Drafting Investment Memos

---
name: drafting-investment-memos
language: en
description: Creates structured investment memoranda with business description, financial analysis, valuation, and risk assessment for deal review. Use when writing investment memos, preparing deal summaries, or documenting investment recommendations.
tags:
  - drafting
  - investment-banking
  - risk
  - investment
metadata:
  author: casemark
  practice_areas:
    - Investment Banking
    - Mergers and Acquisitions
    - Corporate Finance
  document_types:
    - Draft Document
  skill_modes:
    - Drafting
---
# Drafting Investment Memos

Investment memos are the core decision document for deploying capital. They synthesize diligence into a structured argument that enables an investment committee, board, or deal team to make a go/no-go decision with full awareness of the thesis, the risks, and the expected returns. The memo is not a summary — it is the decision artifact.

## When To Use

- Preparing a deal for investment committee review (screening, LOI, or final IC)
- Writing a deal summary or recommendation for board presentation
- Documenting the investment rationale for a platform acquisition, add-on, growth investment, refinancing, IPO, or secondary transaction
- Creating a post-close retrospective memo evaluating realized vs. projected returns
- Supporting a fairness opinion or strategic alternatives analysis with structured deal analysis

## Inputs To Gather

Confirm ALL of the following before drafting. Do not proceed with defaults — wrong audience framing invalidates the entire draft.

### Deal Context (All Required)

| Field | Notes |
|---|---|
| Company/Asset Name | Legal name + common name if different |
| Asset Class | Private equity, growth equity, credit, public equity, real assets, venture |
| Transaction Type | Platform acquisition, add-on, growth investment, refinancing, IPO, secondary |
| Deal Stage | Preliminary screening, LOI stage, final IC, post-close retrospective |
| Deal Size / Check Size | Enterprise value, equity check, total capitalization |
| Source of Deal | Proprietary, auction, banker-intermediated, inbound |

### Audience & Format

| Audience | Primary Focus | Tone | Length |
|---|---|---|---|
| PE Investment Committee | Returns (IRR/MOIC), value creation levers, downside protection | Direct, conviction-driven | 15-25 pp |
| IB Deal Team / Fairness Opinion | Execution feasibility, valuation support, market context | Analytical, balanced | 10-15 pp |
| Credit Committee | Downside protection, coverage ratios, collateral, recovery analysis | Conservative, stress-test-oriented | 12-20 pp |
| Board of Directors | Strategic rationale, competitive positioning, governance | Accessible, strategic | 8-12 pp |
| Growth Equity / Venture | Market size, unit economics, founder quality, path to scale | Forward-looking, thesis-driven | 10-15 pp |

### Source Materials Checklist

- [ ] CIM / Management Presentation
- [ ] Historical financials (3-5 years minimum)
- [ ] Management projections / budget
- [ ] Quality of Earnings report (if available)
- [ ] Industry research / market reports
- [ ] Comparable company data
- [ ] Precedent transaction data
- [ ] Legal/regulatory diligence findings
- [ ] Customer/commercial diligence findings
- [ ] ESG/compliance considerations

> **GATE**: If asset class, audience, or deal stage is unconfirmed, STOP and clarify. Do not draft.

## Workflow

### Step 1: Thesis Construction

Articulate the investment thesis as **three pillars** — three independent reasons this investment should generate returns. Each pillar must be:

- **Specific** — not "strong market position" but "45% share in a $2B TAM with 10-year contracts covering 70% of revenue"
- **Falsifiable** — state the condition that would invalidate the pillar
- **Supported** — cite the diligence source or data point

```
Pillar [N]: [One-line statement]
Supporting evidence: [2-3 data points with sources]
Key assumption: [What must remain true]
Falsification trigger: [What would break this pillar]
```

### Step 2: Pre-Mortem Exercise

Before writing the bull case, write the bear case. Describe in 3-5 sentences the scenario where this investment fails and capital is impaired. This is a narrative of how things go wrong — not a risk factor list. This forces intellectual honesty and informs the Risk Factors section.

### Step 3: Financial Analysis Build

Construct the financial narrative in this order:

| Component | Content | Key Outputs |
|---|---|---|
| Historical Analysis | 3-5 year income statement, balance sheet, cash flow trends | Revenue CAGR, margin trajectory, capex intensity, FCF conversion |
| Normalization | Adjustments for one-time items, owner compensation, related-party transactions | Adjusted EBITDA bridge |
| Projections | Management case vs. sponsor/analyst case | Revenue build, margin assumptions, working capital, capex |
| Key Assumptions Table | Line-item assumptions with justification | Explicit list: growth rate, margin, churn, capex, tax rate |
| Sensitivity Analysis | 2-variable matrix on key value drivers | IRR/MOIC sensitivity to revenue growth × exit multiple (PE) or price target sensitivity (public) |

### Step 4: Valuation

Apply methods appropriate to the asset class. **Valuation must produce a range, not a point estimate** — present base / bull / bear with the assumptions that differ across scenarios.

| Method | When to Use | Key Inputs |
|---|---|---|
| DCF | All situations; primary for growth assets | WACC, terminal growth, FCF projections |
| Comparable Companies | Public equity, benchmarking private valuations | EV/EBITDA, EV/Revenue, P/E multiples from peer set |
| Precedent Transactions | M&A, PE acquisitions | Transaction multiples, control premiums |
| LBO Analysis | PE acquisitions, leveraged situations | Entry multiple, leverage, operating improvements, exit multiple, hold period |
| Sum-of-Parts | Conglomerates, multi-segment businesses | Segment-level multiples applied independently |
| Dividend Discount Model | Yield-oriented investments, REITs, infrastructure | Dividend growth rate, cost of equity |

Use at least two methods and reconcile the resulting range.

### Step 5: Risk Framework

Structure risks into five categories. Each risk gets a probability assessment and a specific mitigant — not a generic disclaimer.

| Risk Category | Examples | Mitigant Type |
|---|---|---|
| Market Risk | Cyclicality, demand shift, commodity exposure | Hedging, contract structure, diversification |
| Execution Risk | Integration failure, management capacity, operational complexity | Retention packages, playbook from prior deals, phased integration |
| Management Risk | Key-person dependency, alignment, track record gaps | Incentive structure, board governance, succession planning |
| Regulatory Risk | Antitrust, licensing, environmental, data privacy [VERIFY] | Legal diligence, compliance programs, regulatory pre-clearance |
| Financial Risk | Leverage, liquidity, covenant compliance, FX exposure | Debt structure, cash reserves, hedging instruments |

Each risk entry must include: (1) specific risk description, (2) probability (High/Medium/Low), (3) impact (High/Medium/Low), (4) mitigant action or structure, (5) residual exposure after mitigant.

### Step 6: Source of Edge

Every memo must answer: **Why does this opportunity exist, and why are we the right capital to deploy?**

- **Proprietary access** — relationship-sourced, not auctioned
- **Information asymmetry** — diligence has surfaced insight the market lacks
- **Timing** — cyclical dislocation, motivated seller, regulatory window
- **Structural** — complexity discount, carve-out, cross-border friction
- **Operational** — portfolio company synergies, sector expertise, management bench

If no clear edge exists, state so explicitly. "Market-clearing price in a competitive auction" is a valid statement — pretending otherwise is not.

### Step 7: Draft Assembly

- **Executive Summary first** — written last, positioned first. One page maximum. Must contain: what, why, how much, expected return, key risk, recommendation.
- **Thesis before data** — lead with the argument, then support with evidence. Do not force the reader to assemble the thesis from scattered data points.
- **Tables over paragraphs** — financial data, comparables, and risk matrices belong in tables, not prose.
- **Flag uncertainty** — mark unverified figures with `[VERIFY]`, assumptions with `[ASSUMPTION]`, and management-provided projections with `[MGMT]`.
- **Recommendation must be unambiguous** — "Invest at $X valuation with conditions Y and Z" or "Pass because [reason]" or "Requires additional diligence on [specific items] before decision."

### Step 8: Post-Draft Alignment

Before delivering, confirm with the requesting party:

| Check | Question |
|---|---|
| Thesis Alignment | "Does the three-pillar thesis match your conviction? Any pillar you would reframe?" |
| Return Expectations | "Are the return assumptions (entry multiple, growth, exit) consistent with your base case?" |
| Risk Calibration | "Are there risks from diligence that are missing or under-weighted?" |
| Audience Fit | "Is the depth and tone appropriate for the target audience?" |
| Data Freshness | "Are the financials and market data current as of the intended IC date?" |
| Recommendation Strength | "Is the recommendation correctly calibrated to your conviction level?" |

> **GATE**: If thesis, return assumptions, or recommendation are misaligned, revise before delivery. Do not submit a memo the deal lead has not approved.

## Output

The final investment memo should contain these sections in order:

1. **Executive Summary** — one page; thesis, deal terms, expected returns, key risk, recommendation
2. **Investment Thesis** — three pillars with falsification triggers
3. **Company / Asset Overview** — business description, history, market position
4. **Industry & Market Analysis** — TAM/SAM, competitive landscape, secular trends
5. **Financial Analysis** — historical performance, normalization, projections, assumptions table
6. **Valuation** — multi-method analysis with reconciled range (base/bull/bear)
7. **Risk Factors** — five-category framework with probability, impact, mitigant, residual exposure
8. **Source of Edge** — why this opportunity exists and our right to win
9. **Recommendation** — unambiguous invest/pass/conditional with specific terms

Tag conventions: `[VERIFY]` for unconfirmed data, `[ASSUMPTION]` for forward-looking estimates, `[MGMT]` for management-sourced projections. Use consistent units ($ in millions unless stated) throughout.

## Quality Checks

### Structural Completeness
- [ ] All nine sections present
- [ ] Executive summary fits on one page
- [ ] Investment thesis states exactly three pillars with falsification triggers
- [ ] Pre-mortem scenario included
- [ ] Source of edge explicitly stated

### Financial Rigor
- [ ] Historical financials cover 3+ years
- [ ] Adjusted EBITDA bridge included with clear add-backs
- [ ] Projection assumptions listed individually with justification
- [ ] Sensitivity table covers at least two variables
- [ ] Valuation uses 2+ methods with reconciled range
- [ ] Returns analysis appropriate to asset class (IRR/MOIC for PE, price target for public)

### Risk Integrity
- [ ] All five risk categories addressed
- [ ] Each risk has probability, impact, mitigant, and residual exposure
- [ ] Pre-mortem narrative is distinct from risk factor list
- [ ] No generic/boilerplate risk language — every risk is specific to this deal

### Drafting Standards
- [ ] `[VERIFY]` / `[ASSUMPTION]` / `[MGMT]` tags applied where appropriate
- [ ] Consistent units, date formats, and decimal precision throughout
- [ ] No hedged or ambiguous recommendation
- [ ] EBITDA definition (adjusted vs. reported) stated once and used consistently
- [ ] Scope limitations noted — e.g., memo based on CIM without QofE should say so
- [ ] Appropriate disclaimers for compliance-sensitive outputs [VERIFY]

## Reference Files

| File | Description |
|---|---|
| `references/MEMO-TEMPLATE.md` | Structural template for investment memoranda with all nine sections and appendices |