Michael Choe - Atomization of Private Equity Decisions at Charlesbank (EP.432)
From Capital Allocators
Michael Choe•CEO and co-head of flagship private equity strategy, Charlesbank Capital Partners
Executive Summary
Charlesbank Capital Partners has developed a systematic, data-driven investment process, viewing it as a "manufacturing system" for sound decision-making rather than relying on individual investor intuition.
The firm replaced traditional five-year LBO models with a proprietary Monte Carlo simulation tool called the "fan of outcomes," which models thousands of scenarios to better assess risk and asymmetric return profiles.
Internal data analysis has debunked several common private equity assumptions, finding no correlation between entry multiples and returns or between C-suite changes and performance, but a strong link between early earnings growth and success.
The firm has identified specialized, asset-light human capital services as a misunderstood and undervalued asset class with the potential for software-like returns.
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Concerns Raised
A potential wave of liability management events stemming from the "leverage excesses" of the 2021 market.
The inherent difficulty in quantifying risks like customer concentration and recession probability, despite their modeling efforts.
The challenge of shifting an investment team's mindset from traditional scenario analysis to a more complex, probabilistic framework.
Opportunities Identified
Investing in specialized, asset-light human capital services companies, which are viewed as a misunderstood and undervalued asset class.
Utilizing their proprietary "fan of outcomes" model to identify investments with asymmetric risk/reward profiles that are missed by traditional analysis.
Applying insights from historical data analysis to focus on the most critical value creation levers, such as driving pre-tax earnings growth in the first two years of ownership.