1 (2001).

16. Todd Thomson, speaking on "Strategic M&A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 20 June 2002.)

17. Mike Bertasso, correspondence with David Harding, 15 December 2003.

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The Impact Investor | ESG Investing Blog

The Impact Investor | ESG Investing Blog

Investing for financial return is only part of the equation.

How to Create an Investment Thesis [Step-By-Step Guide]

Updated on June 13, 2023

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One of the worst mistakes an investor can make is to sink their money into an investment without knowing why. While this may seem like the world’s most obvious mistake to avoid, it happens every day. Look no further than the stock market for plenty of examples of misguided optimism gone terribly wrong.

That’s where the idea of an investment thesis comes in. An investment thesis is a common tool used by venture capital investors and hedge funds as part of their investment strategy.

Most funds also use it on a regular basis to size up potential candidates during buy-side job interviews. But you don’t have to work at a venture capital fund or private equity firm to reap the benefits of creating an investment thesis of your own.

Table of Contents

What Is an Investment Thesis?

Materials needed to create a thesis for your investment strategy, a step-by-step guide to creating a solid investment thesis, step 1: start with the essentials, step 2: analyze the current market, step 3: analyze the company’s sector, step 4: analyze the company’s position within its sector, step 5: identify the catalyst, step 6: solidify your thesis with analysis, free tools to help strengthen your investment strategy.

Couple Checking an Online Documents

An investment thesis is simply an argument for why you should make a specific investment. Whether it be a stock market investment or private equity, investment theses are all about creating a solid argument for why a certain acquisition is a good idea based on strategic planning and research.

While it takes a little more work upfront, a clear investment thesis can be a valuable tool for any investor. Not only does it ensure that you fully understand why you’re choosing to put your hard-earned money into certain stocks or other assets, but it can also help you develop a long-term plan.

Should an investment idea not go as planned, you can always go back to your investment thesis to see if it still holds the potential to work out. By considering all the information your thesis contains, you’ll have a much better idea of whether it’s best to cut your losses and sell, continue holding, or even add to your position.

An investment thesis includes everything you need to create a solid game plan, making it a foundational part of any stock pitch.

See Related : Best Socially Responsible Stocks To Invest In Today

Writing on a Notebook

One of the benefits of an investment thesis is that it can be as complex or as simple as you like. If you actually work at a venture capital firm , then you may want to develop a full-on venture capital investment thesis. But if you’re a retail investor just looking to solidify your investment strategy, then your thesis may be much more straightforward.

If you’re an individual investor, then all you really need to create an investment thesis is somewhere to write it out. Whether it be in a Google or Word doc or on a piece of paper, just make sure you have a place to record your thesis so that you can consult it down the line.

If you’re developing a venture capital investment thesis that you plan to present to an investment committee or potential employers, then there are plenty of great tools online that can help. Slideteam has thousands of templates that can help you create a killer investment thesis , as well as full-on stock pitch templates.

As mentioned earlier, an investment thesis holds the potential to help you plot out a strategy for pretty much any acquisition. But for the sake of simplicity, we’ll assume throughout the examples in the following steps that you’re an investor interested in going long on a stock that you plan to hold for at least a few months or years.

Venture capitalists looking to invest in companies or startups can also apply the same principles to other investment goals. Investors who are looking to short a certain stock should also be able to use these techniques to locate potential investments. The main difference, of course, is that you’ll be looking for bad news instead of good.

First things first. Before you get into doing the research that goes into an investment thesis or stock pitch, make sure you take the time to write out the basics. At the top of the page, include things like:

  • The name of the company and its ticker symbol
  • Today’s date
  • How many shares of the company you already own, if any
  • The current cost average for any shares you may already hold
  • Whether the stock pays dividends and, if so, how often. You may also want to include the current ex-dividend and dividend payment dates.
  • A brief summary of the company and what it does

See Related : How to Start Investing With Purpose

Now it’s time to take a look at the entire market and the direction it’s headed. Why? As Investors Business Daily points out,

“History shows 3 out of 4 stocks move in the same direction as the overall market, either up or down. So if you buy stocks when the market is trending higher, you have a 75% chance of being right. But if you buy when the market is trending lower, you have a 75% chance of being wrong.”

While the overall market direction is definitely an important factor to keep in mind, what you choose to do with this information will largely come down to your individual investing style. Investors Business Daily founder William O’Neil advised investors only to jump into the market when it was trending up.

Another approach, however, is known as contrarian investing, which revolves around going against market trends. Warren Buffett summed up the idea behind this strategy with his famous quote, “Be fearful when others are greedy, and greedy when others are fearful.” Or as Baron Rothschild more graphically put it, “Buy when there is blood in the streets, even if the blood is your own.”

Most investors who are looking for a faster return will likely be better off waiting to strike until the iron is hot. If you align more with the long-term contrarian philosophy, however, bleak macroeconomic outlooks may actually strike you as an ideal investment opportunity .

See Related: How to Invest in Private Equity: A Step-by-Step

Now that you’ve got a look at the overall market, it’s time to take a look at the sector your company fits into. The Global Industry Classification Standard (GICS) breaks down the entire market into 11 sectors. If you want to get even more specific, you can further break down companies into the GICS’s 24 industry groups, 69 industries, and 158 sub-industries.

Once you identify which group your company belongs to, you’ll then want to take a look at that sector’s performance. Fidelity provides a handy breakdown of the performance of various sectors over different time periods.

But why does it matter? Two reasons.

  • Identifying which sectors various companies belong to can help you ensure that your portfolio is properly diversified
  • The reason that sector ETFs tend to be so popular is that when a sector is trending, many of the stocks within that sector tend to move in unison. The reverse is also true. When a certain industry is lagging, the individual stock prices of the companies in that industry may be affected negatively. While this is not always the case, it’s a general rule of thumb to keep in mind.

The idea behind working sectors into your investment criteria is to give you an overview of what type of investment you’re about to make. If you’re a momentum trader, then you may want to shoot for companies within the strongest-performing sectors this year or even over the past few months.

If you’re a value investor, however, you may be more open to sectors that have historically experienced high growth, even if they are currently suffering due to the overall state of the economy. Some speculative investors may even be interested in an innovative industry with strong potential growth possibilities, even if its time has not yet come.

See Related : How to Invest in Community [Step-by-Step Guide]

If you want to up your odds of success even more, then you’ll want to compare the company you’re interested in against the performance of similar companies in the same industry.

These are the companies that tend to get the most attention from large, institutional investors who are in a position to significantly increase their market value. Institutional investors tend to have a huge amount of money in play and are far less likely to invest in a company without a proven track record.

When choosing an investment, they’ll almost always go with a global leader over a new business, regardless of its promise. However, they also consider intrinsic value, which considers how much a company’s stock is selling for now, as opposed to how much revenue the company stands to earn in the future. In other words, institutional investors are looking for companies that are stable enough to avoid surprises but that also stand to generate considerable capital in the future.

Why work this into your game plan? Because even if you don’t have millions of dollars to invest in a company, there may be hedge funds or venture capital firms out there that do. When these guys make an investment, it tends to be a big one that can actually move a company’s share price upward. Why not ride their coattails and enjoy a solid growth rate as they invest more money over time into proven winners?

That’s why it’s important to make sure that you see how a company stacks up against its closest competitors. If it’s an industry-leading business with a large market share, it’s likely to be a strong contender with solid fundamentals. If not, you may end up discovering competing companies that make sense to consider instead.

See Related : What is a Triple Bottom Line? Definition & Examples

At this point, hopefully, you’ve identified the best stock in the best sector based on your ideal investing style. Now it’s time to find out exactly why it deserves to become a part of your portfolio and for how long.

If a company has been experiencing impressive growth, then there’s bound to be a reason why.

  • Is the company experiencing a major influx of business because it’s currently a leader in the hottest sector of the moment? Or is it a “good house in a bad neighborhood” that’s moving independently of the other stocks in its industry?
  • How long has it been demonstrating growth?
  • What appears to be the catalyst behind its movement? Does the stock owe its growth to strong management, recent world events, the approval of a new drug, the introduction of a hot new product, etc?

One mistake that far too many beginning investors make is assuming that short-term growth alone always indicates the potential for long-term profit. Unfortunately, this is not always the case. By figuring out exactly why a stock is moving, you’ll be far better positioned to decide how long to hold it before you sell.

A strong catalyst can cause the price of a stock to skyrocket overnight, even if it’s laid dormant for years. Even things like social media hype and rumors can cause a stock’s price to shoot up over the course of a given day. But woe to the investor that assumes these profits will last. Many are often left holding the bag when the price increase turns out to be part of a “ pump and dump .”

While many day traders can make a nice profit by capitalizing on these situations, such trades are best avoided altogether if you plan to hold a stock long-term. That’s why it’s so important to understand whether a stock is “in play” for the day or whether its growth can be attributed to more permanent factors that support the potential for a high return over time.

See Related : How to Become an Impact Investor [Step-By-Step Guide]

If you’re planning on investing a significant amount of capital in any stock, then a little research may be able to save you from a lot of heartache. Keep in mind that the focus of an investment thesis is to formulate a reasoned argument about why adding an asset to your portfolio is a good idea.

While all investments come with some level of risk, research can be an excellent risk mitigation strategy. There’s nothing worse than watching an investment fail due to an obvious factor you could have spotted with closer analysis. Don’t let it happen to you!

Fundamental analysis can help you ensure that your potential investments have the underlying traits that winning stocks are made of. While there’s a bit of a learning curve involved when you’re first starting out, here are some of the things you’ll want to focus on:

EPS stands for “earnings per share.” It’s a common financial indicator that basically tells you how much a company makes each time it sells a share of its stock. In this regard, a higher EPS is a good thing, but it’s important to look for solid EPS growth over time. Ideally, you’ll want to see consistent growth in a company’s EPS over the past three or more quarters.

Sales and Margins

Investing is all about putting your cash into successful companies, which is why sales and margins are key components to finding worthy investments. Sales indicate how much a business has made from (you guessed it) sales. Sales margin, also known as gross profit margin, is the amount of revenue a company actually gets to keep after you factor in overhead and other production costs. Ideally, a good investment will exhibit strong, consistent sales growth in recent years.

Return On Equity (ROE)

ROE is one of the more commonly used valuation metrics and is calculated by dividing the company’s net income/shareholders’ equity. ROE is basically a measure of how efficiently a company is using the capital it generates from equity fundraising to increase its own value. The higher the ROE, the more likely it is that a company operates with a focus on using its cash flow to increase its profits.

See Related : How to Do a Stakeholder Impact Analysis?

Woman Taking Notes

While these are just a few examples of various analysis methods to work into your investment thesis, they can go a long way toward locating solid companies worth investing in. Interested in learning more about technical and fundamental analysis? There are now plenty of great sites that can help you master the secrets of the training world.

In our opinion, Tradimo is one of the most underrated, as it provides tons of free classes for investors of all levels. Udemy also has some great classes that can help you learn how to beef up your investment thesis with as much quality information as possible.

But keep in mind that these are only suggestions. The most important part of any personal investment thesis is that it makes sense to you and can serve as a valuable tool to help you along your investing journey.

Related Resources

  • Best Impact Investing Online Courses
  • Best Green Apps for a More Sustainable Life
  • Sustainable Investing vs Impact Investing: What’s the Difference?

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Kyle Kroeger, esteemed Purdue University alum and accomplished finance professional, brings a decade of invaluable experience from diverse finance roles in both small and large firms. An astute investor himself, Kyle adeptly navigates the spheres of corporate and client-side finance, always guiding with a principal investor’s sharp acumen.

Hailing from a lineage of industrious Midwestern entrepreneurs and creatives, his business instincts are deeply ingrained. This background fuels his entrepreneurial spirit and underpins his commitment to responsible investment. As the Founder and Owner of The Impact Investor, Kyle fervently advocates for increased awareness of ethically invested funds, empowering individuals to make judicious investment decisions.

Striving to marry financial prudence with positive societal impact, Kyle imparts practical strategies for saving and investing, underlined by a robust ethos of conscientious capitalism. His ambition transcends personal gain, aiming instead to spark transformative global change through the power of responsible investment.

When not immersed in the world of finance, he’s continually captivated by the cultural richness of new cities, relishing the opportunity to learn from diverse societies. This passion for travel is eloquently documented on his site, ViaTravelers.com, where you can delve into his unique experiences via his author profile.

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The X-Factor: Lifecycle of a Private Equity Investment Thesis

Managing Director and Group Head of Private Equity Jennifer Pereira reveals how sponsors develop an investment thesis throughout a hold period

private equity fund investment thesis

PrivateEquityCXO Editorial Team

PE-CXO’s X-Factor interviews cast a spotlight on proven private equity-backed experts and the tools and tactics they leverage to create enterprise value across a variety of business challenges.  Falcon partner Rob Huxtable recently sat down with Managing Director, Group Head of Private Equity at Fengate Asset Management Jennifer Pereira to reveal how private equity investors think through the investment thesis of a portfolio company throughout its lifecycle.   

Executive: Jennifer Pereira is Managing Director and Group Head of Private Equity at Fengate Asset Management’s Toronto office. Fengate is a mid-market private equity fund within a multi-asset manager with over $8 billion in AUM.  Fengate is one of the most active real asset and growth equity investors in North America. 

Challenge: Developing investment theses for PE-backed portfolio companies and iterating upon them throughout a hold period. 

Listen to this episode of The X-Factor, catch up on past episodes, and get notified of new X-Factor releases by subscribing to us on  Spotify ,  Apple Podcasts ,  Amazon Music , or wherever you get your podcasts!  

Watch the full interview:

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What Is an Investment Thesis?

  • Understanding the Thesis

Special Considerations

  • What's Included?

The Bottom Line

  • Portfolio Management

Investment Thesis: An Argument in Support of Investing Decisions

private equity fund investment thesis

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

private equity fund investment thesis

The term investment thesis refers to a reasoned argument for a particular investment strategy, backed up by research and analysis. Investment theses are commonly prepared by (and for) individual investors and businesses. These formal written documents may be prepared by analysts or other financial professionals for presentation to their clients.

Key Takeaways

  • An investment thesis is a written document that recommends a new investment, based on research and analysis of its potential for profit.
  • Individual investors can use this technique to investigate and select investments that meet their goals.
  • Financial professionals use the investment thesis to pitch their ideas.

Understanding the Investment Thesis

As noted above, an investment thesis is a written document that provides information about a potential investment. It is a research- and analysis-based proposal that is usually drafted by an investment or financial professional to provide insight into investments and to pitch investment ideas. In some cases, the investor will draft their own investment thesis, as is the case with venture capitalists and private equity firms.

This thesis can be used as a strategic decision-making tool. Investors and companies can use a thesis to decide whether or not to pursue a particular investment, such as a stock or acquiring another company. Or it can be used as a way to look back and analyze why a particular decision was made in the first place—and whether it was the right one. Putting things in writing can have a huge impact on the direction of a potential investment.

Let's say an investor purchases a stock based on the investment thesis that the stock is undervalued . The thesis states that the investor plans to hold the stock for three years, during which its price will rise to reflect its true worth. At that point, the stock will be sold at a profit. A year later, the stock market crashes, and the investor's pick crashes with it. The investor recalls the investment thesis, relies on the integrity of its conclusions, and continues to hold the stock.

That is a sound strategy unless some event that is totally unexpected and entirely absent from the investment thesis occurs. Examples of these might include the 2007-2008 financial crisis or the Brexit vote that forced the United Kingdom out of the European Union (EU) in 2016. These were highly unexpected events, and they might affect someone's investment thesis.

If you think your investment thesis holds up, stick with it through thick and thin.

An investment thesis is generally formally documented, but there are no universal standards for the contents. Some require fast action and are not elaborate compositions. When a thesis concerns a big trend, such as a global macro perspective, the investment thesis may be well documented and might even include a fair amount of promotional materials for presentation to potential investing partners.

Portfolio management is now a science-based discipline, not unlike engineering or medicine. As in those fields, breakthroughs in basic theory, technology, and market structures continuously translate into improvements in products and in professional practices. The investment thesis has been strengthened with qualitative and quantitative methods that are now widely accepted.

As with any thesis, an idea may surface but it is methodical research that takes it from an abstract concept to a recommendation for action. In the world of investments, the thesis serves as a game plan.

What's Included in an Investment Thesis?

Although there's no industry standard, there are usually some common components to this document. Remember, an investment thesis is generally a proposal that is based on research and analysis. As such, it is meant to be a guide about the viability of a particular investment.

Most investment theses include (but aren't limited to) the following information:

  • The investment in question
  • The investment goal(s)
  • Viability of the investment, including any trends that support the investment
  • Potential downsides and risks that may be associated with the investment
  • Costs and potential returns as well as any losses that may result

Some theses also try to answer some key questions, including:

  • Does the investment align with the intended goal(s)?
  • What could go wrong?
  • What do the financial statements say?
  • What is the growth potential of this investment?

Putting everything in writing can help investors make more informed decisions. For instance, a company's management team can use a thesis to decide whether or not to pursue the acquisition of a rival. The thesis may highlight whether the target's vision aligns with the acquirer or it may identify opportunities for growth in the market.

Keep in mind that the complexity of an investment thesis depends on the type of investor involved and the nature of the investment. So the investment thesis for a corporation looking to acquire a rival may be more in-depth and complicated compared to that of an individual investor who wants to develop an investment portfolio.

Examples of an Investment Thesis

Portfolio managers and investment companies often post information about their investment theses on their websites. The following are just two examples.

Morgan Stanley

Morgan Stanley ( MS ) is one of the world's leading financial services firms. It offers investment management services, investment banking, securities, and wealth management services. According to the company, it has five steps that make up its investment process, including idea generation, quality assessment, valuation, risk management , and portfolio construction.

When it comes to developing its investment thesis, the company tries to answer three questions as part of its quality assessment step:

  • "Is the company a disruptor or is it insulated from disruptive change? 
  • Does the company demonstrate financial strength with high returns on invested capital, high margins, strong cash conversion, low capital intensity and low leverage? 
  • Are there environmental or social externalities not borne by the company, or governance and accounting risks that may alter the investment thesis?"

Connetic Ventures

Connetic Adventures is a venture capital firm that invests in early-stage companies. The company uses data to develop its investment thesis, which is made up of three pillars. According to its blog, there were three pillars or principles that contributed to Connetic's venture capital investment strategy. These included diversification, value, and follow-on—each of which comes with a pro and con.

Why Is an Investment Thesis Important?

An investment thesis is a written proposal or research-based analysis of why investors or companies should pursue an investment. In some cases, it may also serve as a historical guide as to whether the investment was a good move or not. Whatever the reason, an investment thesis allows investors to make better, more informed decisions about whether to put their money into a specific investment. This written document provides insight into what the investment is, the goals of the investment, any associated costs, the potential for returns, as well as any possible risks and losses that may result.

Who Should Have an Investment Thesis?

An investment thesis is important for anyone who wants to invest their money. Individual investors can use a thesis to decide whether to purchase stock in a particular company and what strategy they should use, whether it's a buy-and-hold strategy or one where they only have the stock for a short period of time. A company can craft its own investment thesis to help weigh out whether an acquisition or growth strategy is worthwhile.

How Do You Create an Investment Thesis?

It's important to put your investment thesis in writing. Seeing your proposal in print can help you make a better decision. When you're writing your investment thesis, be sure to be clear and concise. Make sure you do your research and include any facts and figures that can help you make your decision. Be sure to include your goals, the potential for upside, and any risks that you may come across. Try to ask and answer some key questions, including whether the investment meets your investment goals and what could go wrong if you go ahead with the deal.

It's always important to have a plan, especially when it comes to investing. After all, you are putting your money at risk. Having an investment thesis can help you make more informed decisions about whether a potential investment is worth your while. Make sure you put your thesis in writing and answer some key questions about your goals, costs, and potential outcomes. Having a concrete proposal in place can spell the difference between earning returns and losing all your money. And that's if your thesis supports the investment in the first place.

Harvard Business School. " Writing a Credible Investment Thesis ."

Lanturn. " What is an Investment Thesis and 3 Tips to Make One ."

Morgan Stanley. " Global Opportunity ."

Medium. " The Data That Built Our Fund's Investment Thesis ."

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A playbook for newly minted private equity portfolio-company CEOs

CEOs who helm companies owned by private equity (PE) firms face a leadership challenge unlike any other. They must master everything a great public- or private-company CEO does, all while operating at a higher metabolic rate. A newcomer to PE also faces the conundrum of having limited access to insight about the road ahead, because there is so little specific guidance in print about the portfolio-company CEO role. Its unique demands and nuances, however, need not be a mystery.

The world’s top PE firms can’t afford to skimp on CEO talent. The partners who hire, manage, and sometimes dismiss their portfolio-company CEOs think deeply about what sets their investment philosophy and ideal leaders apart.

“In short, we are constantly looking for the CEO with an ownership mentality,” said one PE-firm executive in Asia. In the interview process, this executive hopes “they will ask, ‘What is your underwriting base case and expected holding period? How much value do you expect to generate?’”

Executives at other PE firms highlight additional traits they consider essential to the CEO role, including nonhierarchical thinking, an instinctual grasp of financial metrics, and superlative team-building skills. These executives collectively emphasize the abundant support large PE firms offer their leaders, including operations teams, functional experts, senior advisers, trusted confidants, and a network of other CEOs within their holdings. The ability to derive benefit from these allies is a key leadership strength. In the words of one PE partner, “If they have the art to leverage the network to their advantage, they will be successful. Those who just use their wits will not be as successful.”

The lore of great public-company CEOs is so embedded in business culture that our definitions of leadership itself largely come from their experiences. However, at a time of unprecedented PE deals, more companies require leaders attuned to a portfolio company’s specific mission and pace, making it increasingly urgent to generate a body of knowledge about the CEO role. After massive COVID-19-related disruptions in the second quarter of last year, global PE deal flow increased 35 percent in the third quarter, compared with the prior quarter, and another 15 percent in the fourth quarter. Despite the pandemic, PE firms closed more than 3,100 deals in the fourth quarter, the largest count of any quarter to date. 1 McKinsey analysis of custom data provided by Pitchbook. More is likely to come: global PE uncalled capital has reached $1.4 trillion, an early sign that 2021 may be a banner year for deal flow.

In 2020, PE firms paid higher purchase multiples in the United States than during any year in history, rising in one year from 11.9 times to 12.8 times. To put the multiples growth into context, an investor in 2020 paid 30 to 40 percent more  than a decade ago to acquire the same earnings before interest, taxes, depreciation, and amortization (EBITDA). To create alpha in their portfolios and justify higher multiples, PE firms are increasingly moving to an even more hands-on engagement model.

This article, informed by our work and several recent interviews with PE executives, intends to pull back the curtain on how to be great in this role. We speak directly to you, the newly minted CEO at a PE-owned company. We consider the unique challenges you face and offer a set of actions to guide you through them.

What makes this role different

The CEO role is peerless, exciting, rewarding—and notoriously all-consuming. McKinsey’s research highlights the mindsets and practices of the best CEOs . Portfolio-company CEOs need to master not only these dynamics but also add to them another layer: delivering a broad and challenging agenda within a short time frame. In short, these leaders must train for a sprint and a marathon at the same time. Typical CEOs look at their calendars to prioritize their week, while portfolio-company CEOs look at their watches.

Working with a hands-on portfolio-company board

Oversight of the portfolio company is the PE board’s day job , not just a fiduciary duty. This means that it’s more actively involved; in many ways, it works more like a “super management team,” at least about a quarter of the time. A PE board may require monthly in-depth financial reviews, a subset of the board may intervene when plan deviations occur or progress does not happen fast enough, and the board may be closely involved in helping select the management team.

Even when they are not engaging this deeply, high-functioning board members will behave like “cooperative skeptics” 2 Kathy Kantorski, “Primed for the boardroom,” Hispanic Executive , April 1, 2019, hispanicexecutive.com. —meaning they will ask probing questions and defend against errors and assumptions. It is best, therefore, to design an engagement model that will allow you to get the best out of this active board construct.

“They have to understand that the board is not just a formality; they are a real forum that the CEO can use as a thought partner, and the board is in the driver’s seat,” said a PE executive who routinely hires CEOs. Her advice? Give newcomers books about the PE industry so that they understand its history and language, which makes it easier to communicate with the board.

An executable investment thesis is the top priority

CEOs in PE face a paradox: the business plan is often “written in blood,” and thus, decisions and actions must align with the investment thesis. On the other hand, the CEO must simultaneously be creative, always looking for new ways to underwrite and expand the value-creation plan. The role of the CEO as a strategist is trumped by the need to execute the investment underwriting.

Executing based on a preset plan requires you to understand the deal thesis in both its essence and details and be on top of the numbers and value-creating levers more than any other type of CEO. This granular insight is vital because injecting more capital or time to absorb a mistake can be a problem for the PE firm’s returns and credibility.

The best CEOs “care about how well the finance team is pulling the data for them, giving them visibility into the business,” said a PE executive based in Asia who specializes in hiring.

“In a public company, the CFO will drive all that, but in PE, the CEO has an equally strong grasp of the financials,” said another partner, echoing a common refrain among PE experts: silos between departments and functions have no place in a PE-backed company. Portfolio-company CEOs need to get comfortable with a nonhierarchical, horizontal culture.

Speed to value is prized over meticulous planning

Arguably, the biggest concrete difference between the role of a CEO in PE and any other type of CEO is the pace. Capital in PE clocks at 20 to 25 percent a year, and every month of delay burns returns. PE firms operate with strict timetables for when a company should deliver against its deal thesis, which means that urgency is a way of life for leaders. In the words of a PE director, “A lot of [CEOs] come to the realization that the performance pressure is for real.” (For a look at other psychological challenges that can accompany this role, see sidebar “Coping with the pressure: The inner life of a portfolio-company CEO.”)

Coping with the pressure: The inner life of a portfolio-company CEO

“It’s a combination of insecurity, imposter syndrome, ego issues, all of that,” said one PE director when asked to name the biggest psychological challenges portfolio-company CEOs face. Then there’s the pressure of interacting with the board, coupled with very little time to figure out how best to present earnings, strategies, or other crucial issues, as expressed recently by one of her CEOs: “I used to deal with my public shareholders every quarter. I thought working for you would be easier, but you guys are looking at us on a monthly basis, and I have very little room to massage the numbers or get the story lined up.”

Some leaders struggle with the pace. After two dissatisfactory quarters, a PE board is likely to get deeply involved in solving the problem. That alacrity can surprise newcomers and may prompt rash decision making. One PE partner who acts as a mentor to several CEOs said he often counsels them to make lists, consider options, and run scenarios.

Another struggle for some CEOs is maintaining a sense of conviction in the face of a deeply embedded PE board and operating team. Too much acquiescence, however, is a mistake: “We had a CEO who said yes all the time, and we fired him,” said one PE partner. “They have to have their own point of view, be able to defend it with logic and numbers, and be able to have a constructive debate with us,” he said.

Our research indicates that inertia will stick out like a sore thumb. You will be compared to other CEOs across your PE owners’ portfolio, and partners won’t show the patience corporate boards or shareholders might.

“The honeymoon period is short, and we encourage the CEOs we hire to make talent decisions very quickly,” said the PE executive who specializes in hiring. “Don’t wait for the first board meeting.”

Newly minted portfolio-company CEOs: Four ways to succeed

Any CEO must know their stakeholders, assemble a great executive team, make plans, and develop a network of trusted advisers. Each of these standard leadership tactics will be more important and more nuanced in your new life as a private equity portfolio-company CEO. To develop mastery in each area, we suggest breaking down the challenges by taking stock, taking action, and, ultimately, taking control.

Build a relationship with the board

As discussed above, a PE board will be engaged in a more intense, hands-on way than any board you have encountered previously. An essential part of your job is to build a good relationship with each board member and shape your license to operate.

As PE firms develop and refine their active management strategies, they are building boards in new ways. Two prominent PE players in Asia recently began to include one or two nonexecutive, independent industry experts on their boards. An executive at one firm said, “We have found that they bring a very refreshed perspective, particularly in areas like environmental, social, and governance [ESG]; accounting; and controls.” It’s essential to understand what each board member brings to the table and how they can help you.

Be on the lookout for common misalignments. It’s possible, for example, that deal partners hold different views of how M&A fits into the company’s future. An operating partner may have been through an analogous situation that informs their ideas about what commercial levers can be pulled and in what sequence. Deal teams may have identified what they view as critical gaps in the company (such as supply-chain, cybersecurity, or ESG risk). It’s essential that you know what people think and why. Aim for “zero daylight” between each stakeholder’s point of view and your plan.

  • Take stock . Make sure you understand the expectations of the sponsor and board, what they view as priorities for the business, and the skills and experiences you and they bring to the table.
  • Take action. Establish a structured and frequent cadence of informal conversations and formal reviews, especially with your operating partner. Do you need to check in once a week? Once a month? Enroll critical players in your decision making and determine who you can count on for honest feedback.
  • Take control. Come to your owners with ideas. Put forward a point of view on organic and inorganic growth. Your job is to constantly search for new sources of value, act at pace, and use informal and formal communication channels.

Quickly assemble an A-team

Team-building skills are paramount in this job. Many PE investments involve turnarounds in which the new CEO must partially or fully rebuild the C-suite. Furthermore, because portfolio companies are typically smaller than publicly traded companies, CEOs will spend much of their time working alongside their team rather than providing more distant guidance. 3 Tom Redfern, “How private equity firms hire CEOs,” Harvard Business Review , June 2016, hbr.org.

Our research shows that effective talent management drives financial outperformance. Companies that reallocate talent frequently are 2.2 times more likely to outperform their peers, and those that get talent right in the first year achieve 2.5 times the return on initial investment.

It’s more than a matter of hiring the CFO or COO with the right résumé. Typically, we find that new portfolio-company CEOs need to fill about 30 to 40 percent of “level two” positions, including heads of finance, human resources, procurement, and revenue, and roughly 50 to 65 percent of “level three” positions, which are typically at the vice president level.

  • Take stock. You’ll be able to figure out what roles need what talent by getting closer to the investment thesis and sources of value.
  • Take action. Swiftly assess your direct reports and move quickly on anyone whose performance is questionable. If you’ve confirmed a problem after 90 days, it’s too late: others will assume it’s your problem. Be sure you’ve got your A-team in place before working on esprit de corps . Push for diversity on your management team and board to support internal challenge and healthy debate, improve decision making, and strengthen customer orientation.
  • Take control. In making a commitment to diversity, arm yourself with the data that prove it is the right business strategy. For example, in an examination of its portfolio companies, the Carlyle Group found that organizations with diverse board members achieved 12 percent higher earnings growth compared with boards that are less diverse. 4 Lauren Hirsch, “The Carlyle Group ties a $4.1 billion credit line to board diversity,” New York Times , February 17, 2021, nytimes.com.

Launch an achievable 100-day program

Your plan for the first 100 days will depend on the complexities of your business and other issues that are too numerous and nuanced to cover comprehensively in this article. Instead, we highlight below some of the most important factors to consider throughout this crucial period.

A feasible plan with bankable projections is of critical importance. This road map needs to be grounded in a keen understanding of trends, team capabilities, and potential for success. Unrealistic, overly optimistic plans are perilous, while realistic goals are central to aligning the portfolio-company board and management. Confirm the plan’s feasibility early in the process.

Never “fall in love with the asset.” Instead, continually conduct mental acid tests: If you were a venture-capital or PE firm, would you buy the business and keep your talent? In short, be open to possibilities and move fast to capitalize on opportunities.

  • Take stock. Develop an employee experience that attracts the best thinkers and doers. Identify three to five strategic priorities and set the team on task. Secure external expertise to support change initiatives. Put comprehensive reporting tools in place for monthly financial and operating metrics tied to strategy.
  • Take action. Maintain an expansive mindset that encompasses all potential levers for value creation , including potential profit or balance-sheet improvements, working-capital optimization, product innovation, customer partnerships, regulatory actions, M&A opportunities, and the right exit strategies.
  • Take control. Once you have identified the potential levers for value creation, the next challenge is to deliver this broad agenda in record time. Design your governance setup around a cadence of interactions to deliver the company’s full potential, which should include special sessions with the board to discuss M&A and/or divestiture options and intensive sessions to look at innovation opportunities.

Leverage the resources your PE sponsor has to offer

Today, top PE firms are building internal operating groups and developing more resources to help improve the operating performance of their companies. Some PE firms are staffed with functional experts with deep knowledge of e-procurement, data analytics, leadership development, and enterprise support, among other topics; these experts don’t join company boards but instead work with portfolio companies as needed. In addition to their own operating partners, PE firms may have access to senior advisers with deep experience on specific topics, such as inflation, or relationships with trusted consultants. CEOs of other portfolio companies are another consortium from which you can draw counsel.

  • Take stock. Identify key resources within your PE sponsor and determine how to integrate them into your operating model. Consider which networking events with peers will most help you. Be open to receiving and acting on constructive criticism and advice.
  • Take action. Design your interventions with the capabilities and oversight you have identified in mind. Clarify mentally the type of leader you want to be (for example, inspirational visionary, disruptor, execution driver, among others). Have a personal reckoning to decide whether this is a capstone to your career or if you are positioning yourself for something else. If it’s the former, focus on contributing back to the PE-firm repository by coaching other potential CEOs. If it’s the latter, decide on the impact you intend to have as CEO, hold yourself accountable, and never lose sight of the fact that you will eventually transition.
  • Take control. Know what leadership behaviors your team and the company need from you, and model them daily. Be vigilant about your personal boundaries, making sure to manage your most valuable resource—your time 5 Michael E. Porter and Nitin Nohria, “How CEOs manage time,” Harvard Business Review , July–August 2018, hbr.org. —for maximum efficacy.

The role of CEO of a PE-portfolio company stands apart from other leadership opportunities. From 1996 to 2015, the number of publicly traded companies listed on US stock exchanges alone declined by nearly 50 percent. Some of this shift resulted from company bankruptcies, failures, or mergers—but in most instances, the delisting came from publicly traded firms going private. 6 Luminita Enache, Vijay Govindarajan, Shivaram Rajgopal, and Anup Srivastava, “Why we shouldn’t worry about the declining number of public companies,” Harvard Business Review , August 27, 2018, hbr.org.

Despite the growing predominance of PE-owned companies and the CEOs who steer them, playbooks for this type of leadership have previously been scarce. The guidance here provides the latest thinking by major players in PE who scrutinize leadership practices daily. Absorbing these winning strategies into your muscle memory will help you meet the challenges of this demanding and rewarding role. It is a form of leadership better aligned with the way a growing number of companies are financed, run, and valued.

Claudy Jules

The authors wish to thank Ivo Bozon, Carolyn Dewar, Anand Lakshmanan, and Gary Pinkus for their contributions to this article.

This article was edited by Katy McLaughlin, a senior editor in the Southern California office.

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The Private Equity Case Study: The Ultimate Guide

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Private Equity Case Study

The private equity case study is an especially intimidating part of the private equity recruitment process .

You’ll get a “case study” in virtually any private equity interview process , whether you’re interviewing at the mega-funds (Blackstone, KKR, Apollo, etc.), middle-market funds , or smaller, startup funds.

The difference is that each one gives you a different type of case study, which means you need to prepare differently:

What Should You Expect in a Private Equity Case Study?

There are three different types of “case studies”:

  • Type #1: A “ paper LBO ,” calculated with pen-and-paper or in your head, in which you build a simple leveraged buyout model and use round numbers to guesstimate the IRR.
  • Type #2: A 1-3-hour timed LBO modeling test , either on-site or via Zoom and email. This is a pure speed test , so proficiency in the key Excel shortcuts and practice with many modeling tests are essential.
  • Type #3: A “take-home” LBO model and presentation, in which you might have a few days up to a week to pick a company, research it, build a model, and make a recommendation for or against an acquisition of the company.

We will focus on the “take-home” private equity case study here because the other types already have their own articles/tutorials or will have them soon.

If you’re interviewing within the fast-paced, on-cycle recruiting process with large funds in the U.S. , you should expect timed LBO modeling tests (type #2).

If the firm interviews dozens of candidates in a single weekend, there’s no time to give everyone open-ended case studies and assess them.

You might also get time-pressured LBO modeling tests in early rounds in other financial centers, such as London .

The open-ended case studies – type #3 – are more common at smaller funds, in off-cycle recruiting, and outside the U.S.

Although you have more time to complete them, they’re significantly more difficult because they require critical thinking skills and outside research.

One common misconception is that you “need” to build a complex model for these case studies.

But that is not true at all because they’re judging you mostly on your investment thesis , your presentation, and your ability to answer questions afterward.

No one cares if your LBO model has 200 rows, 500 rows, or 5,000 rows – they care about how well you make the case for or against the company.

This open-ended private equity case study is often the final step between the interview and the job offer, so it is critically important.

The Private Equity Case Study, in Parts

This is another technical tutorial, so I’ve embedded the corresponding YouTube video below:

Table of Contents:

  • 4:32: Part 1: Typical Case Study Prompt
  • 6:07: Part 2: Suggested Time Split for a 1-Week Case Study
  • 8:01: Part 3: Screening and Selecting a Company
  • 14:16: Part 4: Gathering Data and Doing Industry Research
  • 22:51: Part 5: Building a Simple But Effective Model
  • 26:32: Part 6: Drafting an Investment Recommendation

Files & Resources:

  • Case Study Prompt (PDF)
  • Private Equity Case Study Slides (PDF)
  • Cars.com – Highlighted 10-K (PDF)
  • Cars.com – Investor Presentation (PDF)
  • Cars.com – Excel Model (XL)
  • Cars.com – Investment Recommendation Presentation (PDF)

We’re going to use Cars.com in this example, which is one of the many case studies in our Advanced Financial Modeling course:

course-1

Advanced Financial Modeling

Learn more complex "on the job" investment banking models and complete private equity, hedge fund, and credit case studies to win buy-side job offers.

The full course includes a detailed, step-by-step walkthrough rather than this summary, an additional advanced LBO model, and other complex case studies for investment banking, hedge funds, and credit.

Part 1: Typical Private Equity Case Study Prompt

In some cases, they’ll give you a company to analyze, but in others, you’ll have to screen for companies yourself and pick one.

It’s easier if they give you the company and the supporting documents like the Information Memorandum , but you’ll also have less time to complete the case study.

The prompt here is very open-ended: “We like these types of deals and companies, so pick one and present it to us.”

The instructions are helpful in one way: they tell us explicitly not to build a full 3-statement model and to focus on the market and strategy rather than an “extremely complex model.”

They also hint very strongly that the model must include sensitivities and/or scenarios:

Private Equity Case Study Prompt

Part 2: Suggested Time Split for a 1-Week Private Equity Case Study

You have 7 days to complete this case study, which may seem like a lot of time.

But the problem is that you probably don’t have 8-12 hours per day to work on this.

You’re likely working or studying full-time, which means you might have 2-3 hours per day at most.

So, I would suggest the following schedule:

  • Day #1: Read the document, understand the PE firm’s strategy, and pick a company to analyze.
  • Days #2 – 3: Gather data on the company’s industry, its financial statements, its revenue/expense drivers, etc.
  • Days #4 – 6: Build a simple LBO model (<= 300 rows), ideally using an existing template to save time.
  • Day #7: Outline and draft your presentation, let the numbers drive your decisions, and support them with the qualitative factors.

If the presentation is shorter (e.g., 5 slides rather than 15) or longer, you could tweak this schedule as needed.

But regardless of the presentation length, you should spend MORE time on the research, data gathering, and presentation than on the LBO model itself.

Part 3: Screening and Selecting a Company

The criteria are simple and straightforward here: “The firm aims to find undervalued companies with stagnant or declining core businesses that can be acquired at reasonable valuation multiples and then turn them around via restructuring, divestitures , and add-on acquisitions.”

The industry could be consumer, media/telecom, or software, with an ideal Purchase Enterprise Value of $500 million to $1 billion (sometimes up to $2 billion).

Reading between the lines, I would add a few criteria:

  • Consistent FCF Generation and 10-20%+ FCF Yields: Strategies such as turnarounds and add-on acquisitions all require cash flow. If the company doesn’t generate much Free Cash Flow , it will have to issue Debt to fund these strategies, which is risky because it makes the deal very dependent on the exit multiple.
  • Relatively Lower EBITDA Multiples: If the company has a “stagnant or declining” core business, you don’t want to pay 20x EBITDA for it. An ideal range might be 5-10x, but 10-15x could be OK if there are good growth opportunities. The IRR math also gets tougher at high EBITDA multiples because the maximum Debt in most deals is 5-6x.
  • Clean Financial Statements and Enough Detail for Revenue and Expense Projections: You don’t want companies with 2-page-long Cash Flow Statements or Balance Sheets with 100 line items; you can’t spare the time required to simplify and consolidate these statements. And you need some detail on the revenue and expenses because forecasting revenue as a simple percentage Year-Over-Year (YoY) growth rate is a bad idea in this context.

We used this process to screen for companies here:

  • Step 1: Do a high-level screen of companies in these 3 sectors based on industry, Equity Value or Enterprise Value, and geography.
  • Step 2: Quickly review the list of ~200 companies to narrow the sector.
  • Step 3: After picking a specific sector, narrow the choices to the top few companies and pick one of them.

In software , many of the companies traded at very high multiples (30x+ EBITDA), and others had negative EBITDA , so we dropped this sector.

In consumer/retail , the companies had more reasonable multiples (5-10x), but most also had low margins and weak FCF generation.

And in media/telecom , quite a few companies had lower multiples, but the FCF math was challenging because many companies had high CapEx requirements (at least on the telecom side).

We eliminated companies with very high multiples, negative EBITDA, and exorbitant CapEx, which left this set:

Private Equity Case Study Company Selection

Within this set, we then eliminated companies with negative FCF, minimal information on revenue/expenses, somewhat-higher multiples, and those whose businesses were declining too much (e.g., 20-30% annual declines).

We settled on Cars.com because it had a 9.4x EBITDA multiple at the time of this screen, a declining business with modest projected growth, 25-30% margins, and reasonable FCF generation with FCF yields between 10% and 15%.

If you don’t have Capital IQ for this exercise, you’ll have to rely on FinViz and use P / E multiples as a proxy for EBITDA multiples.

You can click through to each company to view the P / FCF multiples, which you can flip around to get the FCF yields.

In this case, don’t even bother looking for revenue and expense information until you have your top 2-3 candidates.

Part 4: Gathering Data and Doing Industry Research

Once you have the company, you can spend the next few days skimming through its most recent annual report and investor presentation, focusing on its financial statements and revenue/expense drivers.

With Cars.com, it’s clear that the company’s “Dealer Customers” and Average Revenue per Dealer will be key drivers:

Cars.com - Key Drivers

The company also has significant website traffic and earns advertising revenue from that, but it’s small next to the amount it earns from charging car dealers to use its services:

Cars.com - Web Traffic and Monetization

It’s clear from this quick review that we’ll need some outside research to estimate these drivers, as the company’s filings and investor presentation have little.

Fortunately, it’s easy to Google the number of new and used car dealers in the U.S. and estimate the market size and share like that:

Cars.com - Car Dealer Market

The company’s market share has been declining , and we expect that trend to continue, but it’s not clear how rapid the decline will be.

Consumers are increasingly buying directly from other consumers, and dealers have less reason to use the company’s marketplace services than in past years.

We create an area for these key drivers, with scenarios for the most uncertain one:

Cars.com - Scenarios for the Market Share

You might be wondering why there’s no assumed uptick in market share since this is supposed to be a “turnaround” case study.

The short answer is that we think the company is unlikely to “turn around” its core business in this time frame, so it will have to move into new areas via bolt-on acquisitions .

For example, maybe it could acquire smaller firms that sell software and services to dealers, or it could acquire physical or online car dealerships directly.

Another option is to acquire companies that can better monetize Cars.com’s large and growing web traffic – such as companies that sell auto finance leads.

As part of this process, we also need to research smaller companies to acquire, but there isn’t much to say about this part.

It comes down to running searches on Capital IQ for smaller companies in related industries and entering keywords like “auto” in the business description field.

In terms of the other financial statement drivers , many expenses here are simple percentages of revenue, but we could also link them to the employee count.

We also link the website traffic to the sales & marketing spending to capture the spending required for growth in that area.

Finally, we need to input the financial statements for the company, which is not that hard since they’re already fairly clean:

Cars.com - Income Statement

It might be worth consolidating a few items here, but the Income Statement and partial Cash Flow Statement are mostly fine, which means the Excel versions are close to the ones in the annual report.

Part 5: Building a Simple But Effective Model

The case study instructions state that a full 3-statement model is not necessary – but even if they had not, such a model would rarely be worthwhile.

Remember that LBO models, just like DCF models , are based on cash flow and EBITDA multiples ; the full statements add almost nothing since you can track the Cash and Debt balances separately.

In terms of model complexity, a single-sheet LBO with 200-300 rows in Excel is fine for this exercise.

You’re not going to get “extra credit” for a super-complex LBO model that takes days to understand.

The key schedules here are:

  • Transaction Assumptions – Including the purchase price, exit assumptions, scenarios, and tranches of debt. Skip the working capital adjustment unless they specifically ask for it. For more on these nuances, see our coverage of Enterprise Value vs. purchase price and cash-free debt-free deals .
  • Sources & Uses – Short and simple but required to calculate the Investor Equity.
  • Revenue, Expense, and Cash Flow Drivers – These don’t need to be super-complex; the goal is to go beyond projecting revenue as a simple percentage growth rate.
  • Income Statement and Partial Cash Flow Statement – The goal is to calculate Free Cash Flow because that drives Debt repayment and Cash generation in an LBO.
  • Add-On Acquisitions – These are part of the “turnaround strategy” in this deal, so they’re quite important.
  • Debt Schedule – This one is quite simple here because the deal is not dependent on financial engineering.
  • Returns Calculations – The IPO vs. M&A exit options add a bit of complexity.
  • Sensitivity Tables – It’s difficult to draft the investment recommendation without these.

Skip anything that makes your life harder, such as circular references in Excel (to avoid these, use the beginning Cash and Debt balances to calculate interest).

We pay special attention to the add-on acquisitions here, with support for their revenue and EBITDA contributions:

Private Equity Case Study - Add-On Acquisitions

The Debt Schedule features a Revolver, Term Loans, and Subordinated Notes:

Private Equity Case Study - Debt Schedule

The Returns Calculations are also simple; we do assume a bit of Multiple Expansion because of the company’s higher growth rate by the end:

Private Equity Case Study - Exit Multiples

Could we simplify this model even further?

I don’t think the M&A vs. IPO exit options mentioned above are necessary, and we could also drop the “Growth” vs. “Value” options for the add-on acquisitions:

Possible Case Study Simplifications

Especially if we recommend against the deal, it’s not that important to analyze which type of add-on acquisition works best.

It would be more difficult to drop the scenarios and Excel sensitivity tables , but we could restructure them a bit and fold the scenario into a sensitivity table.

All investing is probabilistic, and there’s a huge range of potential outcomes – so it’s difficult to make a serious investment recommendation without examining several outcomes.

Even if we think this deal is spectacular, we must consider cases in which it goes poorly and how we might reduce those risks.

Part 6: Drafting an Investment Recommendation

For a 15-slide recommendation, I would recommend this structure:

  • Slides 1 – 2: Recommendation for or against the deal, your criteria, and why you selected this company.
  • Slides 3 – 7: Qualitative factors that support or refute the deal (market, competition, growth opportunities, etc.). You can also explain your proposed turnaround strategy, such as the add-on acquisitions, here.
  • Slides 8 – 13: The numbers, including a summary of the LBO model, multiples vs. comps (not a detailed valuation), etc. Focus on the assumptions and the output from the sensitivity tables.
  • Slide 14: Risk factors for a positive recommendation, and the counter-factual (“what would change your mind?”) for a negative one. You can also explain the potential impact of each risk on the returns and how you could mitigate these risks.
  • Slide 15: Restate your conclusions from Slide 1 and present your best arguments here. You could also change the slide formatting or visuals to make it seem new.

“OK,” you say, “but how do you actually make an investment decision?”

The easiest method is to set criteria for the IRR or multiple of invested capital in each case and say, “Yes” if the deal achieves those numbers and “No” if it does not.

For example, maybe the targets are a 30% IRR in the Upside case, a 20% IRR in the Base case, and a 1.0x multiple in the Downside case (i.e., avoid losing money).

We do achieve those numbers in this deal, but the decision could go either way because the deal is highly dependent on the add-on acquisitions.

Without these acquisitions, the deal does not work; the IRR falls by 10%+ across all the scenarios and turns negative in the Downside case.

We need at least 5 good acquisition candidates matching very specific financial profiles ($100 million Purchase Enterprise Value and a 15x EBITDA purchase multiple with 10% revenue growth or 5x EBITDA with 3% growth).

The presentation includes some examples of potential matches:

Private Equity Case Study Add-On Acquisition Candidates

While these examples are better than nothing, the case is not that strong because:

  • Most of these companies are too big or too small to fit into the strategy proposed here of ~$100 million in annual acquisitions.
  • The acquisition strategy is unclear ; acquiring and integrating dealerships (even online ones) would be very, very different from acquiring software/data/media companies.
  • And since the auto software market is very niche, there’s probably not a long list of potential acquisition candidates beyond the few we found.

We end up saying, “Yes” in this recommendation, but you could easily reach the opposite conclusion because you believe the supporting data is weak.

In short: For a 1-week open-ended case study, this approach is fine, but this specific deal would probably not stand up to a more detailed on-the-job analysis.

The Private Equity Case Study: Final Thoughts

Similar to time-pressured LBO modeling tests, you can get better at the open-ended private equity case study by “putting in the reps.”

But each rep is more time-consuming, and if you have a demanding full-time job, it may be unrealistic to complete multiple practice case studies before the real thing.

Also, even with significant practice, you can’t necessarily reduce the time required to research an industry and specific companies within it.

So, it’s best to pick companies and industries you already know and have several Excel and PowerPoint templates ready to go.

If you’re targeting smaller funds that use off-cycle recruiting, the first part should be easy because you should be applying to funds that match your industry/deal/client background.

And if not, you can always make a lateral move to a bulge bracket bank and interview at the larger funds if you prefer the private equity case study in “speed test” form.

If you liked this article, you might be interested in:

  • Private Equity Value Creation : Equally Viable Alternative to PE Deal Teams?
  • The Growth Equity Case Study: Real-Life Example and Tutorial
  • The Full Guide to Healthcare Private Equity, from Careers to Contradictions
  • Healthcare Investment Banking: The Best Group to Check Into When Human Civilization is Collapsing?

private equity fund investment thesis

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

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How to Create an Investment Thesis

by Admin | Feb 5, 2021 | Angel Investing , Finance , Venture Capital | 0 comments

How to Create an Investment Thesis

One of the essential elements in a venture capital firm is the investment thesis. The thesis can come in many varieties, from broad and loosely defined focuses to a specific vertical and company stage. On the other hand, some investors choose to allocate capital without a core thesis driving their decisions and see success in this strategy. This post will define an investment thesis, why investors decide to develop one, and some tips on creating one.

What is an investment thesis?

Simply put, the investment thesis is an assumption made about a market, vertical, or trend that will drive the strategy for a particular firm or fund. Just as a startup will assume a problem or market need and build a product around solving that problem, an investor will consider various markets and trends and develop an investment strategy focused on that assumption.

Why develop an investment thesis?

The thesis is the driving force behind what a firm chooses to focus on to generate returns. It will be a fundamental part of how VCs decide what to look for in specific markets, source deals, and where they ultimately decide to invest their capital. The thesis helps keep a firm focused, allowing investors to work within particular parameters when they go about their business.

There are a couple of advantages to having a thesis-driven approach as a venture capital firm. It will drive relationships that the firm pursues. This relationship driver applies to how firms source deals from an investment standpoint and choose their limited partners. These relationships with experts in a particular vertical will help portfolio companies with mentorship, independent board seats, and talent sourcing.

A thesis compels VCs to be experts within their particular field. If a firm bases its thesis around FinTech, it will most likely have some expertise in that field. This knowledge will help them understand the marketplace, specific problems a startup is trying to solve and judge founder talent. The firm will also be a thought leader in the space by releasing analysis and reporting trends in the industry. Lastly, the firm’s partners will be a better value-add to the companies within their portfolio, paving a quicker path for a startup’s growth and success.

Example of a thesis

A16Z , a prominent Silicon Valley firm, has several different areas they invest in, from FinTech to Growth to Consumer focused startups. Below is their investment thesis for their FinTech portfolio:

“Fintech companies are innovating across broad categories — in banking, lending, insurance, real estate, and investing — both on the customer-facing side and in core infrastructure. We believe the combination of mobile, digital money, machine learning, and new data sources offers startups a unique opportunity to leapfrog outdated infrastructure and compete with incumbent financial institutions to reimagine the way we manage our finances.”   Source

We understand that the firm focuses on startups that use mobile and machine learning to innovate on financial management through this statement. This thesis has helped drive the firm’s investments in   Stripe   (now valued at $36B) and   Carta   (currently valued at $3.3B).

For an awesome hub of investment thesis examples, check out this   link !

How to build an investment thesis

When developing a thesis, there are vital things to keep in mind:

Markets : Start with market sizing to make sure that a particular industry is worth pursuing. We will discuss market sizing strategies in a future post.

Trends:   Understand macro trends impacting the markets and industries that you determine are big enough to pursue.

Companies : Break down each company within a market that has upside potential. Look at recent companies that have seen success within your specific industry focus.

Exits : Make sure there is an exciting exit environment for companies in that particular segment. You want your investments to see a return through going public or M&A activity.

Tips on the above:

Things to think about defining in a thesis would be company stage, geography, vertical, or market.

People tend to want a fully-formed thesis right off the bat, but it’s an iterative process. The scrum process might be three months, but the full process can take a year before talking about a thesis publicly.

Have a hunch on something that isn’t fully formed and then test it out:

Go out and talk to entrepreneurs.

Talk to buyers of the technology.

Form relationships with ecosystem partners.

Incrementally improve your thesis based on feedback and results.

For some more tips and strategies on creating a thesis, check out this informative   Medium post .

Final thoughts

The thesis can help you stay focused and is your north star. For startups, it will help them target your firm. For LPs, it will help them judge your conviction and investment strategy. When developing a thesis, think about taking on big problems and big ideas. There are so many significant issues to be solved globally, and we have a golden opportunity to help solve them. Think big, and don’t limit yourself only to ideas on making returns for investors, but how to impact the world.

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private equity fund investment thesis

Investment Thesis: An Argument in Support of Investing Decisions

October 29, 2023 by Abi Tyas Tunggal

An investment thesis is a well-reasoned argument that supports a specific investment decision, playing a vital role in the strategic planning process for individual investors and businesses alike. It comprises detailed research and analysis to evaluate an investment's potential profitability. A good investment thesis serves multiple purposes, including helping in the decision-making process, providing a comprehensive framework for monitoring and assessment, and offering a structured approach to identifying potential opportunities.

There are different types of investment strategies, such as venture capital , private equity, and long-term value investments. The core of an investment thesis involves identifying key parameters for evaluating an investment, understanding the unique market dynamics and competitive landscape, and realizing how to create value through strategic planning. To ensure a comprehensive and detailed investment thesis, it is crucial to involve thorough research, considering emerging trends and opportunities, and incorporating industry case studies for better understanding. Ultimately, financial statements and valuation metrics play a significant role in determining a well-suited investment decision.

Key Takeaways

  • An investment thesis is a well-reasoned, research-based argument supporting a specific investment decision
  • There are several types of investment strategies, and a well-structured investment thesis addresses market dynamics and competition to create value
  • Research, valuation metrics, and understanding emerging trends are crucial in crafting a compelling investment ideas

Defining an Investment Thesis

An investment thesis is a well-structured, logical argument that justifies a particular investment decision, based on thorough research and analysis. It is essential for investors, as well as financial professionals in the domains of investment banking, private equity, hedge funds, and venture capital funds . A confident and knowledgeable investor will build out clear investment criteria to successfully navigate the investment landscape.

The primary purpose of an investment thesis is to outline the reasons and expected outcomes of a proposed investment, often focusing on the potential for growth and profit. This document offers a roadmap for investors, guiding them through their decision-making process, and helping to ensure that they arrive at rational and informed conclusions. A comprehensive investment thesis should consider various aspects, such as market conditions, competitive landscape, and financial performance of the targeted asset or company.

A strong investment thesis is built on rigorous market research and analysis. This involves evaluating historical and current financial information, as well as scrutinizing industry trends and the overall economic environment. Skilled investors will also incorporate their expertise in the industry to better assess the merits of an investment opportunity. This level of thoroughness creates a confidently expressed thesis, allowing investors to remain steadfast in their investment decisions, even amid market volatility.

In summary, an investment thesis plays a pivotal role in the investing process. It presents a well-reasoned argument, grounded in extensive research and clear analysis, that supports an investment decision. Crafting a robust investment thesis is crucial for both individual and institutional investors as it provides a solid foundation for investment choices and ensures the alignment of investment strategies with long-term objectives.

Importance of Research in Crafting an Investment Thesis

Thorough research is a crucial aspect of creating a solid investment thesis. It allows investors to gather vital information and insights that will help guide their investment decisions. There are several elements to consider while conducting this research, with data analysis, understanding risks, and returns being essential components.

Data Analysis

Data analysis forms the backbone of any research conducted for crafting an investment thesis. It involves collecting, organizing, and interpreting various types of data, such as financial statements, market trends, and industry forecasts, to identify patterns and make informed predictions about a potential investment opportunity. A comprehensive data analysis can help investors make confident choices based on reliable information, which is essential for a successful investment strategy.

Some key data analysis techniques used in crafting an investment thesis include:

  • Comparative analysis: Comparing the performance of different companies within the same industry to identify investment opportunities.
  • Trend analysis: Monitoring historical data to determine patterns and potential future developments.
  • Financial statement analysis: Examining the financial health of a company through its balance sheets, income statements, and cash flow statements.

Understanding Risks and Returns

One of the primary goals of research in developing an investment thesis is to assess the risk/reward profile of a potential investment. This involves evaluating the potential risks associated with the investment and weighing them against the expected returns. A sound investment thesis should demonstrate a clear understanding of these risks and offer a rationale for why the investment’s potential returns make it a worthwhile addition to a portfolio.

Some common risks to consider when crafting an investment thesis include:

  • Market risk: The risk of an investment losing value due to fluctuations in the market.
  • Credit risk: The risk that a company or issuer of a financial instrument may default on its obligations.
  • Operational risk: The risk of losses arising from failed internal processes, systems, or personnel within a business.

Evaluating these risks requires investors to develop a deep understanding of the investment opportunity, its industry, and the factors that may impact its performance. A diligent and systematic approach to research can help investors identify potential risks and gains, leading to informed and confident decision-making in crafting a strong investment thesis.

Types of Investment Strategy

When it comes to crafting an investment thesis, selecting an appropriate investment strategy is crucial. In this section, we will discuss two popular strategies: Value Investing and Growth Investing.

Value Investing

Value investing is a strategy that focuses on identifying undervalued stocks or assets in the market. These investments typically have lower valuations, which are reflected in their price-to-earnings ratios or book values. The central idea behind value investing is that the market may sometimes undervalue a company or asset, presenting an opportunity for investors willing to do thorough research and analysis.

The process of value investing involves:

  • Fundamental analysis : Evaluating a company's financial health, management, and competitive advantages
  • Value metrics : Identifying various valuation metrics, such as price-to-earnings, price-to-book, and dividend yield
  • Margin of safety : Discovering investment opportunities with a built-in cushion to reduce the risk of loss

Famous investors, such as Warren Buffett and Benjamin Graham, have implemented value investing strategies to achieve long-term success.

Growth Investing

On the other hand, growth investing centers on companies that are expected to grow at an above-average rate compared to their industry. Growth investors seek opportunities in businesses they believe will offer substantial capital appreciation through rapid expansion or market-share gains. They prioritize the potential for future profit over the stock's valuation.

Features of growth investing include:

  • High expectations : Companies targeted by growth investors typically have a history of robust revenue and profit growth
  • Momentum : Investors seek stocks with upward price momentum, as increasing demand for these stocks may drive prices even higher
  • Risk tolerance : Growth stocks can be volatile, and investors must be prepared to weather price swings

Renowned growth investors like Peter Lynch and Phil Fisher have demonstrated the effectiveness of growth investing throughout their careers.

Both value and growth investing strategies have their unique advantages and require different levels of risk tolerance. Investors should carefully consider their investment thesis and select a strategy that aligns with their objectives and risk appetite.

Venture Capital and Private Equity Investment Theses

When considering investments in private companies, venture capital (VC) and private equity (PE) firms each have their own unique strategies encapsulated within their respective investment theses. These theses provide guidance on the focus of investments, the sectors or geographies of interest, and the stage of the target companies.

Learn more about the differences between private equity and venture capital .

Venture Capital Investment Thesis

A venture capital investment thesis outlines how a VC fund aims to make money for its investors, typically referred to as Limited Partners (LPs). This strategy identifies crucial factors such as the stage of companies the fund will invest in, commonly early-stage companies, the targeted geography, and specific sectors of focus.

The thesis may vary depending on a venture capitalist's unique specialization, with some firms concentrating on a specific vertical and stage, while others invest more broadly without a core thesis driving their decisions. The underlying objective of a VC investment thesis is to outline how the firm will achieve high returns on investment by supporting and nurturing the growth of portfolio companies.

Private Equity Investment Thesis

In contrast, a private equity investment thesis is an evidence-based case in support of a particular investment opportunity. It usually begins with a concise argument illustrating how the potential deal supports the fund's general investment strategy. The thesis then provides details that substantiate this preliminary conclusion.

Private equity firms often target more established companies compared to venture capital firms, focusing on businesses with a proven track record. The PE investment thesis may identify areas where operational improvements, strategic mergers, or better capital structures could enhance value, ultimately generating a good return for the firm and its investors.

Overall, both venture capital and private equity investment theses serve as critical frameworks guiding investment decisions. They not only help align these decisions with a firm's specialized strategy but also provide a basis for evaluating potential deals to ensure they contribute to the firm's goals and long-term value creation.

Key Parameters for Evaluating an Investment

When assessing the viability of an investment, it is essential to examine various key parameters to make informed decisions. By analyzing these factors, investors can gain a deeper understanding of a company's financial health and its potential for growth.

One vital metric to consider is earnings per share (EPS) , which represents the portion of a company's profit attributed to each outstanding share of its common stock. A higher EPS indicates higher earnings and suggests that the company may be a lucrative investment opportunity.

Another fundamental metric is the return on assets (ROA) , which measures the effectiveness of a company in using its assets to generate profit. The higher the ROA, the better the company is at utilizing its assets to generate earnings. Similarly, return on equity (ROE) is a measure of financial performance that calculates the proportion of net income generated by a company's equity. A higher ROE demonstrates the efficient usage of shareholders' investments.

Conducting a thorough analysis of the company's financial statements is crucial. This includes reviewing income statements, balance sheets, and cash flow statements. By doing so, investors can gain insights into the company's profitability, liquidity, and solvency.

Another important factor to consider is a company's cash position. Adequate cash reserves enable a company to meet its short-term obligations and invest in growth opportunities. On the other hand, a lack of cash can leave a company vulnerable to market fluctuations and financial stress.

It is also essential to evaluate a company's capital structure, which refers to the proportion of debt and equity financing it uses to fund its operations. A balanced capital structure ensures financial stability, while excessive debt may lead to financial distress.

Examining a company's debt level is crucial, as it can directly impact the company's financial flexibility and risk profile. A high level of debt can hinder a company's ability to grow and adapt to changes in the market, making it a less attractive investment option.

Assessing a company's assets and how they're managed plays a significant role in evaluating an investment opportunity. This includes tangible assets, such as property and equipment, and intangible assets, such as patents and trademarks. Effective asset management contributes to a company's ability to generate profit.

Finally, it is important to scrutinize a company's costs associated with its operations, such as production costs and overhead expenses. A company that efficiently manages its costs will likely generate higher profitability and provide better returns for investors.

Creating Value through Strategic Planning

Strategic planning plays a crucial role in creating value for investors and businesses. It serves as the foundation for effective decision-making and guides companies towards achieving their goals. Through strategic planning, management teams can identify and focus on core competencies that contribute to a company's competitive advantage.

One way to create value is to prioritize revenue growth. By identifying key growth drivers, such as product innovation or market expansion, companies can allocate resources accordingly to boost earnings. Such targeted investments in growth engines allow firms to capture a larger market share and drive long-term profitability.

Another aspect of strategic planning involves optimizing a company's holdings. By assessing the existing portfolio, management can decide whether to divest underperforming assets or make strategic acquisitions that align with their investment thesis. The right combinations and adjustments can significantly enhance a company's overall performance and shareholder value.

Risk management is also an essential aspect of strategic planning. Companies must assess potential risks and incorporate suitable mitigation measures in their plans. This ensures that organizations are prepared for unforeseen circumstances, which can safeguard profits and protect the company's assets.

Furthermore, creating value requires continuous improvement and adaptation to market trends. Companies should routinely reevaluate their strategies to identify both internal and external factors that may impact their current position. By setting clearly defined objectives and quantifiable financial targets, management teams can measure their progress effectively and adjust their strategic plans as needed.

In summary , creating value through strategic planning involves a combination of focusing on core competencies, prioritizing revenue growth, optimizing holdings, managing risk, and continuously reassessing the company's strategic direction. This holistic approach can help businesses enhance their profitability, strengthen their market position, and ultimately deliver strong value creation to investors.

Understanding the Market and Competition

Before developing an investment thesis, it is crucial to have a deep understanding of the market and its competition. The stock market is influenced by various factors such as economic supercycles, bear markets, and secular trends. Analyzing these elements will provide a solid foundation to recognize potential investment opportunities.

An economic supercycle is a long-term pattern that occurs over several decades, during which the economy undergoes periods of growth and contraction. Investors need to be aware of the current phase and how it may impact their investment decisions. For instance, during a growth period, certain industries tend to outperform, while others may underperform during a contraction phase.

In addition to analyzing these market conditions, investors must also pay heed to the competitive landscape of the sector in which they plan to invest. Examining the competitors within the industry enables one to identify companies with competitive advantages, which may lead to superior performance. These advantages can stem from factors such as lower costs, innovation, or a dominant market share.

A bear market occurs when the stock market experiences a prolonged decline, typically characterized by a decrease of 20% or more from recent highs. In such environments, it becomes even more crucial for investors to understand the competitive dynamics within an industry to identify resilient companies that can withstand market downturns.

A secular trend is a long-term movement in a particular direction that can last for several years or even decades. Identifying secular trends within industries is essential to spotting opportunities for long-term growth. For example, investors may capitalize on sectors benefiting from a shift towards clean energy usage or the increasing importance of artificial intelligence.

In summary, understanding the market and competition requires a deep analysis of the stock market, economic supercycles, bear markets, and secular trends. By researching industry trends, evaluating market opportunities, and assessing the strengths and weaknesses of competitors, investors can develop a robust investment thesis that increases the likelihood of achieving long-term returns.

Industry Case Studies

In the investment world, the importance of an investment thesis cannot be overstated. By examining various industry case studies, we can gain insight into how businesses make strategic investments to enhance their value. In this section, we'll discuss notable examples from companies such as DuPont, General Motors, Rexam PLC, and Clear Channel Communications.

DuPont is a leading science and innovation company with a focus on agriculture, advanced materials, and industrial biosciences. During its acquisition of Dow Chemical, DuPont developed a robust investment thesis to justify the merger. Their investment case relied on the belief that the combined entity would benefit from increased operational efficiencies, new market opportunities, and enhanced innovation capabilities. This approach provided a strong rationale for the deal, which has created a more competitive company in the global market.

General Motors (GM) , a multinational automobile manufacturer, crafted its investment thesis in response to evolving trends in the automotive industry, such as the increasing importance of emissions reduction, electrification, and autonomous technology. GM's investment case centered on embracing these trends, focusing on innovation, and expanding its product offerings through strategic M&A, investments, and partnerships. For example, GM has made significant investments in electric vehicles and autonomous driving technology, positioning the company for future growth in these areas.

Next, we have Rexam PLC , a former British packaging manufacturer that was a leading producer of beverage cans globally. When Ball Corporation sought to acquire Rexam, they developed an investment thesis based on the value derived from combining the two companies' strengths. This thesis outlined the strategic fit between both companies, synergies from combining production capabilities, and projected growth, particularly in developing markets. The successful acquisition helped Ball Corporation consolidate its position as a global leader in the packaging industry.

Lastly, Clear Channel Communications is a media company specializing in outdoor advertising. As the company sought to expand its presence in this sector, it created an investment thesis centered around leveraging its core competence in outdoor advertising and acquiring strategic assets. One example is Clear Channel's acquisition of crucial billboard locations to solidify its competitive edge in the outdoor advertising market. This targeted growth strategy has allowed Clear Channel to remain a dominant player in the industry.

In conclusion, these industry case studies demonstrate the value of a well-crafted investment thesis. Effective investment theses provide a roadmap for companies to pursue strategic acquisitions and investments that create long-term value, while also helping investors evaluate the viability of proposed deals. By understanding how companies like DuPont, General Motors, Rexam PLC, and Clear Channel Communications have strategically invested in the market, we can better appreciate the importance of a well-structured investment thesis.

Long-Term Investment Strategies

A long-term investment strategy refers to an approach where investors hold onto their investments for an extended period, typically more than one year. This type of strategy aims to achieve the investment goal by allowing assets to grow through market fluctuations and capitalizing on the power of compounding interest. Diversification and patience play pivotal roles in ensuring the success of a long-term investment strategy.

Portfolio managers often use various techniques and methods to craft long-term investment portfolios. Some of these techniques include targeting undervalued sectors or stocks, dividend reinvestment plans, dollar-cost averaging, and asset allocation. By employing these strategies, portfolio managers increase chances of achieving their clients' investment goals over time.

In order to develop long-term investment strategies, investors should first define their investment goal . This could include objectives such as saving for retirement, funding a child's college education, or purchasing a home. Clear investment goals help in designing an appropriate investment strategy, taking into account factors like the investor's risk tolerance, time horizon, and available capital.

One key aspect of a successful long-term strategy is diversification . Diversifying across asset classes and industries allows investors to spread risks and potentially achieve higher risk-adjusted returns. A well-diversified portfolio will typically consist of a mix of stocks, bonds, and other asset types, with variations in investment size, industry sector, and geographical location. This diversified approach minimizes the impact of underperforming investments on the overall portfolio.

Another crucial element in long-term investing is patience . Market fluctuations can be tempting for investors to react to their emotions and make impulsive decisions, which could derail a well-thought-out investment strategy. Maintaining a disciplined approach and sticking to one's investment plan, even during periods of market volatility, is paramount to achieving long-term success.

In conclusion, long-term investment strategies require investors to define clear goals, diversify their portfolio, and exercise patience in the face of market fluctuations. By adhering to these principles, investors and portfolio managers can steer a course towards achieving their investment objectives.

Emerging Trends and Opportunities

In recent years, various emerging trends have presented attractive opportunities for investors. Among these trends, renewable energy, megatrends, and the coffee shop market stand out as sectors with significant potential for growth.

Renewable energy has gained considerable attention and investment as a response to the global push for addressing climate change and reducing emissions. Solar, wind, and hydroelectric power are some of the most prominent technologies in this sector. With an increased interest in clean energy from both governments and consumers, companies in this space are poised to experience substantial growth.

Megatrends such as urbanization, aging populations, and technological advancements are also influencing investment opportunities. These large-scale shifts provide a backdrop for businesses to tap into new markets and adjust their strategies to capitalize on these changes. For instance, companies working in healthcare and biotechnology may benefit from catering to the needs of an aging population, while businesses focused on artificial intelligence (AI) and automation may find increased demand due to technological advancements.

The coffee shop market, too, presents investment opportunities. This industry has experienced robust growth in recent years as consumers increasingly seek out unique, high-quality coffee experiences. Independent and specialty coffee shops are at the forefront of this trend. Niche coffee shops that offer novel and authentic experiences have seen success by catering to the specialized preferences of today's consumers. As the demand for artisanal and premium beverages continues to rise, businesses operating in this space can expect to have ample opportunities for growth.

In conclusion, current emerging trends such as renewable energy, megatrends, and the coffee shop market offer a wealth of investment opportunities. As these sectors continue to develop and evolve, investors with well-informed investment theses stand to benefit from the potential rewards in these growing industries.

Role of Financial Statements and Valuation Metrics

Financial statements play a vital role in the investment thesis by providing crucial information about a company's financial health and performance. They consist of the balance sheet, income statement, and cash flow statement, which offer insights into the company's assets, liabilities, revenues, expenses, and cash flows. Investors use these statements to assess the company's past performance, current financial condition, and potential for future growth.

Valuation metrics, on the other hand, are vital yardsticks that investors use to compare different investment opportunities and make informed decisions. These metrics include price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, price-to-book (P/B) ratio, dividend yield, and return on equity (ROE), among others. By analyzing these ratios, investors can gauge a company's value relative to its peers and make better investment choices.

Analysts and investors scrutinize financial statements to identify growth trends, profitability, and financial stability. For instance, they may calculate the gross margin, operating margin, and net profit margin to determine the company's profitability across different stages of its operations. Additionally, they examine liquidity ratios, such as the current ratio and quick ratio, to assess the company's ability to meet its short-term obligations.

Valuation metrics provide a quantitative basis for comparing investment opportunities within the same industry or across different sectors. For example, a lower P/E ratio may indicate that a stock is undervalued, while a high P/E ratio might suggest overvaluation. Moreover, the P/B ratio can help investors determine if a stock is undervalued by comparing its market price to its book value.

Another key valuation metric is the dividend yield, which measures the annual dividend income per share relative to the stock's price. A higher dividend yield may attract income-oriented investors, while a lower yield might be more appealing to growth-focused investors. Furthermore, the ROE ratio, which measures a company's profitability in relation to its equity base, is an essential metric for evaluating the efficiency of management in creating shareholder value.

In conclusion, financial statements and valuation metrics are indispensable tools for investors to evaluate a company's financial health and investment attractiveness. By analyzing these data points, investors can make well-informed investment decisions that align with their risk tolerance and investment objectives.

Concluding Thoughts on Crafting a Compelling Investment Thesis

Crafting a compelling investment thesis is crucial for informed investing decisions, as it helps investors thoroughly analyze a potential opportunity. A well-researched investment thesis demonstrates the investor's conviction level and reinforces their confidence in the investment choice. This process involves a deep understanding of the business, its value drivers, and its potential growth trajectories.

A strong investment thesis should be definitive, clearly articulating the reasoning behind the opportunity and the expected returns. This allows investors to stay focused on their goals and maintain their conviction, even when the stock's price movement does not align with their expectations.

By adopting a confident, knowledgeable, and neutral tone, investors can effectively communicate their investment thesis to others. Clarity in presenting the investment case is essential for persuading potential partners or stakeholders to support the opportunity. Utilizing formatting tools such as tables and bullet points can aid in conveying essential information efficiently and ensuring the investment thesis is easy to understand.

In summary, crafting a compelling investment thesis enables investors to make well-informed decisions that align with their financial goals. By developing a thorough understanding of the investment opportunity and maintaining a strong conviction level, investors can better navigate the market and achieve long-term success.

Frequently Asked Questions

How do you develop a strong investment thesis.

A strong investment thesis begins with thorough research on the company or asset in question. This may include looking at the financials, competitive position, management team, industry trends, and future prospects. It's essential to critically analyze the available information, identify potential risks and rewards, and establish a clear rationale for the investment based on this analysis. Staying focused on the long-term outlook and maintaining a disciplined approach to the investment process can also contribute to developing a robust investment thesis.

What are the key elements to include in an investment thesis?

An investment thesis should include the following key elements:

  • Overview of the company or asset: Provide a brief background of the company or asset, including its market, size, and competitive positioning.
  • Investment rationale: Detail the reasons for investing, such as attractive valuation, strong revenue growth, or a unique business model.
  • Risk assessment: Identify potential risks and how they could impact the investment returns.
  • Expected return: Estimate the potential financial return based on the identified growth drivers or catalysts.
  • Time horizon: Indicate the investment period, typically long-term, during which the thesis is expected to play out.
  • Fund size: Specify the amount of invested capital that will be allocated to this particular investment, considering its impact on portfolio construction, liquidity, and potential returns within the overall portfolio strategy

How can one evaluate the success of an investment thesis?

Evaluating the success of an investment thesis involves tracking the progress of the company or asset against its initial expectations and underlying assumptions. This may involve measuring financial performance, analyzing key developments in the industry and the company's position within it, and monitoring potential changes in overall market conditions. It is helpful to revisit the investment thesis regularly to assess its validity and make adjustments as necessary.

What's the difference between an investment thesis for startups and publicly traded companies?

An investment thesis for a startup often focuses on the growth potential of a new or emerging market, considering the innovative products or services the startup offers in that market. Here, the focus may be more on the potential for long-term value creation, the management team's ability to execute on their vision, and market fit.

For publicly traded companies, the investment thesis may include analysis of current financial performance, valuation multiples, and overall market trends. Publicly traded companies have more historical data and financial performance information available, allowing investors to make more informed decisions based on these factors.

How does an investment thesis guide decision-making in private equity?

In private equity, the investment thesis helps guide the selection of companies to invest in, as well as the structuring of deals to acquire those companies. It provides a blueprint for how the private equity firm aims to create value, including plans for operational improvements, financial engineering, or growth strategies. This thesis serves as a basis for monitoring the progress of an investment and helps make decisions on the timing of potential exits.

How can real estate investment theses differ from other sectors?

Real estate investment theses may focus on factors such as location, property type, market dynamics, and demographic trends to identify attractive investment opportunities. The analysis may also take into account macroeconomic factors, such as interest rates and economic growth, which can influence real estate markets. Additionally, real estate investments may be structured as either direct property investments or through financial instruments like Real Estate Investment Trusts (REITs), affecting the underlying investment thesis.

What considerations should a first-time fund manager have when developing a fund's investment thesis?

For a first-time fund manager, crafting a compelling and robust fund's investment thesis is paramount for attracting investors. Given their lack of a track record, these managers need to lean heavily on the research, clarity, and vision articulated in their investment thesis. The thesis should detail how the fund aims to identify ideal investments, especially those in industries with high margins. It should also benchmark the strategies against industry standards to highlight the manager's acumen and awareness of market norms.

How is a stock pitch related to an investment thesis and what role does a target price play in it?

A stock pitch is essentially a condensed, persuasive form of an investment thesis, often presented to stakeholders to advocate for investing in a particular publicly-traded company. A key element of any stock pitch is the target price, which is an estimation of what the stock is worth based on projections and valuation models. This target price serves as a quantitative anchor for the investment thesis, giving stakeholders a specific metric against which to measure potential returns and risks.

How to Write an Effective Search Fund PPM

Preparing a private placement memorandum (PPM) to share with potential investors is typically the first step for most searchers as they begin their search journeys. A PPM is, in essence, an introduction to the searcher and the search fund.

Needless to say, search fund investors, especially those who have been in the industry long term, probably review countless PPMs on a regular basis. In our experience, these investors tend to focus primarily on the searcher’s biography and background, along with any notes on industry specialization. They may also be especially attentive to any anomalies in designated geography, targeted industries (i.e., new or niche spaces), and the few post-acquisition investment terms that appear in a PPM (e.g., catch-up, vesting terms, board designees, etc.). 

Generally, investors are looking for individuals who can demonstrate a strong combination of skills, experience, and personal qualities to successfully search for, acquire, and manage a business that will generate attractive returns on their investment. The specific criteria may vary from one investor to another, but these factors are generally important considerations in the evaluation process. 

That said, a PPM is also a legal document that will ultimately be distributed with a suite of other investment documents upon closing. As such, preparing a PPM from a legal perspective requires careful attention to detail and adherence to applicable securities laws. Here are some key steps to consider when drafting a PPM:

  • Introduction : Provide an overview of the search fund, its objectives, its investment strategy, and potential risks in the introductory section. 
  • Biography and Background : This is the most important section of any PPM. Searchers should highlight any relevant background and experience, emphasizing their qualifications to successfully execute the search and acquisition. Investors prefer searchers with a proven track record of success in their prior professional or entrepreneurial endeavors. This includes factors such as educational background, work experience, and past business achievements. A robust professional network can be invaluable for sourcing potential deals and accessing industry experts. It is also a plus if the searcher has a broad network and the ability to leverage it effectively.
  • Business Description and Investment Thesis : This is the second most important section of any PPM. Clearly articulate the investment thesis, detailing any specific industries the searcher will focus on, the types of businesses the search fund will target, and the rationale for these choices. Investors want to know how the searcher plans to identify and source potential target companies. A well-defined strategy for finding and evaluating acquisition opportunities is crucial. This includes assessing financials, operational performance, market potential, and any risks associated with the acquisition. 
  • Industry Focus : It is not at all crucial to have a specific industry thesis, as many successful searchers have been industry agnostic. If the searcher has a specific industry thesis and relevant experience in that industry, consider discussing it in the PPM and drawing that connection in the personal background section. However, there are some caveats. If the specific industry thesis is to be discussed in the PPM, the industry description should be narrow enough to warrant a meaningful conversation but not so specific that it significantly diminishes the target pool. For instance, “healthcare” is too broad, while “healthcare that provides billing services to left-handed dentists on Wednesdays” is far too narrow. The latter is, of course, an exaggeration — but jokes aside, these descriptions are a balancing act, and searchers should exercise judgment in preparing them. The bottom line is investors will want to understand why that particularly industry should have appropriately sized targets that match classic search fund characteristics. It is about whether the searcher can articulate way the industry makes sense for a search fund acquisition more than it is about whether the searcher is merely interested in that industry. Lastly, in order to maintain adaptability, searchers should appear willing to consider other industries, if that is something they are truly open to. Those that are not completely focused on a single industry should discuss at least three but no more than five various industries.
  • Risk Factors and Risk Acknowledgement : Include appropriate disclaimers regarding the speculative nature of the investment and the absence of guarantees for returns. Disclose potential risks associated with investing in the search fund, such as economic, regulatory, and industry-specific risks. Require potential investors to acknowledge that they have received and understood the risks associated with the investment. If applicable, disclose any potential conflicts of interest that may arise during the search and acquisition process. On the flip side, investors expect searchers to have a clear understanding of the risks involved in acquiring and running a business and a strategy for mitigating those risks.
  • Financial Projections : Provide financial projections for the search fund, including potential returns, anticipated expenses, and any assumptions made in the projections. Searchers should have a strong understanding of financial concepts, as they will be responsible for evaluating potential target companies, conducting due diligence, and managing the acquired business's financials. The PPM should discuss use of proceeds and explain how the funds raised from investors will be used, including search costs, acquisition costs, and working capital. The financial sections of the PPM represent an opportunity for the searcher to demonstrate to investors that they can model. For these sections in particular, it may be beneficial for searchers to consult financial experts to ensure that the models are accurate, appropriate, and, most importantly, prepared in a way that best demonstrates their modeling capabilities. Finally, a common mistake we often see is the omission of the stepped-up search capital. If applicable, searchers should take care to ensure this is reflected, as it is obviously a meaningful point from the investor’s perspective.
  • Subscription Process : Detail the terms of the offering, such as the minimum and maximum amount of capital to be raised, the offering price, and the percentage of ownership offered to investors. Outline the process for potential investors to subscribe and participate in the search fund. Since this process constitutes a securities offering, searchers should ensure compliance with federal and state securities laws, including Regulation D and any applicable “blue sky” laws. 
  • Alignment of Interests and Exit Strategy : Investors often seek alignment of interests between themselves and the searcher. This may involve shared financial incentives and a clear plan for the searcher's compensation, such as any performance-based incentives for the searcher. Investors want to understand the searcher's plan for eventually exiting the acquired business, whether through a sale, merger, or other means. The potential for a profitable exit is a key consideration for potential investors.
  • Boilerplate Language : While most searchers work off a template and, as such, tend to leave in language that appears “boilerplate,” it is best practice to review such language carefully to ensure that it resonates. That said, there is a high bar to edit such boilerplate language if the searcher is using a tried and true precedent. However, from time to time, there are regulatory or industry updates that render updates to such language necessary. Searchers who have questions or issues with those portions should consult legal advisers who specialize in search funds.

Ultimately, a searcher’s PPM represents a first impression and is an important opportunity for searchers to showcase effective communication, organizational skills, and attention to detail. Because a PPM is also a complex legal document tied to other such investment documents upon closing, any misstatements or omissions can have significant legal consequences. Therefore, it is essential to work closely with experienced search fund attorneys to ensure the PPM not only is attractive but is accurate, is compliant, and adequately protects the interests of both the search fund and potential investors.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.

Goodwin Associate Monica Kwok, from Boston, practices in Private Equity, Search Funds, and Food and Healthy Living.

Monica Kwok

Stephen Lee

Stephen Lee

Jon Herzog

Jon M. Herzog

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ESG due diligence rising in priority

ESG due diligence remains a priority for dealmakers. In fact, respondents to the latest Global KPMG due diligence study report a rise in ESG priority in transactions over the last 12 to 18 months, despite challenges.

Many global M&A markets have decelerated in the face of higher interest rates. Geopolitical and economic uncertainty has taken its toll, shifting priorities for many businesses. And, in some countries, there is lively public debate about the merits and justifications to include ESG factors in investment decisions.

Despite these headwinds, the findings from our latest survey of more than 600 active dealmakers from 35 geographies confirms the results of the first-ever international study on ESG due diligence. In 2022, we set out to explore ESG sentiments among dealmakers across the Europe, Middle East and Africa (EMA) region. A follow-up study in the US in 2023 found similar developments, albeit slight less pronounced than in the EMEA region. 

private equity fund investment thesis

ESG in deal is rapidly maturing. The ESG lens is becoming increasingly important to investors and customers. The difficulty lies in the breadth of the topic, making it critical to know how to look at it in a focused manner. That’s why we focus on value not values. Craig Mennie Global Head of Transaction Services KPMG Australia

Global insights at a glance.

ESG due diligence continues to rise in importance, despite headwinds. Dealmakers report an increased importance of ESG due diligence over the past 12 to 18 months, and expect further increases soon. This counters initial expectations of a decline in the importance of ESG factors due to softer M&A activity, economic uncertainty and an ESG backlash in some countries.

Leading investors tie ESG to the investment thesis and drive financial value from it. They do this by combining a deep understanding of the commercial, operational, and financial risks and opportunities triggered by evolving ESG regulations and stakeholder expectations with a disciplined focus on financial returns during the holding period. They use tools like comprehensive baselining, integrated 100- day action plans, and a systemic scan for sources of financing to improve their investee’s performance. Such performance improvements can materialize in the form of increasing revenues, decreasing costs, or de-risking of an investment, across various environmental and social and governance areas — at this moment, typically in connection with themes such as decarbonization, recycling and circularity and supply chain management.

Challenges in conducting ESG due diligence persist, but solutions are emerging. Investors struggle with selecting a meaningful, yet actionable scope with receiving quality data from target companies, and with quantifying potential findings. However, for each of these challenges, there are emerging solutions. On scoping, it is becoming increasingly clear which topics should indeed be part of an ESG due diligence workstream, with the focus moving from values to value. On data quality, we see a great opportunity for sellers and sell-side advisors to drive value from divestments by commissioning higher-quality ESG vendor documentation. And on quantification, the synergies between ESG due diligence teams and commercial and operational due diligence teams are becoming clearer.

Key findings

private equity fund investment thesis

It is becoming increasingly clear that considering ESG on transactions primarily means understanding the commercial implications that could have a significant deal value impact. Florian Bornhauser Director, Deal Advisory, Co-Head of Strategy Group in Switzerland KPMG Switzerland

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Global ESG due diligence study 2024

Learn how leading investors are leveraging evolving ESG regulations and shifting stakeholder behaviors with a disciplined focus on financial returns.

private equity fund investment thesis

Considering ESG in investment decisions has become non-negotiable for many investors. The extent and depth to which ESG-related risks and opportunities are being considered has increased significantly over the past 12 months, and leading investors are driving value from it. Julie Vasadi Partner, Head of ESG Transaction Services, Deal Advisory KPMG Australia

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Interactive dashboard of 2024 findings

Interactive dashboard

Discover the data that drives the world of ESG due diligence with our interactive dashboard. Designed to offer a more personalized view of the data points detailed in our report, this tool allows you to delve deeper into the survey results. With the ability to filter data by region, company type, and sectors, you can gain additional perspectives and insights that go beyond the report.

This dashboard is a companion to the Global ESG due diligence study and when used together, they provide a comprehensive understanding of the findings.  Download the report and explore the dashboard today. Unlock the power of data to drive your ESG due diligence decision-making process.

ESG due diligence around the globe

 Click on the country or region below for the unique point of view in each market. 

ESG due diligence in Australia

In australia, decarbonization, climate risk – both physical and transition – dominate the esg conversation. with no required esg regulations in place just yet, companies keenly aware of the financial implications of esg are voluntarily reporting on their esg practices and disclosing standards. investors, too, are increasingly aware of the importance of identifying climate risks and mitigating climate exposures. modern slavery, human rights and labor practices are also growing focus areas as dealmakers look to better assess potential reputational risks associated with non-compliance. yet, it is the opportunities for value creation that has captured the imagination of mature dealmakers. reinforced by intensifying progressive sentiments, dealmakers are assessing potential targets with a lens on how well they can navigate the transition to a low-carbon economy. those with such potential, can innovate using australia’s natural advantages, its abundant sunshine, for example, to enhance competitiveness in the renewable energy sector, and access new revenue streams and markets. products with strong esg credentials can also command premium prices. seeking value, not values the appetite for esg due diligence is rising, yet the breadth and complexity of the topics within the esg umbrella is challenging. unlike financial due diligence, which has a well-defined scope, esg due diligence encompasses a wide range of issues that can make it difficult for investors to know which issues to prioritize and manage. adding to this is the lack of prescriptive regulations, like those in the eu, that are making it tough for businesses to navigate socially sensitive situations. dealmakers also struggle with the practical aspects of integrating esg considerations into their dealmaking. this includes defining and measuring the financial impact of esg performance. as finding the right advisors who can offer a holistic approach that encompasses environmental, social and governance factors with sector knowledge and an investor acumen. kpmg professionals help clients focus on value, not values. driven by the financial value that esg due diligence can bring to an investment, teams bring their extensive experience and global methodologies to quickly and efficiently define a scope of work that targets value creation, which is translated into financial language. as the country prepares to implement new esg-related reporting frameworks, starting with climate disclosures in 2025, esg due diligence awareness and adoption is expected to grow across all market segments. visit our website if you want to know more about esg due diligence in australia www.kpmg.au, esg due diligence in canada, canada continues to strengthen its understanding and implementation of corporate esg risk mitigation . in the early days of the responsible investing movement, the country’s larger public pension funds were among the first to recognize the impact esg could have on enhancing revenue, reducing costs and mitigating risks. many of canada’s banks , corporations and investors quickly followed suit, voluntarily aligning with international sustainability standards like the principles for responsible investment (pri) and the task force on climate-related financial disclosures (tcfd). as mandatory measures begin to emerge, including reporting on climate risk management for banks, the fight against forced and child labor in supply chains across all sectors, and federal and provincial carbon pricing mechanisms, the country will see even more transparency across esg considerations. this proactive approach is leading many investors and businesses to view esg due diligence as an effective tool for identifying opportunities for value creation rather than solely as a way to mitigate risks. opportunities abound in esg the energy transition, for example, offers ample investment opportunities in renewable energy, electric vehicles and battery storage. government incentives at various levels further support these initiatives, offering financial benefits for energy efficiency and retraining programs. on the risk side, the country’s exposure to wildfires and extreme heat events call for robust climate risk management strategies, especially for the transportation and logistics , mining and industrial manufacturing sectors. despite this support for esg due diligence, investors are challenged by the limited access to reliable data, especially when targets may not provide comprehensive information. canada’s diverse investment portfolio spans various global markets, making it difficult to maintain consistent and comparable esg information. in particular, smaller investors struggle with limited resources and expertise compared to larger funds. to help navigate these challenges, kpmg in canada uses its subject matter expertise in various sectors and sustainability issues to provide clients with insights and practical tools. the firm’s global reach and access to a diverse client base support clients with leading trends and practices to help dealmakers connect esg findings to revenue growth, cost management and asset valuation. looking ahead, climate change is expected to demand increased attention in terms of physical and transition risks. the social aspects of esg, including talent attraction and retention, is also gaining prominence. sustainability will increasingly influence valuations – all of which will likely make esg due diligence an essential part of investment decision-making. as esg in canada evolves from a voluntary, business-led initiative to a more structured practice, investors will need to stay agile and seek the professional guidance they’ll need to help turn esg challenges into opportunities for sustainable growth and long-term value creation. visit our website if you want to know more about esg due diligence in canada www.kpmg.ca, esg due diligence in china, over the past two decades, esg due diligence has undergone a significant evolution in china. initially, esg disclosures were influenced by foreign investors – global private equity funds investing in china as well as chinese investors participating in outbound opportunities. today, voluntary esg reporting is growing across the country. china’s ambitious carbon targets has supported this uptake. esg standards have been embedded into broader compliance frameworks, such as energy efficiency review, air emissions, water discharge and industrial zoning. these regulations promote sustainable development and meet global standards. for the most part they heavily emphasize environmental concerns, and as such, predominately affect high-risk sectors, such as manufacturing and energy. with the potential to incur operational risks, loss of investor confidence as well as financial penalties, investors have come to see esg due diligence as a compliance exercise. broadening the scope of esg due diligence as more and more investors and companies recognize the value of esg, this perception is starting to change. investors and consumers are calling for private equity businesses to prioritize environmental and social responsibilities. government regulations are following suit. guidelines are being developed to promote corporate social responsibilities, and environmental regulations are expanding to more industries. geopolitical uncertainties are becoming more complex, requiring investors to carefully consider these factors in their investment decisions. there are also opportunities for local and global investors: aligning to best practices boosts a company’s public image at home and enhances its appeal globally. the latter point is of particular interest for those investing in emerging sectors, including renewable energy and electric vehicles. all together, these factors are helping corporate and private equity investors broaden their scope of esg. as more and more investors perform esg due diligence and use its findings as a strategic tool to create value, they will likely call on businesses to collect reliable esg data to better assess esg performance – such data is currently lacking. investors should also look to their advisors for such strategic insights, in addition to providing in-depth analysis of regulatory compliance. in time, it is anticipated this experience will help investors in china embrace esg as a core aspect of their business strategy. visit our website if you want to know more about esg due diligence in china www.kpmg.cn, esg due diligence in finland, the trend in finland is clear: corporate and private equity investors recognize esg as a value driver to enhance portfolio performance. esg due diligence is gaining traction, too, appearing in about 20 percent of all deals. this movement is greatly influenced by the esg regulation landscape in the eu. like other eu countries, finland adheres to the corporate sustainability reporting directive and directives in place in the eu. this proactive approach goes further. mature investors, particularly private equity houses, have integrated esg considerations deeply into their strategies and operations. portfolio managers, for example, have developed internal capabilities and tools to scout targets that are innovating sustainable solutions, such as smart grid technology, or using circular economy practices to minimize waste and maximize resources. from an early stage of the deal, they assess esg factors to guide investment decisions and help ensure that potential acquisitions align to their sustainability goals. additionally, they leverage esg performance to attract capital, structuring financial arrangements where esg key performance indicators, such as diversity and climate targets, can influence capital costs. finland’s institutional investors, including pension funds and insurance companies, are highly sophisticated with comprehensive responsible investment policies. using esg strategies, including exclusionary screening, thematic investing, active engagement and esg integration, they can better position their investments to generate financial returns while positively contributing to social and environmental outcomes. investors with less sophisticated practices also increasingly recognize the potential for value creation from strong esg performance. yet, there are challenges holding them back from capturing these opportunities through esg due diligence. with a focus on the immediate risks, some investors struggle to recognize long-term value. further, quantifying value of esg factors, such as human rights and diversity in management, requires sector-specific insights and nuanced analysis that goes beyond simple compliance checks. adding to this challenge are budget constraints. this common issue often leave investors depending on other due diligence workstreams to surface esg risks, or limiting the depth of analysis within a specific esg due diligence. as regulations continue to evolve and investor expectations rise, companies should deepen their esg integration. time will also help investors mature around esg assessments. as they do, pooling sector and esg due diligence expertise can position them to become a benchmark for others to follow. visit our website if you want to know more about esg due diligence in finland www.kpmg.fi, esg due diligence in france, investors in france consider esg issues like talent retention, social governance and environmental initiatives as integral to a company’s long-term success. this has led to marked shift in the demand and scope for esg due diligence in the past 10 years. for decades, businesses and investors in france were focused on environmental, health and safety factors related to tangible assets like manufacturing facilities. then with the growing number of french signatories to the un principles of responsible investment since 2012, the scope was expanded to include the fuller esg criteria. this sentiment led to growing demand for esg due diligence. a trend that is helping investors mitigate the environmental, social and governance risks that face many french companies. for example, environmental risks in industries with high environmental footprints or high turnover rates and employee dissatisfaction that can impact business continuity and reputation. on the other hand, esg due diligence is helping mature investors uncover numerous advantages. companies that aligned with decarbonization targets or demonstrate strong ethical supply chain practices often have enhanced reputation capital, which can translate into higher customer loyalty, better employee retention and greater overall market value. sellers, too, win, attracting more investments in their business. despite this growing awareness and appreciation, esg due diligence continues to be seen as a ‘nice to have’ exercise by less mature investors who are unsure which components to assess across the broad scope of esg criteria. these dealmakers often allocate lower budgets to esg due diligence compared to other due diligence streams, making it hard for advisors to provide an effective assessment of the risks and value potential of a deal. in time, as regulatory frameworks evolve and investors become more attuned to the potential business benefits of esg, the demand for esg due diligence will continue to gain momentum. expectations will likely also shift toward more comprehensive and higher-value esg assessments that can open the door to better business outcomes and a more sustainable future. visit our website if you want to know more about esg due diligence in france www.kpmg.fr, esg due diligence in germany, the following is the transcript from an interview with elsa stetinger, kpmg in germany, about the evolution of esg due diligence in germany. at a high level, could you please explain the local regulatory framework that supports esg due diligence in recent years, various regulations have been enacted, such as the eu green deal, eu taxonomy, sfdr, tcfd, tnfd, csrd, csddd, german supply chain act, cbam and the anti-greenwashing directive that was recently in 2024 enforced. these have become much more important, especially in the european union. those regulations are also strongly interlinked and relevant nowadays to conduct and support an esg due diligence because those regulations request (i) transparency (ii) comparability and (iii) reporting. this, along with the identification of risks and opportunities, is the core of an esg due diligence. these regulations are a strong signal from politicians and the countries for the need for sustainable investments and transformation that drive the future market outlook and future transactions including esg due diligences on the buy-side and on the sell-side. what are the key esg risks and opportunities that companies in germany face the key esg risks in germany include: understanding the various regulatory requirements and complying to them. generating and providing qualitative and quantitative data – so data availability and quality. understanding the various scope items or esg topics, and implementing those into an applicable, usable and feasible framework to analyze risks and opportunities. setting concrete goals, and sustainably and sequentially achieve those goals. having the sufficient resources – financially or personally – so qualified employees. at the same time, the various regulations are a great steep template and offer a huge chance for: innovation; return-on investment; talent attraction; new market expansion and growth opportunities; reputational, transitional, and transformational chances; and future-proof the business and contribute to a sustainable future, including environmental protection and social fairness. could you provide some examples of how esg factors have influenced investment decisions and/or deal outcomes there are several environmental topics, such as very high emissions, main energy sources from nuclear power plants or brown coal, and severe soil and groundwater contamination that could impact the outcome of a deal. social topics, such as human rights issues, forced or child labor as well as poor working conditions, including severe accidents and deaths within a company are an absolute deal breaker. and of course, there are various other esg factors, such as water scarcity or poor climate mitigation, and climate adaptation measures that can influence the investment decision and the deal price. what are the common challenges that companies face when implementing esg due diligence in your local market some common challenges include: defining a reasonable and manageable esg scope. generating and providing robust data. identifying relevant risks and opportunities by qualified people within the various environmental, social and governance topics. setting priorities of measure implementation and being able to quantify findings within an esg due diligence analysis. how does your firm help clients navigate esg risks and opportunities at kpmg in germany, we have established a robust and at the same time flexible, esg due diligence framework that assess the esg-performance and status quo of a company or investment. our esg due diligence framework is based on the various regulations (as mentioned before) and combines and integrates the anchored environmental, social and governance requirements. additionally, we include other kpis that are appliable to the industry, sector and business activity. our established robust and flexible esg due diligence framework allows us to reveal the material risks and opportunities based on key element and color-coding system. it creates objectivity, transparency, comparability and implies the relevant building blocks as a great basis for future transformation processes and impacts of a company or investment. what trends or developments do you foresee in next 5-10 years i think esg due diligence (as a stand-alone workstream) will a be involved almost in 100% of all deals. the need is and will become very high for transparency and a real sustainable future – away from greenwashing. i think the esg due diligence scope is constantly expanding, and more building blocks will be integrated in the esg due diligence scope as newer and stricter regulations will become enforced. the expansion will include integrity due diligences, a stronger double and even triple materiality assessments, and of course risks and opportunities. there will be more precise benchmarking with better data quality, and customer and stakeholder analysis. i believe that various companies might not be able to exist on the market in the next five to 10 years if they do not undertake a sustainable transformation. at the same time, i believe that esg high-performing, very innovative and sustainable companies with a smart governance structure with high-qualitative and robust data will conquer the market in the next five to 10 years. visit our website if you want to know more about esg due diligence in germany www.kpmg.de, esg due diligence in iceland, a growing number of investors in iceland are aligning their investments to sustainability objectives. the upward trend comes from the country’s rising commitment to environmental sustainability, global climate action initiatives, and gender equality and other social issues. as a result, esg due diligence is evolving in the country. five years ago, esg considerations were rarely part of a deal’s due diligence process. now, there is a promising evolution in a short period of time where investors are asking esg-related questions during traditional due diligence exercises, such as tax and legal. more mature investors are also leveraging esg due diligence to assess the value creation potentials in a target. in a country ripe for sustainable innovation, investors are looking for businesses that have the potential to advance renewable energy options like geothermal or hydroelectric power. iceland is also well-known for its strong stance on gender equality and other social equities. this social consciousness is having a greater influence on investors as they seek out targets that actively promote equal opportunities and representation across all levels. compliance as a first step with financial bodies calling for updated reporting from companies big and small, the race to implement the new regulations has left many companies scrambling. partly this is due to a cultural tendency to comply with regulations only when enforced. however, good progress has been made. larger companies with their better access to systems and expertise have been more efficiently responding to mandates. smaller businesses, which make up the majority of iceland’s economy, have also been working to understand the technical standards and minimum safeguards required to comply, despite their limited access to expert resources. as icelandic companies adapt to these changes, the role of due diligence will become increasingly intertwined with esg factors. a thorough understanding of esg issues will be essential for due diligence teams to assess the fuller spectrum of compliance and sustainability aspects. companies will also need to continue to develop their esg practices to mitigate associated risks and fully capitalize on the sustainability opportunities ahead. visit our website if you want to know more about esg due diligence in iceland www.kpmg.is, esg due diligence in island group, in jurisdictions known for their susceptibility to significant climate risks, esg due diligence is gaining attention. the many islands within the caribbean, together with jersey, guernsey, the isle of man and malta make up the kpmg islands group, where investors and businesses are beginning to recognize the potential of esg to attract global capital and ensure sustainable growth. in the cayman islands and bermuda, the financial services sector shows a growing awareness of esg considerations. in the more traditional industrial and tourism-centric jurisdictions, such as trinidad & tobago and jamaica, there is also a growing understanding for esg and its importance to long-term sustainability and competitiveness. with the potential for substantial financial returns, more mature regional players and impact investors are beginning to integrate esg factors into their investment strategies. progress, however, is slow due to the absence of mandatory regulations as well as global political influence. for now, esg integration relies heavily on voluntary adoption and the foresight of investors and business leaders who are looking to open up new opportunities for growth and development. as governments in the region begin to implement frameworks to support sustainable finance, businesses will likely begin to embed esg principles into their core operations and investors are more likely to incorporate esg due diligence into their decision-making, along with the more traditional financial, commercial, regulatory and tax due diligence. this shift could come faster as governments contend with the realities of climate exposure. hurricanes, rising sea levels and extreme weather events pose significant threats to these islands. the bahamas, for example, is still recovering from hurricane dorian in 2019 and may be at risk of financial default if another hurricane strikes. an eye focused on innovation on the upside, with plenty of sunshine and wind energy (as well as the increasingly talked-about natural resource, sea grass), the caribbean region is teaming with untapped esg potential into renewable energy sources like solar and wind power and the ability to create a carbon credit economy from sea grass, as is being explored in the bahamas. such innovations can be hindered by high costs and legacy agreements, but declining costs of renewable technologies and innovative financial strategies, such as thematic bonds, could unlock substantial growth in this sector. governments and private investors can also come together on large-scale renewable energy projects that could help reduce reliance on imported fossil fuels, but also create sustainable jobs and stimulate economic growth. the kpmg islands group professionals are helping investors understand the long-term value that comes from sustainable practices and unlock the region’s potential for sustainable growth. as more investors take advantage of these opportunities, kpmg professional will help them integrate esg due diligence to identify potential risks and uncover opportunities for value generation. visit our website if you want to know more about esg due diligence in island group https://kpmg.com/ky, esg due diligence in norway, esg is moving up the business agenda in norway . already many businesses and investors comply with esg reporting. this signals the country’s cultural commitment to sustainability and the environment. businesses also feel a sense of national pride and responsibility to uphold norway’s image as a responsible and ethical nation. even more businesses are expected to adhere to reporting in line with eu and national standards and requirements as they begin to roll out, including the corporate sustainability reporting directive (csrd) and the corporate sustainability due diligence directive (cs3d). at the core of norway’s new regulations is the transparency act, requiring companies to identify and assess actual and potential adverse impacts on human rights and decent working conditions in companies and their supply chains, among other requirements. as welcome as these regulations may be, they are creating new challenges for companies. businesses often struggle with understanding the depth of compliance required by new and evolving regulations. lack of reliable data and information adds another layer of difficulty. for example, norway’s energy businesses often have complex, multi-tiered supply chains that deal with suppliers from countries and regions with lower transparency practices and potential human rights violations. without a clear line of sight, companies can be exposed to reputational risks and public disapproval. such risks can extend to investors, putting greater importance on comprehensive esg due diligence developed by esg specialists that stay on top of evolving regulations and understand the geopolitical risk environment within specific sectors. sustainable opportunities encourage evolution as important as it is to mitigate risks associated with these social factors, investors and businesses are looking across the broader scope of esg to identify potential opportunities to create value for their companies. this is most notable in the country’s growing clean tech and renewable energy sectors with decarbonization innovations like electrolyzers for hydrogen production and expanding hydropower and wind energy sources. as these and other technologies evolve, there may be growing focus on the intersection of tech investments and esg considerations. for example, as more businesses leverage ai they may want to consider how to best power their respective data centers with sustainability in mind. such evolutions will also shift and refine the scope of esg due diligence to help investors maintain their sustainable and ethical commitments, while enhancing their portfolio performance. visit our website if you want to know more about esg due diligence in norway www.kpmg.no, esg due diligence in spain, in spain, investors have come to see esg due diligence as an essential part of value creation in transactions. this shift indicates a growing sophistication among corporate and private equity dealmakers, and a recognition of the strategic potential benefits of robust esg credentials. spain’s esg due diligence practices are heavily influenced by the influx of eu regulations over the last several years. these directives compel funds to integrate esg considerations into their operations. this exposes businesses and investors to risks should they neglect to comply to these mandates. for example, in sectors like energy or agriculture, lack of alignment could lead to unforeseen liabilities and reputational damage. regulations aside, evolving consumer demands influenced corporate and private equity investors to practice greater corporate responsibility and transparency also contributed to the shift. as investors began integrating esg factors into their investment decisions, the experience provided proof that prioritizing esg supported long-term financial performance. it also enhanced their reputation and helped build trust with clients, consumers and other stakeholders. esg-focused companies are often less volatile, and demonstrate superior risk management and operational efficiency. they are also more innovative. such innovation could come in terms of how well a target can adapt to future regulatory changes or evolving market conditions. it also offers insights in a company’s potential to branch out to emerging sectors, such as renewable energy, sustainable agriculture or green technology – all of which are poised for substantial growth in spain. for the most part, esg in spain has mainly centered on environmental aspects. addressing issues like climate change and decarbonization impacts a company’s operations, portfolio of products and services, as well as its overall strategic approach. the social and governance aspects of esg are less tangible. yet, mature investors are increasingly recognizing such issues, like human rights and fair labor conditions, can be integral to building resilient companies. quantifying such factors is one of the challenges dealmakers face during the due diligence process. unlike environmental liabilities that can often be translated into financial terms, social and governance issues can be tough to attach to a concreate number. such complex valuations call for esg specialists who can assess the cost of reputational risks on company value. looking ahead, esg due diligence in spain is expected to continue to evolve from a niche practice and become a mainstream necessity. this will be especially important as regulations progress and adjust, and consumer demands shift to new focus areas. visit our website if you want to know more about esg due diligence in spain www.kpmg.es, esg due diligence in u.k., investors in the uk are increasingly focusing on sustainability and esg considerations in their investment process. as a result, esg due diligence has jumped higher up the m&a agenda. the kpmg 2024 global esg due diligence study found 71 percent of respondents reported an increase in importance of esg in transactions over the last 12 to 18 months. there are several drivers underpinning this shift. esg has become an important lever to create value in transactions and dealmakers are seeing higher returns for their investments when there are stronger esg practices and positioning in place. investors are also focused on protecting value. with increased regulations, such as the eu corporate sustainability reporting directive (csrd), and concern for ethical considerations there are potential reputational risks that could come with non-compliance. there has also been a significant increase in impact investing. investors focused on impact seek companies that balance profit with purpose, and are focused on addressing global sustainability challenges, such as the energy transition. for investors, then, failure to embrace esg can leave tangible value on the table. it can also minimize the pool of capital, and potentially prevent a deal from closing. uk investors are turning away from some sectors, such as tobacco, gambling and fossil fuels due to ethical consideration and long-term sustainability concerns. according to the survey, more than 50 percent of surveyed investors indicated that esg was a “deal stopper.” investors are also asking more of target companies. with esg due diligence becoming a strategic, cross-function and commercially focused exercise, investors are looking for greater transparency on their climate-related practices, diversity, equity and inclusion programs, supply chains and more. this is pressuring sellers to enhance esg-related efforts, especially as more dealmakers plan to include esg due diligence in deal strategies going forward. globally, 57 percent of survey respondents say they expect to perform esg due diligence on most of their transactions over the next two years. even with this rise in activity, investors are looking for greater clarity around the areas to evaluate, specifically in fast-moving deal contexts. whereas others are looking to advisors to help quantify less tangible esg factors, such as the impact of reputation risks or long-term environmental impacts on value. kpmg in the uk’s esg transaction advisory services is placed to help, bringing you the experience and insights you need to realize value from esg in your investments. visit our website if you want to know more about esg due diligence in u.k. www.kpmg.uk, esg due diligence in u.s., esg is undergoing a transformative shift in the us. with regulations tightening, the investor community is beginning to recognize the link between sustainable esg practices and sustainable business growth. esg has long been on the agendas of us investors and businesses. federal and state regulations were initially focused on environmental health and safety matters, ensuring businesses had the right permits for sustainable practices like air emissions, wastewater discharge and waste management. many of these requirements are still in place today. states have also introduced esg-related regulations to encompass a wider range of issues, including sustainability, employee well-being and regulatory compliance. more recently, states like california have implemented climate disclosure requirements for businesses. investor influence spurs esg due diligence yet, the biggest push for esg mandates comes from investors themselves. over the past five to eight years, there has been a marked shift in interest around esg from investors. this has been particularly driven by private equity investors who are focused on creating sustainable and long-term value for their businesses. they are funding innovative projects in renewable energy and carbon capture and energy-efficient technologies. they are also turning to their advisors to discuss governance matters, supply chain transparency, product lifecycle and customer satisfaction. growing demands from socially and environmentally conscious consumers are further pressuring us companies to integrate esg considerations into their business strategy and operations. however, reporting these practices to investors during esg due diligence is proving challenging. one major issue is the collection and management of relevant data, particularly for greenhouse gas inventories. many companies can track their direct emissions, capturing indirect emissions from supply chains is complex and resource intensive. governance is another area of concern. not all companies have access to robust mechanisms to report regulatory reporting and materiality assessments, or reliable data on social matters related to business ethics, labor practices or supply chain integrity. despite these initial challenges, investors and businesses are starting to realize the financial and operational benefits of more sustainable and ethically responsible practices and investments. looking ahead, emerging regulations and increasing stakeholder demands is expected to continue to shape the esg landscape in the us. as this happens, investors will need to stay agile and seek expert guidance to unlock new growth opportunities. visit our website if you want to know more about esg due diligence in u.s. www.kpmg.us.

KPMG member firms are at the nexus of the intersection between M&A and ESG. Through their daily work, KPMG professionals are at the forefront of the developments taking place in this rapidly evolving field. They are working with many of the leading corporate and financial investors to identify and develop ESG-related deal strategies and processes that meet their unique needs and objectives. Select your country or region below to connect with a local ESG practitioner.

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What a tough private equity environment could mean for university endowments

Amid high interest rates and slowed dealmaking, a major source of investments for elite universities could become a liquidity headache, a new analysis finds.

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Dive Brief:

  • College endowment investments in private equity funds could pose an increasing liquidity risk amid slow dealmaking in the financial sector, according to a new analysis of top-ranked universities from research firm Markov Processes International .
  • MPI’s analysis, published Monday, put the average endowment allocation to private equity at Ivy League and other elite colleges in fiscal 2023 at 36.7% — a substantial chunk of their investment total .
  • About 26% of those allocations came in unfunded investment commitments, meaning the institutions are obligated to put up capital in the future. Those could be subject to capital calls by fund managers, which would require endowments to come up with cash to meet their commitments .

Dive Insight:

  MPI zeroed in on the private equity holdings of endowments at the eight Ivy League institutions , along with the Massachusetts Institute of Technology and Stanford University . 

Prompting the analysis are concerns around private equity. That sector has been hampered in recent years by high interest rates — which make private equity’s strategy of debt-financed buyouts less attractive — and a slowdown in the kinds of deals that drive returns. 

Elite college and university endowments represent hundreds of billions of dollars in investments. At last count, Harvard University’s endowment was worth nearly $50 billion alone , while Yale University’s came in at over $40 billion in fiscal 2023 — each amounting to $2 million or more per student. 

Of course, those figures represent endowment value, not cash. And that value is tied up in ever more sophisticated and complex investment portfolios that typically can’t be converted to cash as quickly as stocks and bonds can. Meanwhile, institutions need increasingly more cash to run their operations as expenses reach new highs . 

Endowments have long sought to diversify and boost returns by investing in private equity funds, which aim to invest in undervalued and sometimes newer, growing companies. 

Yale is credited with reimagining the modern university endowment in the mid-1980s, as it poured money into alternative investments , including private equity. The strategy has since been taken up by other elite institutions as well as smaller colleges. 

By 2023, 45% of endowment funds sectorwide were in alternative investments, according to a study from Commonfund and the National Association of College and University Business Officers.

However, MPI’s analysis noted that endowments with less mature private equity portfolios could be subject to fewer distributions from their investments and higher capital calls from fund managers — which require investors to put up cash to meet as-yet unfunded capital commitments. 

About 40% of Brown University’s $6.2 billion endowment, for example, is allocated to private equity — above the average for those studied — while 34% of that is unfunded, per MPI. 

“ As such, Brown could see lower distributions and higher calls on capital in the near- to mid-term,” the analysis said. 

Others, such as Yale, have older private equity portfolios, which often means fewer unfunded commitments and higher distributions from their investments, MPI noted.

When fund managers make capital calls, endowments typically generate cash from the more liquid parts of their portfolios or from the cash distributions they are getting from private equity funds, MPI noted. 

“Both sources of funding represent risk,” the firm said in its report, highlighting the stresses the cash-raising measures pose to endowments’ liquidity. 

As endowments come under liquidity pressures, MPI pointed to some universities, including Harvard and Princeton , that have issued new debt this year to raise cash, incurring additional liabilities by doing so.  

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  • What a tough private equity environment could mean for university endowments By Ben Unglesbee
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GPIX: Goldman Covered Call Fund Beating JEPI This Year

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  • GPIX is a dynamic covered call ETF launched in 2023 as an alternative to JEPI, offering high dividend yields from equity markets.
  • GPIX outperformed JEPI in 2024 with a dynamic overwrite strategy, utilizing FLEX options for better pricing and performance.
  • The fund's 7.5% current yield is dependent on S&P 500 performance, with risk factors including NAV fluctuations in a down market.
  • The ETF expects that, under normal circumstances, it will sell call options in an amount that is between 25% and 75% of the value of the equity investments in the portfolio.

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The Goldman Sachs S&P 500 Core Premium Income ETF ( NASDAQ: GPIX ) is an equity exchange-traded fund. The vehicle was launched in 2023 and represents an alternative to the widely popular JPMorgan Equity Premium Income ETF ( JEPI ). Both funds take a covered call approach versus on outright position in the S&P 500.

In this article, we are going to have a closer look at GPIX, its composition and performance, the fund analytics, and our view on its forward. We are going to articulate why we favor GPIX over JEPI in the current macro set-up.

The popularity of covered call funds explained

In our view, covered call funds have exploded in the common consciousness via their ability to generate high dividend yields from the equity markets:

option

Options Based Funds (JP Morgan)

Historically, equities are an asset class which experiences capital gains, and most retail investors have thought of equities as a means to invest for the long term.

Covered call strategies have changed the game in that respect, although they have been prevalent in the closed end fund world for a very long time. Covered call strategies purely write calls on the held portfolios, thus generating dividend income. There are various ways to implement this strategy, and we prefer dynamic covered call funds rather than systematic ones.

GPIX falls in the 'dynamic' category via its build:

To generate income, the Fund employs a dynamic options “overwrite” strategy whereby the Fund sells (writes) call options on a varying percentage of the market value of the equity investments in the Fund’s portfolio. The overwrite level (i.e., the ratio of the notional value of call options sold by the Fund to the market value of the equity investments in the Fund’s portfolio) is generally revised each month and the Fund expects that, under normal circumstances, it will sell call options in an amount that is between 25% and 75% of the value of the equity investments in the Fund’s portfolio.

We like dynamic overwrite strategies because they take into account market indicators such as volatility, over-bought or over-sold levels and other technical factors. Conversely, systematic strategies fail to decrease the overwritten ratio when markets are over-sold, or even by-pass writing calls when the volatility levels are too low.

A dynamic strategy does indeed introduce a human element to the equation, but Goldman is a mint name that has produced outstanding results via its asset management division.

Dynamic allocation versus static - JEPI has underperformed in 2024

Since its IPO, JEPI has grown into a behemoth, representing a market standard in the covered call space:

Chart

With notoriety and an AUM of over $30 billion come market distortions. Market participants keenly look for the roll dates associated with the fund in order to trade ahead of the name. GPIX is just getting started, and its dynamic approach in terms of its overwrite percentage has allowed it to outperform this year:

Chart

We are comparing GPIX to the S&P 500 and JEPI here, but also comping it against some golden standard CEFs in the space, namely the Eaton Vance Enhanced Equity Income Fund ( EOI ) and Eaton Vance Tax-Managed Buy-Write Opportunities Fund ( ETV ). While the CEF space has a long history of covered call funds, the CEF structure which allows for discounts to NAV is not as appealing to many retail investors.

While GPIX has outperformed JEPI by a large margin in 2024, the fund unsurprisingly lags the S&P 500 by a small percentage. The covered call CEFs EOI and ETV have been the clear winners in 2024. We cover both those tickers (you can navigate to their respective pages on the Seeking Alpha platform to read our research on them).

Bringing FLEX options into the covered call space is an advantage

What sets GPIX apart, is its usage of FLEX options:

The Fund may invest in FLexible EXchange Options (“FLEX Options”), other types of listed options and over-the-counter (“OTC”) options. FLEX Options are customized exchange-traded option contracts available through the Chicago Board Option Exchange. Through FLEX Options, the Fund could customize key contract terms such as exercise prices and expiration dates.

FLEX options are European style options which are directly negotiated, rather than actively traded on an exchange. Given the purpose of a covered call fund, FLEX options offer better pricing than exchange ones, plus you do not see your transactions on the trading tape for others to front-run you. A covered call fund will wait until expiry date, so unlike private investors who might want to trade in and out of liquid options, covered call funds do not need that pricing flexibility embedded in exchange listed American style options. The current portfolio contains only FLEX options:

portfolio

Current Portfolio (Fund Website)

We can see the fund currently running a ladder of very short-dated FLEX calls (all sub one month).

Yield considerations

Firstly, one has to remember that as a covered call fund, the vehicle is very much dependent on the S&P 500 performance. While many platforms are not showing the current yield for the name, we can back into it:

history

Distribution History (Fund Website)

The fund has seen a constant monthly distribution of roughly 0.3 per share. If we annualize that (0.3 x 12) and divide it by the current fund price of $48/share, we get a current yield of 7.5%. Given the outstanding performance for the index in 2024, we have seen the fund also post a higher NAV this year:

Chart

Long term, expect the fund to make most of its returns via its dividend distribution. In the years when the S&P 500 records outstanding performances (i.e. above 10%) an investor will have the added benefit from a higher NAV as well. As an investor, you will also own the full downside when the market moves lower, with the benefit of clipping options premiums.

Risk factors

An investor needs to understand there is no 'magic' here in deriving dividends from the equity markets. The fund does this via options, but a down market will result in the fund's NAV decreasing, albeit with a dampened approach given the premiums obtained on the written calls.

GPIX is not a fixed income fund where the cash come from the interest obtained from bonds. GPIX's returns purely come from equities and their performance. If the S&P 500 has a down year, GPIX will be down on a total return basis as well.

GPIX is a covered call fund from Goldman. The vehicle employs a dynamic approach to its overwritten portfolio percentage, an approach which we favor in the current macro set-up (versus a systematic call writing one). The ETF currently has a ladder of short-dated FLEX options, with a one-month maximum maturity date in the current portfolio. We like the fund for its ability to bring FLEX options into the covered call space, given the usual life-cycle of such a fund. GPIX has outperformed the market standard JEPI by a large margin in 2024 given its dynamic portfolio approach and the usage of FLEX options. Going forward, we prefer GPIX over JEPI in the ETF space, all while recognizing that the CEF space offers better, more time tested alternatives such as EOI or ETV.

This article was written by

Binary Tree Analytics profile picture

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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How do you structure an investment thesis in PE?

zentiger - Certified Professional

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When you're looking at companies and you distill all the information to form an investment thesis , what frame work or organization do you use?

If a principal asked you and you had to verbally give an investment thesis, how would you start, what would you say, etc?

What kinds of things do you highlight? Thoughts you add?

Thanks for the insight guys. This is also relevant for in interviews when they ask you about your deal and ask you to give an "investment thesis" on why the sellside or buyside transaction happened.

mrb87 - Certified Professional

  • What does the company do?
  • How much can we buy it for?
  • What is the opportunity for value creation / what are other people missing?

Carlsen - Certified Professional

What is an investment thesis in a PE context - confused ( Originally Posted: 11/04/2014 )

Can someone help me. I am a bit confused. I am trying to understand exactly what an investment thesis is for a new investment opportunity in an PE context. Is it the attractions for the investment or is it the same as an investment hypothesis? Is it one long sentece or is a lot of bullet points like: 1: strong market position, 2: scalable business model, 3: visible cash flows and strong cash flow generation, 4: good organic growth opportunities ?

Would be keen on getting peoples views.

Juliusbenedict: Can someone help me. I am a bit confused. I am trying to understand exactly what an investment thesis is for a new investment opportunity in an PE context. Is it the attractions for the investment or is it the same as an investment hypothesis? Is it one long sentece or is a lot of bullet points like: 1: strong market position, 2: scalable business model, 3: visible cash flows and strong cash flow generation, 4: good organic growth opportunities ? Would be keen on getting peoples views.

Some 3rd year associate you are.

cvslane's picture

Agreed. As useful as my left foot.

SSits - Certified Professional

First principles - a PE firm wants to make returns for its LPs and fees and carry for its partners. But you don't want to talk up the management fees part of a deal rationale because you're presenting to an IC of LPs who aren't big fans of doing deals just to pay you fees.

How do you make returns? Through long term capital gains on sales and recaps and dividends out of the business, more so the former.

So investment thesis comes down to the key reasons you think:

(i) the business will grow in value eg it's got a defensible market position supported by sustainable capital advantages (eg better management, low cost producer, highly differentiated product etc), is well positioned for growth (eg in a growth market), deal is structured to incentivise management to grow the business (eg management sweet and sweat equity)

(ii) why the deal is structured so you can harvest and realise that value eg strong potential for dividend recap as banks like this sort of credit and EBITDA growth will support deleverage to a level that will support a refi and recap dividend, strong interest in this sector supports sale or IPO in your realisation timetable etc

Mailowar112 - Certified Professional

Investment thesis: structure and content ( Originally Posted: 11/27/2017 )

for some time now I have been looking for examples or guidlines for a good investment thesis for corporate M&A or PE deals.

So far, I have only found sources regarding HF investment thesis, for example (can't post actual links cause I'm new):

A write up of WSO member "Simple As".

A "mebfaber" source (search Google).

Do you know of any other sources and/or sources that are more geared towards corporate M&A / PE deals?

WSO Monkey Bot's picture

Hi zentiger, check out these resources:

  • How I stay Healthy in Investment Banking
  • What (some of) you are doing wrong
  • How seriously do you take this forum?
  • How do you make it starting out as a broker?
  • Things you need to do and know.
  • How much Coffee do you Drink
  • How much money do you make?

More suggestions...

Hope that helps.

Crame's picture

How to discuss your investment thesis to PE investors over the phone ( Originally Posted: 04/09/2014 )

One thing I hate doing is discussing investments over the phone -- can someone help me by laying out the points I should cover during my call with PE investors on why I think they should invest in a company? That would be really helpful. Thank you.

I have somewhat of an idea -- like discussing my model assumptions, growth opps, risks, etc. But I feel like there should be more I need to tell them to win them over.

Justalurker - Certified Professional

What is this related to? Are you an investment banker?

No I am not. I am interviewing with a PE firm. They gave me a IM and I constructed a model and an investment thesis. Now, they are having a follow-up call with me (it will include a couple PE professionals). They will likely challenge my assumptions, theory, thesis, etc. It would really help if someone can walk me through what they would be expecting and what I should touch on during my call.

Also, what if they ask me how I came up with an entry multiple? Honestly, I had no private company comps or any industry multiples to base my entry multiple off of, I kind of just made it up since I thought the company was valuable at that multiple.

What type of company is it? How large is it (Revenue, EBITDA )? If you can provide those and it falls into one of the industries I cover, I can give you a pretty good idea of what the multiple would be and what they'll likely ask you. I specialize in evaluating manufacturing, distribution, and business services companies in the lower middle market - so if it fits I would be happy to help you out.

Thanks Justalurker -- this particular company develops and produces engineered, expanded thin ductile foils and polymeric materials. Sales of 17-20M with EBITDA (according to IM) 5-7M, but in my model, I am taking a 35% margin and leaving it flat across 5 years to be conservative.

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private equity fund investment thesis

There’s Money in Bull Riding, and Big Law Is Getting Its Share

By Roy Strom

Roy Strom

Women’s soccer. Pickleball. Indoor golf. Even bull riding is a target for private equity money flowing into the sports business.

Deals now span far beyond investing in the four major US professional leagues. That’s boosting Big Law’s M&A practices, including at law firms long known for representing the billionaire buyers and sellers of the country’s largest sports teams.

Just about any business that generates revenue from athletes chasing balls—or mounting 1,500-lb bucking bovines—is getting the attention of investors. That includes emerging sports leagues, media companies, or maintaining the green grass at the 80,000-seat AT&T Stadium in Dallas known as “Jerry World.”

With only so many NBA and MLB teams to invest in, private equity firms are building out portfolios of investments in lesser-known—albeit riskier—sports that may pay out handsomely for a more modest investment.

“It’s a different set of players, and different types of transactions than what we’re used to historically in the sports space,” said Adam Sullins, who co-chairs Latham & Watkins’ entertainment, sports and media practice.

The sports-tech industry saw record M&A activity in 2023, with 328 deals valued at nearly $27 billion, according to investment bank Drake Star. That was up from 236 deals in 2022 worth nearly $10 billion. That data tracks companies in media and broadcasting, fan engagement technologies, fantasy sports, gambling, and data analytics, among others.

Investment firms such as Arctos Capital and RedBird Capital have raised billions in funds dedicated to the sports industry. Sixth Street, which has $75 billion in assets under management and is a minority owner of the NBA’s San Antonio Spurs, is looking to raise its first sports-focused fund, Bloomberg reported in May.

Private equity firms have invested in the major sports leagues since Major League Baseball first allowed institutional capital to back teams in 2019. The National Basketball Association and National Hockey League have followed suit. The National Football League doesn’t allow institutional investors, but it is currently debating the issue.

More recently, asset managers have branched out from the major sports leagues.

Big Law’s Work

Latham & Watkins announced two nontraditional sports deals since mid-June.

The firm represented private equity giant Carlyle in its investment in the National Women’s Soccer League club Seattle Reign FC. And it advised EverPass Media, which counts sports-focused investment firm RedBird Capital as a financial backer, in its acquisition of UPshow, which sells businesses the rights to stream NFL Sunday Ticket.

“A sports practice isn’t just about representing the teams and the leagues anymore,” said Frank Saviano, a Latham partner enmeshed in the sports industry. “Our client base includes the top private equity funds and private debt funds that in one way or another have hired our sports team.”

Hogan Lovells has also racked up recent deals in the space.

This month, the firm advised global sports investment firm Dynasty Equity, which co-led a Series A investment in TMRW Sports, a virtual golf circuit whose founders include Tiger Woods and Rory McIlory.

In March, it announced its work on behalf of Major League Pickleball in a merger with erstwhile rival Professional Pickleball Association. The combined tours secured a $75 million investment from private equity firm SC Holdings. Law firms Choate Hall & Stewart and King & Spalding also advised on that deal.

From Bull Riding to Green Grass

Perhaps the largest deal typifying the race among private investors to control sports revenue came in April, when private equity firm Silver Lake acquired sports and entertainment company Endeavor Group Holdings for $13 billion.

Endeavor owns UFC, WWE, the Pro Bull Riding circuit, and Euroleague Basketball. It also controls talent and marketing agencies, a sports betting data business, and sports streaming technologies.

At least nine major law firms worked on the deal, including Latham, Kirkland & Ellis, Simpson Thacher & Bartlett, Cravath, Swaine & Moore, Sullivan & Cromwell, Freshfields, Debevoise, Skadden, and Akin.

“You are also starting to see much more activity by investors outside of the ‘big four’ national leagues,” said Michael Considine, a Dallas-based Kirkland partner who has advised investors in Premier League Lacrosse, the National Women’s Soccer League, Formula One and others. “People are taking a look at sports and sports-related investments very seriously.”

Beyond the leagues, teams, and media deals, some investors see value in the actual green fields.

Sports-focused investment firm Bruin Capital in May acquired PlayGreen, a Dutch company that maintains natural grass fields and counts as clients the Dallas Cowboys, Boston Red Sox, Wimbledon, and Premier League soccer clubs Arsenal and Tottenham. Simpson Thacher advised Bruin Capital on the deal.

No ‘Golden Ticket’ Hunt

Private equity investors see emerging sports as part of a broader trend that the industry will continue to deliver significant returns, said Russell Hedman, a Hogan Lovells partner who co-led the firm’s work for Dynasty on the TMRW Sports investment.

“It takes vision to see the next opportunities, not just the sports that are already succeeding,” Hedman said. “They’re not trying to get the Willy Wonka golden ticket. Good investors are trying to get results by building portfolios based upon a solid thesis.”

Lesser-known sports in the US that could garner private equity attention include rugby, cricket, cycling, sailing, motorsports, drone racing and lacrosse, said Michael Kuh, Hogan Lovells’ New York office managing partner who frequently handles sports deals.

Part of the push into new sports is driven by the expansion of digital media companies seeking live programming, he said. A thirst for programming on Facebook or Youtube, for example, could open a path to more lucrative media rights deals for new sports.

“It creates all kinds of new opportunities for sports that were not traditionally marquee sports in the US,” Kuh said.

To contact the reporter on this story: Roy Strom in Chicago at [email protected]

To contact the editor responsible for this story: Chris Opfer at [email protected] ; Alessandra Rafferty at [email protected]

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Bicycles riders

Uncover the Essential Insights from Top Mobility Industry Events

Baird's Active Lifestyles, Fitness & Mobility team recently attended two key industry events in Europe and the US: EUROBIKE and PeopleForBikes – Bike Leadership Conference. We have also hosted our annual Private Company Consumer Conference, with multiple micromobility businesses presenting.

The below summarizes our key takeaways from these events – encapsulating the conversations we had with dozens of industry leaders, private equity and family office investors and strategic players across the automotive, cycling and technology sectors.

Mobility remains a focus area

New buyer groups are emerging, market backdrop remains a short-term headwind, winners are being separated from the losers - in brands, top names remain the priority, strong interest in electrified mobility, direct consumer relationship remains key, opportunities exist to own more than the frame, targets financial profiles.

Investors continue to identify the micromobility space as an attractive investment area, looking to play multiple secular themes: outdoor, active lifestyle, enthusiast consumer and sustainability. 
New pockets of capital are emerging and focusing on the space: family offices, wealthy individuals and non-cycling strategics who have identified micromobility – and particularly ebikes – as a key growth area. Strong interest is increasingly observed from Asian investors, who are seeing rapid growth of the cycling market in their home countries.
Many investors have cited the current state of the cycling market as detrimental to transacting in the short term and many strategic players remain focused internally. We suspect that new investors may seek clarity of “the new market normal” before they are able to underwrite their investment thesis in the cycling / micromobility space.
Investors have seen many deals in this new market environment and better understand the characteristics of premium assets vs. less attractive ones. Those criteria help in guiding buyers through their analysis and investment decisions and to an understanding that the winners will accelerate coming out of the backside of the pandemic. Investors seek global brands with clear differentiators (particularly around performance and design), with strong and clearly identifiable appeal to consumers.
Investors believe in the long-term trend of electrified mobility and want to invest in the winners within this category.
Especially post-pandemic, companies need to have a greater pulse on their end consumers to better inform everything from product development to supply chain decisions. Clearly, pure-play direct-to-consumer (DTC) brands have an inherent consumer connection but other brands should aim for some omni-channel consumer connection either through some DTC channel exposure, social media or owned retail.
Consolidation provides unique opportunities to capture gross profit beyond the frame sale – e.g. frame + wheelsets + handlebars.
A clear track record of revenue recovery and growth are required for any investment. Top-line growth rates are very category-dependent, but all investors are seeking proof of sustained, above-market top-line growth rates in the new market normal. A clear view on run-rate profitability is paramount.

Connect with Baird Global Consumer Investment Banking to discuss any of these takeaways in greater detail or see how they may apply to your specific business:

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COMMENTS

  1. How to Write an Investment Thesis

    In private equity and venture capital, an investment thesis (sometimes called a fund thesis or fund strategy) outlines how you plan to use invested capital to generate returns. Your investment thesis clarifies how you'll make money for the investors in your fund—it's a definition of what your fund will do.

  2. Writing a credible investment thesis

    The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. ... Joe Trustey, managing partner of private equity and venture capital firm Summit Partners ...

  3. How to Write an Investment Thesis in Private Equity

    ‍Bottom-Up Investment Thesis for Private Equity Example: ‍"Smith Partners is seeking to invest a $20MM Series A round in Asclepius, Inc. to aid in their rapid growth and contributions to the advancement of the healthcare industry.Their dedication to modernization combined with SP's vast network of cutting-edge automation manufacturers and forward-thinking healthcare providers make this ...

  4. How to create a clear private equity investment thesis

    A private equity investment thesis is an evidence-based case built in favor of a particular investment opportunity. It opens with a two- to three-sentence argument showing how the potential deal supports a general partner's fund investment strategy, then provides details that support that conclusion.

  5. Investment Thesis Template

    "An investment thesis aims to take an abstract idea and turn it into a functional investment strategy. An investment thesis helps investors evaluate investment ideas, ideally guiding them in selecting the best ideas that can help meet their investment objectives." A screenshot below gives you a sneak peek of the template. Free Hedge Fund Pitch ...

  6. What Is an Investment Thesis?

    To write an investment thesis for a venture capital or private equity opportunity, you would follow the same outline. Here's a simplified investment thesis for a new coffee shop: People love coffee .

  7. Writing a Credible Investment Thesis

    But unless you're in the private equity business—which in our experience is more disciplined in crafting investment theses than are corporate buyers—the odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29 percent of acquiring executives started out with an investment thesis ...

  8. How to Create an Investment Thesis [Step-By-Step Guide]

    An investment thesis is a common tool used by venture capital investors and hedge funds as part of their investment strategy. Most funds also use it on a regular basis to size up potential candidates during buy-side job interviews. But you don't have to work at a venture capital fund or private equity firm to reap the benefits of creating an ...

  9. The X-Factor: Lifecycle of a Private Equity Investment Thesis

    Fengate is a mid-market private equity fund within a multi-asset manager with over $8 billion in AUM. Fengate is one of the most active real asset and growth equity investors in North America. Challenge: Developing investment theses for PE-backed portfolio companies and iterating upon them throughout a hold period.

  10. Investment Thesis: An Argument in Support of Investing Decisions

    Investment Thesis: An investment thesis is the beliefs that investors decide to use when determining what investments to purchase or sell, when to take an action and why. An investment thesis ...

  11. A playbook for newly minted private equity portfolio-company CEOs

    An executable investment thesis is the top priority. CEOs in PE face a paradox: the business plan is often "written in blood," and thus, decisions and actions must align with the investment thesis. On the other hand, the CEO must simultaneously be creative, always looking for new ways to underwrite and expand the value-creation plan.

  12. Private Equity Case Study: Full Tutorial & Detailed Example

    The private equity case study is an especially intimidating part of the private equity recruitment process.. You'll get a "case study" in virtually any private equity interview process, whether you're interviewing at the mega-funds (Blackstone, KKR, Apollo, etc.), middle-market funds, or smaller, startup funds.. The difference is that each one gives you a different type of case study ...

  13. How to Create an Investment Thesis

    Simply put, the investment thesis is an assumption made about a market, vertical, or trend that will drive the strategy for a particular firm or fund. Just as a startup will assume a problem or market need and build a product around solving that problem, an investor will consider various markets and trends and develop an investment strategy ...

  14. Investment Thesis: An Argument in Support of Investing Decisions

    An investment thesis is a well-structured, logical argument that justifies a particular investment decision, based on thorough research and analysis. It is essential for investors, as well as financial professionals in the domains of investment banking, private equity, hedge funds, and venture capital funds. A confident and knowledgeable ...

  15. PDF PRIVATE EQUITY STRATEGIES: Performance and its determinants

    This thesis research focuses on the performance of private equity strategies, specifically on buyout funds, venture capital, funds-of-funds, growth equity, secondaries, and balanced funds. Furthermore, we examine the factors that determine the performance of funds.

  16. PE Investment Memo Examples?

    The following would be the general outline of an investment memo based on what I saw. 1. Executive Summary -> investment thesis, why the company, industry average growth rate, brief growth strategy and exit strategy 2. Source of deal - Background of seller and reason for sale (retirement/spin off etc) 3. History of the business - how it had started off 4.

  17. PDF Copenhagen Business School Master's Thesis

    Master's Thesis . Private Equity Goes Public . Examining the Risk and Return Characteristics of Buyout Funds . May 2019 . ... portfolio that mimics the following passive components of the private equity investment pro-cess; (1) asset selection criteria, (2) long holdings periods, (3) infrequent and conservative ... Private equity fund-level ...

  18. How to Write an Effective Search Fund PPM

    Here are some key steps to consider when drafting a PPM: Introduction: Provide an overview of the search fund, its objectives, its investment strategy, and potential risks in the introductory section. Biography and Background: This is the most important section of any PPM. Searchers should highlight any relevant background and experience ...

  19. PDF Private Equity Fund Performance Determinants: Evidence

    fund investment industry, fund sequence (first fund or follow-on fund) and investment market (US or EMEA). Fund performance is measured by internal rate of return, and tested by cross-sectional regression analysis with the method of Ordinary Least Squares. The data employs performance and characteristics of 997 private equity funds between 1985 and

  20. Private Equity Thesis help

    I have written my thesis on PE&VC. There are several streams of academic research in this area: - Structure of Private Equity Funds (LP, covenants, contracting) - Motivation to invest in PE (different types of investors) - PE Strategies (imho, beneficial thesis, you will be aware of main strategies, broad and interesting field) - Investment ...

  21. PDF Have the private equity real estate funds out-performed REITs on a risk

    With the average fund size reaching a new all-time high of $684 million in 2021, fundraising. volume hit a record high, but the number of total funds raised continued to fall from 537 in 2017. to 257 in 2021. Value-added and opportunistic funds continued to claim the greatest share of fundraising.

  22. PDF Master Thesis Financial Economics FEM11067 The impact of private equity

    synergies between private equity firms and the target firm. One method for this value creation is proposed by Scellato and Ughetto (2013) where the sharing of resources and expertise leads to more involvement by private equity firms in the investment phase. In this paper I aim to extend prior research by Officer, Ozbas and Sensoy (2010) and

  23. Global ESG due diligence study 2024

    Leading investors tie ESG to the investment thesis and drive financial value from it. ... Initially, ESG disclosures were influenced by foreign investors - global private equity funds investing in China as well as Chinese investors participating in outbound opportunities. Today, voluntary ESG reporting is growing across the country.

  24. What a tough private equity environment could mean for university

    Dive Brief: College endowment investments in private equity funds could pose an increasing liquidity risk amid slow dealmaking in the financial sector, according to a new analysis of top-ranked universities from research firm Markov Processes International.; MPI's analysis, published Monday, put the average endowment allocation to private equity at Ivy League and other elite colleges in ...

  25. GPIX: Goldman Covered Call Fund Beating JEPI This Year

    Yagi Studio. Thesis. The Goldman Sachs S&P 500 Core Premium Income ETF (NASDAQ:GPIX) is an equity exchange-traded fund.The vehicle was launched in 2023 and represents an alternative to the widely ...

  26. How do you structure an investment thesis in PE?

    Through long term capital gains on sales and recaps and dividends out of the business, more so the former. So investment thesis comes down to the key reasons you think: (i) the business will grow in value eg it's got a defensible market position supported by sustainable capital advantages (eg better management, low cost producer, highly ...

  27. There's Money in Bull Riding, and Big Law Is Getting Its Share

    The firm represented private equity giant Carlyle in its investment in the National Women's Soccer League club Seattle Reign FC. And it advised EverPass Media, which counts sports-focused investment firm RedBird Capital as a financial backer, in its acquisition of UPshow, which sells businesses the rights to stream NFL Sunday Ticket.

  28. Aprio CEO explains details of Charlesbank private equity investment

    Last week, Aprio joined a growing number of accounting and professional services firms that are making deals with private equity companies.. The firm is set to close a deal with Boston-based PE ...

  29. Uncover the Essential Insights from Top Mobility Industry Events

    We have also hosted our annual Private Company Consumer Conference, with multiple micromobility businesses presenting. The below summarizes our key takeaways from these events - encapsulating the conversations we had with dozens of industry leaders, private equity and family office investors and strategic players across the automotive ...