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Saturday, 28 February 2015

How to Access A Company's Fundamental - Lesson from Private Equity Fund Practises:

Dear Members,

Today's article, I would like to share on Private Equity Fund Investment Practices. It is generally not being exposed and shared to the public as it is kept for investment strategies.

Generally, in drilling a Company's Fundamental Health, we are looking at 2 different set of datas:

1. Financial Health Analysis - To know whether the company is in good health or insolvent.

If the company pass the Financial Health Ratios then we only will go to step 2 which is Pricing. Everything that sells in Bursa comes with a Price (price is what you pay, value is what you get):

2. Pricing Analysis - To know the price is cheap or expensive.

For PE Fund requirement before entering an investment, basically we will drill further the Company's Health by looking at ADDITIONAL INFORMATION normally Private Equity Fund House received and not by retailers. Some information structure requested from the PE would be like below:  

Preliminary Information Required by PE Fund House in addition on the Annual Reports/Quarterly Reports:  

1.         Background information of the business and future plans:
a.          Details of future contracts to be obtained / in the process of bidding
b.         Future business plans and business strategy including capital expenditure requirements

2.         Financials:
a.         Management’s projections for minimum the next 3 years including monthly cash flows and expenses
b.         Latest banking facilities obtained from Financial Institutions / in the process of approval 
c.         Top 10 clients/suppliers/vendors for the latest three years with the transaction values and new lists of 
            targeted potential clients

3.         Regulatory matters:
a.         List of all licenses, permits, consents and regulatory approvals required to enable the Group / Company to conduct businesses
b.         List of all patents, trademarks, service marks, copyrights and other form of intellectual property owned by the Company or in the process to be patented/approved.

Look at ITEM NO. 2 : Financials: 

What are the additional information PE House get that retailers don't and that info really makes a difference?

Different no. 1 

All listed entities do have their own 3 years Internal Forecast for their P&L, CASH FLOW and CLIENTS/PROJECTS POTENTIALLY TO BE SECURED and some even do it projection for 5 years. Don't you think with the info guided to them, the PE Fund should have a SUPERIOR RETURN with all the numbers in their hand? So for the retailers who only rely on Quarterly Report, Annual Report and Investor's Briefing keeps on bragging how much they know about the company and their bosses, perhaps you need to think twice before blowing your own trumpet.

How Private Equity Fund Works?

Generally PE Funds will target for 24 Months till 36 Months Investment Period. Rarely it will exit 3 years as they need to conclude the investment return to present their report card to shareholders with the visible earnings. For 3 years of investment, the TARGETED RETURN SHALL BE 30% (IRR 30%), HENCE 36 months of investment shall yield PE Fund a 100% return (assuming monies received from 3 years to be reinvested under FD deposits).

IRR for 3 years = (30% + 30% + 30%) + 2 years FD rate (assuming 1st year and 2nd year return to be parked in FD to enjoy 3.5% interests)= 100%

Different No. 2 

Do take note that PE Funds are the BIGGER BOYS who take HIGHER RISKS in expectant of RETURN OF CAPITAL 30% Per Annum. Next what would PE House do extra to know that the 30% is achievable?

Now we are revealing their Investment Strategies, please be noted you can only read it at Bursa Blue Ocean Group. Base on their 3 years / 5 years historical track record, PE House will use Quantitative Method to Calculate The Probability of The Future Earnings and bench them against the potential company to be invested. PE House will compare their analysis with the potential to be invested Company's own forecast to gauge the Probability of the Future Outcome. Now your question will be, what are the analysis normally they use?

They are few but not exhausted to: Probability Concept, Decision Analysis, Regression, Forecasting Models. I do not want to touch in details as it is more on Quantitative Models and Studies. By the way, those Technical Chart Indicators by using Exponential or Moving Average are all computed using Quantitative Method. It is a method to calculate the Probability of the Model.


Points to Ponder: With the additional 3 Years Projected Numbers and Cash Flow Numbers on hand, they are targeting a 30% per annum (do note that some of their Projects Invested are Flunked). How could you not to use Fundamentals and Business Evaluation when you are investing a particular stock?

A company is listed for their Good Underlying Business Model. No company is listed because the stock are trad-able and to make you rich overnight. When you invest in a stock, you are buying a stake and investing in the growth of the business that you bought! It is not for you to treat it like gambling in Casino.

Thank you.


Humble Pie


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