Dry Powder: The Private Equity Podcast
Rethinking Risk w/ Charlesbank’s Michael Choe
May 21, 2024
Guest Michael Choe from Charlesbank Capital Partners discusses redefining risk management by advocating for asymmetric scenario modeling, short-term analysis, and probabilistic thinking. He emphasizes the importance of considering potential losses, targeting high-yield return distributions, and using back testing tools to enhance decision-making in private equity.
21:45
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Quick takeaways
- Shifting to two-year modeling improves risk assessment by focusing on specific upside and downside scenarios.
- Embracing a probabilistic mindset enhances decision-making processes and fosters nuanced risk assessments at Charles Bank.
Deep dives
Need to Improve the Traditional 5-Year LBO Models
Questioning the effectiveness of the traditional five-year LBO models, Michael Che advocates for a fresh approach to risk management. He emphasizes the limitations of fixating on precise five-year growth rates and IRRs, which lead to overlooking a wider range of outcomes such as capital impairment or runaway success. By shifting the focus to two-year modeling time horizons and specific upside and downside drivers, teams can engage in more precise discussions about probabilities and scenarios, ultimately enhancing risk management strategies.
