Most investment ideas arrive with an appealing story: a growing market, a strong team, an attractive price. The real test is whether the decision would still make sense after careful questioning, and whether someone could look back later and understand why it was made. Whether it is a family buying a shop lot or an institution lending to a business, the same six checks apply.
Key takeaways
- A sound decision rests on evidence that can be checked, not on enthusiasm.
- Testing “what if?” and planning for a bad outcome matter as much as the expected result.
- Writing down the reasons and checking them regularly is part of the decision, not paperwork after it.
01Quality and sustainability of cash flows
A thesis is only as strong as the cash flows it depends on. Reported earnings can be shaped by accounting choices, one-off items and working-capital timing; cash generation is harder to manufacture. A defensible assessment reconciles earnings to operating cash flow, identifies how much of revenue is recurring or contracted, examines customer and supplier concentration, and distinguishes maintenance capital expenditure from growth investment.
Sustainability is a separate question from quality. Cash flows that are genuine today may depend on conditions that are temporary: an exceptional pricing environment, a single large contract, or a policy incentive with an expiry date. The CFA Institute's standards of professional conduct require investment professionals to exercise diligence and thoroughness and to have a reasonable and adequate basis, supported by appropriate research, for any investment analysis or action.1 In practice, that means separating what the evidence shows from what the projection assumes.
02Valuation assumptions and sensitivity
Every valuation is a set of assumptions expressed as a number. For assets without observable market prices, IFRS 13 classifies inputs into a three-level hierarchy, with Level 3 reserved for unobservable inputs that rely on the reporting entity's own assumptions, and requires additional disclosure about those measurements.2 The further a valuation sits from observable prices, the more weight falls on the discipline of its assumptions.
Sensitivity analysis makes that discipline visible. Rather than presenting a single value, a defensible proposal shows how value, or debt-service capacity, responds when key inputs move. Exhibit 1 illustrates this for a hypothetical floating-rate borrower.
| EBITDA \ all-in borrowing rate | 7.5% (base) | 8.5% (+100bp) | 9.5% (+200bp) |
|---|---|---|---|
| RM50m (base) | 2.22x | 1.96x ▲ | 1.75x ▲ |
| RM45m (−10%) | 2.00x | 1.76x ▲ | 1.58x ▲ |
| RM40m (−20%) | 1.78x ▲ | 1.57x ▲ | 1.40x ▲ |
Hypothetical illustration. Borrower with RM300m of floating-rate debt priced at a reference rate plus a 3.0% margin; interest cover = EBITDA ÷ annual interest. ▲ indicates a value below an assumed minimum interest-cover covenant of 2.00x. Not based on any actual borrower or transaction.
The base case comfortably meets the assumed covenant. A moderate rise in rates or a moderate fall in earnings, on its own, brings the borrower to or below the threshold; both together reduce cover to 1.40x. The IMF has observed that private credit typically lends at floating rates to smaller, highly leveraged borrowers, precisely the profile for which this combination matters.3
03Downside scenarios, liquidity and refinancing
Capital preservation begins with an explicit answer to the question: what would have to happen for this investment to lose money, and how much could be lost? That requires scenarios built around the specific drivers of the asset, not a uniform haircut, and a view of recovery value if the scenario materialises.
Liquidity and leverage determine whether a temporary loss becomes a permanent one. A position that cannot be exited, financed by debt that must be refinanced into weaker conditions, can crystallise losses that a patient, unlevered holder would avoid. IOSCO's thematic review of private finance noted that private equity and private credit are generally illiquid and closed-ended, that higher interest rates could raise refinancing and default risk over time, and that leverage at fund and portfolio-company level is often difficult to observe.4 IOSCO's recommendations on liquidity risk management for collective investment schemes similarly emphasise aligning the liquidity of assets with the redemption terms offered to investors.5
Capital preservation begins with an explicit answer: what would have to happen for this investment to lose money, and how much could be lost?
04Private credit: covenants and collateral
In private credit, the lender's protection is largely contractual. Covenants are early-warning conditions written into the loan agreement. Maintenance covenants test leverage or interest cover at regular intervals, giving a lender the chance to intervene before value deteriorates; incurrence covenants apply only when the borrower takes a specified action, such as borrowing more. IOSCO reported that the share of covenant-lite loans in the institutional leveraged-loan market reached 91% in October 2021, and that while private credit loans still usually carry covenants, the number per deal has declined to an average of just over one since 2015.4
Collateral assessment requires the same rigour as cash-flow analysis: whether security is perfected and enforceable in the relevant jurisdiction, how readily the asset could be realised, and how its value would behave in the scenario in which it is needed. Concentration also matters. The IMF's April 2026 report estimated that roughly one-fifth of direct-lending loans are to software companies and that, under stressed conditions, selective default rates could rise to two to three times recent levels.6
05Real assets: diligence and governance
Real assets add physical, legal and operational dimensions. Diligence typically covers title and encumbrances, permits and zoning, physical condition and remaining useful life, environmental exposure, tenant or offtaker credit quality, lease or contract terms, and the assumptions behind any independent valuation. Each of these can be evidenced; none should be inferred from the investment narrative.
Valuation governance is particularly important because real assets are appraised infrequently. IOSCO has observed that private-market valuations generally adjust more slowly than public prices and can become stale.4 The IMF has noted that opacity can create incentives to delay the recognition of losses.3 Independent valuation, a clear policy on frequency and methodology, and separation between those who originate an investment and those who value it all reduce that risk.
06Documentation, decision-making and monitoring
A defensible decision is one that can be reconstructed. The investment record should state the thesis, the evidence relied on, the key assumptions and their sensitivities, the principal risks and mitigants, the dissenting views raised and how they were resolved, the limits and conditions attached to approval, and the specific indicators that would show the thesis is no longer valid.
AM Nusantara's website describes its investment approach as six sequential stages, each posing a question and producing a defined output.7
- 01 Observe What is happening, and why does it matter? OutputMarket context
- 02 Curate Is this worth our attention? OutputA curated shortlist of opportunities
- 03 Assess Does the evidence support the thesis? OutputAn assessed investment thesis
- 04 Govern Has it been appropriately reviewed and challenged? OutputA reviewed and challenged opportunity
- 05 Allocate Is the position sized and structured appropriately? OutputA sized, documented position
- 06 Monitor Does the thesis still hold? OutputOngoing review, material change communicated
Stage questions and outputs as stated on the AM Nusantara website. Shown as the firm’s stated investment approach; it is not a description of specific operational procedures, committees or controls.
The sequence places review and challenge before capital is allocated, and treats monitoring as a continuation of the decision rather than an afterthought. Monitoring is where documentation pays for itself: when the indicators recorded at approval are tracked, a change in circumstances can be recognised as a change in the thesis, rather than explained away after the event.
07Implications for investment assessment
| Element | Question to answer before approval | Evidence that supports the answer |
|---|---|---|
| Cash flows | How much of projected cash flow is contracted, recurring or demonstrated? | Reconciled cash-flow history; contract and customer analysis |
| Valuation | Which assumptions drive value, and what happens when they move? | Sensitivity tables; source of each input; valuation hierarchy level |
| Downside | What causes a loss, how large could it be, and what is recoverable? | Asset-specific scenarios; recovery and collateral analysis |
| Liquidity & leverage | Can the position be held or exited through stress, and what must be refinanced when? | Maturity profile; refinancing scenarios; liquidity terms |
| Protection | Which covenants and security apply, and are they enforceable? | Legal review; covenant headroom under stress |
| Governance | Who reviewed and challenged the proposal, and what was decided? | Documented review, dissent and conditions of approval |
| Monitoring | Which indicators would show the thesis no longer holds? | Defined monitoring metrics, thresholds and review frequency |
Framework prepared by AM Nusantara for discussion. It describes general good practice and is not a description of any specific procedure, committee or control.
| Term | What it means |
|---|---|
| Cash flow | The actual money coming into and going out of a business, as distinct from accounting profit. |
| Sensitivity analysis | Testing how a result changes when key assumptions, such as interest rates or sales, move. |
| Level 3 inputs | Valuation inputs that cannot be observed in a market and rely on the valuer's own assumptions (IFRS 13). |
| Refinancing | Replacing an existing loan with a new one, often when the old one falls due. |
| Covenant | A condition in a loan agreement that acts as an early warning for the lender. |
| Collateral | Assets pledged as security in case a loan is not repaid. |
| Covenant-lite | A loan with few or no regularly tested covenants. |
Simplified definitions for general readers.
Our perspective
No process removes the possibility of loss, and a defensible thesis can still be wrong. What defensibility provides is something different: confidence that the decision was made on evidence rather than enthusiasm, that its risks were understood and accepted deliberately, and that a change in circumstances will be recognised early. Capital allocation should be the outcome of that discipline, not its starting point.
Sources & references
- CFA Institute, Standards of Practice Guidance, Standard V(A): Diligence and Reasonable Basis. Source (opens in new tab)
- IFRS Foundation, IFRS 13 Fair Value Measurement. Source (opens in new tab)
- International Monetary Fund, Global Financial Stability Report, April 2024, Chapter 2: “The Rise and Risks of Private Credit”. Source (opens in new tab)
- IOSCO, Thematic Analysis: Emerging Risks in Private Finance, Final Report FR10/23, September 2023. Source (opens in new tab)
- IOSCO, Recommendations for Liquidity Risk Management for Collective Investment Schemes, Final Report, February 2018. Source (opens in new tab)
- International Monetary Fund, Global Financial Stability Report, April 2026, Chapter 1. Source (opens in new tab)
- AM Nusantara Limited, Investment Approach (corporate website). Source (opens in new tab)
Data cited are as published by the named sources up to 30 October 2026. Exhibits labelled “Hypothetical illustration” are constructed examples and are not market observations.
Important information
This publication is provided by AM Nusantara Limited for general information and educational purposes only. It does not constitute investment, financial, legal, tax or Shariah advice, nor an offer, invitation, solicitation or recommendation to acquire or dispose of any security, fund or other investment, and it does not take into account the objectives, financial situation or needs of any person. Statistics are drawn from the third-party sources listed and have not been independently verified by AM Nusantara; they may be revised. Examples identified as hypothetical are illustrative only and do not represent actual investments, portfolios or results. Views expressed are those of AM Nusantara at the time of writing and may change without notice. Investments involve risk, including the possible loss of capital invested; past performance is not a reliable indicator of future results. Readers should seek advice from an appropriately licensed adviser before making any investment decision.
