The Difference Between Conviction and Confidence
Every deal begins with a story. The market is growing, the business is well placed, and there is a clear route to doubling earnings before exit. The investment thesis is that story, written down.
By the time it reaches an investment committee, though, that story has usually been told many times by people who want it to be true. Management wants the deal. The deal team has spent months on it. Momentum builds, and challenge quietly falls away. Conviction starts to stand in for evidence.
A thesis is a hypothesis
The healthiest way to treat an investment thesis is as a set of assumptions waiting to be proven. Each one carries risk, and each one deserves the same scrutiny a future buyer will give it at exit.
In practice, value rarely disappears because the headline strategy was wrong. It disappears in the detail underneath:
The market is smaller than it looks. A large Total Addressable Market means little if a business can only realistically win a small share of it. For example, a business may be targeting a £2 billion market, but if only a small number of customers are a good fit, sales take a long time or established competitors already have strong relationships, the actual opportunity may be much smaller.
The route to growth is vague. “Organic growth plus acquisitions” is a direction, not a plan. Which markets, which targets, and in what order?
The organisation cannot carry the plan. A well-run business today may still lack the leadership, structure or capability to scale at the pace the model assumes.
The last of these is the most common, and the least examined.
Asking the uncomfortable questions
Good challenge is not about being negative. It is about asking the questions that matter while there is still time to act on the answers:
Are the strategic assumptions supported by evidence, or by optimism?
Is organic growth, acquisition or partnership the best route to value, and why?
Does the acquisition pipeline genuinely serve the strategy, or just add scale?
Where are the capability gaps and operational constraints that could slow delivery?
These questions can feel uncomfortable in a competitive process. They are far more uncomfortable eighteen months into the hold period.
Confidence, not just conviction
Testing a thesis rarely kills a good deal. More often it makes the deal better: sharper on price, clearer on the value creation plan and ready to move from day one. When it does reveal a fundamental flaw, that is one of the most valuable outcomes an investor can have.
Conviction says the plan should work. Confidence comes from knowing why it will, and what could get in the way. The difference between the two is usually the difference between the return in the model and the return that is actually delivered.
Written by Jacob Wagstaff