Constellation Software / MECE Scenario Modelling

September 01, 2022

by a searcher in Berlin, Deutschland

Hi fellow searchers,

While studying CSI I stumbled across their scenario modelling approach when evaluating investment prospects:

"We use a weighted four-scenario approach to assess investment prospects. Academics call this mutually exclusive collectively exhaustive scenario modelling or “MECE”. The cash flows of each of the four scenarios are probability weighted, allowing us to use a single hurdle rate across all investment prospects, even if the investments have very different risk profiles."

Does anyone know more about this particular approach? How does it differ from a basic base-case/bull-case/bear-case?

Looking forward to great discussions on modelling!

Cheers, Tobias

Reply by an investor
from Columbia University in Jacksonville, FL, USA

I think most PE firms model a Upside, Base, and Downside case. Monte Carlo simulations of variables is kind of cutting edge. IMHO, most good operators have more balls than brains and often act quickly and don't flinch. Don't suffer from overanalysis paralysis. If you like the deal, make sure you can service the debt during a "storm" and pull the trigger.

Reply by an investor
from University of Nebraska in Austin, TX, USA

Love this and it's def easier said than done. I do something similar when I get too in the weeds: Pull myself out of weeds, gut check on value (make sure you're not getting screwed), sufficient debt service coverage room, comfortable with red/yellow flag risks...move ball forward and pull trigger.

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