Charlesbank's Michael Choe on PE Decision Making Through a Probabilistic Lens

In Brief: 

Capital Allocators' Ted Seides interviews Michael Choe, CEO of Charlesbank Capital Partners ($22B AUM), diving into how the firm has transformed private equity decision-making by replacing traditional LBO models with sophisticated probability analysis. Choe reveals how their "fan of outcomes" model has improved returns by capturing asymmetric opportunities and better predicting investment success through two-year performance metrics, while avoiding the pitfalls of traditional valuation methods that miss key risk factors.

Big Picture Drivers:

• Evolution: Traditional multiple-based investing increasingly inadequate for modern PE complexity

• Systematization: Industry shifting from star-investor dependence to repeatable processes

• Competition: Rising valuations forcing firms to find new edges beyond simple pricing metrics

Key Topics Covered:

• Origins: Charlesbank's evolution from Harvard Management Company's direct PE team

• Innovation: Development of "fan of outcomes" model using 10,000 Monte Carlo simulations

• Application: How probabilistic thinking reshapes sourcing through exit planning

Key Insights:

• Speed: First two years of ownership highly predictive of ultimate investment success

• Risk: Traditional models systematically underestimate concentrated customer and recession risks

• Operations: Specialized human capital services with recurring revenue offer best asymmetric opportunities

Memorable Quotes:

• "We tend to think about our firm as a manufacturing process where the atomic unit of production is a decision"

• "Unless we're winning out of the gates, we're losing"

The Wrap: 

Charlesbank's shift to probability-based decision making represents a potential sea change in private equity, suggesting the industry's future may lie not in individual investor brilliance but in systematic processes that can consistently identify and capture asymmetric opportunities across market cycles.

Full Interview