Warning: Does that Base Case reflect reality? Or Newt and Biff’s Excellent Adventures

201304_surfer_profilesYears ago, one of my dearest mentors drummed the following advice into my cranium: One of the most obvious marks of inexperience and sloth is using, verbatim, sell-side information that is spoon-fed to an investor group. This is made more egregious as it obviously comes from parties benefiting from uncritical acceptance of the “data”.

Not too long ago, I had an opportunity to meet up with an old friend from a middle-market finance outfit (I am being purposefully vague) while he lamented his duties in pressure-testing assumptions going into underwritings and models that were clearly divorced from the stated investment theses – and as often, reality. He cautioned, “If you’re working with a deal team caught up in the momentum of the transaction (read deal fever), it can be nearly impossible to get anyone to stop and think about real potential downsides or holes in the deal.” He continued, “What can you do? You run the risk of being a pariah if you are the only one pushing for substantiated answers – while others are more concerned about where to have the closing dinner.”

Both of us were rather punchy from too much travel and too little sleep – and we lightheartedly created composite characters many of us have met at some point in our careers: Newt Knewbie and Biff Mountebank.

Newt Knewbie is the new kid with a very high ego-to-experience ratio – with little time to invest in boring data corroboration (“hey, it’s in the CIM, it’s gotta be true”) but boundless confidence in his abilities. Newt likely has a new MBA (ink on diploma barely dry to the touch) and a super-cool license tag holder and vanity plates for his baby Beemer. Newt can dimly recall 2 or 3 of Porter’s Five Forces, vaguely knows that SWOT is more than for controlling the housefly population, and has feeling that “barriers to entry are, like, super important” – so Newt uses the latter term every chance he gets (including notes home to Mom). Newt may even have attended as much as 5 hours in a financial modeling class (about the same amount of time it takes to attend a football game with a tailgate party). He’s working hard on his golf game, but increasingly concerned that he’s not getting the same attention as Mark Zuckerberg or doing deals with Michael Dell (“dude, I have been here for months!”).

Biff Mountebank, on the other hand, has heaps of experience – in flashy sales. A rising star in the organization, he longs for the days when he doesn’t have to be too close to the drudgery of underwriting deals: “High level tête-à-têtes with CEOs is the way to go!”  Biff has invested considerably more time in his short game than he has in keeping current with any industry or financial market developments (besides, Newt will sort that stuff out). But Biff makes use of his slick sales skills – and he knows how to use them cleverly  – internally as well as externally. He keeps Newt and the investment committee focused on hot buttons, buzzwords, and check lists, and (as needed) is able to use omission and obfuscation to tamp down those nagging details that might hang up a deal.

Biff and Newt are a swell team. This one-two punch will make a mint engaging in highly competitive deals where the sense of urgency can be a lever t0 keep any credit committee’s focus away from boring details: “we gotta move fast, management loves us more than their own children, but the market may slam the door on new lenders…” and another classic “we met the CFO and she said they are a leading <insert sector> and are totally killing all competition (large or small) in market share growth and will do so over the next 15 years – and, by golly, she should know.”

Obviously we were having fun with the caricatures of Newt and Biff and they are truly fictional (they do not represent any individual, living or useless). But I have endured similar stories of Biff and Newt’s exploits over the years. Have you met someone like them?

For more on the day to day private equity world, please look for me on Twitter (@GaffinMark). I look forward to your thoughts here and there.

More soon.

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