Seventy-Percent Base-Case Underwriting
Price investments for probable success while preserving asymmetric upside
- Difficulty
- Advanced
- Time to result
- ~weeks to results
- Steps
- 5
- Confidence
- 96%
Seventy-Percent Base-Case Underwriting starts with the investor's required return and works backward to the maximum price supported by a realistic operating case. That base case should have roughly a seventy-percent chance of achieving the target rather than depending on exceptional execution. The investor then examines the distribution around it, seeking substantially greater upside than downside. Strong outcomes may produce multiples of the target return, but they are treated as optionality rather than embedded into the purchase price. Downside scenarios test whether setbacks, slower growth, or execution errors would permanently impair the investment. The key decision rule is to reject opportunities where every assumption must work perfectly. By separating probable performance from aspirational performance, the method protects margin of safety while retaining participation in unusually strong results.
Origin
Extracted from Masters in Business through Graham Weaver's description of Alpine Investors' pricing and investment-committee discipline.
Core principles
- 01Underwrite probable outcomes, not perfection
- 02Back into price from required returns
- 03Preserve more upside than downside
- 04Treat optimistic cases as optionality rather than the base case
How to run it
- 1
Set the target return
Define the return the investment must generate before changing assumptions to accommodate a particular deal. Keep the hurdle consistent with the strategy and risk involved.
Pro tip Document the hurdle before negotiations influence the analysis.
Watch out Moving the target after seeing the asking price undermines discipline.
- 2
Build a realistic base case
Model operating performance using assumptions that can withstand ordinary setbacks. Estimate whether that case has roughly a seventy-percent probability of occurring.
Pro tip Use historical evidence and operational capabilities rather than market enthusiasm.
Watch out Do not relabel an optimistic scenario as the base case.
- 3
Back into the acceptable price
Calculate the purchase price at which the realistic base case reaches the required return. Treat that figure as a ceiling rather than a negotiating aspiration.
Pro tip Recalculate the ceiling whenever material assumptions change.
Watch out A lower purchase price cannot rescue a fundamentally poor-quality business in every case.
- 4
Map upside and downside
Model credible scenarios above and below the base case. Seek a distribution where strong execution can produce multiples of the target while adverse outcomes remain manageable.
Pro tip Focus on asymmetric opportunities rather than narrow forecasts.
Watch out Ignoring downside magnitude because it seems unlikely can conceal permanent capital loss.
- 5
Run the perfection test
Ask which assumptions must succeed for the deal merely to hit the target. Reject or reprice the opportunity if nearly everything has to go right.
Pro tip Have a senior reviewer challenge hidden perfection embedded across several assumptions.
Watch out Small optimistic assumptions can combine into one highly improbable forecast.
In the wild
A software acquisition reaches its return hurdle only if customer retention rises, margins expand, a new product launches on schedule, and valuation multiples remain elevated. Although each assumption appears defensible alone, their combined success is unlikely.
→ The committee lowers its maximum price or declines the deal rather than underwriting a perfect landing.
An investor prices a recurring-revenue company so modest execution reaches the target return with high confidence. Better sales productivity and successful add-on acquisitions could multiply returns, but neither is required in the base case.
→ The investment preserves downside protection while retaining substantial upside.
Common mistakes
Pricing in perfection
Requiring every operational and market assumption to succeed means the investor is paying today for value that has not yet been created.
Counting upside as the base case
Exceptional execution should enhance returns, not be necessary to reach the minimum acceptable result.
Ignoring combined probability
Several individually plausible assumptions may be highly improbable when all must occur together.
Is it for you?
Best for
It is best for acquisition teams evaluating uncertain future cash flows and operating improvements.
Not ideal for
It is not ideal when assumptions cannot be supported well enough to construct realistic scenarios.
From the transcript
“we can pay a price that we can hit our target returns with like a seventy base case, and then we need there to be…”
“when everything in the world has to go perfectly to hit that target.”
“when you start pricing in perfection, that's a time when you realize you're overpaying.”
From the episode
Graham Weaver on Private Equity
Graham Weaver