How can you develop a winning private equity investment thesis?

1 Identify the industry drivers

The first step in developing a winning investment thesis is to identify the key drivers of growth, profitability, and sustainability in the industry you are targeting. These drivers can be macroeconomic factors, such as demand, supply, regulation, innovation, or consumer preferences, or microeconomic factors, such as customer segments, pricing, differentiation, or efficiency. You need to understand how these drivers affect the industry structure, dynamics, and performance, and how they create opportunities for value creation or destruction. You also need to assess the industry attractiveness, using frameworks such as Porter's Five Forces, to evaluate the potential returns and risks of investing in the industry.

2 Evaluate the competitive advantage

The next step in developing a winning investment thesis is to evaluate the competitive advantage of the target company or segment within the industry. Competitive advantage is the ability to generate higher returns than the industry average by offering superior value to customers, suppliers, or partners. You need to identify the sources of competitive advantage, such as unique resources, capabilities, processes, or relationships, and how they are sustained or eroded over time. You also need to benchmark the target company or segment against its peers, using metrics such as market share, growth rate, margins, or return on invested capital, to determine its relative position and performance.

3 Define the value proposition

The third step in developing a winning investment thesis is to define the value proposition of your investment strategy. The value proposition is the statement of how you intend to create value in the target company or segment, by enhancing its competitive advantage, improving its operational efficiency, or unlocking its hidden potential. You need to specify the actions you will take to achieve your value proposition, such as acquiring, merging, divesting, restructuring, or expanding the target company or segment, and the expected outcomes and benefits of your actions, such as revenue growth, cost reduction, margin improvement, or market penetration. You also need to estimate the investment size, duration, and exit strategy, and the projected returns and risks of your investment.

4 Test the investment hypothesis

The final step in developing a winning investment thesis is to test your investment hypothesis against the available data and evidence. The investment hypothesis is the logical argument that supports your value proposition, based on the assumptions and premises you have made about the industry drivers, the competitive advantage, and the value creation potential. You need to validate your investment hypothesis by conducting a thorough due diligence, using primary and secondary sources of information, such as financial statements, market reports, industry experts, or customer surveys, to verify the facts and figures you have used. You also need to challenge your investment hypothesis by identifying the potential pitfalls and uncertainties, such as market changes, competitive threats, operational issues, or regulatory risks, that could undermine your value proposition, and how you will mitigate or overcome them.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?