Maximizing Upside: A Framework for Asymmetric Risk-Reward Profiles

During their recent episode, Taylor, Carlisle, and Conor Maguire discussed Maximizing Upside: A Framework for Asymmetric Risk-Reward Profiles. Here’s an excerpt from the episode:

Conor: So, it’s basically three elements to it, really, I suppose, are valuation, obviously, the clue’s in the title. So, valuation focused where I don’t really concern myself with PE ratios and EPS numbers. I take a more, I suppose, valuing the business on an entire enterprise basis and looking at the whole value of the whole company and its assets and so on. So, really kind of a more comprehensive view on valuation rather than headline PE ratios.

I suppose given my background in private equity and I worked in kind of credit and distressed and special situations, was kind of downside protection. And that’s really, I suppose, looking at the balance sheet, again, looking at the asset base, what kind of asset coverage is there, what kind of cash generation or what other kind of protections are there in a kind of a liquidation scenario or in the event that you’re wrong in your initial assessment, what’s the backstop there in terms of value?

And then really, I suppose combining those two elements, valuation where I’m looking for a certain level of upside and then matching that against kind of what I think the downside is and what’s the worst case in the downside scenario. I want to see a very asymmetric risk rewards or risk return profile, where typically the upside is three times the downside risk is kind of how I just– That’s the minimum hurdle I’d try and look for. I suppose, at a high level, that’s the framework I try and employ all the time.

Jake: Did you get the memo that we’ve gotten rid of bankruptcy in the US?

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