Portfolio optimisation case, how would you structure / answer?

Here you can get as technical as you want but a basic ideology here is:

- each portfolio has a rate of return: R

- the R is calculated (at a high level) as a weighted average of the different $(i) amounts invested into a set of different investments {x, y, z, etc} and the probability(i) of each being successful with an individual rate of return R(i). It's a function of free cash flow and covariance of the FCF relative to other investments (e.g. a "balanced risk" porffolio will be solar vs coal because they have a positively correlated covariance - one goes down, other goes up, assuming the probability / risk of each succeeding is the same of course - called market beta).

- your investment into 1-2 firms depends on whether they add or remove risk from the portfolio while maximising the overall rate of return.

The above are the high-level basical structural discussions you can have. I don't remember the math beyond that but those are not what you'd be asked to do in a case anyway. Be sure you understand the logic you are using and the rest should follow.

Hemant

Hey anonymous,

That seems a very traditional investment case with a small twist in the way it is presented - just to understand if the candidate is able to understand what’s been asked.

You should check whether the company has any particular goal, besides what’s already presented in the problem statement, but if not, then it’s just about structuring the problem in order to compare the Return on Investment/NPV of the 5 different opportunities, do the analysis according to the data available and finally select the best option(s) until reaching the maximum investment funds available! No need to over complicate such case

best

Bruno

Thanks everyone, very useful suggestions - so the interviewer asked for criteria to prioritize which companies to focus on first, and while I had thought of 2 criteria (profitability / size) among others, it could be argued both ways:

- Profitability: Would you focus on more profitable or less profitable companies within the portfolio first and why? I could argue to focus on more profitable companies because each dollar of sales generates more net profit, but I could also argue less profitable companies likely hold margin improvement opportunities.

- Would you prioritize larger or smaller companies within the portfolio and why?

Similarly, I can see arguments both ways for this, would be keen to hear whether anyone has a good way to prioritize.

Hi,

It sounds like it's not portfolio optimization but rather investing more in the companies where you can get higher returns. Thus I would start with clarifying the objective: What is the criteria for successful investment? Do we want higher returns? Maybe it's about returns, maybe with some companies, we'll be able to make an exit faster, having additional investments. You need to understand the underlying objective.

In the cases of 5 companies / 10 markets, etc. the analysis generally ends up with a table with different criteria that interviewer will give you. However, in the beginning, you should make a good structure of how you would approach this in real life.

Then I would use a classic PE structure to address the issue but in this particular case I would start with the companies (Mainly because they may have immediate financial needs)

Companies

• Revenue / market share
• Profitability
• Immediate need for money (Financial restructuring needs, debt to equity ratio, etc) - this bullet point is the key. If no immediate needs then I would just assess the opportunities of the companies to generate returns
• Investment plans - similar to the previous bullet point
• Unit economics (Margins, costs) in current or target markets
• Key capabilities

Market opportunities

• Size
• Growth rates
• Profitability
• Segments
• Opportunities to enter the other markets

Competitive landscape

• Market shares of competitors and their segments (see the next point)
• Concentration / fragmentation (Fragmented market with lots of small players is less mature and easier to enter from a scratch. Concentrated market is hard to enter but has potential acquisition targets)
• Unit economics of the players (Margins, relative cost position)
• Key capabilities of the players (e.g. suppliers, assets, IP, etc)

Feasibility of exit:

• Exit multiples
• Exit time
• Existence of buyers

Good luck!