Writing an Investment Thesis

Step 1: Market Thesis

The market thesis combines two things: how fast the addressable market is growing, and how well this specific company is positioned to capture that growth. For this platform, industry unit growth plus consolidation capacity support organic growth of 4.0% (0.04) per year, plus an estimated 2.0% (0.02) per year of inorganic contribution from bolt-on acquisitions, for a combined revenue growth rate of 6.0% (0.06) per year over the hold period.

The market thesis is the leg of the three the sponsor controls least directly — it depends on end markets actually growing and being consolidatable. Investment Committees stress-test it hardest, because if the market thesis is wrong, the operational and financial theses inherit a smaller revenue base than assumed.

Step 2: Operational Thesis

The operational thesis translates the deal into specific, executable margin levers rather than a vague "we will run it better." Assume procurement renegotiation, pricing discipline, and a phased ERP/systems upgrade lift the EBITDA margin from 15.0% (0.15) at entry to 18.0% (0.18) by exit — a 300 basis point improvement over the hold period.

This is the leg of the thesis the sponsor owns most directly post-close. Interviewers probe here because "we will improve margins" is not a thesis until it is attached to a named lever, a dollar or basis-point impact, and a timeline for implementation.

Step 3: Financial Thesis — Entry Structure

Entry EV = LTM EBITDA × Entry Multiple = $22.5m × 8.0x = $180.0m

Debt = Target Leverage × LTM EBITDA = 5.0x × $22.5m = $112.5m

Sponsor Equity = Entry EV − Debt = $180.0m − $112.5m = $67.5m

Sponsor equity is the capital actually at risk in the deal, and it's the denominator for every return calculation that follows. A higher entry multiple or higher leverage both change how much equity is required — and therefore how large the eventual return multiple needs to be just to clear the fund's hurdle.

Step 4: Financial Thesis — Exit and Return Check

Where: MoM = Multiple of Money, IRR = Internal Rate of Return, EV = Enterprise Value.

Applying the market thesis's 6.0% (0.06) revenue CAGR over the 5-year hold:

Year 5 Revenue = $150.0m × (1.06)^5 = $200.7m

Applying the operational thesis's 18.0% (0.18) exit margin:

Year 5 EBITDA = $200.7m × 18.0% = $36.1m

Using the 8.0x exit multiple (no multiple expansion assumed) and $40.0m of remaining debt at exit:

Exit EV = $36.1m × 8.0x = $289.1m

Exit Equity = Exit EV − Remaining Debt = $289.1m − $40.0m = $249.1m

MoM = Exit Equity / Entry Equity = $249.1m / $67.5m = 3.7x

IRR = MoM^(1/5) − 1 = 3.7^(0.2) − 1 ≈ 29.9%

At roughly 3.7x MoM and a ~29.9% IRR, the deal clears the fund's 25.0% (0.25) hurdle rate — and it does so with no multiple expansion assumed, meaning the thesis works purely on market growth and margin improvement. That is exactly the combination an Investment Committee wants to see, rather than a deal that only clears its hurdle if the exit multiple happens to expand.

Final Results

• Entry Enterprise Value: $180.0m (8.0x LTM EBITDA)
• Sponsor Equity Required: $67.5m
• Projected 5-Year MoM: 3.7x
• Projected 5-Year IRR: ~29.9%

This return check is what turns the market and operational theses from narrative into an underwritable deal — the next step for the deal team would be sensitizing these assumptions (slower growth, a smaller margin ramp, or multiple compression at exit) to see how much cushion the thesis actually has.

Would you like to explore how the thesis holds up if the operational levers only deliver half the assumed margin expansion?