Portfolio managers, CIOs, and investment committees at major buy-side firms are tasked with deploying large amounts of capital on behalf of their clients. The process that takes an investment from a raw idea to a full commitment of funds can seem at times idiosyncratic from the outside but, in reality, most institutional investors have developed sophisticated approaches to making these high-stakes decisions. This process usually starts with an investment pitch prepared by the research or analyst team.
Whether at a public or private equity fund, a venture capital or private credit firm, or even at an absolute-return hedge fund, an investment pitch must clearly articulate the investment’s potential for returns, an assessment of risk, and alignment with the firm’s investment objectives. Here are the key elements that constitute best practices when it comes to an investment pitch for most institutional investors:
Finding the Best Available Opportunities
Large institutional investors spend vast resources on their “deal flow”. The idea is to have a robust supply of investment opportunities, regardless of whether the source is internal or external, and keep a fresh list of candidates to look further into. In some cases, opportunities are simply known companies or assets these investors are already familiar with. In others, ongoing research efforts lead to identifying unknown situations that are new to the scene or were overlooked in prior searches. Institutional investors also maintain active relationships with advisors who bring ideas to their attention, typically for a fee, as a way for the investor to have their eyes on more places without having to hire additional personnel. The best ideas in the funnel are usually placed on a “short list” that will help analysts select the ones they view as the most likely winners.
Compelling Investment Thesis
The recommendation must offer a succinct and compelling thesis explaining why this investment is attractive and aligns with the firm’s strategy. In addition, the “upside” or value creation must be explicit, along with an assessment of the possible downside if things go wrong. It must always contain a sober view on the probability of success or failure, also known as risk assessment. One of the most conventional ways to present this type of analysis is by including a valuation and returns overview, with varying degrees of detail depending on the audience and investment culture of the firm.
Overview of the Opportunity
While audiences can vary in their familiarity with the opportunity, the business or asset that supports the intrinsic value of the investment needs to be described with sufficient detail, particularly as it relates to its background, core activities, market position and other relevant information. Most investments tend to be tied to specific financial conditions, product changes, prevailing trends or market opportunity, which could require significant details to substantiate. The opportunity should also be explained within the context of timing (i.e., when it would be best to proceed) and time constraints (i.e., when it would be too soon or too late to proceed). Decision makers usually need to know why now might be the correct time to focus on the specific situation.
Operating Team and Management
The people factor is crucial to most investments. Investors usually prefer to understand the backgrounds of the founders, management team, and key personnel, emphasizing their track record. Governance is also a major factor in the success of most businesses so, increasingly, an assessment of a company’s board has become mandatory for most investors. The same should be said of issues related to the environment and social responsibility as most institutional investment firms now have established policies regarding dos and don’ts in these areas.
Financial and Operational Performance
This is usually the section that requires the finest tooth comb, as the financially minded investment community has trained itself to not miss any crucial detail. History and projections are typically required and the “story behind the numbers” must jump out at the eyes of the audience with clarity and congruency. The financial section can vary in terms of complexity, depending on the situation, perceived risks, and other factors such as liquidity, commitment size, etc. A risk assessment and mitigation strategy can accompany the financial review and include scenario analysis, which is a way of saying “what if.” Investors want to know they thought of every conceivable outcome, and this is the section that can help with that.
Starting in the early 90s, the term KPI or “key performance indicators” has increased in popularity among financial and business analysts. KPIs are in essence a collection of variables that can impact the financial returns of the investment in meaningful ways (e.g., unit sales, costs per unit, market share, product satisfaction metrics, etc.) and therefore, require special attention and follow-up. Analyzing historical and projected KPIs is going to be a crucial aspect of any investment pitch.
Market and Competitive Landscape
A comprehensive review of the industry, competition and key trends is a major component of most investment pitches. Investors are interested in knowing which competitors pose the greatest threat and what the target investment is doing to mitigate this risk. The assessment may focus on high-level issues like industry trends, but it could also cover details regarding product performance if the success of the investment is deemed to be influenced by this variable. Note that along with competitive issues, investors usually require a financial side-by-side. This is likely to include comparisons with competitors related to costs, margins, relevant KPIs and so-called “valuation comps,” which is where we get to see how the price of our investment target looks relative to its peer group.
Investment Structure and Terms
While all financial instruments rely upon a particular type of capital structure with embedded advantages and disadvantages, deal structure is particularly crucial for private deals, whether equity or credit oriented. These types of deals are usually crafted to reflect certain rights and limitations affecting different groups of investors differently, which can greatly affect valuation, risk, and also impact return considerations. In general terms, private equity instruments will seek protection against dilution, assert their ability to vote and evaluate management’s performance, while private creditors will generally be concerned with their recovery rank in the capital structure, protections against “priming” (i.e., others jumping ahead in recovery priority) and, last but not least, access to collateral protection when possible. Specific terms regarding maturity, amortization schedule and interest rate can substantially add to or detract from expected returns and are also crucial in deal structuring and negotiations.
Catalysts, Drivers, and Exit Strategy
The excitement around making an important investment can only come second to the excitement that comes from realizing profits. For this reason, investors are laser-focused on the events that help their investments increase in value so they can monetize and lock-in the gains. These events can include an improvement in business conditions, better margins, product innovation, new customer gains and various other welcomed developments. Conditions around exits can be relatively simple (i.e., selling to a bidder) or more complex, such as an IPO, mergers, and other significant corporate events like divestitures or spin-offs.
Conclusion
Pitching investments successfully is typically the most important component of an investment analyst’s job. Successful pitches that end up as profitable exits are crucial to fulfill the expectations of institutional investors and their demanding clients. While this list of the key components of an institutional investor pitch looks daunting, it is a good reflection of all the methodical work required to deploy large amounts of capital. In the end, whether on a small or large scale, investing is about rational decision making based on due diligence, a reasonable assessment of risk and ultimately having a plan for monetizing gains.
