Don’t lose your Investor in a Perfect, But Boring Model

Don’t lose your Investor in a Perfect, But Boring Model
Don’t lose your Investor in a Perfect But Boring Model

Think of a car manufacturer building a new model. Think about the team required: marketing, strategy, engineering, etc. The Analyst is the conduit between all of the departments, tasked with the ability to relate all the wires and mechanical details with the high-level vision of how the model is expected to perform and accomplish for the manufacturer. A key role the analyst needs to master is the ability to present and explain the details to the executive suite (client or investor) accurately, while avoiding the gory details of every electric and structural nuance. Here is a short list of things to consider in balancing the focus on the vision and confidence in the engine of a transaction model:

I. The Dashboard

Transactions get complicated, quickly. There are dozens of nuances and optionality that the transaction model needs to allow the driver to adjust in order to get to the target returns and value proposition to justify moving forward with the acquisition.

As such, I believe in building a single page dashboard that allows for adjustments to both, the various parts of the capital stack (senior debt, mezzanine debt, preferred equity, JV equity, Sponsor and Land equity) and operational expectations (growth factors, revenue assumptions, expenses assumptions, capital expenditures, debt coverage reserves, delay in operations, etc.).

The dashboard is your cockpit, and in putting the time and care into building it, it helps the analyst walkthrough the various components of the model in the right amount of detail without losing the Client / Investor’s attention. It also allows the Analyst to keep the wires organized, and if a specific component of the capital or operational analysis requires more details or adjustments, you can quickly adjust or explain straight from this page.

II. The Budget

Following a walkthrough of the Dashboard, the most common question is the accuracy and integrity of the costs. The Budget tab is commonly the next page of discussion. It is the primary input for the discussion of the capital markets and return discussions as you come back to the strategy in your discussions with the Client / Investor.

III. The Pro Forma

After Costs are relevant financing is confirmed, the next discussion is naturally the revenues. The Pro Forma, driven by the various Dashboard assumptions discussed above, shows the project’s profitability. The Analyst main goal in this part of the discussion is to balance the Client / Investor’s expectations with real world expectations based on market and projected values.

IV. Fine-Tuning and Returns Engineering (Time and Finance)

IRR is a time-value return, and therefore can be engineered based on timing of cost and revenue timing. Various capital events (i.e. refinancing / recapitalization) have a large impact on project returns. As mentioned above, it is the analyst’s job to balance real world expectations with those of the Client / Investor. The various time and financial engineering aspects and options, it is helpful to include these as a section in the Dashboard.

This is usually the final conversation when presenting a model, and used to fine tune the returns based on confirmation of all the other variables.

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