Macro Screening: This is the initial, broad-based screening process. It's about identifying potential investment *sectors* or *industries* that are likely to offer attractive returns. This stage doesn't look at individual companies yet; instead, it focuses on larger trends and factors. Examples of factors considered during macro screening include:
* Market size and growth: Is the target market large enough and growing rapidly enough to support significant returns?
* Industry trends and dynamics: Are there positive or negative trends impacting the industry? (e.g., technological disruption, regulatory changes, etc.)
* Competitive landscape: Is the industry fragmented or dominated by a few players? What are the barriers to entry?
* Economic conditions: Are macroeconomic factors (interest rates, inflation, etc.) favorable for investment in this sector?
* Government policies and regulations: Are there supportive government policies or regulations that could benefit the industry?
* Technological advancements: Are there significant technological advancements that could create opportunities or threats?
Essentially, macro screening helps to narrow down the vast universe of potential investments to a smaller, more manageable set of industries or sectors worth further investigation.
Micro Screening: Once promising sectors have been identified through macro screening, micro screening shifts to the evaluation of *individual companies* within those sectors. This involves a much deeper dive into specific businesses and their financials. Examples of factors considered during micro screening include:
* Financial performance: Reviewing financial statements (income statement, balance sheet, cash flow statement) to assess profitability, liquidity, and efficiency.
* Management team: Assessing the experience, skills, and track record of the management team.
* Business model: Evaluating the viability and scalability of the business model.
* Competitive advantage: Identifying the company's unique selling proposition and its competitive advantage over rivals.
* Valuation: Determining a fair price to pay for the investment.
* Risks: Identifying and assessing potential risks associated with the investment (e.g., market risks, operational risks, financial risks).
* Exit strategy: Planning how the investment will be sold or liquidated in the future.
Micro screening is a much more detailed and intensive process than macro screening. It aims to identify those companies that possess the characteristics of a successful investment within the previously selected sectors. The output of micro screening is a short-list of companies worthy of further due diligence.