Capital Allocators – Inside the Institutional Investment Industry Michael Choe - Atomization of Private Equity Decisions at Charlesbank (EP.432)
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Feb 17, 2025 Michael Choe, CEO and Co-Head of Flagship private equity strategy at Charlesbank Capital Partners, shares his journey from science to finance, shaped by his immigrant background. He discusses Charlesbank's innovative decision-making framework and the significance of the 'fan of outcomes' model in private equity. The conversation delves into the importance of human capital, structured investment strategies, and adapting to market fluctuations through systematic processes. Choe also reflects on personal growth and intriguing connections to quantum physics.
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Flaws of Five-Year LBO Models
- Traditional five-year LBO models promote biases and don't accurately reflect outcome dispersion.
- Charlesbank developed a two-year fan of outcomes model, a Monte Carlo analysis considering 10,000 simulations, to better assess future probability distributions.
Two-Year Focus and Probabilistic Thinking
- Focus on two-year EBITDA performance, as it's highly predictive of investment success.
- Shift from scenario-based to probabilistic thinking, analyzing KPIs like the percentage of modeled outcomes exceeding specific targets.
Probabilistic Risk Assessment
- Incorporate probabilistic thinking into risk assessment by assigning probabilities to events like recessions or customer churn.
- This allows for a more nuanced understanding of downside risks compared to traditional modeling approaches.
