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Investment Thesis

Definition - What does Investment Thesis mean?

An investment thesis is the analysis performed by a buyer to assess a potential acquisition against an established set of investment criteria. The investment thesis may be formally written up as a document or slide presentation to the buyer's investment committee for deal approval. Private equity firms in particular usually develop an investment thesis for every potential acquisition before a letter of intent is issued. The thesis allows the deal captain who is promoting the investment to articulate the rationale behind the transaction and why it makes a good investment.

Divestopedia explains Investment Thesis

An investment thesis will consider the following:

  • How does the selling company fit in with the buyer? Does it add additional services that can be cross-sold, provide geographical footprint expansion, or offer up a new technology?
  • What type of growth opportunities (new services, additional sales to existing customers) exist post-acquisition?
  • What kind of synergies can be derived from the transaction?
  • How will the management team be structured post-transaction?
  • What is the historical and projected financial performance of the selling company, and how does it measure up against the buyer-expected margins and returns?
  • What potential risks exist and what action plan needs to be in place to mitigate these risks?
  • What is the anticipated internal rate of return (IRR) on the investment and the potential exit strategy?

A smart seller will stand out by getting ahead of the process and articulating the investment thesis for the buyer. This can be done by presenting the future strategy of the company, and how it plans to grow and diversify its products and services. It shows potential buyers that the company understands how to generate high returns for its shareholders.

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Resources

  • Equicapita: Equicapita
    Equicapita's model is to acquire established, private small and medium sized enterprises (“SMEs”) located primarily in Western Canada.
  • Evolution Capital: Evolution Capital
    Leaders in growing small business.