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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

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

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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Deal Thesis: A Single Deal? Or the Entire M&A Program?

The focus on outcomes in M&A and corporate dealmaking highlights the importance of a robust deal thesis, also known as an investment thesis. As the saying goes: to maximize potential, “begin with the end in mind.” So, how does one develop an effective deal thesis? There are two common approaches: a deal-specific approach and one that considers a program of multiple acquisitions. Below we define what makes a concrete deal thesis, compare the merits of a single deal thesis and one designed for a program of multiple acquisitions, and identify how certain tools can help with this crucial aspect of M&A and the corporate dealmaking process in general. 

What is a deal thesis?

A deal thesis in corporate development and M&A assesses and speaks to the value of an acquisition against clear objectives and benchmarks set by the buyer. A target may offer different things to different potential acquirers. The right buyer for a target should be confident that their deal thesis supports extracting and, in turn, delivering the most value. 

Deal Thesis: Single Deal vs. Comprehensive M&A Program

A  single deal or deal-specific thesis  is unique and focuses on a single acquisition target, with the goal of identifying the potential benefits and risks of that one transaction. This approach is often used by strategic buyers, who are looking to acquire a company that will help them achieve particular business objectives, such as access to new markets or technology, or bringing a key competitor under their umbrella of influence.

In contrast, a  thesis for a comprehensive M&A program  of multiple acquisitions is typically used by private equity-backed platform companies, serial acquirers, or dealmakers with roll-up strategies. These firms often have a predefined investment thesis that guides their acquisition strategy, such as focusing on certain industries or geographic regions. The goal of this approach is often to build a portfolio of companies that can be integrated and managed as a single entity, with the aim of generating value through cost synergies and operational improvements.

One key difference between these two approaches is the level of risk involved. A deal-specific thesis typically involves a higher level of risk, as it is focused on a single acquisition target that may not deliver the expected benefits. That being said, with a single deal thesis, one knows fairly definitively what drives value post transaction. In contrast, a thesis for an M&A program of multiple acquisitions typically involves a more diversified risk profile, as the portfolio of companies can help offset the risks associated with any individual acquisition. 

Another key difference lies in the repeatability inherent in a comprehensive M&A program under one deal thesis. As each individual deal is completed and actual outcomes are assessed, a team can adjust its program thesis accordingly, which, in turn, increases the overall thesis accuracy. Examining these multiple deals collectively is therefore more valuable to future deal initiatives, mimicking the common premise that 1+1+1 = 4. The collective impact has a benefit beyond each individual deal, and this is the real value of the M&A program. Private equity companies do this quite well via roll-up platforms. They are able to have cookie cutter deal theses that are well-defined based on experience and successful value creation. 

In short, a single deal thesis versus a thesis for a comprehensive M&A program (a stream of deals) is the difference between operating M&A activities in silos versus looking at them collectively within a defined program so experiential learnings can be leveraged to increase future success.

Ultimately, the decision between leveraging a deal-specific thesis and a thesis for a program of multiple acquisitions will depend on the specific goals and objectives of the acquiring company. For strategic buyers, a deal-specific thesis may be the best approach for achieving their business objectives. In contrast, private equity-backed platform companies may be better served by leveraging a thesis for a program of multiple acquisitions, as this approach can help them build a portfolio of companies that can be integrated and managed as a single entity.

How Can I Create a Realistic Deal Thesis?

Creating a realistic and detailed deal thesis increases opportunities for maximizing value creation via M&A.  To do this, begin by defining your specific strategy and objectives and determining  how this will allow you to add the most value to the target in focus.  What are your drivers that make your deal thesis tick? Maybe it is an efficient backend or a good relationship with suppliers. Specifically, the most accurate and valuable theses, both single and for an M&A program, detail:

• Cross and upsell synergies – define the specific take-rates and prices for specific products in specific segments in specific markets to be achieved with specific resources…be specific!
• Cost synergies – define what specific IT systems and supporting personnel will be consolidated and/or phased out within a specific time frame and at a specific expense.

Which tools are used to create a deal thesis?

The M&A Machine — people+process+tools — needs all cylinders firing for the engine to successfully run. Leveraging an end-to-end tool allows practitioners to identify, qualify, bid, win, and integrate targets, all while remaining focused on the deal thesis. Traditional tools, such as Excel, have serious drawbacks due to the inherent lack of collaboration and communication challenges, combined with the potential loss of information as a deal progresses through the pipeline. 

Midaxo offers a comprehensive corporate dealmaking platform that empowers everyone involved in a deal to collaborate, refine their process, and focus on the deal thesis. 

Conclusion:

Having a clear deal thesis and understanding why you are the best buyer for a specific target are foundational for an acquisition. Remaining focused on the deal thesis throughout due diligence, integration, and post-integration is vital, using this thesis to create tangible actions to capture synergies. Deal thesis and corporate dealmaking  productivity platforms can aid in thesis creation and assure a heightened, sustained focus on the deal thesis, ultimately allowing buyers to create an efficient M&A Machine.

Other Resources

How to Supercharge Your M&A Process with Artificial Intelligence

7 Ways a Purpose-Built M&A CRM Can Increase Your Deal Pipeline

4 Ways Technology Can Accelerate Corporate Dealmaking

How AI Can Supercharge M&A Post-Merger Integration

Learn how midaxo can power your dealmaking.

Contact us for a live demo or simply to discuss how Midaxo can improve the productivity of your team

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.

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.

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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Business Advisory: How to build investment thesis clarity for better M&A outcomes

In M&A, clarity on business rationale and investment thesis is critical.

So how do you build it?

Often the lack of specificity in M&A investment thesis leads to poor decision-making. It is crucial to determine at a detailed level “how” and “where” a deal will create value. This involves moving beyond generic assumptions to a detailed vision, rigorous due diligence and a robust implementation plan.

Common questions relating to the integration of operational platforms and the impacts of divestments need clear, granular answers.

The M&A investment thesis should guide deal objectives and execution performance tracking while ensuring alignment across all organisational levels. Initial stakeholder alignment on success metrics is key and while agility in approach is necessary, the core M&A investment thesis and goals must remain.

Ultimately a detailed understanding of value creation sharpens focus and drives success in M&A.

Access our free guide to build a robust M&A investment thesis for your business.

HOW DLA PIPER BUSINESS ADVISORY CAN HELP YOUR ORGANIZATION WITH M&A

We help clients to address the inherently complex risk of M&A by uplifting capability and overcoming any capacity challenges. Our integrated team accompanies you through the deal lifecycle with a single point of accountability from the pre-deal strategy and preparation, deal execution all the way through to close and integration/separation. We also provide specialised advice in M&A ESG, ventures and joint ventures.

For more information reach out to Guy Fisher .

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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.

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

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?

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?

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.

Sutton Capital

How to Create an Investment Thesis

What it is, why you want one, and how to create it.

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.

This story is from Sutton Capital contributor Zeb Hastings. For more information on Zeb’s work, please visit his  website .

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How to Write an Investment Thesis

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources , and more. Learn More

NASDAQ: DUOL

Plus, a look at "one of the most obvious long-term trends out there" and more.

In this podcast, Motley Fool analyst Jason Moser discusses:

• Recognizing short-term catalysts.
• Why home improvement is "one of the most obvious long-term trends out there."
• Travel and return-to-work are two trends worth watching.

Then, using language-learning app Duolingo ( DUOL 0.62% ) as an example, Motley Fool analyst Alicia Alfiere shares key questions to ask when writing an investment thesis, including:

• What are its competitive advantages?
• Who's running the company?
• Will broader trends help or hurt?
• Stocks discussed: BKNG ( BKNG 0.08% ) , HD ( HD -0.30% ) , LOW ( LOW -1.55% ) ,  MSFT ( MSFT 0.22% ) , and DUOL.

To catch full episodes of all The Motley Fool's free podcasts, check out our  podcast center . To get started investing, check out our  quick-start guide to investing in stocks . A full transcript follows the video.

10 stocks we like better than Duolingo, Inc. When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

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See the 10 stocks

*Stock Advisor returns as of March 3, 2022

This video was recorded on March 7, 2022.

Chris Hill: Tell the DJ to queue up ZZ Top because we're talking about investing trends with legs. Motley Fool Money starts now. I'm Chris Hill joined by Motley Fool senior analyst Jason Moser. Thanks for being here.

Jason Moser: Hey, thanks for having me.

Chris Hill: Everybody loves a good trend, right?

Jason Moser: Sure.

Chris Hill: We're investors, we love a good trend. Lately, I don't know if you've noticed as the market has continued its grim slide of 2022, that doesn't stop potential trends from emerging here or there. I wanted to talk with you about how to figure out which trends have legs and which ones don't. I'll just start with an example of one that I think for me anyway, doesn't really have legs, and it goes under the umbrella of because of reasons, this industry has sold off tremendously. Therefore, it presents an opportunity for investors because it's trading below where it should be. The one that leaves to mind for me that's come up several times over the past two plus years is the Cruise Industry, and that may be a good short-term opportunity for some people. I'm not interested in that.

Because it's not an industry that I think has great long-term tailwinds behind it, I don't mean to pick on the Cruise Industry, but you know what I'm talking about. There are some trends that get a lot of attention, but it's for short-term reasons.

Jason Moser: Yeah, I'm glad you said short-term reasons because I agree with what you're saying. I think the way I typically try to break this down in my own mind, and I've talked before about the way that I invest. As a long-term investor, someone who typically like to be a net buyer of stocks, I'd like to buy, I don't really like selling. Typically I am looking for companies that I feel they're going to be relevant for decades. Figuring out and following the long-term trend in differentiating that between what I would call a short-term catalyst, and so I think that the Cruise example there is a good example of something where there's a short-term catalyst. Before 2020, I don't know that Cruise ships were really a place where I was interested in investing, it sounds you feel the same way. It's just not an industry that you're all that interested in. I think that's how I start to at least look at this, because you could look at the Cruise liners for example, and say, "well, I'm not all that interested." But by the same token, it does feel there's a short-term catalysts in place that could result in value for shareholders if things continue to improve. The travel industry in general has been shellacked, but things are starting to come back.

There were a lot of questions early on in 2020 as to whether these major Cruise liners would even survive. They did a good job, I think of figuring out ways to survive and keeping their balance sheets in working order there, but I think for me, you see the benefit of a reopen and then say, alright, Cruise liners could benefit from that, the stock's been may start to reflect that optimism. But beyond that short-term catalyst, is there something there? Do you see more people clamoring to go on cruises as the years go by? I'm not convinced that's the case. I think it's a relevant industry. I think there are people who love to take cruises, but I think there are also a lot of risks that come with something like that. For me, it's trying to think about what direction the world is headed and I'll be honest with you, I'm sure you probably can relate to this as a parent. I looked at my kids, I have two daughters, they're are at sophomore junior and high school. I looked at them and their friends and what they're doing, what they're watching, the apps that they're using, ways that they're conducting their business, that to me starts to tell a little bit more about consumer behavior, trends that may be forming, things that matter to younger generations that will continue to matter even as they get older. I typically try to break it down between looking at a long-term trend versus a short-term catalysts in figuring out ways to discern between the two.

Chris Hill: If you think back to last year in the late spring, one of the big trends getting a lot of attention was what was referred to as the great reopening.

Jason Moser: Yeah.

Chris Hill: It seems we're at that point again, as Omicron levels continue to drop, vaccines continue to rise, more and more businesses, we talked about this last Friday on Motley Fool Money about some of the biggest tech companies in America opening up their offices, mask mandates coming down. You were talking to the folks at Cheddar, and I'm happy to share Jason Moser as a resource our with media outlets. [laughs] You're welcome Cheddar. But seriously, you were talking to them about this trend, weren't you?

Jason Moser: Yeah, we were talking about reopening, and to me it feels like reopening 2.0. We did go through a reopening before, where I think a lot of us are starting to get back out there and resuming somewhat normal behavior. This is the next iteration of that, where I think the wall start to come down and even more people start to go out and really get their lives back to normal. We were talking about ideas, investments, companies that will benefit from this next phase of reopening, and then what future they may have even beyond that, because I would look at reopening as definitely a short-term catalyst. This is not something where the long-term trend is for our economy to reopen, and so for me that doesn't mean that there aren't great ideas out there, that doesn't mean there's no money to be made, but by the same token, and I think, we said this a lot when we were talking about the stay at home stock, theme that we were delving into a couple of years ago. 

You want to make sure that regardless, these are businesses that you feel will continue to do well even beyond the short-term catalysts. Because this short-term catalyst will end, and then you want to make sure that you're not left holding the bag with the business that maybe isn't going to continue to benefit beyond just that catalyst. For me, there are a lot of different ways you can look at the companies that will benefit from this. I mean, you're talking about incremental traffic in all places, people going back to work, office buildings getting busier, the areas around the office buildings getting busier, malls getting busier, so what companies can you expect a benefit there? To me, there are a lot of different ways you can look at it. I think travel is one that stands out immediately just because so many people are ready-to-go do something. We saw some of the snap-back in travel earlier through the course of this last couple of years, but it does look things continue to get even better. 

I was looking through Booking Holdings, for example their most recent earnings call, they were talking about the fact that they are seeing the trends continuing to move in the right direction. They said the first half of February they saw meaningful improvement across all of their regions compared to January, but then they made this reference to gross bookings. They said gross bookings for the summer are higher than they were at this time in 2019, so that's encouraging for a number of different reasons and it sounds a lot of people are planning trips. I know that we are both planning to get a trip and I'm going to be going a few places here over the summer as well looking forward to that. But when you think about just the fact that gross bookings for the summer are higher than they were at this time in 2019, that's really encouraging. The nice thing about travel is it's truly a global opportunity. I think travel is going to continue to be a long-term trend that investors can benefit from, so Booking Holdings stands out as one way to look at this reopen 2.0.

Chris Hill: It is interesting. The difference, as you said, the long-term trend versus the short-term catalysts, because ultimately there has to be something sustainable. There has to be something about an underlying business that we as investors can see a pathway for growth. Which, and this may be just my preference, I always prefer organic growth as opposed to growth through acquisition. It's not to say that that doesn't work, there are plenty of businesses that have rewarded shareholders by going the route of acquisition. But to me, it's just preferable to see a business like I've talked before about Home Depot and Lowe's, and not that they do a tremendous amount of increasing their store count year-over-year, but you look at the way that they've grown out their online presence, their deliveries, that sort of thing, that's just easier for me to wrap my head around.

Jason Moser: Well, yeah. I think Home Depot and Lowe's, two very good examples of businesses that I think could certainly benefit here over the next several months as consumer traffic continues to pick up. We've seen the strength in the housing market over the past couple of years, and the neat thing about housing is whether you own or you rent, home improvement maintenance, all that stuff is always on the table. That's to me one of the most obvious long-term trends out there, because everybody needs a roof over their head. You look at Home Depot and Lowe's, the quarters that they just chalked up, to be able to maintain their gross margins in a time like this when inflation really is front and center, Lowe's actually expanded their gross margin very modestly. Home Depot, a little bit of pressure, but overall they've really been able to maintain prices very well and passes these costs along to consumers.

I think part of that is just due to the nature of the market that it serves, it's a necessary market. Then they love to throw the statistics out there, 50 percent of the homes here in the US are over 40 years old. A lot has changed in 40 years. The ways that we build houses, the ways that we've repair our homes and update and improve our homes. What that ultimately means is you get this massive installed housing base out there just in this country alone, that really requires a lot of what Home Depot and Lowe's are selling. They may not be the sexiest names in the world, and they may not like the world on fire in the near-term, but when you stretch the chart out, if you look at the way these companies performed through the years, 3, 5, 10 years, they are just tremendous performers. Lowe's in particularly, you look at what Marvin Ellison has done there, that has been just nothing short of spectacular. I think what we've got now is really two businesses there in Lowe's and Home Depot that you and I have likened before to MasterCard and Visa . It's almost like a which one should I pick? Why bother choosing? You could actually own both and get away with it just fine. It's not a bad idea, actually.

Chris Hill: Not a bad idea at all. Last thing and then I'll let you go. When you think about long-term trends, I suppose there are a couple of different ways you can think about them. One is to try and predict where the future is going and be right, not only about the direction, but the timing of how soon we're going to get there. I was on David Gardner's Rule Breaker investing podcast recently and on an episode that were set in the year 2052 and one of the jokes we made on that was that self-driving cars, still not a thing [laughs] and it may not be by the way. That's one way to do it, like OK, this is where the world is going. But another way to do it is to look at trends right now and say, OK, do I think this is going to be here in 20 years? You can say that about individual products, you can also say that about industries. It's why whenever someone has a new baby and he's like, I want to buy a stock for them. My answer is always Starbucks. Because I know that the way we drink coffee in 50 years is going to look a whole lot like the way we drink it now.

Jason Moser: [laughs] If it looks any different, Starbucks is probably going to be one of the companies that is innovating and iterating there. So you probably win either way. Yeah, I think to me, one of the trends that I think it's front and center right now for a lot of people is work, exactly how we're going to be working. We're talking about stay at home, now we're talking about reopen. It's been a weird two years. There're offices that never closed down and then there are other offices that just have closed down completely and you wonder what exactly the future holds. I look to a business like Microsoft, for example, and I think it's very telling that you've got a lot of these big tech companies that are reopening their offices. They're eager and excited to do that, and I think that's for a number of reasons. I think that you've seen some of the CEOs of these businesses, Twitter for example, they're talking about the fact that, yes, remote work is available, but it is harder. It makes things a lot more difficult. I'm sure probably you run into some challenges where remote work does make things harder. 

But by the same token, there are a lot of folks that like that, convenience in being able to go do what they want to do when they want to go do it, it certainly expands that work schedule. For me, I look at the absolutes as being probably what you want to avoid. If you're saying, well, we're just going to be a virtual-only company, you're probably leaving something on the table there. But if you say that, well, everybody has to be at the office all the time, well, you're leaving some talent out there that you might not be able to get otherwise. To me, the hybrid work environment, that's what seems like the future holds. You look at a company like Microsoft , a company that's responsible for getting so many of those tools that we've been able to use, whether you're Slack or Zoom or Microsoft Teams, Microsoft Teams and all of the tools that Microsoft provides, they help enable what ultimately I think we're going to see is the hybrid work environment where a lot of folks have the opportunity to do it however they want to do it, but companies still have a process and a philosophy in place that leaves everybody feeling included. I think that's probably one of the bigger challenges. I think that's going to be one of the things that companies will figure out as time goes on, is managing the remote and the physically present workforce together. Not saying that's an easy thing to do, but I think that's going to be something that companies are going to have to do. Because to me, again, it feels like you've take it to the extreme, if you go absolutes one way or the other, that to me seems to open up more challenges of opportunities the longer you play that out.

Chris Hill: Jason Moser, thanks for being here.

Jason Moser: Thank you.

Chris Hill: Remember back in high school when your English teacher taught you how to write a thesis statements, it's the main idea of your essay and you are not going to get an A without a strong thesis statement. It turns out that's one of those skills that comes in handy for investors like you and me. Here to talk through the nuts-and-bolts of an investment thesis is Motley Fool Senior Analyst, Alicia Alfiere. Thanks for being here.

Alicia Alfiere: Thanks for having me.

Chris Hill: Before we get into some of the key questions that can go into an investment thesis. Why do you think an exercise like this is helpful for us as investors?

Alicia Alfiere: First, when we think of an investment thesis, it's really a summary of what you think of the company and why you think it makes a good investment case, as well as some of the risks. It's really important, particularly now when we are seeing a lot of market volatility. The idea here is that I will help you cut through all the noise of that market volatility and focused on signals for your company and hopefully stop you from selling a company that's actually pretty good.

Chris Hill: I know that you've been using Duolingo, let's use that as an example here, and some of the key questions that people can ask when they are looking to build an investment thesis for any business, for any stock and it starts with really knowing the company.

Alicia Alfiere: This one sounds like a no-brainer, but there are actually companies out there that require a little bit extra time and research to be able to answer questions like, what does this company sell? Do? What problem are they solving? Who are their customers? How do they make money? That's really fundamental to understand. If we use Duolingo as an example here, Duolingo is a global mobile learning platform with the mission to develop the best educational content in the world and make it universally available. They offer a gamified approach to learning over 40 languages and they offer a lot of different solutions here. They have their flagship Duolingo Learning Language App, which is free. They have Duolingo Plus, which is a subscription. Duolingo English Test, which is a proficiency exam, and Duolingo for Schools. Essentially the problem that they're solving here, is making education accessible to the mobile generation and their lessons are pretty effective. According to their internal study, users with five Duolingo units were as proficient in reading and listening as students with four college semesters of language classes. Then in terms of how do they make money, again really important to understand. They make most of their money from their subscription products. The rest comes from the Premium Apps, so those are based revenues and revenues from their English tax.

Chris Hill: Every business has competition, so obviously it is worth spending a minute or two when you're putting together an investment thesis thinking about competitive advantages that a business might have.

Alicia Alfiere: Look at the competition within the industry. Is there a product or service sticky? Does the business have network effects? When we talk about network effects, think of a platform like Facebook. Where you have this virtuous circle of data which makes your users use it more, which brings in more data, which allows you to get more insights, [laughs] which again makes that product even more valuable. In terms of Duolingo they are in a highly competitive industry. Lots of options to learn new languages, whether it's a virtual or in-person classes, other apps and websites and there is substitution items that you could use as well like translator apps. But what advantages does Duolingo have? They have a strong brand, they have had over 500 million downloads and their flagship app is the top grossing app in the education category on Google Play and the Apple App Store. This strong brand recognition really helps to drive organic growth for them. 

They also have strong network effects so 41.7 million monthly active users, which includes a US contingent that actually out numbers. Total US high school foreign language learners which a massive amount here. They have over a half billion exercises completed daily on the platform and as a result of that strong network, Duolingo beliefs, they have the largest collection of language learning data, and they feed this virtual cycle of their network by using their collection of data, to make learning experiences more efficient and differentiated for its users. In terms of platform stickiness, over 50 percent of daily active users have used the app for more than seven days in a row, and one million users have an active stretch of longer than 365 days. Pretty impressive there, but there are some tricky parts here for paid subscribers, it's a bit more complicated. About 40 percent of annual subscribers renew their subscriptions after a year or about nine percent of monthly subscribers renew their subscription after one year. They got some work to do here.

Chris Hill: At the Motley Fool, we're not just interested in the business, we're interested in the management as well. It's worth spending time figuring out, hey, who are the people running this business?

Alicia Alfiere: Absolutely. Take a look at who are the co-founders, who is leading the Company? Do they have a long-term vision? What's their culture like? Remember their employees are what make a vision come to life. If employees don't buy in, it's going to be really hard for a company to grow. For Duolingo, it was founded by Luis von Ahn and Severin Hacker, two engineers who met at Carnegie Mellon. Luis is the CEO and Director, Severin is the CTO and Director. They're both heavily involved in the company, which we really like. For Luis growing up in Guatemalan, he saw how access to education can truly transform lives and when he met his kindred spirit in Safran the two embarked are creating an accessible, effective, and intelligent learning solution. While they started with languages, their long-term goal is to have language learning be just one of the education solutions that they offer. They've already started along this path. They have their Literacy App, Duolingo ABC, which teaches children how to read and they're working on an app to teach elementary school math. For culture, I like to look at website like Glassdoor to see what employees think. Do they like working there? Are they dedicated to vision? On Glassdoor, 93 percent of employees would recommend Duolingo to a friend and 97 percent approve of the CEO, so pretty solid results here.

Chris Hill: We say all the time investing is about the future. At some point when you're putting together an investment thesis, you got to check a couple of boxes in terms of what does the future look like for this business?

Alicia Alfiere: Yes. Think about the future. What's the market opportunity for them? Can they grow? How can they grow? Are there any broader trends that can help or hurt the company in the future? For Duolingo, they're a player in a growing market, the mobile learning space. Preferences for convenience, an on-demand services have driven a lot of consumers toward mobile solutions. Whether it's shopping or learning, and COVID accelerated the usage for mobile learning. Though the growth will probably edge away from some of that COVID highs, it's still expected to grow. Global language learning spending both online and offline, reached 61 billion in 2019 and is projected to grow to 115 billion by 2025. Within this market, online learning is growing fast. From 12 billion in 2019 to 47 billion in 2025. Perhaps the convenience and flexibility of mobile learning, as well as smartphone adoption overall, is broadening the demand for that language learning products. Since Duolingo's annual revenues were about 161 Million in 2020, they're only about 1.3 percent of the current market for online language learning, which gives them a ton of room to grow. They have a plan to grow, which is really important. They think that they could grow by increasing the number of users, converting free users to those paid subscription users, increasing subscription stickiness, which we already talked about, and expanding their solutions, beyond that language learning.

Chris Hill: We want to be bullish when we're thinking [laughs] about stock that we're considering adding to our portfolio. But at some point you have to put on the bare hat and think about what are the risks to this business?

Alicia Alfiere: Because every investment has risks, that's the nature of the beast and if you can't find one, you need to research more. Be curious, play the part of the skeptic and ask, what could go wrong. This is especially important in times of market volatility. For Duolingo, we already talked about some of the issues that they have here. Operating in a highly competitive environment and subscription retention numbers that could be better. But there's also another issue we didn't talk about, and that's low switching costs. What that means that it doesn't really cost a lot of money and it's not a huge hassle for users to simply change apps, or take in person costs instead and so that is another risk.

Chris Hill: You've clearly put in some work on Duolingo, tell me how the story ends. Is this stock you're adding to your portfolio or is it on your watchlist for right now?

Alicia Alfiere: Well, right now it's more on my watchlist. At the end of this process, what I like to do is summarize and actually, hey, what would the investment thesis look like? In this case, I would say Duolingo has gamified approach to learning, which has helped the company build a strong brand and benefit from strong network effects in some platform stickiness. With these competitive advantages, strong tailwinds from online education trends, a large market to expand into, and a plan for expansion, Duolingo is an intriguing company by subscription retention statistics and those low switching costs give me a bit of a pause for right now. I'm going to continue to follow them and research them because I find this company fascinating and a really value leadership's vision and plans for the future.

Chris Hill: Do you've more information about putting together your own investment thesis in our show notes. So check those out when you get a chance. Alicia Alfiere, thanks so much for being here.

Chris Hill: That's all for today, I will be coming up tomorrow, three analysts share some of the biggest investing lessons that they've learned over the past 20 years. As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.

Alicia Alfiere owns Microsoft. Chris Hill owns Home Depot, Lowe's, Microsoft, Starbucks, and Visa. Jason Moser owns Booking Holdings, Mastercard, Starbucks, and Visa. The Motley Fool owns and recommends Booking Holdings, Home Depot, Mastercard, Microsoft, Starbucks, Twitter, and Visa. The Motley Fool recommends Lowe's and recommends the following options: short April 2022 $100 calls on Starbucks. The Motley Fool has a disclosure policy .

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Developing an M&A Thesis

Every company wants to evolve and grow its business, and M&A is one of the fastest and most powerful ways to grow. If done correctly, M&A can transform an organization overnight but there must be a sound M&A thesis. Without an M&A thesis, acquirers might end up wasting time, money, and opportunities. In this article, Siran Tanielyan, SVP, Corporate Development at Paramount, will discuss developing an M&A thesis. 

"An M&A thesis is a by-product of consistent conversations with the C-suite, business unit leaders, and continued assessment of the available assets." - Siran Tanielyan

What is an M&A Thesis

An M&A thesis is corporate development’s formal projection of where a specific area in the company can use M&A to accelerate the corporate strategy. The M&A thesis should answer three questions:

• What areas can be strengthened to deliver on the corporate strategy?
• Which areas can be supported by organic investment and which ones need inorganic growth?
• What are the specific targets that are best to support the goal? 

Often, corporate development cannot answer these questions. They must spend time with the business leaders, technology team, and product team to identify existing gaps.

How to Build an M&A Thesis

Corporate development's role is to determine the organization's capabilities and how the capabilities can achieve the overall strategy. Here are the steps to building an M&A thesis:

• Corporate strategy - The thesis aims to support achieving the corporate strategy. Everyone must be aligned with the goal. 
• Collaboration - Have strong partnerships and a regular cadence with the business leaders to see the areas where they could benefit from acceleration.
• Capital allocation - Not every company has unlimited funds for M&A. Understand the limits of funds for inorganic growth.
• Targets available - Look at companies that can help achieve the desired growth.  
• Buy-in leadership - If no dedicated leader takes responsibility for the success of the acquired business, the deal will fail. Ensure leadership buy-in before proceeding with the deal. 
• Establish consensus - M&A touches every facet of an organization. Getting buy-in from all the other constituents within the company that the transaction will directly impact is critical. 

If successful, corporate development is now in a position where they can proactively pursue deals to help achieve the corporate strategy. 

The biggest challenge when developing an M&A thesis

The biggest challenge when developing an M&A thesis is getting the commitment and bandwidth of the business unit leaders. Creating a thesis and working through lists of companies takes time. Understand that business leaders have day jobs and other priorities. Getting their attention and commitment is a constant struggle that most corporate development teams face. 

Corporate development must develop a strong relationship with the business leaders if the company wants to be proactive in M&A.

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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.

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Chosun Ilbo

M&A: Success & Failure Successful M&A? Need to have a clear investment thesis

The ultimate goal of M&A is not to win the deal in the bidding process.

By Soomin Kim

• August 18, 2007

The ultimate goal of M&A is not to win the deal in the bidding process. A wrong M&A can seriously harm the company rather than helping it to grow. What are the secrets to a successful M&A deal that can satisfy all the stakeholders from the CEO, employees and shareholders?

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Due Dilligence + Investment thesis

Helping companies at the early stages of an m&a to determine the right targets for acquisition through evaluation of risks, assessment of value generation levers, and results simulations, what challenge(s) do our clients face.

How to confirm the investment thesis in the early stages of a deal, which is characterized by lack of information about the actual valuation of a target organization, and its potential value creation levers

Most M&A processes originate from a business case/investment thesis based on the value-creation potential of acquiring and/or merging businesses. There are multiple challenges facing organizations during the pre-deal stage:

• Analyzing the current and potential value of a target: confirming or not the investment thesis
• Defining Valuation parameters
• Setting concrete and realistic goals for the integration: Agreeing targets which will drive the integration timeline, investment, milestones and team
• Mapping risks: Identifying potential problem areas and preparing mitigation and contingency plans
• Aligning expectations between all parties: Reaching consensus on the deal and integration goals, both across and within organizations

These challenges are particularly amplified in the early stages of a deal, which in our experience is often characterized by:

• A lack of information available on the target organization and/or the industry
• Conflicting interests between the sell and buy sides
• Time pressure, driven both internally based on the organization’s targets, and externally, as a result of uncertainty around the competition’s strategy

How do we help?

Integration helps to confirm the value creation levers, challenging the investment thesis and reducing the uncertainty in the decision-making process by bringing an unbiased perspective, balance between desire and reality, and a tested methodology.

We can help our clients with:

• Strategic Due-Diligence : Evaluating and analyzing the target’s strategic positioning and coherence with the Investment Thesis, considering aspects like market growth overview and trends, competitive landscape analysis, growth potential of the target, cultural assessment and governance related challenges. Our objective here is to see how a target company can contribute to the overall Investment Thesis.
• Commercial Due-Diligence: Evaluate and analyze the target’s commercial and sales strategy considering aspects like consumer needs, commercial structure, client base, and topline performance. Our objective here is not only to identify opportunities for cost saving but also to expand net revenue.
• Operational Due-Diligence: Evaluate and analyze operational aspects like manufacturing, logistic and back-office processes and structure; with the objective of foreseeing challenges and risks for each area, identifying any need for investment in infrastructure, people and also systems to achieve the desired service level for our clients.

What are the benefits ?

A thorough due diligence alleviates uncertainty and reduces risk. It can:

• Connect senior leadership to the reality: Understand expectations of your team vs. the deal context and target, to identify conflicts and reduce future frustration
• Improve accuracy of valuation through business/quantitative levers : Identify main aspects of the business that help to achieve the financial and strategic results planned in the investment thesis and / or business case, and estimate the benefits that it will bring to the new organization
• Improve accuracy of valuation through qualitative levers : Identify “soft” factors inside the organization which generate complexity in the post-merger integration phase, and impact capability and speed to generate value
• Reduce resource investment : Assess potential deal-breakers during due diligence, to improve efficiency in the evaluation process and accelerate decision making
• Improve visibility of risks and realistic action plans : Identify and measure business levers against the Investment Thesis target to assess potential conflicts, and set action plans with defined enablers and investment

How does it work ?

Our methodology has been developed through our experience in over 60 M&A processes, in a range of sectors, geographies and levels of complexity.

Each Due Diligence Assessment is unique and can vary in terms of phases depending on the maturity of the deal and its objective. But in most cases, it can be divided into three main steps:

The value of an unbiased party between the sell side and buy side should not be underestimated during the due diligence phase. Through our clean team approach, we bring a neutral and technical perspective that reflects what is best for the business, even if it frustrates individual agendas and interests.

SUCCESS STORIES

• BUY AND BUILD IN PRIVATE EQUITY
• ENTERING BRAZILIAN BEVERAGES THROUGH ACQUISITION
• EXPANDING PORTFOLIO IN SNACKS

A Private Equity & Investments fund had a buy and build Strategy for the Food Service Logistic Industry, and needed to evaluate multiple acquisitions at the same time to initiate a new platform from scratch: organizing the operation, defining the organizational structure and management team, and developing a plug and play platform.

We helped the client to carry out a strategic, commercial and operational due diligence – identifying the main opportunities to leverage the organization’s growth – and a market scan – evaluating the growth perspectives and the organization’s possible expansion scenarios. Based on the buy and build strategy, they rapidly invested in one target. After this first acquisition, we helped them to confirm the investment thesis targets and assess a group of companies that they were considering for investment.

For the private equity fund: we confirmed the investment thesis targets, selection of the potential targets and provided visibility of the main risks of the strategy defined (commercial and operational issues), increasing their confidence on the thesis. The company started with zero and after 2 years had an income of over R$2 Bi /year.

For the Management Team and Board of the acquired organization, we helped to organize and define key questions to be evaluated during the acquisition process and clarified the need to prepare the teams for the multiple PMI processes.

A leading European beverage organization entered the Brazilian beverages market through the acquisition of a local player. The client had no prior knowledge about the market, and needed to understand the local competitive landscape, and route to market.

We started by completing a commercial pre-due diligence assessment of the prospect’s route to market capability, and developed an analysis to test if the volume forecast in the entry strategy business case could be achieved in the timeframe expected, based on the client data base. We identified the main gaps in the market, and further evaluated the route to market strategy and commercial structure, to understand the core strengths of the acquired organization, and their capability to cover the market gaps.

We concluded that their business case was feasible from a route to market perspective, with one major attention point flagged for the real due diligence (price deflation), for which we defined a clear action plan. Following this confirmation, we supported the client to detail the synergies and plan the integration, considering the action plans defined in the Due Diligence Phase.

An American Chocolate Manufacturer with a small presence in Brazil was looking to expand its operation via acquisitions. Considering that other leaders in the chocolate business were already owned by other multinationals, they identified a player that had a wider portfolio, playing in snacks beyond confectionary. The client asked Integration for support in evaluating the real chances of success from a possible merger.

One the project had been confirmed as aligned with the overall strategy, and approved by investors, we worked hand in hand with global M&A to develop extensive data analysis and simulations, interview local producers and conduct field visits, to ensure the recommendation was solid and the rationale clearly understood.

Through a detailed understanding of the target company value proposition, distribution channels, brand equity and profitability projections, our recommendation did not confirm the organization’s hypothesis.  The deal was not approved, and the client took a different, more successful direction.

INDUSTRY EXPERIENCE

Our M&A approach adapts to industries of every sector – we serve industries going through an M&A process by themselves, and private equity organizations who have competed many before, working with many regional and international companies across Consumer Goods, Logistic Operators, Retail, Pharma Healthcare among others.

Our professionals have a developed understanding of market dynamics, best practices, and organizations’ strategic decisions across geographies, as well as industry segments. This allows us to bring robust and customized solutions to our clients in all M&A strategies and contexts.

Augusto Ribeiro

Augusto Ribeiro is a partner at Integration and has been working since 2003 in the Marketing & Sales practice. Augusto built a solid international experience, leading and implementing strategic Marketing & Sales projects in industries ranging from Consumer Goods through Construction & Property Development to the Financial Industry, especially in the Private Equity sector.

Carlos Lima

Carlos Lima is the president of Integration and a founding partner. Carlos has worked with leading international companies across the globe as a consultant for the last 30 years and has developed a particular specialization in Marketing and Sales. He is considered an expert in the Consumer Goods sector and on the topics of Commercial [...]

Carolina Flores

Carolina Flores is a senior director an  has been working in our Finance & Management Practice since 2010, helping our clients across industries achieve important transformations. She has often been involved in projects of large and international scale supporting organizations to achieve their financial objectives through efficiency programmes, Organizational Structure changes, Synergy Evaluation and PMI [...]

Daniel Rodrigues

Daniel is a Partner within our Marketing & Sales practice and leader of Integration’s Tech & Digital. Over the course of over 10 years with Integration, Daniel has helped clients from diverse industries and countries with digital and commercial challenges ranging from Go-to-Market Strategy to Commercial Due Diligence. Through his extensive business experience Daniel ensures [...]

Hugo Ribeiro

Hugo Ribeiro is a founding partner at Integration and can count on more than 30 years of experience in consulting. Hugo, who holds a post-graduate degree in Business Administration from Harvard University, is a senior specialist in the area of Finance & Management and frequently leads projects in Organizational Structure, Strategic Planning, M&A, Improvement of [...]

Lucas Tavolaro

Lucas Tavolaro is a senior director at Integration and has been working in the Finance & Management Practice since 2011. He has supported our clients in the creation Strategic Roadmaps, M&A synergy evaluations, Go-to-Market strategies, Cost Efficiency and Strategic Sourcing projects. His experience includes sectors such as Consumer Goods, Construction & Property Development, Education, Private [...]

Luis Bernal

Luis Bernal is a director in the Marketing & Sales Practice. Originally from Columbia, Luis is an entrepreneur at heart, and has worked in several start-ups in Colombia, receiving his MBA from IPADE. He has accumulated international consulting experience whilst working across the United States, Mexico, Caribbean and Central America, Colombia and Brazil in industries [...]

Luis C Vidal

Luis C Vidal is a partner at Integration where, since 1999, he has been working in the Supply Chain practice. During this period, he has led projects in the most diverse sectors and in themes such as Logistic Optimizations, Process Efficiency, Planning (S&OP), Industrial Strategy, Go-to-Market Strategy and Distribution Structure. His international experience encompasses the [...]

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How do you structure an investment thesis in PE?

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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.

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

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.

Agreed. As useful as my left foot.

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

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?

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.

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.

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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Mergers and Acquisitions as a Strategic Market Entry Approach

In today's rapidly changing global business environment, companies of all sizes continually seek ways to expand their market presence and secure future growth. One of the most effective strategies for achieving this objective is through mergers and acquisitions (M&A). M&A offers the potential for rapid market entry and numerous other advantages that can position a company for success in unfamiliar territories. This article will explore the intricacies of M&A as a market entry strategy, examining its benefits, challenges, best practices, and critical considerations for making informed decisions.

Crafting Your Strategic Growth Journey

While there is no one-size-fits-all solution, the key to successful strategic growth lies in a combination of factors: a clear understanding of market dynamics, a customer-centric approach, the ability to adapt to emerging trends and technologies, and a commitment to innovation. Whether through organic growth, M&A, digital transformation, international expansion, or a blend of these methods, organizations that embrace a strategic growth mindset and continually seek opportunities to evolve are well-positioned to survive and thrive in the complex and ever-changing business world. The journey to strategic growth may be challenging, but the rewards are abundant for those who embark upon it with vision, determination, and adaptability.

Crafting a strategic growth journey is akin to laying down a roadmap for a long trip. With clarity of direction, the right strategies in place, an innovative mindset, and a robust team, businesses can navigate the complexities of growth and achieve long-term success. Remember, the growth journey is about reaching the destination and evolving, adapting, and thriving along the way.

Understanding M&A as a Market Entry Strategy

Mergers and acquisitions refer to the strategic activities wherein two companies combine forces or acquire the other. A merger occurs when two relatively equal-sized companies form a new, combined entity. In a merger, both companies typically contribute their assets, liabilities, and equity to the new entity, which often has a new name and organizational structure. The goal of a merger is to create synergy, combining the strengths of both companies to achieve operational efficiencies, expand market presence, and increase competitiveness. On the other hand, an acquisition involves one company purchasing another company, resulting in the acquired company becoming a subsidiary or part of the acquiring company. In this scenario, the acquiring company assumes control of the acquired company's assets, operations, and decision-making. Let's summarize it:

Merger : This is when two companies combine to form one entity, generally aiming at leveraging synergies, improving efficiencies, or growing market share.

Acquisition : This is where one company buys another. The acquiring company takes over the management and decision-making of the acquired firm, which may continue to operate as a separate entity or be absorbed.

While M&A transactions are often associated with consolidation within established markets, they have also become pivotal tools for entering new markets. M&A as a market entry strategy involves purchasing or merging with a business already operating in the target market, providing an immediate foothold. The critical distinction between M&A and other market entry methods, such as organic growth or joint ventures, is the speed and scale it allows a company to penetrate a new market. It can be particularly advantageous in fast-moving industries where being a first-mover or early entrant is essential for gaining a competitive advantage.

Types of M&A Market Entry

Before diving deeper into the mechanics of M&A as a market entry strategy, it's essential to recognize that M&A can take various forms when entering new markets. These forms include:

Horizontal Integration : This involves acquiring a company that operates in the same industry and market as the acquiring company. It aims to expand market share, reduce competition, and achieve economies of scale.

Vertical Integration : A company acquires a business that is part of its supply chain, either upstream (supplier) or downstream (customer). This strategy can enhance control over the supply chain and improve efficiency.

Market Extension : Market extension M&A involves entering new geographic markets by acquiring a company with an established presence in those regions. It is an effective means of expanding internationally.

Product Diversification : Companies can use M&A to diversify their product or service offerings by acquiring a business in a different industry or market. This approach can reduce risk by decreasing dependence on a single market.

Benefits of M&A in Market Entry

M&A as a market entry strategy offers a range of compelling benefits, making it an attractive choice for businesses aiming to expand their reach. Let's explore these advantages in detail:

Rapid Market Access:  One of the most significant advantages of M&A for market entry is the speed at which a company can establish a presence in a new market. Instead of building operations from scratch, which can be time-consuming and resource-intensive, M&A allows for immediate entry. This rapid access is especially valuable in industries where being late to market can result in missed opportunities and increased competition.

Established Customer Base:  Acquiring an existing business in the target market provides immediate access to an established customer base. It can jumpstart revenue generation and help mitigate the challenges of building brand recognition and customer trust from scratch.

Access to Local Expertise:  Entering a new market often involves navigating unfamiliar regulatory frameworks, cultural nuances, and consumer preferences. When a company acquires a local business, it gains access to valuable local expertise, including knowledge of market dynamics, customer behavior, and regulatory compliance.

Risk Mitigation:  While market expansion is inherently risky, M&A can help mitigate some risks. By acquiring an existing business with a track record of success, a company can reduce the uncertainty associated with market entry. Additionally, risks related to establishing supply chains, distribution networks, and market relationships can be minimized.

Synergy Realization:  M&A can unlock synergies that create value beyond what the individual companies could achieve on their own. These synergies can take various forms, including cost savings, revenue enhancement, and improved operational efficiency.

Strategies for Identifying Suitable Targets: Strategic Fit and Target Pipeline Development as the First Step

Identifying suitable acquisition targets is critical in executing a successful M&A market entry strategy. To achieve your long-term growth plans, you must define the specific market, the essential elements of the ideal target company, the strategic and cultural fit, and the financial performance. Let's look at those topics:

Identifying Target Markets:  Start by identifying the specific markets that align with your expansion goals. Consider factors such as market size, growth potential, competitive landscape, and regulatory environment. A well-defined target market will guide your search for acquisition opportunities. I find portfolio analysis methods such as the Boston Consulting Group matrix, product life cycle (PLC), and the SWOT analysis helpful to define in which markets you want to invest.

The M&A Target list - Scouting Potential Acquisitions:  Once you've pinpointed your target market, begin scouting for potential acquisition targets. It can involve market research, networking, and engaging with industry experts and advisors. Companies often employ specialized firms or brokers to help identify suitable targets. Using investment banks and advisors will help you to find more potential targets.

Strategic Fit and Cultural Fit Analysis:  Evaluate potential targets based on their strategic fit with your business. Consider how the acquisition aligns with your overall growth strategy, whether it complements your existing operations, and if it provides access to critical resources or capabilities.

Financial Performance and Valuation Methods:  Determining the value of a potential target is a complex process. Companies use various valuation methods, including market-based, income-based, and asset-based approaches, to assess the fair market value of the target company. Consulting with financial experts and valuation specialists is advisable to ensure accuracy. I usually use the comparable transaction method (e.g., EBITDA multiple of recently sold similar companies) and a discounted cash flow (DCF) method.

The M&A Process: The Next Steps from the First Discussions to the Operational Integration

Executing a successful M&A market entry strategy involves a series of well-defined steps. These steps provide a structured framework for navigating the complexities of M&A transactions:

Initial Contact and Negotiation:  The M&A process typically begins with identifying a suitable target (as outlined before) and initiating contact. Initial discussions involve exploring the potential transaction, assessing mutual interest, and conducting preliminary negotiations. Confidentiality agreements (NDAs) to protect sensitive information are essential during this phase.

Due Diligence, Investment Thesis, and Plans for the Operational Integration:  Due diligence is a comprehensive investigation into the target company's financial, operational, legal, and regulatory aspects. It aims to uncover potential risks or liabilities and validate the information the target provides. Due diligence is a critical phase that informs the decision-making process. You develop your investment thesis based on the due diligence data and start planning the operational integration.

Deal Structuring and Agreement:  Once due diligence is complete and both parties are satisfied with the terms and deal structure, the next step is to draft a formal agreement. This agreement outlines the terms and conditions of the transaction, including the purchase price, payment structure, and any contingencies.

Regulatory Approval:  M&A transactions often require regulatory approval from government authorities or industry-specific regulators. Companies must navigate the regulatory landscape to ensure compliance and secure the necessary approvals. Delays or challenges in this phase can impact the transaction's timeline and outcome.

Post-Closing Adjustments and Post-Acquisition Integration:  After the closing, you follow up on any purchase price adjustments (e.g., working capital adjustments) and work with your accounts on the purchase price allocation (PPA), defining goodwill. The successful execution of an M&A market entry strategy doesn't end there. Post-acquisition integration is a critical phase where the acquiring company and the target company merge their operations, cultures, and resources. Integration can be complex and time-consuming, but it's essential for realizing the anticipated synergies and achieving long-term success.

Case Studies: Successful M&A Market Entry

To gain a deeper understanding of how M&A can serve as a market entry strategy, let's explore a few real-world case studies of successful M&A transactions:

Example 1: Disney's Acquisition of Marvel Entertainment

In 2009, The Walt Disney Company acquired Marvel Entertainment for approximately $4 billion. This acquisition provided Disney with access to a vast library of iconic characters, expanding its content portfolio. Disney successfully integrated Marvel's characters into its media and theme park offerings, resulting in substantial revenue growth and franchise expansion.

Example 2: Amazon's Purchase of Whole Foods

In 2017, Amazon acquired Whole Foods Market for $13.7 billion. This strategic move allowed Amazon to enter the grocery retail sector, giving the e-commerce giant a physical retail presence and access to Whole Foods' customer base. Amazon has since integrated its online services with Whole Foods, offering benefits such as Prime discounts to customers.

Example 3: Facebook's Acquisition of WhatsApp

In 2014, Facebook acquired WhatsApp, a leading messaging app, for $19 billion. This acquisition enabled Facebook to expand its messaging capabilities and user base. WhatsApp continued to operate independently, but Facebook leveraged its extensive resources to support its growth and development.

These case studies illustrate how M&A can be a successful market entry strategy, provided companies carefully evaluate their target companies and execute integration effectively.

Conclusion: M&A for Market Entry – A Strategic Imperative

In the dynamic and fiercely competitive business world, expanding into new markets is often a strategic imperative for growth and sustainability. Mergers and acquisitions offer a potent means of achieving this objective, providing a rapid path to market entry, access to established customer bases, local expertise, and the potential for synergistic value creation.

However, the successful execution of M&A as a market entry strategy requires careful planning, meticulous due diligence, and a deep understanding of the target market's nuances. Companies must also navigate challenges related to cultural integration, regulatory compliance, financial risks, and synergy realization.

Despite these challenges, M&A remains a compelling and flexible strategy for market entry. It can transform companies, unlock new opportunities, and position them for sustained growth in unfamiliar territories. By embracing the principles of clear communication, stakeholder involvement, flexibility, continuous evaluation, patience, and persistence, companies can harness the full potential of M&A as a strategic imperative for market entry and expansion. In the ever-evolving global marketplace, M&A continues to be a path that leads to new horizons, growth, and success.

Why Coaching is the Secret Ingredient to M&A Success

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Steward Partners CEO tackles AI, M&A and hybrid RIAs

Steward CEO Jim Gold sits down with InvestmentNews to weigh in on the top trends moving the RIA space.

• June 14, 2024
• By Gregg Greenberg

Sorry sci-fi fans, but the rise of artificial intelligence (AI) is not going to sink the RIA industry. Clients will always need – and value – financial advice delivered by human beings for human beings.

Where AI will shake-up the wealth management arena, according to Steward Partners CEO Jim Gold , is its ability to improve the manner in which that advice is communicated.

“For 30 years, going back to online trading, there’s been this industry fear over the ‘death of advice.’ I remember the commercial with a truck driver having his own island,” said Gold. “I think the threat is not to advice.”

The growth of AI and other tools to better connect advisors and clients is only the latest trend Gold sees the RIA world undergoing. A longer running movement is the shift from wirehouse operators to independent RIAs like Steward Partners, which at last check oversees $35 billion in client assets, facilitated by a network of over 250 independent advisors across 59 offices.

In fact, Gold sees that trend as “underreported” despite its longevity.

“I think if you look at the data in the last 20 years, those firms have gone from over 50 percent market share to 37 percent market share. Yet, talk about record productivity, record Advisor, headcount and all of that is going to some form of independence,” said Gold. “I think there’s really a generational shift taking place right in front of our eyes.” 

While the shifting tide away from wirehouses to independent RIAs may not getting as much airtime or press as it used to, there has been a lot written and reported of late about so-called hybrid RIAs. Gold believes the hybrid RIA model offers increased “optionality”, something which Steward highly values.

“I think the trend there is the big getting bigger and they are going to win more. I think scale used to be at $2 billion or $3 billion for an RIA, say 10 or 15 years ago. Back then, that may have been considered an RIA of size or a hybrid of size. Now that number is $10 billion,” said Gold. “I think that’s actually helping to drive M&A inside the space.” 

Speaking of M&A in the RIA arena , and the private equity money driving it, Gold sees it as a positive factor, not to mention a validation of the trend toward independence.

“These are sophisticated investors that are saying ‘this thesis is real’,” said Gold. “And it is still in the early stages. I think it’s actually a real benefit to the wealth management space to have that private capital to utilize and to grow.”

One widely reported trend that could potentially undermine the growth of the wealth management industry is the potential retirement of up to a third of working advisors over the next decade in a demographic-based exodus .

Gold, for one, is confident those advisors will be replaced. The challenge in his view is the quality of the wealth managers that will take their places.

“Are you bringing in people who are equally as talented, and how do you get them?” asked Gold.

“To me, succession is a multi-year process,” Gold said. “It’s not something you decide today in June and say ‘Hey, I’m going to wrap it up at the end of the year.’ You have clients to think about and you have your team to think about and you have to think about the monetization of the practice you built. That’s a lot and I think people need to give it time to make sure they do it right.” 

Related Topics: Steward Partners

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How one approach to M&A is more likely to create value than all others

M & A is having a moment—again. The US Federal Trade Commission (FTC) has had to adjust its premerger review process to manage the tidal wave of filings coming its way. 1 Competition Matters , “Adjusting merger review to deal with the surge in merger filings,” blog entry by Holly Vedova, August 3, 2021, ftc.gov. And according to some sources, deal value rose more than 300 percent in the first half of 2021 compared with the first half of 2020, and “was virtually equivalent to the total value recorded in all of 2020.” 2 Michael Deyong and John Reiss, New heights: US M&A H1 2021 , White & Case, August 2021, whitecase.com.

About the authors

Activity is surging as companies use M&A to manage the still-unpredictable economic effects of the COVID-19 pandemic and find their strategic footing. They are pursuing deals to streamline their assets, establish or extend their digital capabilities, acquire top talent, and otherwise strengthen their competitive positions. None of this is news to those companies that have adopted a through-cycle mindset to M&A ; alliances, partnerships, and other transactions have been top of mind for them all along.

What might interest all executives, however, is a reminder of what really works when it comes to deal making. Our empirical research, which analyzes more than 20 years of data, confirms, once again, that programmatic M&A is the strategy that is most likely to create the most value for companies. That is, carefully choreographing a series of deals around a specific business case or M&A theme—rather than relying on episodic “big bang” transactions—is far more likely than other approaches to lead to stronger performance and less risk. 3 Organic M&A entails making less than or equal to one deal every three years, where the cumulative value of deals is less than 2 percent of the acquirer’s market capitalization. Selective M&A entails making less than or equal to two deals a year, where the cumulative value of deals is greater than 2 percent of the acquirer’s market capitalization (and not organic). Programmatic M&A entails making more than two small or midsize deals a year, where the total market capitalization acquired is meaningful (median of 19 percent). Large-deal M&A entails making more than or equal to one deal a year, where the target market capitalization is more than 30 percent of the acquirer’s market capitalization.

Indeed, our most recent survey data, which we’ll explore in this article, reveal other facts about the impact of programmatic M&A  across sectors, during downturns, and in the context of large deals. (Hint: large deals are not always value-destroying, especially when complemented by some form of programmatic M&A.) We’ll examine which M&A strategies create the most value, why programmatic still reigns over other approaches to M&A, and how programmatic acquirers do what they do .

Proof of efficacy aside, it’s critical for executives to remember that programmatic M&A is not purely a volume play; it’s a strategy for systematically building new businesses, services, and capabilities. The companies that use a programmatic approach create deal flows linked to their conviction in their corporate strategy, understanding of their competitive advantage, and confidence in their capacity to execute. They manage their growth strategies proactively. And their approach to M&A does not change, regardless of the success or failure of any single deal.

Which M&A strategies create the most value?

McKinsey’s Global 2,000 research had previously demonstrated that companies that use a programmatic approach to M&A—versus organic, selective, or big-deal approaches—generally outperform their peers. 4 In our ongoing Global 2,000 Survey, we track the largest 2,000 global companies (by market capitalization), measure the amount of excess TRS they created compared with industry peers, and examine the type of acquisition strategy they deployed. The data confirm that programmatic acquirers continue to perform better than industry peers across sectors; the more deals a company did, the higher the probability that it would earn excess returns. Programmatic M&A entails pursuing a minimum of two small or midsize deals a year, with meaningful market capitalization acquired (20 percent to 30 percent). These companies are able to build lasting, distinctive capabilities in M&A precisely because they do deals frequently and systematically.

Fast-forward to 2021, and the results of our ongoing M&A research are even more compelling. Data from the most recent decade reconfirm that companies that regularly and systematically pursue moderate-size M&A opportunities deliver better shareholder returns than companies that do not. For instance, programmatic acquirers, on average, delivered about 2 percent more in excess total returns to shareholders (TRS) annually as compared with their peers. By contrast, none of the other approaches to M&A (organic, selective, big deal) created any excess TRS, on average, for the cohort of companies.

But the following five new pieces of information emerged for the first time.

Finding 1: Organic-growth strategies are now—on average—the worst performing of all M&A approaches

In the past, our data have shown the limitations of both selective-acquisition and organic growth 5 Organic growth refers to the growth a company achieves by expanding its own capacity, using internal resources. (or not pursuing M&A) strategies; both had, on average, created notable losses in excess TRS relative to the other two approaches (programmatic and large-deal programs). However, our most recent numbers show that, of the four types of programs studied, organic-growth strategies are now the worst performing and the most risky, while the large-deal approach to M&A essentially amounts to a coin flip (Exhibit 1).

According to our analysis, programmatic M&A remains the least risky approach with the smallest deviation in performance and the largest share of companies that generate positive excess TRS (65 percent). In other words, two out of the three companies that practice programmatic M&A outperformed against their peers.

Finding 2: The programmatic approach succeeds across nearly all sectors of the economy

Our close look at how global companies in various sectors performed (again, keying in on excess TRS created) shows that a programmatic approach wins the day—particularly in advanced industries and the energy and materials sectors (Exhibit 2).

Finding 3: The large-deal approach to M&A does not necessarily destroy value

For companies using a large-deal approach to M&A—that is, pursuing deals in which the target company’s market cap is greater than or equal to 30 percent of the acquirer’s market cap—our research confirms that such pursuits are, as mentioned earlier, the equivalent of a coin toss. But companies can increase the odds of success with this approach by complementing it with a programmatic strategy. The data show that companies that pursued large deals early during the 2010s, but augmented this approach with programmatic M&A, generated 1 percent more annually in TRS (on average) than their peers did. They in fact won the coin toss (Exhibit 3).

Take one medical-device company, for example: between 2000 and 2009, it completed around one deal a year, and its excess TRS over the period was –1.5 percent. Between 2010 and 2019, the company went through a leadership change and adopted more of a programmatic model. It was then completing about six deals per year, including some larger targets (up to 10 percent of the company’s own market capitalization). Most of the deals were focused on expanding the medical-device-company’s geographic footprint. In part because of its new approach to M&A, the company’s excess TRS over the decade averaged 2.7 percent per year above that of its peers.

Finding 4: The programmatic approach can withstand periods of high economic volatility

Even during the COVID-19 pandemic, programmatic acquirers’ performance far outpaced that of their peers using other approaches to M&A, which is consistent with patterns we have seen in prior downturns . What’s more, the numbers show a widening performance gap between programmatic acquirers and companies using other approaches to M&A (Exhibit 4).

Finding 5: Changing course remains difficult

Despite all the evidence in favor of a programmatic approach, more than 50 percent of companies in our research base have kept the same M&A strategy over the past 20 years (Exhibit 5).

Why? Change is hard, and the programmatic model may not be the right fit for every company: some businesses may have to contend with organizational limitations or industry-specific obstacles. Nevertheless, it can be instructive for companies with any type of M&A program to take lessons from those that are changing course.

Consider a large brewing company: it increased its average annual deal count from about 1.5 (2000–09) to about three (2010–19) deals per year, and, perhaps more important, the size of the deals increased. In the first period, the deals targeted less than 2 percent of the brewing company’s own market cap. In the second period, the deals targeted more than 5 percent of the company’s market cap, with some acquisitions targeting 15 percent above its market cap. In part because of this change in approach, the brewing company’s annual excess TRS grew from –6 percent in 2000–09 to +2 percent in 2010–19.

What do programmatic acquirers do differently?

M&A is not “an event,” and it is not something that “happens” to a company. It is a capability that is essential for creating outsize value, and like any capability, it requires sufficient attention and resources to grow. Our decades of research on companies’ M&A approaches and underlying capabilities point to three critical focus areas for success —what we’ve dubbed the three C’s of M&A: competitive advantage, conviction, and capacity. The programmatic acquirers in our research base are particularly adept in each of these areas.

Competitive advantage

Our most recent data show that programmatic acquirers are more likely than their peers to understand how economic shocks, such as the COVID-19 pandemic, affect their competitive advantage and how to modify their corporate and M&A strategies and initiatives accordingly. Programmatic acquirers are also more likely than their peers to develop a robust M&A blueprint  that explicitly defines how M&A will contribute to corporate strategy and guide proactive deal sourcing.

For instance, our 2021 survey revealed that programmatic acquirers are:

• 1.5 times more likely than peers to strongly agree that they have a clear understanding of their source of competitive advantage
• 1.4 times more likely than peers to strongly agree that they are aligned on the industry and market trends they want to pursue
• 1.4 times more likely than peers to strongly agree that they understand which assets they need to acquire to meet the company’s M&A aspirations

These companies have a trusted process for generating multiple financial and operational scenarios and leaning into them as they unfold, adjusting their strategies (including their M&A strategies) as they go. Previous McKinsey research  points to the large TRS gains resilient companies achieved as a result of careful actions taken before, during, and after the 2008 credit crisis. With a focus on competitive advantage during the latest economic shock, it is likely that programmatic acquirers have similarly positioned themselves ahead of their competition for several years.

Programmatic acquirers continually assess and update their central M&A themes , so they can build conviction for targeted deals and act quickly when opportunities emerge. All too often, companies dedicate less time and attention to assessing an M&A opportunity than they would an internal deployment of capital—which is ironic, given how much larger M&A investments can be compared with most internal investments. Our research shows that programmatic acquirers are about 1.2 times more likely than their peers to build comprehensive business cases around potential M&A targets. By doing so, they can persuade senior managers and board directors to buy into the deal relatively quickly; they can also create a strong M&A narrative that can be shared with prospective targets, investors, the market, and others.

Our research also shows that programmatic acquirers are 1.4 times more likely than their peers to proactively reach out to prospective targets, and about 20 percent more likely than their peers to reallocate capital in line with corporate strategy. Notably, only 13 percent of programmatic acquirers paused their M&A activity in 2020 amid the COVID-19 pandemic, compared with 31 percent of nonprogrammatic acquirers.

A company’s ability to execute on its strategy often comes down to whether it has enough financial, talent, and organizational capacity. Programmatic acquirers tend to have a strong sense of that capacity given their well-developed M&A operating model. Because they don’t have to reinvent the wheel for every due-diligence process or integration plan, for instance, they can execute more transactions while creating more value from each.

According to our 2021 survey, programmatic acquirers are:

• 1.9 times more likely than peers to strongly agree that they have the right capabilities (tools and talent) to execute their M&A strategy
• 1.4 times more likely than peers to strongly agree that they have clearly defined processes for all dimensions of a due-diligence process (financial, legal/risk, operations, culture, and talent)
• 1.6 times more likely than peers to strongly agree that they have a clear process for designing a new, integrated organizational structure

These and other data confirm that a programmatic approach to M&A and a focus on the three C’s can lead to outperformance. But the proof is not just in the numbers; it’s in the stories of businesses that have differentiated themselves through their ability to source the deals that align most with their overall corporate strategy—and to act quickly because of the knowledge, infrastructures, and capabilities they have built up around M&A.

The lessons come from, for instance, the luxury-goods company that has been able to generate outsize returns over the past ten years—and has continued do so, even during the COVID-19 pandemic. Between 2010 and 2020, the company completed nearly 50 deals and achieved excess TRS of 15.2 percent. Most of the targeted deals have been small (less than 5 percent of the company’s market cap) although several have been larger (nearly 30 percent of its market cap). Through these acquisitions, the company has been able to build out product segments and expand its geographical reach. Given the high volume of deals the company has pursued, M&A has become a full-fledged capability—along the lines of R&D or marketing.

The case for a programmatic approach to M&A has long been established. But newer findings about its compatibility with the large-deal approach to M&A; its effectiveness in multiple sectors of the economy, notably during times of high volatility; and how it fares against organic-growth strategies reflect the staying power of this deal-making strategy—and the opportunities for the companies that are paying attention. Those that have tested and evolved their M&A strategies toward a programmatic approach will likely have the edge moving forward.

Paul Daume is an associate partner in McKinsey’s Cologne office; Tobias Lundberg is a partner in the Stockholm office; Patrick McCurdy is an associate partner in the Boston office, where Jeff Rudnicki  is a partner; and Liz Wol is a partner in the New Jersey office.

The authors wish to thank Riccardo Andreola, Thomas Fehm, Jasleen Kaur, Cathy Lian, and Cole McWhorter for their contributions to this article.

This article was edited by Roberta Fusaro, an executive editor in the Waltham, Massachusetts, office.

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How to Create an Investment Thesis

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

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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More From Forbes

How family offices can lead the charge to de-risk investments.

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Family offices are uniquely poised to de-risk investments, clearing the way for other investors to ... [+] direct capital to impactful causes & organizations.

Family offices are uniquely positioned to drive significant societal change by de-risking investments in emerging technologies and solutions addressing global challenges such as the climate crisis. Traditional venture capital often falls short in funding long-term, high-risk projects, leaving a critical gap that family offices can fill.

Family offices can lead the way in securing a sustainable and innovative future by employing a blended finance approach and developing strategic investment theses.

The Importance Of De-Risking Investments

Albert Wenger , a partner at Union Square Ventures , underscores the unique role family offices can play in taking on risks that traditional venture capital firms often shy away from.

Wenger, who also wrote the book World After Capital , points out that family offices have the flexibility and capacity to invest in high-risk, high-reward areas such as fusion energy and geo-engineering research. These areas are crucial for tackling the climate crisis but are typically seen as too uncertain for institutional investors.

To that point, Wenger remarks that the current wealth management practices might be misaligned, "Personal wealth should be taking exactly the risks that other people aren't willing to take. One of my big misgivings about a lot of personal wealth is that it's being all handed to managers, and the managers are then immediately being risk-averse again."

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Family offices, therefore, have a unique opportunity to step in and fund projects that might not see the light of day otherwise. By de-risking these investments, they can not only contribute to significant advancements in critical areas but also potentially reap substantial rewards.

Employing a Blended Finance Approach

A blended finance approach allows family offices to combine different types of funding—venture capital, philanthropic efforts, and direct investments—into a cohesive strategy. This approach is essential for addressing complex global challenges that require more than one type of financial support.

Wenger advocates for this holistic method, saying, "It's much more important to have a thesis-based approach and then say, if this is my thesis, what are the different levers I can actuate?" This means that family offices should not view their investments as separate and unconnected buckets. Instead, they should integrate various forms of capital to address different facets of a problem simultaneously.

For example, the climate crisis requires new technologies to be developed and existing ones to be deployed. Venture capital can help fund the former, while direct investments and philanthropic efforts can support the latter, as well as fund activism and research that might not yield immediate financial returns but are crucial for long-term solutions.

Developing a Solid Investment Thesis

Having a well-defined investment thesis is crucial for guiding family offices in their investment decisions, as this can ensure the alignment of various individual investments. Wenger emphasises the importance of this strategic approach, noting that family offices should see their investments as part of an integrated strategy driven by a central thesis.

"You have to have a thesis, and the thesis connects various investments in interesting ways," Wenger explains. This approach ensures that all investments are aligned with long-term goals and can drive substantial impact.

For instance, a family office might adopt a thesis focused on combating climate change. This thesis would guide all investment decisions, from funding clean energy startups to supporting geoengineering research. By having a clear, overarching strategy, family offices can ensure that their investments are not only financially sound but also contribute to their broader goals.

Wenger also highlights the importance of being hands-on and willing to do the necessary homework. "If you want to pursue a thesis-driven direct investment strategy, you have to be willing to do your own homework," he advises. This might involve researching new technologies, understanding the science behind them, and identifying the right people and projects to invest in.

The Unique Opportunity For Family Offices

Family offices have a unique opportunity to lead the charge in de-risking investments and addressing global challenges through a blended finance approach and strategic investment theses. Retail investors aren’t able to have the same impact and other large institutional investors often aren’t able to take on the same amount of risk. By taking on the risks that traditional institutional investors avoid, employing a holistic financing strategy, and developing robust investment theses, family offices can drive meaningful change and secure a sustainable future.

As Wenger succinctly puts it, "The people whose fortune it is ought to decide what they want the money to do and which risks they want to take." This mindset is key to leveraging the full potential of family offices in today's complex investment landscape.

By embracing these strategies, family offices can not only enhance their financial returns but also make significant contributions to solving some of the world's most pressing problems. From addressing the climate crisis to sustaining democratic institutions, the potential for family office impact investing is immense. It is time for family offices to step up and lead the way, using their unique capabilities to drive positive change on a global scale.

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How to best work with your Board of Directors: Tips and tools for SaaS CFOs

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People & Leadership

Do you have the tools you need to make every board meeting efficient and productive? If not, we can help.

Board management is something all SaaS CFOs have to deal with, so it’s worth taking the time to get it right.

What does your board of directors expect of you, and how can you most effectively measure your progress in that direction?

Just as importantly, do you know what to avoid at board meetings and what red flags to watch out for? 

In this article, we’ll set you up to manage your board successfully and build a profitable working relationship.

What that looks like depends on whether your organization is backed by private equity (PE) or venture capital (VC) funding.

Here’s what we’ll cover

For saas cfos, board management differs based on context, what does a pe board want to see, visualize your data in board meetings, what is the board’s investment thesis, what will growth look like, where will m&a come from, keeping your vc board happy, a red flag to watch out for, 1. prioritize transparency with your board, 2. show up with solutions, not questions, 3. give them more than numbers, get the board management strategies you need, sage intacct saas intelligence.

To learn more about the impact your metrics can have on your company’s success, check out our video on using your KPIs to tell your story to VC investors.

Your board members will have different strategic goals you’ll need to meet depending on whether you’re dealing with a PE or VC organization.

SaaS CFOs must be attuned to these nuances because an effective board meeting boils down to two primary factors:

• What you choose to communicate
• How you choose to communicate it

As we’ll see, the best approach to point number two remains the same regardless of whether you’re at a PE or VC SaaS company.

(Hint: it involves transparency and storytelling.)

But there are subtle differences in what you need to communicate to your board, depending on which type of company you’re at.

In both PE and VC board meetings, you’ll want to kick things off at a high level and then drill down into specifics.

Don’t dive straight into the profit and loss statement and get lost in the weeds with a barrage of follow-up questions. Start with your metrics and work your way into denser topics. 

For PE SaaS CFOs, some of the KPIs you’ll want to focus on include:

Customer acquisition cost

Your customer acquisition cost (CAC) should be front-and-center because it shows board members how much sales resistance you’re encountering.

PE board members want to see a consistently low CAC because it signals that people are drawn to your product, and just as importantly, there’s more capital available for business reinvestment.

Recurring revenue

Annual and monthly recurring revenue (ARR and MRR) are highly important to a PE company’s board.

In addition to padding the company’s bottom line, a strong ARR and MRR show your board of directors that the financial strategies you’ve been implementing are paying off.

CAC to CLV ratio

Your customer lifetime value (CLV) tells you the average amount of money each customer spends with you before they churn.

In addition to expecting a low CAC, a PE board of directors will want that matched by a high CLV.

Your company’s CAC to CLV ratio offers an important snapshot of your financial health.

A large part of successfully managing your board lies in your method of presentation. How you approach conveying your metrics and other financial data to board members is key to a board meeting’s success.

When you present to your board, you want to give them the clearest possible picture of what’s happening at the company.

For SaaS CFOs, data visualization and financial storytelling are the best ways to achieve that. 

SaaS companies deal with massive amounts of financial data, and it’s almost impossible to weave it into a cohesive narrative without some way to visualize it.

In SaaS finance, data visualization involves using AI software to turn your dry financial data into role-based dashboards, pie charts, line and bar graphs, and other visual aids. 

Using organized and compelling images to convey your points will help you tell a cohesive financial story instead of just putting numbers on a screen.

However, data visualization isn’t the only way to reach mutual clarity with your board.

You also need to take the time to understand where they’re coming from.

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Understanding your PE board

To formulate winning business strategies as a SaaS CFO, you have to understand your board’s frame of reference in detail.

That means asking some questions.

You need an in-depth understanding of your board’s investment thesis.

Without knowing their exact plan to generate returns, you won’t be able to tailor your strategies to their expectations and specific needs.

Does your board want to focus on inorganic growth through mergers and acquisitions (M&A) or aim for organic growth?

As with their investment thesis, knowing their plans and preferences around growth will help you craft appropriate strategies.

You also need to know what form M&A activity will take. Is your board envisioning vertical expansion or vertical penetration? 

If you don’t know the answers to these questions, take the time to nail these things down.

As the CFO, it’s essential that you understand where your board is coming from.

What about VC board meetings? As with PE boards, you’ll want to focus on revenue, EBITDA, and your SaaS KPIs.

However, there are a few contextual differences to keep in mind. 

When presenting to a VC board, you’ll want to hone in on the following:

• Costs and cash burn rate

• Sales and marketing spend
• CAC payback period
• Customer retention
• Consistent top line growth

One of the core questions a VC board will ask is, “Are we on track for our next funding round?”

Your board wants to know that you’ll be able to hit your funding objectives across your company lifecycle .

Whether you’re the CFO of a PE or VC SaaS company, one thing should never happen in a board meeting.

You never want your board to have to get involved in tactical matters.

Tactics are for you and the CEO; your board wants to worry about corporate governance, their exit path, and high-level strategic matters rather than the company’s day-to-day. 

Before we wrap up, we’ll discuss three best practices for your next board meeting.

Best practices for your next board meeting

A good rule of thumb for the board-CFO relationship is to keep your board “over-informed.”

If a problem is brewing, you might be tempted to sweep it under the rug, thinking you can handle it before it boils over. 

That represents a glaring lack of transparency.

Always be forthright with your board, especially when the news is less-than-pleasant.

Transparency is the foundation of a productive relationship with your board and will help them see you as someone they can trust.

When monthly or quarterly board meetings roll back around, be the person who shows up with a plan.

Your board is counting on you and the CEO to be problem-solvers who can drive long-term revenue growth.

When you attend board meetings with solutions in tow rather than a laundry list of questions, you’re more likely to be seen as a high-caliber leader.

In addition to being prepared with solutions, go the extra mile and draft a pro and con list for each of them.

This point bears repeating. You’ll lose your audience in board meetings if you simply display numbers on a screen.

Your board won’t be engaged and will likely struggle to form a cohesive business narrative for the prior month or quarter.

Most people think in terms of images and stories much more easily than numbers.

Leveraging role-based dashboards and other financial storytelling methods immediately gets everyone on the same page for effective board meetings.

As much as we’ve covered here, it’s just the tip of the iceberg. Want to learn even more about vital topics like this?

On June 5th, 2,000+ SaaS industry leaders, investors, and experts digitally gathered at the Modern SaaS Finance Forum to discuss board management and other core aspects of SaaS finance success.

Hosted by Sage Intacct, the conference had three different learning tracks consisting of 20-minute sessions for CFOs, controllers, and RevOps managers at SaaS, AI, and high-tech companies.

We’ve made each session digitally available, so you can listen to as many or as few as your schedule permits .

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