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The 1992 book Debt merchantsA critical history of the private equity firm KKR, it recounts the moment in the early 1980s when an executive at the firm stumbled upon VisiCalc, the spreadsheet software that would revolutionize both KKR and Wall Street.
“KKR couldn’t quickly analyze several companies at once, because their financial plans required weeks of hand calculations,” George Anders wrote of the old way of doing business. But with the arrival of VisiCalc, “suddenly, the financials of giant companies could be analyzed in an afternoon.”
After VisiCalc came Lotus 1-2-3 and, later, Microsoft Excel. For investors like Martin Brand, who now heads Blackstone’s leveraged buyout group in the US, it is now possible to conduct a deal analysis while on the phone with the investment banker making the sales presentation.
Blackstone has dozens of engineers and data scientists working alongside its investors to build automation tools that can ease the processing burden on junior employees without sacrificing the rigorous number-crunching required to invest billions of dollars.
One such tool is BX Atlas, a standardized LBO model that gives Blackstone dealmakers a near-instant read on a deal’s viability and whether it warrants further study. “It’s really cool,” Brand said.
Even though functionality increases every year, bankers and investors in their twenties had been forced to manually type numbers and equations into cells and then link and format those cells.
That drudgery may be about to end with seismic advances in computing power. What that means for investment returns, the happiness of Wall Street salt mine workers and the skills needed for the next generation of rainmakers has become the next interesting question.
For firms lacking Blackstone’s in-house tech developers, Ian Gutwinski is trying to fill the void. The 2021 Harvard Business School graduate and former private equity investor sells an LBO modeling software called Mosaic. Like Blackstone’s Atlas, Mosaic can generate investment returns with just a few quick manual inputs.
Mosaic also offers helpful visualizations that show whether those returns are due to operational improvements or mere financial leverage. The entire process takes just a few minutes. Gutwinski says the preliminary models are not only fast, but also free of defects, eliminating the possibility of common human errors, such as entering an incorrect number or link. Mosaic models can also be downloaded to Excel and then customized as the operations team sees fit.
Gutwinski’s clients include large firms such as Warburg Pincus and CVC Capital. One user, who asked not to be identified, explained that junior associates had numerous day-to-day responsibilities, including overseeing existing companies, which were better uses of their time. “Modeling is a commodity,” this person said.
“One of the really amazing aspects of the history of spreadsheets in the 1980s, particularly in the case of private equity, is that spreadsheets allowed financiers to see and imagine differently,” said William Deringer, an MIT historian and former investment banker.
“I think it’s quite possible that new automation tools for financial analysis can offer equally new kinds of insight and imagination.”
In An academic articleDeringer cited a 1989 New York Times article that captured the cultural shift sweeping Wall Street in the dawning era of VisiCalc. “Sharp elbows and a working knowledge of computer spreadsheets suddenly counted for more than a nose for dry sherry or membership in Skull and Bones,” he wrote, the latter referring to Yale’s blue-blooded secret society.
This time of year, investment banks are welcoming new students and teaching them the basics of spreadsheet modeling. The ultimate goal is not just to understand the mechanics, but to develop critical thinking, intuition, and problem-solving skills. And historically, the currency of exchange in these new cohorts has been mastery of Excel.
The black-box tools that are emerging may soon make technical capabilities matter less, in the same way that software programmers are expected to one day give way to artificial intelligence engineers. There has always been a gap between what makes a good junior associate (raw processing power) and a senior executive (decisiveness, maturity, and a respectable golf game). From now on, that gap may slowly begin to narrow.