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Private Equity Interviews 101: How to Win Offers

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Private equity interviews can be challenging, but for most candidates, winning interviews is much tougher than succeeding in those interviews.

You do not need to be a math genius or a gifted speaker; you just need to understand the recruiting process and basic arithmetic.

Still, there is more to PE interviews than “2 + 2 = 4,” so let’s take a detailed look at the process:

How to Network and Win Private Equity Interviews

The Private Equity recruiting process differs dramatically depending on your current job and location.

Here are the two extremes:

If you’re in between these categories, the process will also be in between these extremes.

For example, if you’re at a smaller bank in NY, you may complete some on-cycle interviews, but you will almost certainly also go through the off-cycle process at smaller firms.

If you’re in London, there will also be a mix of on-cycle and off-cycle processes, but they tend to start later and move more slowly than the ones in NY.

We have covered PE recruiting previously ( overall process and what to expect in the on-cycle process ), so I am not going to repeat everything here.

Interviews in both on-cycle and off-cycle processes test similar topics , but the importance of each topic varies.

The timing of interviews and start dates, assuming you win offers, also differs.

The Overall Private Equity Interview Process

Regardless of whether you recruit in on-cycle or off-cycle processes, or a combination of both, almost all PE interviews have the following characteristics in common:

The differences are as follows:

Timing and Time Frame: If you’re at a BB/EB bank in NY, and you interview with mega-funds, the process starts and finishes within several months of your start date at the bank (!), and it moves up earlier each year. Interviews at the largest firms start and finish in 24-48 hours, with upper-middle-market and middle-market firms beginning after that.

By contrast, interviews start later at smaller PE firms, and the entire process may last for several weeks up to several months.

Importance of Topics Tested: At large funds and in the on-cycle process, you need to complete modeling tests quickly and accurately and spin your pitches and early-stage deals into sounding like real deals; at smaller funds and in off-cycle interviews, the reasoning behind your case studies/modeling tests and your real experience with clients and deals matter more.

Firm-specific knowledge and fitting your investment recommendations to the firm’s strategies are also more important.

Start Date: You interview far in advance if you complete the on-cycle process, and if you win an offer, you might start 1.5 – 2.0 years later. With the off-cycle process, you start right away or soon after you win the offer.

Private Equity Interview Topics

There is not necessarily a correlation between the stage of interviews and the topics that will come up.

You could easily get technical questions early on, and you’ll receive fit/background and deal experience questions throughout the process.

Case studies and modeling tests tend to come up later in the process because PE firms don’t want to spend time administering them until you’ve proven yourself in previous rounds.

However, there are exceptions even to that rule: For example, many funds in London start the process with modeling tests because there’s no point interviewing if you can’t model.

Here’s what to expect on each major topic:

Fit/Background Questions: “Why Private Equity?”

The usual questions about “ Why private equity ,” your story , your strengths/weaknesses , and ability to work in a team will come up, and you need answers for them.

We have covered these in previous articles, so I’ve linked to them above rather than repeating the tips here.

Since on-cycle recruiting takes place at warp speed, you’ll have to draw on your internship experience to come up with stories for these questions, and you’ll have to act as if PE was your goal all along.

By contrast, if you’re interviewing for off-cycle roles, you can use more of your current work experience to answer these questions.

While these questions will always come up, they tend to be less important than in IB interviews because:

Technical Questions For PE

The topics here are similar to the ones in IB interviews: Accounting, equity value and enterprise value , valuation/DCF, merger models, and LBO models.

If you’re in banking, you should know these topics like the back of your hand.

And if you’re not in banking, you need to learn these topics ASAP because firms will not be forgiving.

There are a few differences compared with banking interviews:

Most interviewers use technical questions to weed out candidates , so poor technical knowledge will hurt your chances, but exceptional knowledge won’t necessarily get you an offer.

Talking About Deal/Client Experience

This category is huge, and it presents different challenges depending on your background.

If you’re an Analyst at a large bank in New York, and you’re going through on-cycle recruiting, the key challenge will be spinning your pitches and early-stage deals into sounding like actual deals.

If you’re at a smaller bank, and you’re going through off-cycle recruiting, the key challenge will be demonstrating your ability to lead, manage, and close deals .

And if you’re not in investment banking, the key challenge will be spinning your experience into sounding like IB-style deals.

Regardless of your category, you’ll need to know the numbers for each deal or project you present, and you’ll need a strong “investor’s view” of each one.

That’s quite a bit to memorize, so you should plan to present, at most, 2-3 deals or projects.

You can create an outline for each one with these points:

If you just started working, pick 1-2 of your pitches and pretend that they have progressed beyond pitches into early-stage deals.

Use Capital IQ or Internet research to generate potential buyers or investors, and use the company-provided pitch materials to come up with your projections for the potential stumbling blocks in the transaction.

For your investment recommendation, imagine that each deal is a potential LBO, and build a quick, simple model to determine the rough numbers, such as the IRR in the baseline and downside cases.

For the risk factors, reverse each model assumption (such as the company’s revenue growth and margins) and explain why your numbers might be wrong.

If you’re in the second or third categories above – you need to show evidence of managing/closing deals or evidence of working on IB-style deals – you should still follow these steps.

But you need to highlight your unique contributions to each deal, such as a mistake you found, a suggestion you made that helped move the financing forward, or a buyer you thought of that ended up making an offer for the seller.

If you’re coming in with non-IB experience, such as internal consulting , still use the same framework but point out how each project you worked on was like a deal.

You had to win buy-in from different parties, get information from groups at the company, and justify your proposals by pointing to the numbers and qualitative factors and addressing the risk factors.

Firm Knowledge

Understanding the firm’s investment strategies, portfolio, and exits is very important at smaller firms and in off-cycle processes, and less important in on-cycle interviews at mega-funds.

If you have Capital IQ access, use it to look up the firm.

If not, go to the firm’s website and do extensive Google searches to find the information.

Finding this information should not be difficult, but the tricky point is that firms won’t necessarily evaluate your knowledge by directly asking about it.

Instead, if they give you a take-home case study, they might judge your responses based on how well your investment thesis lines up with theirs.

For example, if the firm makes offline retailers more efficient via cost cuts and store divestitures, you should not present an investment thesis based on overseas expansion or roll-ups of smaller stores.

If they ask for an investor’s view of one of your deals, they might judge your answer based on your ability to frame the deal from their point of view.

For example, if the firm completes roll-ups in fragmented industries, you should not look at a standard M&A deal you worked on and say that you’d acquire the company because the IRR is between XX% and YY% in all scenarios.

Instead, you should point out that with several roll-ups, the IRR would be between XX% and YY%, and even in a downside case without these roll-ups, the IRR would still be at least ZZ%, so you’d pursue the deal.

Market/Industry

In theory, private equity firms should care about your ability to find promising markets or industries.

In practice, open-ended questions such as “Which industry would you invest in?” are unlikely to come up in traditional PE interviews.

If they do come up, they’ll be in response to your deal discussions, and the interviewer will ask you to explain the upsides and downsides of your company’s industry.

These questions are more likely in growth equity and venture capital interviews , so you shouldn’t spend too much time on them if your goal is traditional PE.

And even if you are interviewing for growth equity or VC roles, you can save time by linking your industry recommendations to your deal experience.

Case Studies and Modeling Tests

You will almost always have to complete a case study or modeling test in PE interviews, but the types of tests span a wide range.

Here are the six most common ones, ranked by rough frequency:

Type #1: “Mental” Paper LBO

This one is closer to an extended technical question than a traditional case study.

To answer these questions, you need to know how to approximate IRR, and you need practice doing the mental math.

The interviewer might ask something like, “A PE firm acquires a $150 EBITDA company for a 10x multiple using 60% Debt. The company’s EBITDA increases to $200 by Year 3, $225 by Year 4, and $250 by Year 5, and it pays off all its Debt by Year 3.

The PE firm sells its stake evenly over Years 3 – 5 at a 10x EBITDA multiple. What’s the approximate IRR?”

Here, the Purchase Enterprise Value is $1.5 billion, and the PE firm contributes 40% * $1.5 billion = $600 million of Investor Equity.

The “average” amount of proceeds is $225 * 10 = $2,250, and the “average” Exit Year is Year 4 (no need to do the full math – think about the numbers – and all the Debt is gone).

So, the PE firm earns $2,250 / $600 = 3.75x over 4 years. Earning 3x in 3 years is a ~45% IRR, so we’d expect the IRR of a 3.75x multiple in 4 years to be a bit less than that.

To approximate a 4x scenario, we could take 300%, divide by 4 years, and multiply by ~55% to account for compounding.

That’s ~41%, and the actual IRR should be a bit lower because it’s a 3.75x multiple rather than a 4.00x multiple.

In Excel, the IRR is just under 40%.

Type #2: Written Paper LBO

You can get a full example of a paper LBO test, including the detailed solutions, here .

You can also check out our simple LBO model tutorial to understand the ropes.

With these case studies, you need to start with the end in mind (i.e., what multiple do you need for an IRR of XX%) and round heavily so you can do the math.

Type #3: 1-3-Hour On-Site or Emailed LBO Model

These case studies are the most common in on-cycle interviews because PE firms want to finish quickly.

And the best way to do that is to give all the candidates the same partially-completed template and ask them to finish it.

You may have to build the model from scratch, but it’s not that likely because doing so defeats the purpose of this test: efficiency.

You’ll almost always receive several pages of instructions and an Excel file, and you’ll have to answer a few questions at the end.

The complexity varies; if it’s a 1-hour test, you probably won’t even build a full 3-statement model.

They might also ask you to use a cash-free debt-free basis to simplify the transaction assumptions and adjustments.

But if it’s a 3-hour test, a 3-statement model is more likely. If you do build all three statements, the other parts of the model will be simple.

Here’s an example of a 90-minute LBO modeling test for a European company ( blank Excel file here ).

There are no 3-statement projections, but there is some complexity in the returns calculations. The full solutions and several other examples are in our Interview Guide:

IB Interview Guide

Land investment banking offers with 578+ pages of detailed tutorials, templates and sample answers, quizzes, and 17 Excel-based case studies.

Type #4: Take-Home LBO Model and Presentation

These case studies are open-ended, and in most cases, you will not get a template to complete.

The most common prompts are:

With these case studies, you must fit your recommendation to the firm’s strategy rather than building a needlessly complex model.

You might have 3-7 days to complete this type of case study and present your findings.

You might be tempted to use that time to build a complex LBO model, but that’s a mistake for three reasons:

I don’t have a great example of an open-ended case study, but the Dell LBO presentation is a good example of the type of recommendation you’d make.

Your model can be far simpler, and the presentation itself can be 3-5 pages instead.

Type #5: 3-Statement/Growth Equity Model

At operationally-focused PE firms, growth equity firms, and PE firms in emerging markets such as Brazil , 3-statement projection modeling tests are more common.

The Atlassian case study is a good example of this one, but I would change a few parts of it (we ignored Equity Value vs. Enterprise Value for simplicity, but that was a poor decision).

Also, you’ll never have to answer as many detailed questions as we did in that example.

If you think about it, a 3-statement model is just an LBO model without debt repayment – and the returns are based on multiple expansion, EBITDA growth, and cash generation rather than debt paydown .

You can easily practice these case studies by picking companies you’re interested in, downloading their statements, projecting them, and calculating the IRR and multiples.

Type #6: Consulting-Style Case Study

Finally, at some operationally-focused PE firms, you could also get management consulting-style case studies, where the goal is to advise a company on an expansion strategy, a cost-cutting initiative, or pricing for a new product.

We do not teach this type of case study, so check out consulting-related sites for examples and exercises.

And keep in mind that this one is only relevant at certain types of firms; you’re highly unlikely to receive a consulting-style case study in standard PE interviews.

A Final Word On Case Studies

I’ve devoted a lot of space to case studies, but they are not as important as you might think.

In on-cycle processes, they tend to be a “check the checkbox” item: Interviewers use them to verify that you can model, but you won’t stand out by using fancy Excel tricks.

Arguably, they matter more in off-cycle interviews since you can present unique ideas more easily and demonstrate your communication skills in the process .

What NOT to Worry About In PE Interviews

The topics above may seem overwhelming, so it’s worth pointing out what you do not need to know for interviews.

First, skip super-complex models.

As a specific example, the LBO models on Macabacus are overkill; they’re way too complicated for interviews or even the job itself.

You should aim for Excel files with 100-300 rows, not 1,000+ rows.

Next, skip brain teasers; if an interviewer asks them, you should drop discussions with the firm.

Finally, you don’t need to know about the history of the private equity industry or much about PE fund economics beyond the basics.

Your time is better spent learning about a firm’s specific strategy and portfolio.

PE Interview X-Factor(s)

Besides the topics above, competitive tension can make a huge difference in interviews.

If you tell Firm X that you’ve already received an offer from Firm Y, Firm X will immediately become far more likely to give you an offer as well.

Even at the networking stage, competitive tension helps because you always want to tell recruiters that you’re also speaking with Similar Firms A, B, and C.

Also, leverage your group alumni and the 2 nd and 3 rd -year Analysts.

You can read endless articles online about interview prep, but nothing beats real-life conversations with others who have been through the process.

These alumni and older Analysts will also have example case studies they completed, and they can explain how to spin your deal experience effectively.

PE Interview Preparation

The #1 mistake in PE interviews is to focus excessively on modeling tests and technical questions and neglect your deal discussions.

You can avoid this, or at least resist the temptation, by turning your deals into case studies.

If you follow my advice to create simplified LBO models for your deals, you can combine the two topics and get modeling practice while you’re preparing your “investor’s views.”

If you’re working full-time in banking, use your downtime in between tasks to do this , outline your story , and review technical questions.

If you only have 10-15-minute intervals of downtime, break case studies into smaller chunks and aim to finish a specific part in each period.

Finally, start preparing before your full-time job begins .

You’ll have far more time before you start working, and you should use that time to tip the odds in your favor.

The Ugly Truth About PE Interviews

You can read articles like this one, memorize PE interview guides, and get help from dozens of bank/group alumni, but much of the process is still outside of your control.

For example, if you’re in a group like ECM or DCM , it will be tough to win on-cycle interviews at large firms and convert them into offers no matter what you do.

If the mega-funds decide to kick off recruiting one day after you start your full-time job in August, and you’re not prepared, too bad.

If you went to a non-target school and earned a 3.5 GPA, you’ll be at a disadvantage next to candidates from Princeton with 3.9 GPAs no matter what you do.

So, start early and prepare as much as you can… but if you don’t receive an offer, don’t assume it’s because you made a major mistake.

So You Get An Offer: What Next?

If you do receive an offer, you could accept it on the spot, or, if you’re speaking with other firms, you could shop it around and use it to win offers elsewhere.

If you’re not in active discussions with other firms, you’re crazy if you do not accept the offer right away.

If You Get No Offer: What Next?

If you don’t get an offer, follow up with your interviewers, ask for feedback, and ask for referrals to other firms that might be hiring.

If you did reasonably well but came up short in a few areas, you could easily get referrals elsewhere .

If you did not receive an offer because of something that you cannot fix, such as your undergraduate GPA or your previous work experience, you might have to consider other options, such as a Master’s, MBA, or another job first.

But if it was something fixable, you could take another pass at recruiting or keep networking with smaller firms.

To PE Or Not to PE?

That is the question.

And the answer is that if you have the right background, you understand the process, and you start preparing far in advance, you can get into the industry and win a private equity career .

And if not, there are other options, even if you’re an older candidate .

You may not reach the promised land, but at least you can blame it on someone else.

private equity case study interview tips

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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49 thoughts on “ Private Equity Interviews 101: How to Win Offers ”

Brian, What about personality tests? What is their importance in the overall hiring process eg if you get them as the last stage?

They’re not that important, and even if you do get them, you can’t really “prepare” in any reasonable way (barring a brain transplant to replace your personality and make it more suitable for the firm). It’s also highly unusual to get one in the final stage – a firm doing that is probably just paranoid that you are secretly a serial killer and they want to rule out that possibility.

Hey- for the Fromageries Bel case study, can’t quite make sense of the Tier 4 management incentive returns, what’s the calculation for each tier? Would think it’s Tier 2 less tier 1 * tier 1 marginal profit

Tier 4 is based on a percentage of all profits *above* a 2.5x equity multiple. Each tier below it is based on a percentage of profits between specific multiples, which correspond to specific EUR proceeds amounts.

I have an accounting background (CPA & several years removed from school) and a small amount of finance experience through internships. I’m interviewing for a PE analyst position and managed to get through the first round of interviews. The firm itself doesnt just hire guys with a few years of banking, their team is very diverse with some backgrounds similar to mine.

The first round interview was a mix of technical questions plus a lot about myself and my experience. No behavioral questions. The first round was with an associate for 30 minutes, the second round is an hour with a partner. I managed to answer a lot of the questions about LBO models and what types of companies are good LBO candidates. Thanks to your website for that.

Any advice for a second round interview for a guy like me who doesnt have deal making experience or much experience in finance? Will the subsequent interviews after the first round be more technical-based questions? Or do they lean more on technical questions in round 1 to weed out candidates?

They will usually become more fit-based if they’ve already asked a lot of technical questions in earlier rounds. I would focus on your story and answers to the Why PE / Why This Firm / Are you sure you want to switch?-type questions.

Is it likely too difficult to access the on-cycle process from the CLT office of an In-Between-a-Bank that it would make more sense to focus one’s energy on the MM/LMM? Is the new era of Zoom making geography/distance less of a factor or is the perceived prestige of NY still an obstacle?

Location is somewhat less of a factor now, but it still matters, and working from home will not continue indefinitely into the future. It will be very difficult to participate in on-cycle recruiting at the mega-funds if you’re working in Charlotte at Wells Fargo if that’s your question, but plenty of MM funds are realistic.

What are some of the larger funds that you would consider realistic?

There are dozens of funds out there (it’s not like bulge bracket banks or mega-fund PE firms where there’s only a defined set of 5-10), so I can’t really give you a specific answer. My recommendation would be to look up people who worked at WF on LinkedIn and see the types of funds they are now working at.

I remember I saw a video of yours (might have been YouTube) where you explained the PE process. You talked about do pe firms really add value and then you went over how when a pe firm buys a company, they do a little “trick” where they create a shell company to acquire the target so the debt isn’t on the pe firms books. I’ve been looking all over for this video. Do you know which video I’m referring to?

Yes, that is no longer in video form. It’s still in the written LBO guide but the video from the old course was removed because it was way too long and boring for a video and was better explained in text.

Hi Brian, can you elaborate more on ‘Understanding the firm’s investment strategies, portfolio, and exits’ when you talk about smaller firm and off-cycle processes, simliar point came up under *Type 5*: you must fit your recommendation to the firm’s strategy rather than building a needlessly complex model. What exactly should I pay attention on? I felt funds I checked their investment strategy descirption are pretty broad, and they invest in various type of deals, say even in one industry, they do different purchase range. Also, when talking about growth equity, you mentioned you can practice case by picking companies you’re interested in, downloading their statements, projecting them. What if they are not public companies, how can I get those information? Are you recommending only those companies with 20F available? Or can you just elaborate more on how can I follow your instruction? Thanks

All you can do is go off their website and possibly a Capital IQ description if you have access. See if they focus on growth, leverage for mature companies, operational improvements, or add-on acquisitions and pick something that fits one of those.

You can pick public companies for growth equity or find a public company that is similar to a private one the firm has.

Hey Brian! I have an interview with a family office for a private equity analyst position. The firm is small and not much about it online. I haven’t had much time to prepare as it was not an interview I was expecting. What would you say the most important elements to focus on are for the interview considering the time constraint? I am an undergrad, third year, second internship. (first internship was for a large construction/developer as project coordinator, not finance based)

Focus on your story, the firm’s portfolio companies and strategies, and a few investment ideas you have for specific sectors. Technical questions are fine, but you probably won’t have much time to prepare at the last minute.

How would PE interviews / Technical questions look like for straight out of undergrad PE role look like

e.g Blackstone internships, Goldman Merchant Banking internships etc

Largely the same, but less emphasis on deal experience and deal-related questions at the undergraduate level. They may ask slightly more questions on LBOs, but at the undergrad level, they assume you know very little, so questions will span a wide range of topics.

Have you written or seen similar articles on PE operating partner interviews?

No, sorry. There’s hardly any information on that level of interview online because you can’t really make an interview guide or other product to prepare for it, and most people at that level would need 1-on-1 coaching more than a guide. My guess is that they will focus almost exclusively on your past experience turning around and growing businesses and assess how well you can do it for their portfolio companies. They’re not going to give you LBO modeling tests or case studies.

“Next, skip brain teasers; if an interviewer asks them, you should drop discussions with the firm”

Could you please elaborate on this? Almost every IB interview includes brain teasers so I am wondering why a PE interview shouldn’t?

Brain teasers are not that common in IB interviews in most regions unless you count any math/accounting/finance question as a brain teaser. They are far more common in S&T, quant fund, and prop trading interviews.

The point of this statement is that it’s OK if an occasional brain teaser comes up, but if the interviewer asks you brain teasers for 30 minutes, which have exactly 0% correlation to the real work in PE, you should leave because it’s a sign that the people working at the firm are idiots who don’t know how to conduct proper interviews or test candidates.

This is helpful. I find myself at a fix, I do not think I have had the right exposure, although in a BB I support teams with standard materials in a particular industry group in M&A. However I have interviews with a top global PE next month. Any guidance on how should I prepare for it ?

Thanks in advance

Follow everything in this article… practice spinning/discussing your deals… practice LBO questions and simple case studies.

Brian – thank you for your concise and candid remarks. do you have any insights or advice for someone with 5yrs of BB ECM & DCM experience now at a top full-time MBA program looking to break in?

It’s going to be very difficult if you just have capital markets experience and you’re already in business school. You should probably move to an M&A or strong industry team at a large bank (BB or EB) after business school and then go into private equity from there. It’s tough, but still easier than trying to move into PE directly out of an MBA program with only capital markets experience.

My next interview will highly likely involve a statement/growth equity modeling case. I tried to find the Atlassian Case interview but i am unable to open the link.

Would it be possible to share an example case or more information on that topic?

Many thanks,

The Atlassian case study is all we have. I don’t know why you can’t open the files, but I just tried and they seemed to work. Maybe try again or use a different browser.

Hi M&I team,

I have an opportunity to interview for an Analyst level opening at a boutique PE fund. This is a shop that has just started operations so I am directly communicating with the Partner. I doubt they have any structured recruitment process at this stage of their existence. He asked me to send some written work (memos and spreadsheets) on any public listed co that demonstrates my understanding of investing (basic balance sheet analysis, ratio analysis, valuation multiples).

So I am just wondering what to do? Should I work on projections and prepare a DCF model or do something simpler? I’d really appreciate your guidance on this.

Thanks again for the amazing work you’ll have been doing!

Yes, just create simple projections, a simple valuation/DCF, and maybe a simple LBO model since it is a PE fund that intends to buy and sell companies.

Could you provide some advice for preparing interviews for principal investing role ?

Thank you in advance Laura

We don’t really focus on that, but the articles on private equity and funds of funds on this site might be helpful.

Just wanted to say thank you! After reading everything on this site including all the CV and interview material I have managed to transition from a second year engineering undergrad with no prior experience/spring weeks/insight days, into an intern at Aviva Investors (UK buy side) within the space of one year.

The information you have posted is invaluable and “breaking in” is definitely doable with the right mindset and appetite for rejections!

Thanks again.

Thanks! Congrats on your internship offer.

Hi Brian/Nicole – Im an Economics student from the UK in 3rd year out of a 4 year course at a semi-target college, with 2 finance internships done up until now(not FO). I plan on doing a Msc Finance when I finish and eventually break into IB or Sales/Trading (I know I still haven’t decided which one I really want more). Through a family friend I have an offer to do a short internship this summer in NY in a post-trade regulatory commission. As this isn’t actually sitting at a trading desk experience, or anything related to IB should I decide to go down that road, would this add genuine value to my CV ? How are internships in regulatory commissions looked at for students looking to break into sales/trading? Surely even having any NY Finance experience on the CV will add more substance over here in London when going for internships compared to the majority of UK students who don’t? Appreciate any advice on this matter, Thanks!

I don’t think it would help much because you already have 2 non-FO internships, and a regulatory internship would be yet another non-FO internship. If it’s your best option, you can take it, but you would be better off getting something closer to a real front-office role.

Hey Brian. I am graduating after this semester going into Management consulting (Deliote, AT Kearny, Accenture)but I’m hoping to make a switch into either IB or PE after a couple years. I have one search fund internship which was enough to get me a few 1st and second round ib/pe FT interviews but no offers.My plan is to get into the best online MSF program I can and switch into Finance once I’m done. Do you think, given how close I was to getting in my 1st try, a high GPA from a reputable MSF and good experience in consulting will be enough or should I try to somehow get an IB internship before I apply?

I think you will probably need another internship just before the MSF starts or while it is in progress, not necessarily in IB, but something closer to it. Otherwise you’ll get a lot of questions about why you went from the search fund to consulting.

Thanks. As far as my story is concerned, is it better to do another finance internship before consulting so it’s search fund->ib->consulting->MSF (or MBA not sure)? I only ask because I may be able to get on some m&a projects with the consulting firm and my story could be when exposed to those deals, I realized how big my passion for finance was and that’s when I decided to get my MSF and switch to IB.

No, I think that would make less sense because then you would have to explain why you went from IB to consulting… and are now trying to go back to IB. Saying that you got exposed to M&A deals during the consulting experience would be a better story (and you would still ideally pair it with a transaction-related internship before/during the MSF).

Got it, thanks!

Probably missing something here, but for the first example, where does the 300% and 55% come from?

300% = 4x multiple. If compounding did not exist, we could just say 300% / 4 = 75% annual return. Because of compounding, however, the actual return does not need to be 75% per year in order for us to earn 300% by the end of 4 years. Instead, it can be a fair amount less than that, and we’ll still end up with 300% at the end.

To estimate the impact of compounding, you can multiply this 300% / 4 figure by a “compounding factor,” which varies based on the multiple and time period, but which is around 55% for a 4x return over a standard holding period.

Do you mind explaining how you can estimate a “compounding factor” such as with the 55% here?

There’s no easy-to-calculate-using-mental-math way to get this for all scenarios, but you can memorize quick rules of thumb (based on actual numbers and looking at the ratios) for 3 and 5-year periods and extrapolate from there. I don’t really think it’s worth doing that in-depth, though, because you just have to be roughly correct with these answers.

Do you think you will do a hedge fund interview guide similar to the one you have here?

Potentially, yes, but it’s much harder to give general guidelines for HF interviews because they’re completely dependent on your investment pitches. Also, interest in HFs has declined over the years (we no longer receive as many questions about them).

On that mental paper LBO question, how is the company able to pay off 900 of debt by year 3? It sounds like proceeds from the sale will have to be used in order to fully pay off the debt because EBITDA alone only adds up to 525, and that’s assuming there’s no interest.

Favorable working capital… NOLs… asset sales… the Konami code or other cheat codes. The point is not the numbers but the thought process.

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How to prepare for the case study in a private equity interview

If you're interviewing for a job in a private equity firm , then you will almost certainly come across a case study. Be warned: recruiters say this is the hardest part of the private equity interview process and how you handle it will decide whether you land the job.

“The case study is the most decisive part of the interview process because it’s the closest you get to doing the job," says Gail McManus of Private Equity Recruitment. It's purpose is to make you answer one question: 'Would you invest in this company?'

In most cases, you'll be given a 'Confidential Information Memorandum' (CIM) relating to a company the private equity fund could invest in. You'll be expected to a) value the company, and b) put together an investment proposal - or not. Often, you'll be allowed to take the CIM away to prepare your proposal at home.

“The case study is still the most decisive element of the recruitment process because it’s the closest you get to actually doing the job. Candidates can win or lose based on how they perform on case study. People who are OK in the interview can land the job by showing the quality of their thinking, ” says McManus. “You need to show that you can think, and think like an investor.”

"The end decision [on whether to invest] is not important," says one private equity professional who's been through the process. "The important thing is to show your thinking/logic behind answer."

Preparing for a PE case study has distinctive challenges for consultants and bankers. If you're a consultant, you need to, "make a big effort to mix your strategic toolkit with financial analysis. You need to prove that you can go from a strategic conclusion to a finance conclusion," says one PE professional. Make sure you're totally familiar with the way an LBO model works.

If you're a banker, you need to, "make a big effort to develop your strategic thinking," says the same PE associate. The fund you're interviewing with will want to see that you can think like an investor, not just a financier. "Reaching financial conclusions is not enough. You need to argue why certain industry is good, and why you have a competitive advantage or not. Things can look good on paper, but things can change from a day to another. As a PE investor, hence as a case solver, you need to highlight and discuss risks, and whether you are ready or not to underwrite them."

Kadeem Houson, partner at KEA consultants, which specialises in hiring junior to mid-level PE professionals, says: “If you’re a banker you’re expected to have great technical skills so you need to demonstrate you can think commercially about the numbers you plugged in. Conversely, a consultant who is good at blue sky thinking might be pressed more on their understanding of the model. Neither is better or worse – just be conscious of your blank spots.”

A good business versus a good investment

For McManus, one of the most important things to consider when looking at the case study is to understand the difference between a good business and a good investment. The difference between a good business and a good investment is the price. So you might have a great business but if you have to pay hugely for it it might not be a great business. Conversely you can have a so-so business but if you get it a good price it might make a great investment. “

McManus says as well as understanding the difference between a good business and a good investment, it’s important to focus on where the added value lies. This has become a critical element for private equity firms to consider as competition for assets has become even more fierce, given the amount of dry powder that funds now have at their disposal through a wide array of funds. “Because of the competition for transactions generally you have to overpay to win a deal. So in the case study it’s really important you think about where the value creation opportunity lies in this business and what the exit would be,” says McManus.

She advises candidates to be brave and state a specific price, provided you can demonstrate how you’ve arrived at your answer.

Another private equity professional says you shouldn't go out on a limb, though, and you should appear cautious: "Keep all assumptions conservative at all times so as not to raise difficult questions. Always highlight risks, downsides as well as upsides."

Research the fund – find the angle

One private equity professional says that understanding why an investment might suit a particular firm could prove to be a plus. Prior to the case study, check whether the fund favours a particular industry sector, so that when it comes to the case study, you can add that to the investment thesis. “This enables you to showcase you have read up on the firm’s strategy/unique characteristics Something that would make it more likely for the fund you’re interviewing with winning the deal in what’s a very competitive market, said the PE source, who said this knowledge made him stand out.

However, the primary purpose of the case study is to test the quality of your thinking - it is not to test you on your knowledge of the fund. “Knowing about the fund will tick an extra box, but the case study is about focusing on the three most critical things that will drive the investment decision,” says McManus.

You need to think through these questions and issues:

We spoke to another private equity professional who's helpfully prepared a checklist of points to think about when you're faced with the case study. "It's a cheat sheet for some of my friends," he says.

When you're faced with a case study, he says you need to think in terms of: the industry, the company, the revenues, the costs, the competition, growth prospects, due dliligence, and the transaction itself.

The questions from his checklist are below. There's some overlap, but they're about as thorough as you can get.

When you're considering the industry, you need to think about:

- What the company does. What are its key products and markets? What's the main source of demand for its products?

- What are the key drivers in that industry?

- Who are the market participants? How intense is the competition?

- Is the industry cyclical? Where are we in the cycle?

- Which outside factors might influence the industry (eg. government, climate, terrorism)?

When you're considering the company, you need to think about:

- Its position in the industry

- Its growth profile

- Its operational leverage (cost structure)

- Its margins (are they sustainable/improvable)?

- Its fixed costs from capex and R&D

- Its working capital requirements

- Its management

- The minimum amount of cash needed to run the business

When you're considering the revenues, you need to think about:

- What's driving them

- Where the growth is coming from

- How diverse the revenues are

- How stable the revenues are (are they cyclical?)

- How much of the revenues are coming from associates and joint ventures

- What's the working capital requirement? - How long before revenues are booked and received?

When you're considering the costs, you need to think about:

- The diversity of suppliers

- The operational gearing (What's the fixed cost vs. the variable cost?)

- The exposure to commodity prices

- The capex/R&D requirements

- The pension funding

- The labour force (is it unionized?)

- The ability of the company to pass on price increases to customers

- The selling, general and administrative expenses (SG&A). - Can they be reduced?

When you're considering the competition, you need to think about:

- Industry concentration

- Buyer power

- Supplier power

- Brand power

- Economies of scale/network economies/minimum efficient scale

- Substitutes

- Input access

When you're considering the growth prospects, you need to think about:

- Scalability

- Change of asset usage (Leasehold vs. freehold, could manufacturing take place in China?)

- Disposals

- How to achieve efficiencies

- Limitations of current management

When you're considering the due diligence, you need to think about:

- Change of control clauses

- Environmental and legal liabilities

- The power of pension schemes and unions

- The effectiveness of IT and operations systems

When you're considering the transaction, you need to think about:

- Your LBO model

- The basis for your valuation (have you used a Sum of The Parts (SOTP) valuation or another method - why?)

- The company's ability to raise debt

- The exit opportunities from the investment

- The synergies with other companies in the PE fund's portfolio

- The best timing for the transaction

BUT: keep things simple.

While this checklist is important as an input and a way to approach the task, w hen it comes to presenting the information, quality beats quantity. McManus says: “The main reason why people aren’t successful in case studies is that they say too much. What you’ve got to focus on is what’s critical, what makes a difference. It’s not about quantity, it’s about quality of thinking. If you do 30 strengths and weaknesses it might only be three that matter. It’s not the analysis that matters, but what’s important from that analysis. What’s critical to the investment thesis. Most firms tend to use the same case study so they can start to see what a good answer looks like.”

Houson agrees that picking out the most important elements in the case study are more important than spending too much time on an elaborate model. “You don’t necessarily need to demonstrate such technical prowess when it comes to building the model. But you need to be comfortable about being challenged around the business case. Frankly it’s better to go for a simple answer which sparks a really interesting conversation rather than something that is purely judged from a technical standpoint. The model is meant to inform the discussion, not be the discussion itself.”

Softer factors such as interpersonal skills are also important because if the case study is the closest thing you’ll get to doing the job, then it’s also a measure of how you might behave in a live situation. McManus says: “This is what it will be like having a conversation at 11am with your boss having been given the information memorandum the day before. Not only are the interviewers looking at how you approach the case study, but they’re also looking at whether they want to have this conversation with you every Tuesday morning at 11am.”

The exercise usually takes around four hours if you include the modelling aspect, so there is time pressure. “Top tips are to practice how to think in a way that is simple, but fit for purpose. Think about how to work quickly. The ability to work under pressure is still important,” says Houson.

But some firms will allow you do complete the CIM over the weekend. In that case on one private equity professional says you should get someone who already works in PE to check it over for you. He also advises getting friends who've been through case study interviews before to put you through some mock questions on your presentation.

But McManus says this can lead to spending too much time and favours the shorter method. “It’s fairer and you can illustrate the quality of your thinking over a short space of time.”

The case study is conducted online, and because of Covid, so too are many of the follow-up discussions, so it’s worth thinking about how to present yourself on zoom or Teams. “Although a lot of these case studies over the last couple of years have been done remotely, in many ways that’s even more reason to try to bring out a bit of engagement and personality with the people you’re talking to."

“ There’s never a right or wrong answer. Rather it’s showing your thinking and they like to have that discussion with you. It’s the nearest you get to doing the job. And that cuts both ways – if you don’t like the case study, you won't like doing the job. “

Contact: [email protected] in the first instance. Whatsapp/Signal/Telegram also available (Telegram: @SarahButcher)

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Some Thoughts on Private Equity Case Study Interview

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CIM and Private Equity Case Study Interview

Questions to ask about case study for pe.

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Comments ( 114 )

Rank: Almost Human

Great stuff.

Rank: Human

Very informative.

Rank: Senior Baboon

Great information

+1 Solid stuff!

Rank: The Pro

great stuff thanks king

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Rank: Monkey

Do any of you have advice on an interview for a pe role right out of undergrad?

What kind of modelling will they test you on?

spot on. great post. would be great to hear some of the feedback you (or others you know going through the same process) might have heard throughout the process that might help those currently auditioning for a PE role.

skylinegtr94: spot on. great post. would be great to hear some of the feedback you (or others you know going through the same process) might have heard throughout the process that might help those currently auditioning for a PE role.

If you've got some questions or some specific topics you'd like to see addressed, feel free to throw them out there in a comment. If anything warrants a separate post, I might put it together for later this week. If there are some quicker questions, I might be able to answer them here.

TheKing: skylinegtr94: spot on. great post. would be great to hear some of the feedback you (or others you know going through the same process) might have heard throughout the process that might help those currently auditioning for a PE role.

I was thinking more on feedback during the interview process, areas you may have stumbled or shown well. Any war stories? People always tend to like hearing about those. Also, anything where they thought you were the greatest person to walk the earth? Appreciated in advance.

Stringer Bell

Good stuff man. His last point about not going overboard on the case is really important. I went way, way over board on my first two PE interviews. Did all sorts of unnecessary shit, and worse things I couldn't talk to particularly well.

One thing you can do on the modeling part to help you stand out, is try to put together your spreadsheets more like an investor and not like an investment banker. Like don't spend a bunch of time doing all sorts scenario analysis, sensitivity tables and charts. I know sensitivity tables look cool, but sadly you can't actually write a check for every "+/-" .5 movement along the horz. / vertical axis.

Focus more on some of the other bullets King listed above meshing with your model / analysis instead of a bunch of paste in graphics for a book.

Sack up and make a case if your pretend case study is either a "big-x" deal or a pass.

Yeah just to piggy back off of what Stringer said and the excellent post by TheKing, make sure that you actually make a decision based on the analysis. I have had friends who built great models but didn't come right out and provide their opinion. As a result they didn't get offers for those processes.

Have conviction and come right out and say "I would invest in this company." or "You shouldn't invest." Then state your case... "The projected returns are attractive (IRR is X%), they have X% market share , profitability and growth prospects and based on the analysis I see value creation opportunity during the defined investment horizon .

It makes sense to note that there are some potential risks, because obviously no deal is a pure slam dunk with no considerations, but don't be wishy washy. You need to make a call and support that call with your findings.

Thanks TheKing, very useful information. By the way, what advice would you give to someone that doesn't have much live deal experience given the weak dealflow of the group? How can I spin my experience when most of the work thus far is just pitches?

Thanks King.

If they haven't already, WSO should make a compendium of well-written, informative posts by users. Feel like I'm searching for a needle in a haystack when I'm looking for these types of posts.

junkbondswap

Great post. Any perspective regarding off-cycle PE recruiting and/or lateraling from shop to shop? Would you suggest that the best course of action is simply to work through headhunters such as Oxbridge , SG Partners , CPI , etc. Anyone else that I am missing?

Just came back to read this for the 3rd or 4th time so thought I would give it a bump.

Rank: Chimp

Private equity case study ( Originally Posted: 05/06/2008 )

Does anyone have sample case studies for PE interviews. Would be very helpful if someone can share tips or sample case studies. Treat guaranteed.. :) Thanks a ton.

regards ruchir

Hey! Did you ever receive anything for the case study??? Could really need some help on this. thanks

Bain has one on their website. Check out the sample cases.

CompBanker’s Career Guidance Services: https://www.rossettiadvisors.com/

Some cases on wall street oasis, search for them. But mostly expect to do an IRR for an LBO in Excel. You can gooogle and find "LBO IRR Models filetype:xls". Good luck man!

Bullet-Tooth Tony

Chris-Matteo: Some cases on wall street oasis, search for them. But mostly expect to do an IRR for an LBO in Excel. You can gooogle and find "LBO IRR Models filetype:xls". Good luck man!

I'm quite certain he isn't still wondering about this.

Private Equity Case Interview Prep books ( Originally Posted: 12/01/2011 )

Any good private equity guides ?

Rank: Senior Neanderthal

http://www.wallstreetoasis.com/guide-to-finance-interviews

Rank: Orangutan

Vault, PE casebook by Lerner

know how to do an lbo model, know M&A concepts, know market players (themes like tech, buyout, global, china, etc), and look up some recent PE transactions in the news

http://tradingevents.blogspot.com/p/recommended-reads.html

www.tradingevents.blogspot.com/

FinanceNerd9

Private Equity Case Study Preparation ( Originally Posted: 11/07/2012 )

I am brand new to this site, first post, so thank you for your patience. I am an investment banker at a BB bank looking to prepare for upcoming Private Equity interviews . It is my understanding that most of the places I am looking to interview will have either a take home or in person case study. Few questions about preparing for this process:

1) Can you please recommend any good pe guides that exist (free or paid). For the paid ones, are they worth it, what information does it have that will be helpful?

2) Are there any mock case study services available, that ask you questions you would expect to get in a real interview so you have a practice round?

3) Any other advice you can provide for preparing would be helpful.

Thank you all for your help!

I'm curious too - thanks.

Do you not have friends or colleagues who have gone through or are going through the process?

SanityCheck

Everyone at my BB had access to network drives and internal sample case study/ modeling templates for buyside interviews. Why aren't you asking your colleagues and peers? There's actually not much to it, I don't recommend any of the "case studies" that are offered out there. You're a current investment banker, there's no one with better information than you (supposedly).

If you can't do a simple LBO /operating model or talk about deals that YOU'VE done then no guide is going to help you. If you're actually considering paying for some older ex-banker/random guy to give u a model/advice then there is absolutely no hope for you. Pick a favorite model you or someone else has done at your BB and recreate it.

Know your deals, know the reasoning behind it, know how to talk intelligently and then practice building models from scratch (nothing hard, 1 pager LBOs , quick operating models). The rest is up to fit and how much they like you.

I am not concerned about the interviewing portion or the modeling, I know my deals cold and I can speak to them very well. And I know that all the questions asked will be questions I have dealt with through all my deal experience. But that is still very different than the case study format where you have to take a CIM and put together an investment thesis in a couple hours (potentially in an industry you do not know).

I would hope that a guide would give a list of questions that are commonly asked, which of the assumptions and investment drivers are the most discussed and questioned and what areas the PE firms will drill down into. For example, should I spend valuable time during the case study justifying a leverage multiple? I would assume given the limited time and resources (at least for an in person case study) that it would be ok to use a reasonable assumption and just discuss the sensitivity around adding more or less leverage. But if I knew that it is typical for them to ask a lot of questions around why I picked leverage then I would grab a few comps , see their leverage levels, FCF numbers and ratings and pick my leverage based on that. Same question for entry and exit multiples , for margin assumptions, for rates, for competitive positioning of the company etc.?

Hopefully you see what I am getting at now, in a case study there is not enough time to fully vet all of these. I would feel fine answering all these questions with unlimited time and resources, but given that I do not have those things, where should I focus my time in order to be best prepared to answer the questions I will likely be asked and defend the drivers that are most commonly questioned in a case study. I think that a guide or a practice run would help me see what to expect so I can budget my time accordingly. That is more what I am looking for in a guide. With that clarification in mind, any suggestions?

It depends on the firm and interviewer. I was never asked one real "technical" in my process -- I did my case study and the rest of the interviews were about my thought process (pertaining to the case and otherwise).

Yeah, I know what you're saying but given that I've went through dozens of PE interviews, there is no "list of questions". It's exactly what I just said in my first post so study your deals and learn about each firm (deals done, strategies, etc.) before each interview and you'll be fine.

And to answer your questions, you will be asked to justify EVERYTHING in your model and it totally depends on what the interview wants. Turnaround/distressed PE firms had me talk about debt tranches all the time but other than that there was no real consistency in what questions were asked more.

If you know your deals and you can model, there is absolutely no need to pick up a guide, it will not help whatsoever.

check out the interview guide at http://www.streetofwalls.com/

helped me a ton.

Help private equity case study ( Originally Posted: 01/22/2013 )

I've got a private equity case study to do but some information are bothering me.

For this case study, I've got projections of Turnover, EBITDA , EBIT and net income for the next 3 years.

I also have the projected financial debt (I guess, it's the pre-existing one, not the debt from the aquisition) and projected cash position.

What I wanted to do for my lbo model was to calculate FCF from EBIT and use all of them to repay the acquisition's debt.

However, I don't know what I'm suppose to do with the projected cash position. Should I use it and calculate the difference between each year in order to identify the cash flow of the year ? Doing so, I obtian cash flows far above the cash flows I calculate using the traditional method starting from EBITDA . (So basically, I don't understand where the amount of cash position comes from)

I don't know if I'm really clear, and I would appreciate any help.

Thanks guys

gotta quick question for ya -- how would you account for turnover in your model? Thanks.

ddp34: gotta quick question for ya -- how would you account for turnover in your model? Thanks.

You know he's talking about revenue and not people right? :)

I think he's talking about inventory and A/R turnover.

Optimus Prime

Nilokas: Hi folks, I've got a private equity case study to do but some information are bothering me. For this case study, I've got projections of Turnover, EBITDA , EBIT and net income for the next 3 years. I also have the projected financial debt (I guess, it's the pre-existing one, not the debt from the aquisition) and projected cash position. What I wanted to do for my lbo model was to calculate FCF from EBIT and use all of them to repay the acquisition's debt. However, I don't know what I'm suppose to do with the projected cash position. Should I use it and calculate the difference between each year in order to identify the cash flow of the year ? Doing so, I obtian cash flows far above the cash flows I calculate using the traditional method starting from EBITDA . (So basically, I don't understand where the amount of cash position comes from) I don't know if I'm really clear, and I would appreciate any help. Thanks guys

First - you need to work out what the new capital structure will be and for that you need to know what is the debt / equity split.

For simplicity sake - I would use any existing cash within sources & uses. So you will have debt (lets assume its 4x EBITDA + Cash on b/s + Equity from the sponsor - which will be your plug to get to the Total).

Now you have a Debt number and your cash is zero.

However, before you get to a FCF to pay down any debt you need to make some assumptions around interest cost, tax, Capex & working capital as you don't mention if these have been provided or not.

You could assume that all the debt is in 1 tranche and lets say you charge 6% interest on it.

If you are in the US - just use 35% as the tax rate.

You don't mention if any capex assumptions have been given or not - you could use D&A as a proxy (EBITDA less EBIT) and model capex as 100% of D&A or alternatively ramp up slowly to 100% over years (PE firms usually don't buy mature assets and capex and D&A being imply that the firm only invests in sustaining capex and as such has no expansion).

Working capital - this is tricky but again you could simply run with a 5% of sales assumption and then take the difference between prior and current year and roll forward.

So now you take your EBITDA (remember D&A is non-cash so get to FCF you should use EBITDA) less interest less tax expense less capex +- Change in Working Capital

This should now give you free cash flow . Now you could use this FCF no in its entirety to repay debt and as such your cash balance will continue to remain zero as you go through future years up to the point your debt has been paid down completely, at which point you will start to build a cash position.

Remember, the above assumes there are no dividend distributions to the sponsor.

Thanks for your answer.

What's really bothering me is how the cash position has been calculated in the assumptions (already given in the exercice).

Because, correct me if I'm wrong, if I take the difference of cash position between Year N and Year N+1, I obtain Cash flows of year N right ?

If true, do you think I should use this amount as the starting point for repaying new debt and interest ? (WHich means I don't have to make any calculation using EBITda, capex, NWC, taxe etc.) If not, what's the meaning of this information ?

First, I wanted to do like Optimus said, EBIT - taxe, - interests, - capex etc.. to obtain cash flows. But when I do so, I obtain cash flows far from what I can find in the previous method.

SO basically, why did they give me information about cash position in my exercice ?

ps: The only assumptions I got are revenues, ebitda , ebit, net income, Cash position and financial debt.

Nilokas: Hi ! Thanks for your answer. What's really bothering me is how the cash position has been calculated in the assumptions (already given in the exercice). Because, correct me if I'm wrong, if I take the difference of cash position between Year N and Year N+1, I obtain Cash flows of year N right ? If true, do you think I should use this amount as the starting point for repaying new debt and interest ? (WHich means I don't have to make any calculation using EBITda, capex, NWC, taxe etc.) If not, what's the meaning of this information ? First, I wanted to do like Optimus said, EBIT - taxe, - interests, - capex etc.. to obtain cash flows. But when I do so, I obtain cash flows far from what I can find in the previous method. SO basically, why did they give me information about cash position in my exercice ? ps: The only assumptions I got are revenues, ebitda , ebit, net income, Cash position and financial debt.

Cash position btw Y N & N+1 is not the cashflow. Has there been changes in debt? Part of the FCF could have been used to pay down debt, additionally, difference btw N & N+1 debt is not necessarily all resulted from cash payment, there could have been a recap. Calculate FCF (let's called the number A) use Optimus method, then calculate the difference btw cash (N+1) and cash (N) (let's call this number B). (A) - (B) =(C) is the cash you used to pay down debt during year N. If there is a difference between (C) and (debt difference btw N+1 and N), the difference is probably due to recap.

Rank: King Kong

I'm late to the party here, but for the sake of anyone reading this, my view regarding projected cash balance is that it would be completely irrelevant in this case. As mentioned above, projected cash balance would include any changes in the capital structure (recaps, debt changes). Since you are modeling an LBO for a private equity firm, you are supposed to layer in your own capital structure - one that makes sense for the sponsor given the returns. This means you would cake any existing cash, apply it to the transaction in a sources & uses table (some reasonable assumptions will have to be made here) and project cash yourself using the operational projections along with your capital structure (interest rate will be a driver of cash, as well as debt repayments).

Also, I don't think you would need to assume working capital as 5% of sales (for example). Since you have been given turnover. You were given turnover - if this refers to working capital turnover (which I would assume it is), then it's a simple formula:

Working capital turnover = sales / working capital

http://www.investopedia.com/terms/w/workingcapitalturnover.asp

paperorplastic

Private Equity Cases ( Originally Posted: 10/03/2013 )

Can anybody recommend a book/resource for private equity investment cases? Looking for a source with numerous examples of value-add/strategies used in past investments.

Could you elaborate on what you are looking for? Are you referring to modeling case studies?

Not modeling, just a book or collection of particular investments made by PE firms, including the reasons the target appeared attractive (where PE firm was trying to add/extract value), and how these strategies evolved in reality.

Nouveau Richie

Also interested. Will shell out SBs for good recs!

Check out Merchants of Debt and King of Capital - they are the histories of KKR and Blackstone

Kirk Lazarus

I would suggest Googling "PE offering memorandum". You can find some OMs from various MM groups on the internet. These OMs show past investments, entry multiples, and most importantly to your question, the investment thesis . They can skew a bit towards the marketing side, but they are also a great introduction into how a PEG is structured and how they are looking for value in various investments.

straightnochaser

Private Equity Case Study: Help! [URGENT] ( Originally Posted: 12/18/2013 )

Hi monkeys! I'm working on a 24 hour case study for a private equity analyst internship application (I'm a senior at a non-target) and I really need to clear a few things up, since 1) I have never worked on a PE case study, so virtually zero LBO modelling experience, 2) the hypothetical deal includes terms I've never worked with in my past internship in corporate finance (although I didn't do much modeling then either).

1) In most of the lbo models that I've practiced on, the current stock price was usually provided, and from there I could calculate the offer price per share, but in this case, there isn't one. I can't do a DCF to obtain a fair value since I'm only provided with a very basic income statement.

2) Can anyone tell me when given senior debt margins and junior debt margins (cash and PIK) and equity as funding, how should I make use of the information?

3) I was provided with the base rate as well, but I am not certain how I should use this.

I understand there are quite a few questions, but I would appreciate it very much if anyone can take some time to help me with these areas. Thank you in advance!

1) Just assume a reasonable earnings multiple based on industry / growth profile / comps , that's often how it's done in real life anyway when you have a private deal.

2) Base rate + interest margin = the interest on that particular class of debt

there is an introduction to lbo modeling section on macabacus - that should be very helpful if you're unfamiliar

Thanks Jec! 1) might be difficult since the company in question is operating in a highly obscure industry in a hypothetical market. Any advise on that?

Well then just assume something in a reasonable range ~10x earnings or something. alternatively you could work backwards to a price based on target IRR . i wouldn't sweat this too much as long as you can justify your assumptions in some way.

I would also suggest an EBITDA multiple, since an earnings multiple would capture the current capital structure and in an LBO scenario you usually want to layer in a new capital structure. EBITDA multiple ignores the capital structure, which is cleaner IMO.

Rank: Gorilla

Agree with jec. Backsolve entry multiple by assuming say 25% irr

He can't really back solve for IRR since I'm guessing he doesn't have an exit multiple either. And unless there's something unique here (e.g. Turnaround-type story), you'll likely want to enter and exit at similar multiples. Multiple expansion is tough to underwrite.

Broader point still stands, though. OP, I promise it's not THAT obscure. You can find multiples of companies in similar industries--again, the goal is just to be close and to have some evidence to justify your choice

Private Equity Case Study Models ( Originally Posted: 01/14/2014 )

Looking to break into RE PE after 2 years at a Brokerage Leasing Shop in an analytic role.

I've been doing some solid networking and am looking for some excel models and or case studies that I can start cranking through.

Does anyone have some high quality institutional level models that they can share?

Gene Parmesan

Any specific property type?

Let me know if you want to trade @"GeneParmesan".

Office would be a great start.

Gene Parmesan: Any specific property type?

Would love a multifamily or office if you have one. Thanks!

I would be interested as well. Thanks.

I have a detailed multifam model with sensitivity tables and GP/LP waterfalls. Im willing to trade it for an office or retail model. PM if interested.

I have an office development model if you would like to make a trade. pm me.

If you have a brokerage background, it would probably be helpful to get some training on how to create investment models so you fully understand the pieces rather than just understanding how to input some assumptions. I'd recommend reaching out to Bruce Kirsch (or similar) to get started.

greenlander.

I'd be interested in trading. I have a big4 mixed use development model.

If someone has a good retail or multifam model, pls PM me

Jaime_Lannister

Marina, PM and let me see if i can help you.

To the guys, Throwing my hat into the exchange ring: PM me with model types that you have to share and I will tell you what I have as well.

*Also, if anyone has a professional/industry grade development model for evaluating a residential rental or condo project (with in case of rental an 80/20 affordable housing component; and retail components and multi tier distribution/waterfall component), I have models to trade for it.

Something that I can use when someone gives me a model in the same genre/deal niche, to take all of their deal assumptions and put them a new model to evaluate their project. Maybe some guys implant a 2-3 pages 'mini-model' in the existing model to check its feasibility and value, but I think it is best to take all the controlling assumptions and put it into your own distinct model.

anyone got a detailed multifamily model with monthly proforma projections?

Private Equity Case Study Prep (WITHOUT model) ( Originally Posted: 12/12/2014 )

I've noticed that a lot of PE firms have moved to asking private equity interview questions in the case format that do not require a model to be built. I realize that these are likely structured similar to a consulting case interview , but as someone who never interviewed with a consulting firm, I was wondering if anyone knew of any good ways to prepare for these types of interviews. I've purchased the Case in Point book but I feel like a lot of the information in there is tailored to consulting. Are there any consulting type questions that are more tailored to PE (such as profit and growth questions)? Basically just looking for a way to focus my studies so I am more efficient and not all over the place with my preparation.

I've gone through 2 of these (albeit for PE analyst programs). Personally I was given the names of the companies (portfolio companies for one of them) a few days ahead of time. Read through their latest 10-k and latest 10-Qs. Know why it made sense to enter the investment (or potential investment), what are the revenue/cost drivers, what are upside levers a PE shop could pull, and what are the risks they face (and how to hedge the risk if possible). Very heavy on knowing the business and thinking like an investor, also need to remember numbers.

dave.michael.smith

Interesting Private Equity Case Study Interview - NEED ADVICE PLS ( Originally Posted: 02/25/2016 )

I've made it through a few stages in a PE house and the next step is the dreaded take home case study.

This one isn't the usual LBO . I've been given two recent board packs on a company that they invested in a few years ago, along with the original investment document and an internal investment review.

They are asking for a summary on how the business is trading OPERATIONALLY and FINANCIALLY.

So my question is, what do you guys think they mean by operationally? Are they talking about processes, margins, org structure or what?!

Is there anything you suggest i look at?

I know its hard without the actual docs, but just hoping for a brainstorm.

For operations I will assume they are looking for your insight on; Supply chain, productivity, sales (B2C/B2B) and what the potential improvement opportunities are for unlocking value.

Supply chain would look at bottlenecks, logistics and queuing for instance.

ILikeDistressedStuff

Thats an interesting one, do us all a favor and keep us posted about your progress and final results please :) I never encountered such a case study, I guess I would have interpreted "operational" as everything above/to EBIT and financially as credit ratios, interest cover, leverage, etc

But Kevins answer might be more viable than mine, so I would suggest that you just work through the material and take a judgement based on the information available in the decks they gave you

First off, keep us posted. This is definitely an interesting case, and not something you hear about frequently on here.

As to your question, I think the question is whether this is a PIPE or not and that should resolve how you approach this. The PE Shop wants to know how their investment is doing from both the operation standpoint with respect to many of the aspects that Kevin discussed and financially, which includes how their liquidity, A/R, A/P, DSO /DIO, DPO , Revenue Metrics, Growth Metrics, debt servicing, inventory ratios, Net Income, Fixed Asset costs , Solvency Ratios (Quick, Cash, straight Solvency), things like that. They want your take on how the company is doing, and given the information provided, if you have any insight on how to find ways to improve growth on either side of the board. Keep that stuff in mind when you review the documents because you are valuing these companies what you can do to extract more growth.

West Coast Analyst

I took an elective class on this. I think the below should be what you're looking for, on top of what the three previous posts suggest:

-book on supply chain mgmt (try dl-ing a pdf of this book: http://cachon-terwiesch.net/2e/) -knowing what the key performance indicators are (dashboard!) -deep understanding of business models, including customer analysis -risk assessment -distribution -rescue plan: if you invested and f up, what's the alternative? read this article on turnarounds https://hbr.org/2000/05/cracking-the-code-of-change

most importantly, knowing how to tie these up with the financials is crucial. you have to dig into the financials and tease out many levels beyond that, and from the sound of it, this PE shop is def operationally-focused so you better get down to the units-level. good luck!

For the operational piece I think you want to focus on how the company has progressed on its core initiatives or key performance indicators . The original investment memo should give some idea of what the 100 day plan was / focus areas post investment and the board decks will give updates on where the company stands in terms of progress to the core initiatives and KPIs .

In two weeks I will have to take a modelling test at a PE shop in NYC . They will give me a 60-page CIM and 2 hours to skim through it, build a LBO and provide them with an investment memo (bullet points).

How would you do it? What are the important elements I should put in the investment memo? Should I build a lbo model with IS, BS , CF or just IS and CF?

I am not sure how I would do it within an hour..

Prepfordays234

Hey - this is great. How do you think the process will be for a 1 hour case study? It's hard to imagine that one would be expected to read the IM or CIM , do a model and a few slides in that time frame...

PE Interview - Need immediate help with case study!!!! ( Originally Posted: 10/12/2011 )

I have a Mezz PE Fund interview coming up in a few days and I am supposed to build out a fully integrated, 3-statement model. I am given a CIM on a hypothetical company with 4 yr historical financials & 5-yr projections of income statement ( up to EBIT ) and balance sheet ( up to Current Liabilities ) with depreciation & capex . My questions is how do I begin the integration of 3 statements without historical debt and owner's equity information? Any advise would be helpful. Thanks.

If I understand your question well enough, they are not expecting you to make a pro-forma balance sheet which would require the historical data (wouldn't you have it in the documents BTW?). I would say that what they want you to build is a balance sheet forecast on the basis of the cap structure at closing provided in the transaction sources.

Apologies for not being clear. I have 4 yr historical data & 5 yr projections for both income statement (up to EBIT) and balance sheet (up to current liabilities) along with depreciation and capex. Only other details I'm given are the transaction sources which include a Revolver, Senior Debt A & B, Subordinated Debt and Equity. Other notes include the breakdown of equity needs with mgmt rollover.

whateverittakes

My approach would be to assume no debt and to assume that shareholders' equity in the four years prior to the transaction is based purely on retained earnings . Easy enough to just add net income from each preceding year to the old RE balance.

I tried that approach but BS didn't tie out when I tried matching the given projected total assets with current liabilities and the new debt and equity acquired. Goodwill is included in the projections. Am I missing something here?

P.S. I am given no RE balance to add the net income to in either 4-yr historical data or 5-yr projections.

Is it fair to assume that the oldest year in your historical data is the year the company was founded? If that is the case, I would assume an RE balance of 0 at the beginning of that year, and an RE balance equal to the net income at the end of year 1.

No, the company was founded in 1982. The actuals are from 2008-2011 and projected out from 2012-2016. I've been scratching my head and trying numerous methods but I just can't seem to move on with the model without SH Equity. I need to tie at least one year of the balance sheet so I have a base or maybe not. I've been working on this all night. Can't figure it out.

I still can't figure from your question why you need the historical data. We Europeans have another way to present the Balance Sheet, but I'll give it a shot American way:

Normal adjustements you make to your BS using your S&U are: - Cash-on-hand decreased by the amount used in your Sources of funds for the transaction - Deferred Financing Fees up by the amount of fees paid - Goodwill & Intangible assets up by the difference between existing BV of Equity and the Equity Purchase Price - Add to new liabilities as provided in the Sources - New shareholder equity = (Equity contribution - other fees and expenses)

Basically what you are going to want to forecast I guess is how debt is paid down going fwd to calculate the return on your mezz. For that you need to take your EBIT, convert it in FCF do a debt repayment schedule and model the total debt service over the course of the plan (interest + pcpal repayment).

Your goodwill is the only plug in your BS where pre-close SE is inputed, and has no significance on your Mezz IRR going forward. Wrong?

are you sure they are asking you to build the whole 3 statement model? It sounds like a quick cash flow model to me

Ricqles: are you sure they are asking you to build the whole 3 statement model ? It sounds like a quick cash flow model to me

Here are the directions for the case study unless I am misreading them:

• Information memorandum -Limited to 15 pages

• Financial model -Fully integrated income statement, balance sheet, cash flow model -5 year analysis; annual -Calculate pertinent financial covenants -Calculate any pertinent performance statistics -IRR & Cash‐On‐Cash for all securities

Do you guys still think its a quick cash flow model? If so, I might as well start on that.

when they said "fully integrated", it might just mean to connect all of them together (i.e. the projection of nwc affects the cash flow, etc). I don't see any reason of even having the equity section in the BS when you are just looking at the IRR and return.

I suppose you are right. If that's what I assume then, I'd simply have to calculate cash int. exp./income based on terms and use that along with changes in nwc for FCF . Then I could just make a capitalization chart, credit statistics, IRR and Cash on cash return schedules.

yes, i assume you know that you should build up a debt schedule as well

yup, thanks.

Just FYI, I ended up making a long-form LBO Model. It seems that it all ties out in the end. I simply just used Total Assets less Total Liabilities to derive the SH Equity assuming that company had no leverage for historical data. I'm glad I did this exercise, I ended up learning a lot more from scratch. I recommend the book "Investment Banking" by Joshua Rosenbaum and Joshua Pearl. It's very thorough in its explanations. Happy modeling guys!

is this for a first round? what fund?

No, final round. Its a Mezz Fund focused on the middle market transactions.

how did the interview go?

johnny_quest

PE Case Study - question about Valuation ( Originally Posted: 07/01/2012 )

I have a case study that I need to complete on a potential LBO opportunity. I was provided a CIM and was asked to come to a conclusion on whether I would invest in this company or not?

This is a fairly small MM target company that I'm looking at, so my first question is how do I come up the valuation for this target (e.g. entry multiple, etc.) so that I can even begin to come up with a capital structure.

Any insight would be helpful!

valuation in PE is no different than valuation in IB ..

I will be doing a lbo model but the valuation will be affected by my Entry Multiple - I'm not sure what the right multiple would be, as this would dictate what the equity purchase price is.

I dont think the scope of the case study is to do a DCF , or comps analysis (there are no comps , as its a very small company with no public competitors).

I'm an undergrad student so I literally have no idea what I'm talking about here, but aren't there industry standard multiples you can pull off Bloomberg for that sort of thing?

There are always comps , and a good PE firm will have access to them. Also, as alluded to above, you can pull industry standars/average multiples (which is just a proxy for comps). Also, you can run out a DCF to get a sense of what those multiples should generally look like from a valuation standpoint.

value the company focusing on returns, checking if that valuation makes sense for the seller, and if investment return satisfy the risk involved in the company's financing package / operations.

I would first do a very short LBO test to get a valuation, build the operating model, and caluclate returns. Then finish with a quick DCF .

You should focus on capital structure more than growth. Your assumptions need to make sense for the business operations.

again, I would focus on analyzing the capital structure.

I recently evaluated five deals for a small pe firm and they gave me an offer so...

Seperate the eval into buckets:

Management Business Model Financial evaluation Questions

Always ask a ton of question in your evaluation. Start with the P&L. What are the company's revenues? Expenses? How much does that mean it makes in operating earnings? Does it require a lot of cap ex? Does it have any debt on it? How much does it cash flow, after interest and taxes? Assuming it didn't have any debt, how much cash could it produce after taxes? How much would you be willing to pay for it (hint: start with your targeted rate of return (say 20%) and work backwards… if you need a 20% return and it cash flows $5 / year, you'd be willing to $25, right?)? Assuming you could put 3x EBITDA worth of debt on it and paid 5% in interest, then how much would you be willing to pay for it?

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Ace the Growth Equity Case Study Interview

Mike Hinckley

Written By An Industry Expert

10+ years of growth/VC experience

Intro to case studies.

Note: This article is part of a broader series on how to prepare for growth equity interviews

The growth equity case study is the source of much anxiety for candidates preparing for interviews.

In general, case studies are often the difficult part of any private equity interview — even more so than why growth equity or other interview questions . But case studies can be especially challenging in growth equity given the wide range of case study types. In this article, I shed some light on this part of the interview and how best you can prepare.

One reason why this exercise can be more challenging than it is for private equity case studies is there are many different shapes it can take, and you don’t know which type you’ll get. That is, the exercise could focus on modeling expertise, investment judgement, or prospecting ability.

It can be difficult to know what to expect; however, most growth equity case studies fall into four different categories.

Growth equity modeling test

This usually takes place on-site. The firm will give you some source material on a company, which can range from a 10-k (if the company is public) to an internal investment committee memo (if the company is a portfolio company).

The exercise will usually last 1-3 hours; as such, to expedite things, you’ll usually be given a model template from which to build your model, however not always.

After completing the model, you may be asked to also leave time to create slides or draft a mini-investment memo. In this memo, you’ll be asked whether or not you support proceeding with the investment and why. (You knew I was going to say this, but of course, the “why” is most important).After time is completed, you’ll may be asked to present your work to investment professionals at the firm. Or, they will “grade” your work separately and get back to you on if you “passed.”

Keys to success in this type of case are:

If these sound daunting, or you have questions about any of these areas, just remember these aren’t impossible skills to practice! In fact, I believe most, if not all, candidates can completely master these if they are truly dedicated and learn the right frameworks to apply.

In my full course, I cover in detail how to prepare for the growth equity modeling exercise (including the differences with typical LBO/buyout models) , frameworks for analyzing growth investments, mental models for organizing and presenting your work, as well as time management rules for the case.

Prospecting exercise

This involves the firm asking you to investigate an industry (or an investment theme) and to prepare a short brief on companies in the space.

This is usually conducted as a take home assignment, where candidates can complete it on their own time but within a certain period.

I really love this kind of exercise, because it simulates one of the best parts of the growth equity job. That is, you join one of the top growth equity firms — so that you can be empowered to look into cool industries and pick the best companies!

Sure, you’ll also build models and investment committee memos on companies you’re pursuing (which is tested more directly in the modeling exercise), but I find what really sets investment professionals apart in growth equity are the skills tested in the prospecting exercise. In a future post, you’ll be able to read about how I majorly flopped my first “on the job” prospecting case study 🙂

This exercise should not be confused with what I call the “sourcing” mock interview, which is common for undergraduate hires. In sourcing interviews, you’re asked to simulate a cold call with prospective CEOs.

After you’ve submitted your work, you’ll usually be asked to discuss or present it in person or over the phone. This is where the firm will probe your thinking and make sure your investment judgement is sound.

In prospecting exercises, the investment fundamentals and the ability to present are under a microscope. However, you’ll note market analysis is also a key to success. This is slightly different than the modeling exercise, where market analysis can be important but is tested less explicitly.

Market analysis is critical in prospecting exercises because you’re not only assessing one company, but you’re making broad generalizations (and prioritizing) across multiple companies. That means, you need to step back and assess the market as a whole.

This can be tricky for candidates, especially those coming from investment banking where analysts typically focus on discrete transactions rather than pulling back and analyzing an industry. This is one of the areas, I believe management consultants can have a leg up in private equity recruiting.

STEP-BY-STEP ONLINE COURSE

Everything you need to master growth equity interviews, mini-case exercise.

The mini-case is given to almost every interview candidate, in some form or another. It can happen at different points in the interview process, depending on the firm’s sequencing.

The mini-case involves a series of technical questions related to a single company or business problem. In my interviews with Advent International, I remember the mini-case was the most challenging aspect of the entire interview.

My interviewer started the mini-case by describing a portfolio company of theirs, the industry it operated in, and the broad strokes of an issue the company face. He explained the company was a distribution company that transported consumer packaged goods and was experiencing gross margin pressure.

Then, he asked a series of questions about what might be causing the company’s margin pressure, and ways I’d go about diagnosing the cause (hint: use data from the company’s balance sheet and P&L to diagnose unit cost, price, and volume trends then overlay industry analysis).

All told, this part of the interview will usually last 15 minutes or so. It can be prompted explicitly with a disclaimer like, “Now, we’ll spend a few minutes asking questions about a specific problem at a portfolio company which I’ll describe.” Or, the interviewer could start a mini-case less explicitly by sustaining a series of questions without the disclaimer upfront.

In any case, keys to success in this type of case are:

Mock sourcing call

Especially for analyst positions (post-undergrad), mock sourcing calls are common in growth equity interviews . I am planning to explore this unique portion of the interview in a separate post which I will link to here once complete.

**UPDATE: Here’s my completed break down of Sourcing and Mock Cold Call interview questions and case studies .

How important is the case study in growth equity interviews

Forget about interviews for a minute, and let’s think about what actually sets people apart as high performers in growth equity. At a highest level, the job is to find the highest growth markets, and then invest in the market leaders .

When you break this down, this means success is a function of the investor’s ability to pick the right market, to source the best companies within it, to pick the best company to pursue from all the companies you’ve sourced, and then to convince the company to take you on as a partner (aka “win” the deal).

All these core competencies map to the different skills tested in a case study. That’s why it is given lots of weight during the interview process.

Granted, it can seem a bit absurd to take one discrete portion of the interview process (that may only last 1 hour), and project forward the person’s career potential as an investor. However, this all the firm has to go on, so it’s an important piece of the puzzle.

Private equity interview case studies

Case studies also play an important part in getting into private equity . However, if I had to generalize, buyout firms are more focused on assessing the technical and modeling ability in junior/mid-level professionals, whereas growth equity may take a more holistic view of the candidate’s overall ability as an investor.

This is driven by the more varied nature of the growth equity job, which could include developing an industry thesis, sourcing attractive investment prospects, and then evaluating and executing on opportunities.

It’s more likely, at large firms especially, that a buyout analyst or associate’s typical day is more focused on the last part (evaluating and executing on opportunities), so modeling and the ability to churn through CIM’s are usually valued at a premium at these firms!

Alright, team. That’s all I got for now! Check out my other posts on growth equity recruiting , and sign up for the newsletter below to receive all my best tips in your inbox. For more comprehensive interview prep, check out my full growth equity interview prep course .

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Private Equity Interview Questions

Guide to Understanding the Core Private Equity Concepts

Learn Private Equity Online

Private Equity Interview Questions and Answers

Q. What is a leveraged buyout (LBO)?

An LBO is the acquisition of a company, either privately held or publicly traded, where a significant amount of the purchase price is funded using debt. The remaining portion is funded with equity contributed by the financial sponsor and in some cases, equity rolled over by the company’s existing management team.

Once the transaction closes, the acquired company will have undergone a recapitalization and transformed into a highly leveraged financial structure.

The sponsor will typically hold onto the investment between 5 to 7 years. Throughout the holding period, the acquired company will use the cash flows that it generates from its operations to service the required interest payments and pay down some of the debt principal.

The financial sponsor will usually target an IRR of approximately ~20-25%+ when considering an investment.

Q. Walk me through the mechanics of building an LBO model.

Q. What is the basic intuition underlying the usage of debt in an LBO?

The typical transaction structure in an LBO is financed using a high percentage of borrowed funds, with a relatively small equity contribution from the private equity sponsor. As the principal of the debt is paid down throughout the holding period, the sponsor will be able to realize greater returns upon exiting the investment.

The logic behind why it is beneficial for sponsors to contribute minimal equity is due to debt having a lower cost of capital than equity. One of the reasons the cost of debt is lower is because debt is higher up on the capital structure – as well as the interest expense associated with the debt being tax-deductible, which creates an advantageous “tax shield”. Thus, the increased leverage enables the firm to reach its returns threshold easier.

Simply put, the smaller the equity check the financial sponsor has to write towards the transaction, the higher the returns to the firm.

Private equity firms, therefore, attempt to maximize the amount of leverage while keeping the debt level manageable to avoid bankruptcy risk.

Another side benefit of using higher amounts of debt is that it leaves the firm with more unused capital (i.e. “dry powder”) that could be used to make other investments or to acquire add-ons for their portfolio companies.

Q. What is the “Sources & Uses” section of an LBO model?

The “Sources & Uses” section outlines the amount of capital required to complete the transaction and how the proposed deal will be funded.

Example “Sources & Uses” Table from the BMC Case Study ( Wall Street Prep LBO Modeling Course )

Q. How do private equity firms exit their investment?

The most common ways for a PE firm to monetize its investment are:

Buyout Exits by Channel ( Bain 2020 Private Equity Report )

Q. What are the primary levers in an LBO that drive returns?

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Q. What attributes make a business an ideal LBO candidate?

An ideal LBO candidate should have most (or all) of the following characteristics:

Q. What types of industries attract the most LBO deal flow?

The industries that tend to attract higher amounts of interest from private equity investors are those that are mature, growing at a moderate rate, and non-cyclical. The companies found in these types of industries are more likely to generate predictable revenue with fewer disruption risks from technological advancements or new entrants due to having high barriers to entry .

The ideal industry should exhibit stable growth in the upcoming years and have positive tailwinds that present growth opportunities. Typically, industries expected to contract or prone to disruption are avoided. Some PE firms do specialize in high-growth sectors (e.g. Vista Equity Partners, Thoma Bravo), but drift more so onto the side of growth equity than traditional buyouts.

Furthermore, if the investment strategy of the firm is based around roll-up acquisitions – the PE firm will look for fragmented industries where the consolidation strategy (i.e. “buy-and-build”) would be more viable since there are more potential add-on targets in the market.

Q. What would the ideal type of products/services being sold be for a potential LBO target?

Ultimately, there are various avenues that you can go down when answering this question and it would be best to tailor your response based on the specific types of portfolio companies the firm owns and their investment strategy.

Q. What is the typical capital structure prevalent in LBO transactions?

The capital structure in an LBO tends to be cyclical and fluctuates depending on the financing environment, but there has been a structural shift from Debt to Equity ratios of 80/20 in the 1980s to around 60/40 in more recent years.

The different tranches of debt include leveraged loans (revolver, term loans ), senior notes, subordinated notes, high-yield bonds , and mezzanine financing . The vast majority of the debt raised will be senior, secured loans by banks and institutional investors before riskier types of debt are used.

In terms of equity, the contribution from the financial sponsor represents the largest source of LBO equity. In some cases, the existing management team will roll over a portion of their equity to participate in the potential upside alongside the sponsor. Also, because most LBOs retain the existing management team, sponsors will usually reserve anywhere between 3% to 20% of the total equity as an incentive for the management team to meet financial targets.

Buyout Leverage Multiples Historical Trends ( Bain 2020 Private Equity Report )

Q. Which credit ratios would you look at when assessing the financial health of a borrower?

Leverage ratios compare the amount of debt held by a company to a specific cash flow metric, most often EBITDA. The leverage ratio parameters will be highly dependent on the industry and the lending environment; however, the total leverage ratio in an LBO ranges between 4.0x to 6.0x with the senior debt ratio typically around 3.0x

Interest coverage ratios examine a company’s ability to cover its interest payments using its cash flows.

As a general rule of thumb: the higher the interest coverage ratio , the better (ideally >2.0x)

Q. List some of the red flags you would look out for when assessing a potential investment opportunity.

Q. When measuring returns, why is it necessary to look at both the internal rate of return (IRR) and cash-on-cash return?

The cash-on-cash multiple cannot be a standalone metric as it does not consider the time value of money , unlike the IRR calculation.

For instance, a 3.0x multiple may be impressive if achieved in five years. But whether it took five years or thirty years to receive those proceeds, the cash-on-cash multiple remains the same.

Over shorter time frames, the cash-on-cash multiple is more important than IRR – however, over longer time frames, it is better to achieve a higher IRR.

On the other hand, IRR is an imperfect standalone measure because it is highly sensitive to timing.

For example, receiving a dividend right after the acquisition immediately increases the IRR and could be misleading for near-term time frames.

Nonetheless, these two metrics are interlinked, and both are widely used by investors to assess returns accurately.

Q. What are some positive levers to increase the IRR on an LBO?

Q. A private equity firm has tripled its initial investment in five years, estimate the IRR.

If the initial investment tripled in five years, the IRR would be 24.6%.

Since it is very unlikely for you to be handed a calculator to solve this calculation, it is highly recommended that you memorize the most common IRR approximations as shown in the table below:

Private Equity Interview IRR Approximations

Q. If an LBO target had no existing debt on its closing balance sheet, would this increase the returns to the financial buyer?

Upon the completion of an LBO, the firm essentially wiped out the existing capital structure and recapitalized it using the sources of funds that were raised. When calculating the IRR and cash-on-cash returns, the companies’ debt balance pre-investment does NOT have a direct impact on returns.

Q. If you had to choose two variables to sensitize in an LBO model, which ones would you pick?

The entry and exit multiples would have the most significant impact on the returns in an LBO.

The ideal scenario for a financial sponsor is to purchase the target at a lower multiple and then exit at a higher multiple, as this results in the most profitable returns.

While the revenue growth, profit margins , and other operational improvements will all have an impact on the returns, it is to a much lesser degree than the purchase and exit assumptions.

Q. What is rollover equity and why is it viewed as a positive sign?

In some cases, the existing management team may roll over some or all of its equity into the newly acquired company and may even contribute additional capital alongside the financial sponsor.

Rollover equity is an additional source of funds and it reduces the amount of leverage necessary and the equity contribution from the financial sponsor to complete the deal.

Generally, if a management team is willing to roll over some equity into the new entity, it implies the team is doing so under the belief that the risk they are undertaking is worth the potential upside in it for them. It is overall beneficial for all parties involved in the deal for the management team to have “skin in the game” and altogether have closely aligned incentives.

Q. In the context of an LBO, what does the “tax shield” refer to?

In an LBO, the “tax shield” refers to the reduction in taxable income from the highly levered capital structure.

As interest payments on debt are tax-deductible, the tax savings provides an additional incentive for private equity firms to maximize the amount of leverage they can obtain for their transactions.

Because of the tax benefits attributable to debt financing, private equity firms can be incentivized to not repay the debt before the date of maturity assuming the prepayment is optional (i.e. “cash sweep”).

Q. What is PIK interest?

PIK interest (“paid-in-kind”) is a form of non-cash interest, meaning the borrower compensates the lender in the form of additional debt as opposed to cash interest.

PIK interest typically carries a higher interest rate because it has a higher risk to the investor (i.e. delayed payments result in less certainty of being paid).

From the perspective of the borrower, opting for PIK conserves cash in the current period and thus represents a non-cash add-back on the CFS .

However, PIK interest expense is an obligation that accrues towards the debt balance due in the final year and compounds on an annual basis.

Q. How does the treatment of financing fees differ from transaction fees in an LBO model?

Q. If an acquirer writes-up the value of the intangible assets of the target, how is goodwill impacted?

During an LBO, intangible assets such as patents, copyrights, and trademarks are often written up in value.

Goodwill is simply an accounting concept used to “plug” the difference between the purchase price and fair value of the assets in the closing balance sheet – so, a higher write-up means the assets being purchased are actually worth more.

Therefore, a higher write-up of intangible assets means less goodwill will be created on the date of the transaction.

Note: Goodwill cannot be amortized by publicly traded companies under US GAAP – however, private companies can opt to amortize goodwill for tax reporting purposes. This question is in reference to the purchase accounting on the closing date of the transaction.

Q. What is an add-on acquisition and how does it create value?

An add-on acquisition is when a portfolio company of a private equity firm (called the “platform”) acquires a smaller company. The strategic rationale for bolt-on acquisitions is that the add-on will complement the platform companies’ existing product/service offerings – thus, enabling the company to realize synergies, as well as enter new end markets.

One of the reasons that add-ons are a common strategy employed in private equity is because the acquisition target will more often than not be valued at a lower multiple than the acquirer (and thus be an accretive transaction).

For example, if a company valued at 15.0x EBITDA purchases a smaller company for 7.5x EBITDA, the earnings of the add-on target will automatically be priced at 15.0x post-closing in theory. Once the transaction has successfully closed, the cash flows of the newly acquired company will immediately be valued at the multiple of the platform company – instantly creating value for the combined entity.

Another positive consequence provided by the roll-up strategy is that it allows platform companies to better compete with strategic buyers in sale processes.

Q. What is a dividend recapitalization?

A dividend recapitalization is when a private equity firm raises additional debt with the sole purpose of issuing themselves (i.e. the equity shareholders) a dividend.

Recaps are done to monetize profits from an investment before a complete exit and have the benefit of increasing the IRR to the fund due to the earlier receipt of proceeds.

Completing a dividend recap is often considered to be a risky action that should only be undertaken when an LBO is proceeding better than originally anticipated and the acquired company has the financial stability to take on the additional leverage raised.

Q. Why is an LBO analysis often referred to as a “floor valuation”?

An LBO model provides a “ floor valuation ” for an investment as it is used to determine what the financial sponsor can afford to pay for the target while still realizing the typical 20%+ IRR.

In other words, the question being answered from the perspective of the private equity investor is: “ What is the maximum amount that we can pay while still meeting our fund’s return hurdle?”

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S T R E E T OF W A L L S

Private equity interview, private equity recruiting process.

The lion’s share of the recruiting process for pre-MBA private equity associates truly begins in the first year of standard investment banking and consulting analyst programs. This may surprise some people, but the recruiting cycle is very structured, even though it can start at a moment’s notice (depending upon when the leading firms in the space begin their process). Prospective private equity candidates must be ready for the process early in their investment banking analyst programs in order to be successful in landing a private equity job. That said, recruiting for some other PE jobs will take place year-round. Thus if you happen to miss the main recruiting process for PE jobs, you’re a leg down, but not out. You may still be able to find available opportunities. This chapter will detail this timeline more thoroughly.

The pre-MBA recruiting process for PE positions is truly unique. After banking, exiting to a position as a private equity associate is very prestigious, and PE firms want to make sure that they don’t miss the most qualified applicants. You’ll need to be prepared for the process to start at any time. Once one of the leading PE firms begins its search for the incoming associate class for its firm, the rest of the firms will generally start recruiting directly afterward. For the majority of the firms, the entire recruiting process will be finished within several months once the leading firms start recruiting.

This “leader and followers” pre-MBA recruiting process is primarily driven by the “megafunds” (KKR, TPG, Blackstone, etc.). When they decide to start the recruiting process, most of the other large PE firms, with associate classes ranging from 8-15 professionals per year, will then launch their processes right away. The middle market/smaller PE firms will typically follow shortly after that.

Note that venture capital firms and smaller private equity firms will typically recruit outside of this standard recruiting cycle, and thus the notes above about the process tend not to apply to them. That said, overall most hiring for next year’s summer start dates will be completed by July or August—nearly a full year in advance!

The competition for these jobs is very tough. You’re going to be up against a large pool of talented, driven investment bankers, and will be working against a tight timeline. Therefore it’s very important that you plan out your process well ahead of time.

Even before the official private equity process begins, the initial step for pre-MBA recruits is to meet with headhunters. They are essentially the “gatekeepers” for the interviews with most firms. Headhunters will contact a pre-MBA candidate in the first year of his/her analyst program (up to three months in advance of the start of the recruiting season).

For post-MBA candidates, note that the recruiting process is a bit different. These candidates can rely a bit more heavily on their graduate schools’ career centers, since most PE firms will go directly to MBA program candidates to begin recruiting them. In this respect, post-MBA recruiting is more predictable and standard, as it conforms to the overall MBA student recruiting timeline.

The typical recruiting cycles for pre-MBA and post-MBA associate positions are illustrated below:

For pre-MBA candidates, after the headhunter interview the candidates go on to meet with the private equity firms directly. The overall process is a lot faster and more intense than investment banking. Candidates in this process truly need to be prepared for anything and everything. The recruiting process can be over very rapidly! A specific firm’s interview process can range from days to weeks, depending on the market conditions, how many firms are recruiting at the same time, and how quickly the firm in question finds prospective associates it wants to hire and who want to work for them.

Some investment banking analysts recruiting for PE firm jobs have encountered first-round interviews called “super-days,” where they meet with 8-10 people in one day and receive full-time offers at the end of the day. If this occurs, the PE firm will expect the candidate to accept (or reject) the offer within a few days! In other cases, the process is a bit slower, with several rounds of interviews spread out over a couple of weeks.

The traditional components of a private equity recruiting process include the standard behavioral and technical interviews conducted by junior PE associates—this part of the process is similar to investment banking recruiting. Where the process differs is in two primary places: the testing for investing acumen, and the testing for superior and LBO-specific technical ability.

Testing for investing acumen can come in the form of a broad 20-minute, consulting-like case study, or a detailed 3-5 hour investing exercise wherein the candidate has to research a company, go through the company’s filings, and write an investment memo on the sample target company. Unlike in a hedge fund recruiting process, PE associate candidates will very rarely be asked to pitch an investment idea. Instead, they may be asked what characteristics they would look for in a good LBO candidate.

LBO-specific technical ability screenings can come in the form of a financial modeling test, such as a paper LBO (in which the candidate must do LBO math in his/her head or on a piece of paper), or in a several-hour modeling test wherein the candidate has access to a computer and Microsoft Excel. Different firms like to administer this portion of the interview process differently, so for example, some will have modeling tests at the beginning of their process, while others may have it as the last stage of the process.

Therefore, you need to be prepared for every possibility if you hope to maximize your chance of landing a private equity associate position successfully. That said, don’t be afraid. The following sections and chapters in this guide will help you navigate the recruiting cycle and also help to prepare you for the modeling tests.

Initial Preparations: Before Headhunter Recruiting Starts

Given the short timeframe of the recruiting process, investment banking and consulting analysts need to be as prepared as possible for the process to start. In addition, no one knows exactly when the recruiting process is going to start until it does!

The first thing to do, then, is to make sure you’re interested in private equity. If so, make sure you understand the industry thoroughly, and know what the firms in the industry are going to be looking for in a good candidate.

The key thing that private equity firms look for is that the candidate is skilled at thinking like an investor rather than just being capable of performing the tasks needed for deal execution, which would mean being skilled at operating like an investment banker . Remember, private equity involves making successful investments rather than cranking out many transaction closings. For the banker, the firm’s revenue and profit are not affected by the post-transaction performance of the clients. In private equity, the firm’s success is heavily dependent upon how the client/target performs after the transaction is completed. Therefore, a successful PE associate will need to be able to help his colleagues make successful transaction decisions.

If this does not sound like something you’re interested in doing, then PE is probably not the right destination for you. If it is, then you will need to know how to best position yourself and market yourself to the interviewer with all of this in mind. Start thinking like an investor now, if you’re not already doing so—it will pay huge dividends for you when the PE recruiting process begins.

Private Equity Headhunter Interview

Now that you know how to prepare for the early stages of the PE recruiting process, we’ll discuss what the headhunter interview entails. Recruiters, or headhunters, play a large role in private equity searches. These recruiting firms source top candidates for private equity interviews. Traditionally, headhunting recruiters seek out and work with top-ranking first-year analysts at investment banks and top-tier consulting firms. Recruiters are essentially the “gatekeepers” into the private equity industry, so candidates need to take these relationships very seriously.

A good headhunter interview can make a tremendous difference in the number of PE interview opportunities a candidate will be presented with. It is very important for candidates to realize that headhunters are working for their private equity clients , and will therefore only show candidates that they believe are sufficiently qualified for the client and fit the firm’s criteria. If you do not come across as highly qualified and a good fit for the client, the number of opportunities you will be given will certainly suffer as a result.

Headhunters will often reach out to prospective candidates in their first year as analysts, often within 4-6 months of being on the job, so bankers need to make sure they’re ready early on in their analyst position if they want to do well in PE recruiting. For those who do not receive phone calls from headhunters, it doesn’t mean you are not desirable; it simply means you may have to reach out to the recruiters yourself. Well-known private equity headhunters that you can reach out to include SG Partners, GloCap, CPI, Amity Search Partners, Oxbridge Group, and Search One.

Important! Headhunter Interview Tip: Make sure not to give the recruiter/headhunter any attitude. You are one of many candidates with whom headhunting firms will be working, and headhunters will have no problem never working with you again. They need to feel confident about you being a strong candidate, and just as importantly , being presentable to their own clients. Displaying an attitude of “you will make money off of me” is just not a good way to get the attention you want. Your attitude should be confident, yet humble, thoughtful and gracious.

Private Equity Interviews

The Behavioral Part of the Interview Process: If the headhunter is comfortable putting you in front of his/her private equity clients, your resume will be submitted to the PE firm for selection. If selected, you will begin a typical interview process that will most likely consist of 2 to 4 rounds of interviews. On the first round, the private equity firm will host numerous 30-minute behavioral interviews to make sure you have the right background, strong communication skills (for example, to make sure you are capable of engaging appropriately with investment target companies, portfolio companies, bankers, and consultants), and that you have thoughtful, genuine reasons for pursuing a private equity career. Make sure at this stage to describe what sets you apart from the other candidates. That’s how you’ll stick in their memory and stand out from the dozens of other applicants.

The Technical Part of the Interview Process: If you receive a second-round interview, you can expect to reach the more technical part of the process. Typical private equity firms look to hire pre-MBA and post-MBA associates who have very strong financial accounting and modeling skills, and an appetite for quantitative analysis and data-driven decision making. Be prepared for technical questions similar to ones you received in the investment banking interview process. One major distinction in private equity interviews, though, is that candidates will often have to complete a financial modeling case study that illustrates his or her proficiency in financing modeling and accounting concepts. Candidates could be tested on this in a variety of ways, including analyzing a full LBO model, a growth capital case study, a paper LBO, or a consulting-like case study. A candidate may be handed one sheet of paper that consists of various assumptions and/or a laptop computer that has a blank excel sheet to build out an investment scenario. These modeling tests will be detailed later in the guide.

Some sample technical questions include:

Sample Questions to Ask

During the PE associate interview process, you will have the opportunity to ask the interviewers a few questions that will show them how interested you are in working for the firm. The following list provides good examples of questions to ask to demonstrate this interest.

The questions you ask should be selected carefully so that you receive the maximum amount of information about the job. This information will help you select the right firm for your background and personality. You will want to make sure you work with a group of people that you can get along with and will enjoy working with as part of the investment team. You will be spending a lot of time with this group, and making the right choice is critical.

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COMMENTS

Private Equity Case Study: Full Tutorial & Detailed Example
You'll get a “case study” in virtually any private equity interview process, whether you're interviewing at the mega-funds (Blackstone, KKR, Apollo, etc.)
Private Equity Interviews
The first round interview was a mix of technical questions plus a lot about myself and my experience. No behavioral questions. The first round was with an
How to prepare for the case study in a private equity interview
“The case study is the most decisive part of the interview process because it's the closest you get to doing the job," says Gail McManus of
Bain Private Equity Case Interview Example
Bain case prep program: https://managementconsulted.com/consulting-prep-resources/Want to see how Bain & Company conducts case interviews?
The Private Equity Case Study: The Ultimate Guide
In this tutorial, you'll learn how to approach an open-ended private equity case study where you have one week (7 days) to select a company
The Private Equity Case Study: The Ultimate Guide
Part 1: Typical Case Study Prompt. • Normal: “Here are the companies and types of deals we usually do. Go research a company, make an investment.
Some Thoughts on Private Equity Case Study Interview
You get a copy of a CIM (Confidential Information Memorandum), usually from an old sell-side process that the PE firm took part in, and are asked to throw
Approaching The Growth Equity Case Study & Modeling Interview
In general, case studies are often the difficult part of any private equity interview — even more so than why growth equity or other interview questions.
Top Private Equity Interview Questions
Private Equity Interview Questions and Answers · Top 25 Most Common Technical Questions · Q. What is a leveraged buyout (LBO)? · Q. Walk me through the mechanics
Private Equity Interview
Private Equity Interviews · Why did you choose investment banking/consulting? · Why do you want to pursue a career in private equity? · What characteristics do you