Time to talk about playbooks. A central concept all over the investment world. Asset managers have playbooks, PE funds, VC funds, entrepreneurs, politicians, they all have playbooks.
Origin: the word playbook comes from the US and is mostly found in the context of American football. For a given team and its strength and weaknesses, you define a set of tactics that you use to play the game. It goes further, it defines all the tactics and formations available to the football team. And even more, it defines how subsets of these tactics are used against certain competitor teams. Tactics and formations in playbooks are to be learned by heart by all players and they are the central control instrument of the „army“ of the football team that the coaches use to win games.
In the investment world, there can be different meanings for the word playbook. Let’s look at them:
- 1-to-1 Playbooks: How to nail an investment case.
The classical playbook known from football where you define your potential moves to win a negotiation against a key competitor. In the investment world, especially the private equity world, negotiating is one of the key drivers of investment returns apart from transforming the investment opportunity. Bargaining down the price at the time of purchase and bargaining up the price at the time of sale is crtitical.
- 1-to-k Playbooks where k is a smaller amount of players : Defining „the approach“
: This could be the playbook on how to select investments (the k represent the investment opportunities) or how to find the right buyer of the company (here k is a potential exit partner). Instead of focusing on tactics to win a negotiation, this playbook focuses on building a set of checks on evaluating the k alternatives that shows both their general attractiveness and the ability to win in a 1-to-1 fashion in case of a negotiation scenario. And it considers how the fund approaches working the battlefield of all k players at once. This is the part where strategy comes into play. Opposed to the 1-on-1 play, the play in this arena is not a single game, but – in game theory speak – an infinite repetition of plays and a play of one against many. The reaction of one player in case of a lost negotiation affects the reaction of other players in case the players talk. And the overall success in doing negotiations that create wins for all RELEVANT parties will define future opportunities.
Just look at a small fund that can not accept being known as an asshole fund and has to win every negotiation in a way that leaves all stakeholders happy. And then of a fund that wins by making a very small amount of investments outstandingly successful and is bad for all other companies and co-investors working with it on these deals.
So here the playbook stems from the idea of a general „fund go to market“ or thesis on how to do deals. It is a set of general observations of best practices and targeted scenarios.
- 1-to-n Playbooks where n is a smaller amount of players. : THe relevant market „assumptions / simple rules“
Again different, because the network among players is neglible. The game still is repetitive. This time it is all about reputation and success rate. The idea is still related to playbooks, because you reduce choices of actions. This is the world of an asset manager that might define key assumptions on the macro environment and do its investment in certain period depending on the core beliefs about the period. So after the strategy team of the fund says it will do „mortgage“, the playbook says where the opportunities rest in the current time window by coming up with STRONG HYPOTHESIS about the markets – e.g. Interests will increase, markets will soak it up – that imply SIMPLE RULES – e.g. wait for the interest increase and go all in into companies with strongest impact of interest rates on revenues and valuation! So the playbook says what areas to focus on and what known relationships in the market to look at. So the reduction of applicable tactics / simple rules relates to the concept of a playbook.
Understood? Good.Naturally, a good investment manager/fund will have all three of these playbooks. But highly successful will dominate on at least one of these three concepts and their operative model and „investment thesis“ will be built around this dominance.
Let’s look at some playbooks.