private equity case study interview example

Hacking the Case Interview

If you have an upcoming private equity case interview and are feeling stressed, overwhelmed, or unsure of what to do, we have you covered.

Private equity case interviews are a common type of case given in consulting interviews in addition to market entry case interviews , growth strategy case interviews , M&A case interviews , pricing case interviews , operations case interviews , and marketing case interviews .

Fortunately, private equity case interviews are fairly straight forward. They are very predictable and all cases generally follow the same steps to solve.

In this comprehensive article we’ll cover:

• What is a private equity case interview?
• Why do consulting firms give private equity case interviews?
• How to solve a private equity case interview
• Private equity case interview framework
• Private equity case interview examples
• Private equity case interview vs. M&A case interview
• Recommended private equity case interview resources

If you’re looking for a step-by-step shortcut to learn case interviews quickly, enroll in our case interview course . These insider strategies from a former Bain interviewer helped 30,000+ land consulting offers while saving hundreds of hours of prep time.

What is a Private Equity Case Interview?

A private equity case interview situates you in a business situation where you are helping a private equity firm decide whether or not to acquire a company to add to their portfolio.

For those that are unfamiliar with what private equity is, private equity firms are investment management companies that specialize in making investments in privately held companies or in public companies that they plan to take private.

This type of investment is called private equity because it involves investments made in privately held companies in contrast to publicly traded companies, which have shares that can be traded on public stock exchanges. However, private equity firms can also buy out a public company and take that company private.

Private equity firms raise capital from investors, including pension funds, endowments, and high-net worth individuals.

These private equity firms then identify potential companies to acquire or invest in, performing a thorough due diligence to ensure that the investments they make are attractive and will generate a high return on investment for their investors.

In a private equity case interview, you will be conducting a due diligence on a company that has been identified as a potential acquisition target.

The value that private equity firms provide include:

• Providing capital to companies that need funding for growth and expansion
• Bringing expertise and resources to help improve operational efficiency
• Providing strategic guidance and advice for business strategy and market positioning
• Providing access to an extensive network of industry contacts, potential customers, suppliers, distributers, retailers, and other stakeholders
• Using financial engineering techniques to optimize capital structure, including restructuring debt, recapitalizing the company, or implementing tax-efficient strategies

Why do Consulting Firms Give Private Equity Case Interviews?

Consulting firms give private equity case interviews because they closely simulate what private equity work at the firm looks like. If candidates can do well on a private equity case interview, they’ll likely succeed doing private equity due diligences for actual clients.

Case interviews in general are a way for consulting firms to assess whether candidates have the skills and capabilities to succeed in consulting.

In just a 30 to 45-minute case interview, interviewers can assess a variety of different skills that are critical to management consulting. Skills assessed in a case interview include:

Logical and structured thinking : Consultants need to be organized and methodical in order to work efficiently.

• Can you structure complex problems in a clear, simple way?
• Can you take tremendous amounts of information and data and identify the most important points?
• Can you use logic and reason to make appropriate conclusions?

Analytical problem solving : Consultants work with a tremendous amount of data and information in order to develop recommendations to complex problems.

• Can you read and interpret data well?
• Can you perform math computations smoothly and accurately?
• Can you conduct the right analyses to draw the right conclusions?

Business acumen : A strong business instinct helps consultants make the right decisions and develop the right recommendations.

• Do you have a basic understanding of fundamental business concepts?
• Do your conclusions and recommendations make sense from a business perspective?

Communication skills : Consultants need strong communication skills to collaborate with teammates and clients effectively.

• Can you communicate in a clear, concise way?
• Are you articulate in what you are saying?

Personality and cultural fit : Consultants spend a lot of time working closely in small teams. Having a personality and attitude that fits with the team makes the whole team work better together.

• Are you coachable and easy to work with?
• Are you pleasant to be around?

Consulting firms typically charge anywhere from 20-50% higher rates for private equity work compared to other types of consulting work. Therefore, consulting firms are always trying to sell more private equity work and really value candidates that show the potential to do private equity diligences.

Showing competency during a private equity case interview will make you a highly attractive candidate.

How to Solve a Private Equity Case interview

Although the exact industry or company that you will do a due diligence on during a private equity case interview will vary, all private equity cases typically follow the same five steps.

Once you have done a few private equity cases, you’ll quickly notice this pattern and be able to take your learnings from your previous cases and apply them to future private equity case interviews.

1. Understand the goal of the acquisition

The first step of any private equity case interview is to understand what is the goal of the acquisition. Only once you understand the goal or objective can you start to evaluate whether the acquisition or investment makes sense.

There are a number of different reasons why a private equity firm may want to acquire or invest in a company:

• Potential for growth : Private equity firms may target companies that have strong growth potential, including the potential to expand into new markets, introduce new products or services, or for increasing market share in existing markets
• Operational improvement : Private equity firms often specialize in operational optimization and efficiency. They may target companies with underperforming operations or inefficient processes to implement changes to improve profitability and performance
• Strategic fit : Private equity firms may pursue investments that align with their overall investment thesis or strategic objectives. This includes investing in companies that complement their existing portfolio holdings or fill a gap in industry coverage
• Turnaround opportunities : Private equity firms may also specialize in turning around distressed companies that are facing significant financial challenges or difficulties. They may see an opportunity to acquire a distressed company at a heavily discounted price
• Market timing : Private equity firms may also opportunistically invest in companies based on market conditions, lower than average valuation multiples, or industry trends. They may see attractive opportunities during periods of economic downturns or industry consolidation

2. Create a framework

The next step to solving a private equity case interview is to create a framework to guide your due diligence.

A case interview framework is a tool that helps you structure and break down complex problems into smaller, simpler components. You can think of a framework as brainstorming different ideas and organizing them into different, neat categories.

Instead of answering the overall question of whether the acquisition should be made, a framework can break up this large question into a few smaller, more manageable ones:

• Is the market that the acquisition target in attractive?
• How does the company perform relative to its competitors?
• Does the private equity firm have the skills or expertise to improve or turn around this company?
• Are there synergies that can be realized from this acquisition with other companies in the private equity firm’s portfolio?
• What are the major risks of this investment?
• What is the expected return on investment?

As you can see, using a framework helps you break down an ambiguous and daunting due diligence task into several more manageable steps.

3. Develop a hypothesis

Once you have developed a great framework to help you solve the private equity case, the next step is to develop a case interview hypothesis .

Based on the limited information that you have, what is your preliminary hypothesis on whether the company should be acquired?

Hypotheses are used in case interviews, as well as in consulting, because they are a very efficient way to solve problems. A hypothesis helps you focus your attention on the issues that matter most in developing a recommendation.

Many candidates find it challenging and intimidating to develop an initial hypothesis with very limited information. However, don’t be discouraged from this.

Know that it is completely acceptable for your initial hypothesis to be wrong.

Remember, the goal of coming up with an initial hypothesis is to help guide your analysis and discussion towards the right direction. You can think of your hypothesis as a strawman that you will either build support for or reject.

Your hypothesis will help you decide on an area of your framework to tackle first.

4. Build support for a recommendation

Now that you have a hypothesis for your private equity case interview, it is time to start building support for it or rejecting it.

As with any other type of case interview, you’ll likely need to do both case math as well as have qualitative discussions with the interviewer to discover more information and uncover key insights.

It is important that throughout the case, you are keeping track of all of the new information presented to you. It will be especially important to keep track of the major insights or key takeaways from each question that the interviewer asks you.

Keeping track of the major insights or key takeaways will make it significantly easier to develop a final recommendation at the end of the private equity case interview.

5. Deliver a recommendation

The last step in a private equity case interview is to develop a recommendation and present it to the interviewer.

Developing an ultimate recommendation is difficult because it requires you to review all of the work that you have done so far in the case interview and synthesize and distill all of it into just the most important points or takeaways.

You’ll also likely need to exercise business judgment to determine whether you should recommend acquiring the company or passing on the investment opportunity.

It is completely acceptable to ask the interviewer for a few minutes of silence so that you can collect your thoughts and deliver your recommendation in a clear, concise, and confident way.

When delivering your recommendation, make sure that you start with your recommendation first. Then, present the reasons or evidence that supports your recommendation. Finally, end by discussing potential next steps that you would look into if you had more time.

You don’t want to start your recommendation by summarizing all of your work and then stating a recommendation at the very end of your presentation.

This makes your recommendation excessively long and potentially unclear and confusing because the interviewer won’t know which way you are leaning towards until the very end.

Private Equity Case Interview Framework

The framework that you develop for your private equity case interview is the most important step of solving a private equity case interview.

Having a comprehensive and robust framework will make solving any private equity case interview easier. On the other hand, having an incomplete and poorly thought out framework will make solving the case significantly more challenging.

While you should not resort to purely memorizing frameworks for case interviews, there is a single framework that we recommend all candidates become familiar with. Many of the components of this private equity case interview framework can be applied to nearly any private equity case interview.

The major components of a private equity framework could include: market attractiveness, company attractiveness, private equity firm capabilities, synergies, financial implications, and risks.

• Market attractiveness : What is the market size of the market that the acquisition target is in? What is the growth rate of that market? How competitive is the market?
• Company attractiveness : What is the financial performance of the acquisition target? What are their key strengths or competitive advantages? What are their weaknesses?
• Private equity firm capabilities : Does the private equity firm have expertise in the industry or market that the acquisition target is in? Does the private equity firm have the capabilities or resources to improve the company’s performance?
• Synergies : Are there potential revenue synergies that can be realized with other companies in the private equity firm’s portfolio? Are there potential cost synergies that can be realized?
• Financial implications : Is the acquisition price fair? What is the potential return on investment? How long will it take the private equity firm to recoup their initial investment?
• Risks : What are the major risks of this investment? Can these risks be mitigated? What is the likelihood of these risks materializing?

An outstanding private equity case interview framework should include at least a few of these components, if not all of them.

However, make sure that you are customizing your private equity case interview framework based on the specific pieces of information and nuances of the case that you receive.

Private Equity Case Interview Examples

Below, we’ve provided examples of several different types of private equity case interviews you could see on interview day.

You can find more case interview examples in our articles on case interview examples and practice and MBA casebooks .

Private Equity Case Interview Example #1 : A private equity firm is interested in acquiring a technology startup with innovative products and a strong customer base. The firm sees significant growth potential in expanding the company's offerings to new markets and leveraging its technology to capture market share. Should they make this acquisition?

Private Equity Case Interview Example #2 : A private equity firm is considering acquiring a manufacturing company with inefficient operations and high production costs. The firm believes it can implement operational improvements, streamline processes, and reduce costs to enhance profitability and competitiveness. Should they acquire this manufacturing company?

Private Equity Case Interview Example #3 : A private equity firm that specializes in the healthcare sector is evaluating the acquisition of a pharmaceutical company with a promising drug pipeline. The firm's industry expertise and network could help accelerate the development and commercialization of the company's products. Should they make this acquisition?

Private Equity Case Interview Example #4 : A private equity firm wants to expand its presence in the consumer goods industry and is looking to acquire a well-established retail brand with a loyal customer base. The acquisition would complement the firm's existing portfolio and provide synergies in distribution, marketing, and brand positioning. Should they acquire this retail brand?

Private Equity Case Interview Example #5 : A private equity firm has identified a target company with substantial real estate assets and a strong cash flow from its core business. Should they make this acquisition?

Private Equity Case Interview Example #6 : A private equity firm that specializes in distressed investing is interested in acquiring a struggling automotive supplier facing liquidity challenges. The firm sees an opportunity to stabilize the business, renegotiate contracts, and implement cost-saving measures to return the company to profitability. What price should they bid for this potential acquisition?

Private Equity Case Interview Example #7 : A private equity firm has recognized a favorable market opportunity in the renewable energy sector and is considering the acquisition of a solar power company with a competitive cost structure and strong growth prospects. The firm aims to capitalize on increasing demand for clean energy solutions and government incentives. What is the most the private equity firm should bid on this solar company?

Private Equity Case Interview Example #8 : A private equity firm is evaluating the acquisition of a software company with a differentiated product offering and a growing customer base. The firm plans to invest in scaling the business and increasing market penetration, with the ultimate goal of exiting through a strategic sale or IPO to realize significant returns for its investors. How much should the private equity firm acquire this software company for?

Private Equity Case Interview vs. M&A Case Interview

Although private equity case interviews and M&A case interviews share many similarities, specifically that both are case interviews that involve deciding on whether to make an acquisition, there are some notable differences.

1. Long-term vs. short-term perspective

Private equity case interviews typically have a longer-term investment horizon since private equity firms may hold onto an investment for 5 to 10 or more years before selling. They are not heavily concerned with exactly how well the investment will perform in the first few years because they have a longer time horizon.

In contrast, for M&A case interviews, there is generally an expectation that a merger or acquisition will provide immediate tangible benefits to the company and shareholders.

2. Reasons for the acquisition

For private equity case interviews, candidates are often asked to develop an investment thesis for a potential acquisition. They will need to articulate why the target company represents an attractive investment opportunity and how the private equity firm can create value from the investment.

This may include identifying growth drivers, operational improvement opportunities, and synergies that can be realized with the existing portfolio.

In contrast, for M&A case interviews, candidates mainly focus on understanding the rationale behind a potential acquisition, including strategic fit, synergies, and market dynamics.

3. Different risk factors

In both private equity and M&A case interviews, candidates will need to give thought behind the potential risks of the acquisition. However, the major risks for a private equity firm making an acquisition vs. a company making an acquisition differ slightly.

For private equity acquisitions, major risks include: market risks, competitive threats, and execution risks. In contrast, for a merger or acquisition, major risks include company integration risks, legal risks, and regulatory compliance.

4. Exit strategies

Private equity case interviews often emphasize the importance of exit strategies since private equity firms typically aim to realize returns for their investors within a specific timeframe.

Therefore, for private equity case interviews, candidates may be asked to evaluate potential exit options, such as strategic sales, IPOs, and secondary buyouts. They may be asked to assess the timing and feasibility of each option.

For M&A case interviews, candidates may need to consider potential exit scenarios, such as divestiture or spin-offs, but the focus may be less on maximizing financial returns and more on strategic objectives.

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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:

• Investment Banking Analyst at a Bulge Bracket or Elite Boutique in New York: The process will be highly structured, and interviews will finish at warp speed. In some ways, your bank, group, and academic background matter more than your skill set or deal experience. This one is known as the “on-cycle” process.
• Non-Banker in Another Part of the U.S. or World: The process will be far less structured, it may extend over many months, and your skill set and deal/client experience will matter a lot more. This one is known as the “off-cycle” process.

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:

• Multiple Rounds: You’ll almost always go through at least 2-3 rounds of interviews (and sometimes many more!) where you speak with junior to senior professionals at the firm.
• Topics Tested: You’ll have to answer fit/background questions, technical questions, deal/client experience questions, questions about the firm’s strategies and portfolio, market/industry questions, and complete case studies and modeling tests.

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:

• In on-cycle processes, it’s tough to differentiate yourself – everyone else also did multiple finance internships and just started their IB roles.
• They care more about your deal experience, whether real or exaggerated, in both types of interviews.

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:

• Technical questions tend to be framed in the context of your deal experience – instead of asking generic questions about the WACC formula , they might ask how you calculated it in one specific deal.
• More critical thinking is required. Instead of asking you to walk through the financial statements when Depreciation changes, they might describe companies with different business models and ask how the financial statements and valuation would differ.
• They focus more on LBO models, quick IRR math , and your ability to judge deals quickly.

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:

• The company’s industry, approximate revenue/EBITDA, and multiples (or, for non-deals, estimated costs and benefits).
• Whether or not you would invest in the company’s equity/debt or acquire it (or, for non-deals, whether or not you’d pursue the project).
• The qualitative and quantitative factors that support your view.
• The key risk factors and how you might mitigate them.

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 (for more on these fields, see our coverage of venture capital interview questions and the venture capital case study ).

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

The idea is similar, but the numbers are more involved because you can write them down, and you might have 30 minutes to come up with an answer.

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 or a working capital adjustment to tweak the Sources & Uses slightly.

If it is a 3-hour test, a 3-statement model is more likely (the other parts of the model will be simpler in this case).

Here’s a free example of a timed LBO modeling test ; we have many other examples in the IB Interview Guide and Core Financial Modeling course .

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:

• Build a model and make an investment recommendation for Portfolio Company X, Former Portfolio Company Y, or Potential Portfolio Company Z.
• Pick any company you’re interested in, build a model, and make an investment recommendation.

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:

• The smaller firms that give open-ended case studies tend not to use that much financial engineering.
• No one will have time to review or appreciate your work.
• Your time would be better spent on industry research and coming up with a sold investment thesis, risk factors, and mitigants.

If you want an example of an open-ended exam like this, see our private equity case study article and follow the video walkthrough or article text.

Your model could be shorter, and your presentation could certainly be shorter, but this is a good example of what to target if you have more time/resources.

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, and skip points like circular references unless they specifically ask for them (for more, see our tutorial on how to remove circular references in Excel )

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.

Additional Reading

You might be interested in:

• The Search Fund Internship: Perfect Pathway into Investment Banking and Private Equity Roles?
• Private Equity Analyst Roles: The Best Way to Skip Investment Banking?

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

Free Exclusive Report: 57-page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews

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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

Similar to IB ones, with a focus on LBOs?

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.

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“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?'

When the case study interview starts, you usually 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 this 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.”

Felix Beuttler, a former Goldman Sachs associate and founder of FinEx Academy, says bankers and consultants have different strengths and weaknesses when it comes to the case study interview. "Consultants are often too focused on the qualitiative elements and bankers are too focused on getting the numbers right," he says. Both need to prepare with a view to overcoming their weaknesses.

A good business or 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 now that rates are higher, prices are still comparatively high, and adding value is more difficult. "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:

Beuttler advises his students to assemble a deck filled with a particular set of slides, including investment highlights, investment risks, a value creation strategy, returns analysis and a clear conclusion. You will also want to include slides outlining the route to deriving a return on the investment.

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, when 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.”

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.

Have a confidential story, tip, or comment you’d like to share? Contact: +44 7537 182250 (SMS, WhatsApp or voicemail). Telegram: @SarahButcher.  Click here to fill in our anonymous form , or email [email protected]. Signal also available.

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Private Equity Case Study: Tips, Prompt & Presentation

Private equity case studies serve as a pivotal stage in recruitment. They offer firms a window to assess candidates' analytical, investing, and presentation skills. Understanding the nuances of these case studies can significantly enhance your preparation and success rate.

This comprehensive guide provides insights into the types of case studies, preparation strategies, and key aspects of presentation and analysis. Whether you're new to private equity or a seasoned professional, mastering these case studies is essential for succeeding in a competitive industry.

What Should You Expect in a Private Equity Case Study?

Private equity case studies are a critical component of the recruitment process, offering firms a valuable opportunity to assess candidates' analytical, investing, and presentation skills. Understanding what to expect in a private equity case study can significantly enhance your preparation and improve your chances of success.

What are the Types of Private Equity Case Studies?

Private equity case studies can take various forms, each presenting its unique set of challenges. Candidates can anticipate encountering one of the following formats.

• Candidates are provided with company information and tasked with evaluating the feasibility of an investment. This type of case study typically involves preparing a comprehensive presentation or investment memo, supported by a detailed LBO (leveraged buyout) model, within a specified timeframe.
• Candidates are granted several days to a week to research a company, develop a model, and formulate a recommendation for or against an acquisition. This type of case study necessitates critical thinking and external research.
• Similar to the take-home assignment, but completed on-site at the firm's office within a few hours. Candidates must construct a financial model and make an investment decision based on the provided information.
• A 1-3-hour test, either conducted on-site or remotely, where candidates must swiftly build an LBO model. Proficiency in Excel shortcuts and familiarity with modelling tests are crucial for success.
• A condensed version of an LBO model completed either on paper or verbally. This type of case study focuses on the fundamental aspects of the model and requires candidates to demonstrate their understanding without the use of Excel.
• Candidates construct a simple leveraged buyout model using pen-and-paper or mental calculations, estimating the internal rate of return (IRR) using rounded figures.

Preparation Strategies

To prepare effectively for a private equity case study, focus on developing your investment thesis, honing your presentation skills, and enhancing your ability to respond to questions thoughtfully. Remember, the complexity of your model is secondary to your capacity to construct a compelling argument for or against the investment.

How to Present a Private Equity Case Study?

Presenting a private equity case study requires a strategic and thorough approach to effectively convey your analysis and recommendations. Whether you're preparing for a take-home assignment or an in-person presentation, mastering the art of presentation is crucial for success in the private equity recruitment process.

The core question you'll encounter in any private equity case study is whether you would invest in the company under consideration. To answer this, you'll need to analyze the provided materials and construct a leveraged buyout (LBO) model to assess the potential return on investment. Typically, a return of 20% or higher is sought.

The case study prompt often includes specific assumptions to guide your LBO model construction, such as the pro forma capital structure, financial assumptions, and acquisition and exit multiples. Some firms may provide an Excel template for the LBO model, while others may expect you to create one from scratch.

Presentation

In a take-home assignment scenario, you'll likely be required to present your investment memo during the interview. This presentation is typically conducted in front of one or two representatives from the private equity firm.

The presentation format may vary among firms, with some expecting you to present first and then field questions, while others may prefer the reverse. Regardless of the format, be prepared to articulate your findings and respond to inquiries.

While technical proficiency is important in private equity recruitment, communication skills and attention to detail are equally critical. Interviewers will assess your ability to convey complex ideas clearly and concisely, as well as your meticulousness in addressing all aspects of the case study.

In the private equity interview process, every detail matters. Therefore, strive to provide a comprehensive and well-structured presentation, demonstrating your analytical rigour and ability to communicate effectively.

How to Do a Private Equity Case Study?

When tackling a private equity case study, a structured approach is crucial to deliver a comprehensive analysis and recommendations.

Step 1: Read and Understand the Material

Begin by thoroughly reading and understanding the provided materials. Gain insights into the company's background, industry dynamics, and financials.

Step 2: Construct a Basic LBO Model

Build a fundamental leveraged buyout (LBO) model using the ASBICIR method (Assumptions, Sources & Uses, Balance Sheet, Income Statement, Cash Flow Statement, Interest Expense, and Returns). This foundational model will underpin your analysis.

Step 3: Enhance Your LBO Model

Incorporate advanced features into your LBO model as required by the case study prompts. While it's essential to cover all aspects, prioritize completing the core financial model to ensure thoroughness.

Step 4: Develop Your Investment Thesis

Step back and formulate your investment view based on your analysis. Consider critical assumptions, conditions for proceeding with the investment, key risks, and primary drivers of returns.

Step 5: Craft Your Presentation

Organize your insights and analysis into a structured presentation. Clearly articulate your investment thesis, supporting analysis, and key findings.

Step 6: Practice Your Presentation

Rehearse your presentation to ensure clarity and confidence. Be prepared to engage in a discussion and defend your investment thesis.

Approaching a private equity case study with this methodical approach demonstrates your analytical prowess and strategic thinking.

How to Succeed in a Private Equity Case Study?

Succeeding in a private equity case study demands a strategic blend of analytical prowess, strategic acumen, and effective communication.

• Master the Fundamentals: Start by focusing on the foundational aspects of the case study before delving into the complexities. Build a solid understanding of financial modelling principles and investment analysis basics. This will provide you with a strong grounding to tackle more intricate tasks with confidence.
• Demonstrate Nuanced Investment Judgment: Avoid simplistic yes or no answers when presenting your investment recommendation. Instead, offer a nuanced analysis that considers the price point at which you would consider investing and the key assumptions driving your decision. Highlight potential avenues for value creation in the deal and discuss the primary risks and uncertainties involved.
• Engage in Meaningful Dialogue: While the ability to build complex financial models is important, what truly sets you apart is your capacity to think critically and engage in intelligent discussion about the investment. Focus on presenting a well-considered recommendation supported by solid reasoning and analysis. Be prepared to discuss your model and elaborate on your investment thesis clearly and concisely.
• Prioritize Substance Over Complexity: While showcasing your proficiency in financial modelling is essential, the goal is not to build the most intricate model. Concentrate on constructing a model that is accurate, logical, and well-structured. The true measure of success lies in your ability to derive meaningful insights from the model and utilize them to make informed investment decisions.
• Highlight Value-Creation Opportunities: In addition to identifying risks, emphasize the potential opportunities for value creation in the deal. Discuss how you would leverage these opportunities to enhance the company's performance and generate returns for investors.

By following these strategies, you can significantly enhance your prospects of success in a private equity case study. Demonstrating your ability to think critically, analyze investments, and communicate effectively will showcase your thought leadership and analytical prowess.

How Do I Prepare for a Private Equity Case Study?

Preparing for a private equity case study requires a structured approach and a solid understanding of the fundamentals of financial analysis and investment evaluation.

• Understand the Case Study Objective: Begin by understanding the objective of the case study, which is typically to evaluate the investment potential of a company. Familiarize yourself with the key concepts and methodologies used in private equity investing.
• Review Financial Modeling Basics: Brush up on your financial modelling skills, focusing on key concepts such as revenue forecasting, expense modelling, and valuation techniques. Practice building and analyzing financial models to prepare for the case study.
• Familiarize Yourself with LBO Modeling: Since leveraged buyout (LBO) modelling is a common aspect of private equity case studies, make sure you are comfortable with building LBO models. Understand the key components of an LBO model, such as debt structure, cash flow projections, and exit strategies.
• Practice Case Studies: Practice solving case studies to hone your analytical skills and improve your ability to think critically. Look for case studies online or create your own based on real-world scenarios to simulate the interview experience.
• Stay Updated on Industry Trends: Keep yourself informed about the latest trends and developments in the industries you are interested in. This will help you make informed assumptions and recommendations during the case study.
• Develop a Structured Approach: Develop a structured approach to solving case studies, including how you will analyze the company's financials, identify key risks and opportunities, and formulate your investment thesis.
• Seek Feedback: Seek feedback from mentors, peers, or professionals in the field to improve your case study skills. Consider participating in case study competitions or workshops to gain practical experience.

FAQs (Frequently Asked Questions)

1. How do you approach a private equity case study? Approach a private equity case study by understanding the objective, reviewing financial basics, practicing LBO modelling, staying updated on industry trends, and developing a structured analysis approach.

2. How can I stand out from other candidates? Stand out by demonstrating nuanced investment judgment, engaging in meaningful dialogue, prioritizing substance over complexity in modelling, and highlighting value-creation opportunities.

3. What is the role of modelling in a private equity case study? Modelling plays a crucial role in a private equity case study as it helps evaluate investment potential, assess risks, and determine the feasibility of an acquisition.

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Private Equity Interview Questions

Step-by-Step Guide to Navigating the Top 25 Private Equity Interview Questions

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Common Private Equity Interview Questions

The Top 25 Private Equity Interview Questions covered in our comprehensive interview guide are intended to help prepare candidates for the competitive recruiting process and improve their odds of receiving an offer.

How to Prepare for Private Equity Interview Questions

Unlike investment banking interviews where you’ll likely get a lot of technical interview questions, private equity interviews will stress the Paper LBO and LBO Modeling Test to confirm you’ve got the technicals down.

However, you are likely to still encounter private equity interview questions in the earlier rounds of the interview process, so we’ve compiled the most common technical interview questions that you absolutely must know the answer to.

The types of questions asked in a private equity interview can be broken into four categories:

• Behavioral Questions (“Fit”)
• Technical LBO Questions
• Investing Acumen Questions
• Firm-Specific Industry Questions

Understanding the fundamental LBO concepts is essential to perform well on the LBO modeling and case study portions of the interview, as well as to showcase your judgment during investment rationale and deal discussions in the later stages of the recruiting process.

Generally, the standard technical questions are most applicable to interviewees from non-traditional backgrounds and are less common for more experienced candidates. Nevertheless, the following article still should serve as a helpful refresher for those that have completed a stint in investment banking.

Let’s move on straight to the top private equity interview questions now.

Top 25 Private Equity 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 for 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.

• Step 1: Entry Valuation → The first step to building an LBO model is to calculate the implied entry valuation based on the entry multiple and LTM EBITDA of the target company.
• Step 2: Sources and Uses → Next, the “Sources and Uses” section will lay out the proposed transaction structure. The “Uses” side will calculate the total amount of capital required to make the acquisition, whereas the “Sources” side will detail how the deal will be funded. Most importantly, the key question being answered is: What is the size of the equity check the financial sponsor must contribute?
• Step 3: Financial Projection → Once the Sources & Uses table has been completed, the free cash flows (FCFs) of the company will be projected based on the operational assumptions (e.g. revenue growth rate, margins, interest rates on debt, tax rate). The FCFs generated are central to an LBO as it determines the amount of cash available for debt amortization and the interest expense due each year.
• Step 4: Returns Calculation → In the final step, the exit assumptions of the investment are made (i.e. exit multiple, date of exit), and the total proceeds received by the private equity firm are used to calculate the IRR and cash-on-cash return, with a variety of sensitivity tables attached below.

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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 has 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 toward 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 and Uses of Funds” section of an LBO model?

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

• Uses Side → The “Uses” side answers, “What does the firm need to buy and how much will it cost?” The most significant usage of funds in an LBO is the buyout of equity from the targets’ existing shareholders. Other uses include transaction fees paid to M&A advisors, financing fees, and oftentimes the refinancing of existing debt (i.e. replacing the debt).
• Sources Side → On the other hand, the “Sources” side answers: “Where is the funding coming from?” The most common sources of funds are various debt instruments, the equity contribution from the financial sponsor, excess cash on the balance sheet, and management rollover in some cases.

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:

• Sale to a Strategic Buyer → The sale to a strategic buyer tends to be the most convenient while fetching higher valuations as strategics are willing to pay a premium for the potential synergies.
• Secondary Buyout (aka Sponsor-to-Sponsor Deal) → Another option is the sale to another financial buyer – but this is a less-than-ideal exit as financial buyers cannot pay a premium for synergies.
• Initial Public Offering (IPO) → The third method for a private equity firm to monetize its profits is for the portfolio company to undergo an IPO and sell its shares in the public market – however, this is an option exclusive to firms of larger size (i.e. mega-funds) or club deals.

Buyout Exits by Channel ( Bain 2020 Private Equity Report )

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

• Deleveraging → Through the process of deleveraging, the value of the equity owned by the private equity firm grows over time as more debt principal is paid down using the cash flows generated by the acquired company.
• EBITDA Growth → Growth in EBITDA can be achieved by making operational improvements to the business’s margin profile (e.g. cost-cutting, raising prices), implementing new growth strategies to increase revenue, and making accretive add-on acquisitions.
• Multiple Expansion → Ideally, a financial sponsor hopes to acquire a company at a low entry multiple (“getting in cheap”) and then exit at a higher multiple. The exit multiple can increase from improved investor sentiment in the relevant industry, better economic conditions, and favorable transaction dynamics (e.g. competitive sale process led by strategic buyers). However, most LBO models conservatively assume the firm will exit at the same EV/EBITDA multiple it was purchased at. The reason is that the deal environment in the future is unpredictable and having to rely on multiple expansion to meet the return threshold is considered to be risky.

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

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

• Steady, Predictable Cash Flow Generation
• Operates in a Mature Industry with Defensible Market Positioning
• Business Model with Recurring Revenue Component
• Strong, Committed Management Team
• Diversified Revenue Streams with Minimal Cyclicality
• Low Capex Requirements & Working Capital Needs
• Currently Undervalued by Market (i.e. Low-Purchase Multiple)

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?

• Mission Critical → The ideal product/service is essential to the end market being served. In other words, discontinuance should be detrimental to the customers’ business continuity, result in severe monetary consequences, or damage their reputation. For example, the decision for a data center to terminate its contract with its security solutions provider (e.g. video surveillance, access control) could impair the data center’s relationships with its existing customers in the case of a security breach and loss of confidential customer data.
• High Switching Costs → T he decision to switch to another provider should come with high costs that make customers reluctant to move to a competitor. Said another way, the switching costs should outweigh the benefits of moving to a lower-cost provider.
• Recurring Revenue Component → Products/services that require maintenance and have a recurring revenue component are more valuable given the greater predictability in revenue. In most cases, customers prefer to receive maintenance and other types of related services from the original provider they purchased the product from.

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

• Total Debt / EBITDA
• Senior Debt / EBITDA
• Net Debt / EBITDA

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)

• EBITDA / Interest Expense
• (EBITDA – Capex) / Interest Expense

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

• Industry Cyclicality: The ideal candidate for an LBO should generate predictable cash flows. Therefore, highly cyclical revenue and demand fluctuations based on the prevailing economic conditions (or other external factors) make an investment less attractive from a risk standpoint.
• Customer Concentration: As a general rule of thumb, no single customer should account for more than ~5-10% of total revenue as the risk of losing that key customer due to unforeseen circumstances or the customer’s refusal to continue doing business with them (i.e. decides not to renew their contract) presents a significant risk.
• Customer and Employee Churn : While the circumstances will be specific to the case, high rates of customer and employee churn are generally perceived as a negative sign as high customer churn creates the need for constant new customer acquisitions while low employee retention signals issues in the organizational structure of the target.

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?

• Earlier Receipt of Proceeds → Dividend Recapitalization, Sooner than Anticipated Exit, Opted for Cash Interest (as opposed to PIK Interest), Annual Sponsor Consulting Fees
• Increased FCFs Generation → Achieved through Revenue and EBITDA Growth, Improved Margin Profile
• Multiple Expansion → Exiting at a Higher Multiple than the Purchase Multiple (i.e. “Buy Low, Sell High”)

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:

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?

• Financial Fees → Financing fees are related to raising debt or the issuance of equity and can be capitalized and amortized over the tenor of the debt (~5-7 years).
• Transaction Fees → On the other hand, transaction fees refer to the M&A advisory fees paid to investment banks or business brokers, as well as the legal fees paid to lawyers. Transaction fees cannot be amortized and are classified as one-time expenses that are deducted from a company’s retained earnings.

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?”

• Google+
• Basic LBO Modeling Test
• Standard LBO Modeling Test
• Leveraged Finance Guide (LevFin)

For question: “What are some positive levers to increase the IRR on an LBO?” Why does using cash interest increases IRR? I would assume that using PIK would increase IRR as you can use the increased FCF for dividend repayments or other levers to increase IRR.

Hi, Claudius, If you use the cash that would have paid interest to pay dividends instead, then it may indeed increase IRR, but there are often restrictions on this, and the cash is required to be used to make optional prepayments on term loans before dividends can be paid. So, …  Read more »

Thanks Brad. I’m still not sure why this should lead to an earlier receipt of proceeds. In general, yes it increases IRR if you pay less interest on debt. You should always opt for the cheapest debt options. But why should it affect earlier proceeds? I would even assume that …  Read more »

Hi, Claudius, Dividends would lead to earlier receipt of proceeds, but I’m not assuming you can pay them. So not sure what you mean by earlier proceeds. What I am saying is that if you opt for PIK interest at a higher rate rather than negotiating a lower rate and …  Read more »

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MASTERING PRIVATE EQUITY CASE STUDIES: A COMPREHENSIVE GUIDE

​ Having progressed through the initial stages outlined in our preparation guide , you are now about to enter the case study phase of the interview process. This stage closely mirrors the tasks you'll perform on the job, testing your analytical skills, strategic thinking, and investment rationale. 

Regardless of the level you enter the fund at, the case study is a generally accepted practice and forms one of the three key pillars of any successful interview process: structured interviews, work–based tests, and psychometric assessments based on empirical evidence.

To help you succeed, this guide delves into the nuances of PE case studies, offering insights from industry experts and best practices.

The Essence of the PE Case Study

A private equity case study typically requires evaluating a potential investment opportunity. You’ll receive an Information Memorandum (IM) for a company the PE firm could consider investing in, potentially some supporting information (industry news/benchmarking), and possibly a part-completed model (though often you are asked to prepare this from scratch). Your task is to value the company and formulate an investment proposal, including whether or not to invest. Keep in mind that this task may not be exclusive. The key lies not only in your final decision but also in the depth and logic of your analysis.

Types of PE Case Studies:

1. paper lbo/dcf.

A Paper LBO/DCF involves a simplified leveraged buyout or discounted cashflow model performed on paper or verbally, focusing on core concepts without the aid of a computer.

Preparation Strategy

Understand Core Concepts: Be well-versed in the fundamentals of LBO and DCF models.

Practice-Without Tools: Get comfortable performing calculations manually or explaining your thought process clearly without visual aids.

2. Timed LBO Modelling Test

A Timed LBO Modelling Test is a fast-paced, 1-3 hour on-site or remote test focused on speed and accuracy. These are often designed to understand the gaps in your skill-set, so it is not about achieving the perfect result, but creating a well thought-through working model. It is therefore important to pace yourself and breakdown what to focus on and when before you start.

Speed and Accuracy: Hone your Excel skills and practice building LBO models quickly.

Simulate Test Conditions: Replicate the pressure of a timed test to build your endurance and efficiency.

3. Take-home LBO Model and Presentation

The Take-home LBO Model and Presentation involves a comprehensive analysis where you might have a weekend or a week to build a full LBO model and prepare a detailed investment recommendation. Typically, you will then be asked to submit your findings and return to present 

Detailed Analysis: Conduct thorough research and develop a comprehensive model. Ensure the numbers balance and that you are not making assumptions based on incorrect data.

Effective Presentation: Focus on creating a clear, concise, and compelling presentation of your findings and recommendations.

4. Commercial Case Studies

Commercial case studies are less frequently used but typically deployed when you come from a non-financial background, such as commercial consulting or industry. In this scenario, you are either presented with a CIM or some high-level information about a business and then asked to think through aspects like business model, unit economics, market dynamics, growth opportunities, investment risks, KPIs, and areas of additional diligence.

Develop a Structured Approach: Create a framework for methodically analysing businesses. Practice with a few random CIMs you can find online. Example framework:

Revenue Generation: How does the business generate revenue? What does it sell, and how does it sell these products or services?

Revenue Evolution: How is the company’s ability to generate revenue likely to evolve? What are its growth prospects?

Direct Costs: What are the direct costs associated with its revenue streams? Is it a people-oriented cost structure, a SaaS business, or a materials-based cost structure?

Indirect Costs: What indirect costs are required to drive revenue? Consider factors like sales intensity and capital intensity.

Financial Understanding: Understand growth rates, margin profiles, operating leverage, unit economics, and cash flow profiles.

Market Positioning and Dynamics: Where is the business positioned in the value chain? What external factors, such as changing market dynamics and competition, will impact the business model

Dissecting the Case Study

To effectively analyse a potential investment in a private equity case study, it is crucial to break down the company and its environment into several key areas. Each aspect provides insight into different facets of the business and its viability as an investment. This section outlines the essential components you should examine, from industry dynamics to the specifics of the transaction, ensuring a comprehensive analysis.

Industry Analysis

Key Products and Markets: Understand the company’s primary products and markets and the main demand drivers.

Market Participants and Competition: Analyse the competitive landscape and the intensity of competition.

Industry Cyclicality: Determine the cyclical nature of the industry and external factors influencing it, such as regulatory changes or economic cycles.

Company Analysis

Position in Industry: Assess the company’s market position and growth trajectory.

Operational Leverage and Margins: Evaluate the cost structure and sustainability of margins.

Management and Cash Needs: Consider the effectiveness of the management team and the company’s working capital requirements.

Financial Analysis

Revenue Drivers and Stability: Identify revenue drivers, growth potential, and stability.

Cost Structure: Examine supplier diversity, fixed versus variable costs, and capex requirements.

Competitive Analysis: Assess industry concentration, buyer and supplier power, brand strength, and potential substitutes.

Growth Prospects

Scalability and Efficiency: Evaluate scalability and potential efficiency improvements.

Due Diligence: Consider environmental, legal, and operational risks.

Transaction Analysis

LBO Model: Build a leveraged buyout model to project financial performance and returns.

Valuation and Debt Capacity: Justify your valuation and the company’s ability to raise and service debt.

Exit Opportunities: Assess potential exit strategies and their impact on returns.

Building a Leveraged Buyout Model

Creating a full 3-statement model is crucial, and it's important to ensure it balances. You will typically build this from scratch, and we recommend a buyout overlay (especially for large-cap funds). While formatting isn't a primary concern, the model should lead you to a clear view of the deal's merits and risks, culminating in a definitive recommendation—whether to invest or not.

Key Components of the Model

Income Statement: Shows the company's revenue, expenses, and net income over a specific period.

Balance Sheet: Displays the company's assets, liabilities, and shareholder equity at a specific point in time, providing a financial snapshot.

Cash Flow Statement: This statement illustrates the company's cash inflows and outflows from operating, investing, and financing activities over a specific period.

Ensuring it balances is a core principle because it reflects the fundamental accounting equation: Assets = Liabilities + Shareholders' Equity. In simpler terms, everything a company owns (assets) must be financed by what it owes (liabilities) and the money invested by shareholders (equity). The 3-statement model is designed to be internally consistent, so changes in one statement should automatically flow through and impact the other statements, ensuring the balance sheet remains balanced.

Buyout Overlay

With a buyout overlay to the model, we can determine:

Financial Assumptions:

Buyout Price: Determine the price per share the private equity firm will pay for the company. Techniques for this can include:

Market Valuation Techniques

Market Multiples: Compares the target company's financial metrics to publicly traded companies in the same industry.

Transaction Multiples: Analyses recent M&A deals in the same industry.

Discounted Cash Flow (DCF) Valuation: Considers the target company's future cash flows, discounting them to their present value to arrive at a company valuation.

Financing Structure: Specify the debt and equity financing mix used to fund the buyout, impacting the company's capital structure and future cash flows.

Exit Strategy: Consider the private equity firm's expected exit timeline, influencing future growth assumptions.

Income Statement:

Impact on Revenue: Analyse if the buyout will affect the company's pricing strategy, market access, or growth initiatives.

Impact on Expenses: Consider potential changes in management structure, financing costs (interest on debt), or one-time transaction fees.

Balance Sheet:

Shareholder Equity Elimination: Upon buyout, existing shareholder equity gets replaced by new equity issued to the private equity firm.

Debt Assumption: Account for the new debt used to finance the buyout, increasing the company's liabilities.

Cash Flow Impact: Model the cash outflow for the buyout transaction and the ongoing cash flow implications of the new debt (interest payments).

Cash Flow Statement:

Financing Activities: Reflect the cash inflow from the debt portion of the buyout financing.

Debt Service: Include the cash outflow for ongoing interest payments on the new debt.

Iteration and Sensitivity Analysis:

Refine Assumptions: Based on industry benchmarks and company-specific factors.

Perform Sensitivity Analysis: See how variations in buyout price, financing structure, or growth assumptions impact the model's outputs.

Presenting Back to the Business

Effectively presenting your analysis to the business is a critical part of the private equity case study process. This step involves synthesising your findings into a clear and compelling narrative that highlights the company’s strengths, weaknesses, opportunities, and threats (SWOT analysis). By doing so, you can provide a comprehensive view of the potential investment, showcasing both its merits and risks. Here’s a detailed breakdown of what to consider when presenting your findings to ensure a thorough and persuasive presentation.

Strengths (Internal - Positive)

Financial Performance: Examine profitability (margins, net income), revenue growth, and cash flow generation.

Competitive Advantage: Identify unique selling propositions or strategic advantages.

Management Team: Evaluate the management team's experience, track record, and expertise.

Product/Service: Consider the quality, innovation, and market demand for the company's offerings.

Operational Efficiency: Analyse production processes, inventory management, and cost structure.

Weaknesses (Internal - Negative)

Financial Performance: Identify weaknesses in profitability, cash flow, or high debt levels.

Market Position: Assess the company’s competitive challenges.

Product/Service: Evaluate the relevance and competitiveness of products or services.

Operational Inefficiencies: Identify inefficiencies in production, supply chain, or overhead costs.

Management Team: Assess any gaps in management experience or track record.

Opportunities (External - Positive)

Market Growth: Identify growth potential in the target market.

Industry Trends: Leverage favourable industry trends.

Technology Advancements: Consider new technologiesto enhance the company's products or services.

Acquisitions: Explore potential acquisitions or partnerships.

Economic Conditions: Evaluate positive economic factors that could benefit the company.

Threats (External - Negative)

Market Competition: Assess the impact of increasing competition.

Economic Downturn: Consider the potential impact of economic slowdowns.

Regulatory Changes: Identify new regulations that could increase costs or restrict operations.

Technological Disruption: Evaluate the threat of emerging technologies.

Political Instability: Consider the impact of political or economic instability in the company’s operating regions.

Key Tips for Success

Prioritise depth over breadth.

Concentrate on the most crucial elements of your analysis. It's better to delve deeply into a few critical points than to cover too many topics superficially.

Simulate Realistic Conditions

Practice under time constraints to enhance your speed and accuracy. Replicating the pressure of a real case study will help you perform better during the actual interview.

Utilise Mock Case Studies

Engage with mock case studies and seek feedback from industry professionals. This will help you refine your approach and improve your analytical skills.

Be Honest and Transparent

If you don’t know the answer to a question, admit it. Honesty is valued over attempting to bluff, as interviewers can easily spot insincerity.

Align with the Firm’s Philosophy

Customise your analysis to match the investment strategy of the private equity firm you are interviewing. Understanding and reflecting on the firm’s investment style can distinguish you from other candidates.

Succeeding in a private equity case study requires a blend of analytical rigour, strategic insight, and effective communication. The process tests your technical skills and ability to think like an investor and articulate your ideas clearly. Here are the key takeaways to ensure success:

Analytical Rigour: Dive deep into financial data to uncover meaningful insights. Develop a robust understanding of the company's financial health through detailed analysis of income statements, balance sheets, and cash flow statements.

Strategic Insight: Go beyond numbers. Assess the company's market position, competitive landscape, growth prospects, and potential risks. Identify where value can be created and understand the broader industry dynamics.

Effective Communication: Your ability to present your findings clearly, concisely, and compellingly is crucial. Ensure your presentation is structured logically, highlights the key points, and supports your investment thesis with solid evidence.

Value Creation Focus: Always keep the potential for value creation at the forefront of your analysis. Consider how operational improvements, strategic repositioning, or market expansion can enhance the company's value.

Practice and Preparation: Simulate real case study conditions to build speed and accuracy. Engage with mock case studies and seek feedback from industry professionals to refine your approach.

Customisation: Tailor your analysis to align with the specific investment philosophy of the PE firm you’re interviewing with. Understanding the firm's strategy and past investments can provide valuable context and make your presentation more relevant.

Focusing on these areas can demonstrate your potential as a valuable investment professional. Remember, the case study is not just a test of your analytical abilities but a showcase of how you approach problem-solving and decision-making in a real-world context.

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Ace the Growth Equity Case Study Interview

Intro to case studies

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:

• Technical growth equity modeling chops  – is your model right? Does it include all the required features to properly analyze the growth company?
• Investment fundamentals  – how do you think about growth investments? Does the way you’ve thought about the opportunity make sense and are you focused on the right areas?
• Ability to articulate or present your work  – are your thoughts well-organized and do you articulate them succinctly and confidently? This is very important in growth equity as I believe firms place a premium on these skills in growth
• Time management  – did you complete the entire exercise?

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.

• Market analysis  – How do you analyze markets? What are the competitive dynamics and what are the long-term growth fundamentals?
• Investment fundamentals  – Same as above. How do you think about growth investments? Does the way you’ve thought about the opportunity make sense and are you focused on the right areas?
• Ability to articulate or present your work  – Same as above. Are your thoughts well-organized and do you articulate them succinctly and confidently? This is a very important skill in growth equity as I believe firms place a premium on these skills in growth

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.

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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:

• Clarity of thought (under pressure)  – this is the biggest thing the interview is probing; can you work through difficult problems on the fly? How does your brain think through problems?
• Ability to articulate ideas  – it’s okay to think through problems out loud, but you want to make sure you’re able to summarize and synthesize your thinking where possible.

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 & Answers

Types of Private Equity Interview Questions

#1 technical private equity interview questions, #2 transaction experience private equity interview questions, #3 pe firm-specific private equity interview questions, #4 culture fit private equity interview questions.

• Private Equity Interview Questions - Financial Modeling Case Studies

Private Equity Interview Questions Recap

Additional resources, private equity interview questions.

Prepare for the 4 most common types of questions

Private Equity Interview Questions & Answers

This guide will help you prepare for and ace the most common private equity interview questions. The main types of PE interview questions you will encounter include technical knowledge, transaction experience, firm knowledge, and culture fit.  In addition, you may also be asked to complete a practical financial modeling -related case study.

As mentioned above, there are generally four types of questions you’ll usually encounter in a PE interview. The four types are:

• Technical knowledge (finance, accounting, modeling)
• Transaction experience (deals you’ve worked on)
• Firm knowledge (what you know about the PE firm)
• Fit and personality (how well you fit in with the culture of the firm)

In the sections below, we will go through the most common private equity interview questions and answers!

What are the limitations of a DCF model?

While discounted cash flow analysis is the best method available for assessing the intrinsic value of a business, it has several limitations. One issue is that the terminal value represents a disproportionately large amount of the value of the total business, and the assumptions used to calculate the terminal value ( perpetual growth or exit multiple ) are very sensitive.

Another issue is that the discount rate used to calculate net present value is very sensitive to changes in assumptions about the beta , risk premium, etc. Finally, the entire forecast for the business is based on operating assumptions that are nearly impossible to accurately predict .

What are the most important factors in a merger & acquisition model?

From a valuation perspective, the most important factors in an M&A model are synergies, the form of consideration (cash vs. shares), and purchase price. Synergies  enable the acquiring company to realize value by enhancing revenue or reducing operating costs, and this is typically the biggest driver of value in an M&A deal (note: synergy values are very hard to estimate and can often be overly optimistic).

The mix of cash vs. share consideration can have a major impact on accretion/dilution of per-share metrics (such as EPS). To make a deal more accretive, the acquirer can add more cash to the mix and issue fewer shares. Finally, the purchase price and takeover premium are major factors in the value that’s created.

What indicators would quickly tell you if an M&A deal is accretive or dilutive?

The quickest way to tell if a deal between two public companies would be accretive is to compare their P/E multiples . The company with a higher P/E multiple can acquire lesser valued companies on an accretive basis (assuming the takeover premium is not too high). Another important factor is the form of consideration and mix of cash vs. share (see the previous question).

What assumptions is an LBO model most sensitive to?

LBO models are most sensitive to the total leverage the business can service (typically based on the  debt/EBITDA ratio), the cost of debt, and the acquisition or exit multiple assumptions. In addition, operating assumptions for the business play a major role as well.

Given two companies (A and B), how would you determine which one to invest in?

This is one of the most common private equity interview questions. Deciding between company A and B requires a comprehensive analysis of both quantitative and qualitative factors. Assuming they are in the same industry, you could start to compare the businesses based on:

• Business model – how they generate money, how the company works
• Market share/ Size of the market – how defensible is it, opportunities for growth
• Margins & cost structure – fixed vs. variable costs , operating leverage, and future opportunity
• Capital requirements – sustaining vs. growth CapEx , additional funding required
• Operating efficiency – analyzing ratios such as inventory turnover , working capital management, etc.
• Risk – assessing the riskiness of the business across as many variables as possible
• Customer satisfaction – understanding how customers regard the business
• Management team – how good is the team at leading people , managing the business, etc.
• Culture – how healthy is the culture and how conducive it is to success

All of the above criteria need to be assessed in three ways: how they are in (1) the past, (2) the near-term future, and (3) the long-term future. This will be the basis of a DCF model (which will have multiple operating scenarios ), and the risk-adjusted NPV for each business can be compared against the price the business might be purchased at.

Describe a deal you worked on at Investment Bank X.

Example answer: One of the most interesting and challenging deals I worked on at the bank was the sale of a private company to PE Firm Z for $275 million. (To elaborate on your answer, provide highlights of the deal as follows):

• Describe the industry and the company’s business model
• Discuss the revenue, EBITDA , or earnings of the business
• Do you think it was high, low, or other comments
• Outline the strategic rationale for the transaction
• Point out both the seller’s perspective and the buyer’s perspective on the deal (are they both equally valid?)
• Challenges or hurdles you had to overcome to get the deal done
• Anything else of interest that you learned in the process about the seller, the buyer, the process, etc.

All other questions related to the transaction will be some sort of derivative of the above question or dig deeper into the above transaction and expand in more detail on any of the points above.

Image: CFI’s LBO Modeling Course .

What do you know about us and why do you want to work at our firm?

This is one of those private equity interview questions that you really have to prepare for. Giving generic answers like “your firm has a great reputation” is not sufficient – you need to point out some real specifics. Spend time going through the company’s website and looking at their current and past portfolio companies.

Make sure you find several that you’re personally interested in and can speak about in detail (see the next question below). Have a solid understanding of the firm’s approach to investing, their track record, who the founders and management team are, and, most importantly, what you like about their approach.

See a list of the largest PE firms to start doing some research.

What do you think about some of our portfolio companies?

Research in advance on the firm’s website and write down notes on the portfolio companies you find the most interesting.  Obtain and retain facts about their:

• Business model
• Management team
• The transaction the PE firm acquired them in
• The industry they operate in
• Their competitors
• Whatever else you can find out about them

What is our firm’s investment strategy?

To answer this question well, you’ll have to do a lot of research. You can probably find an official statement on their website, but a more insightful answer would come from having read any interviews with founders and partners that talk about their approach, as well as understanding the themes across their portfolio companies and how they all fit together.

These private equity interview questions are designed to see what you’re really like as a person in order to determine how well you would fit with the culture of the firm. Since PE firms are typically a lot smaller than sell-side firms, personality and culture fit matters a lot.

Variations of these fit questions can include:

Why do you want to work in private equity?

Walk me through your resume., what are your personal strengths and weaknesses, what do you like to do when you’re not working, how do you de-stress, how do you manage risk in your personal life.

The key to answering these questions well is to (A) understand what the questions are aiming at – assessing you personally in relation to the firm’s culture, and (B) being relaxed, organized with your thoughts, and showing that you’re a likable person who’s easy to get along with and who works well on a small team.

Every firm and team has its own culture and types of personalities they like best, so it’s important to ask around and see what you can learn about them. General personality traits that nearly every firm values are hard-working, reliable, respectful, humble, honest, easy to work with, inquisitive, organized, and possessing an extremely strong business sense.

Learn more in CFI’s Why Private Equity Guide .

Private Equity Interview Questions – Financial Modeling Case Studies

As part of the interview process, you may be asked to complete a case study, either in the office or at home, after the interview. Be prepared to do it right then as part of the interview. If the interviewer says they want you to do it as a “take-home” assignment, look the case over carefully and ask any questions you need to in order to make sure you understand it all properly,

Case studies are a great way for PE firms to quickly get a full picture of your financial modeling skills and valuation skills. It’s one thing to be able to talk about modeling and another thing to actually have best practices when it comes to building models in Excel .

Examples of case studies include the following:

• Finish a partially completed LBO model
• Build a full model from scratch
• Assess a deal in a completed model

The best way to prepare for case studies is by ensuring you have extremely strong financial modeling skills and brushing up with Financial Modeling Courses if necessary.

Image: CFI’s financial modeling courses .

In summary, there are four main types of private equity interview questions: technical, transactions, firm, and fit. Technical and transaction questions require you to have solid financial modeling and valuation experience, with a strong understanding of how to make good investments. Firm and fit questions are more soft skills type questions and require being prepared to speak in detail about the firm and about yourself.

In addition to the above, you should expect a case study of some kind that requires analyzing a market and or business using financial modeling.

Thank you for reading this guide to Private Equity Interview Questions. To be prepared for interviews, check out the following guides:

• Investment Banking Interview Questions & Answers
• Accounting Interview Questions
• Finance Interview Questions
• Equity Research Interview Questions
• See all career resources
• See all capital markets resources

• Share this article

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

Lbo modeling test example.

When interviewing for a junior private equity position, a candidate must prepare for in-office modeling tests on potential private equity investment opportunities—especially LBO scenarios. In this module, we will walk through an example of an in-office LBO modeling test. In-office case studies and modeling tests can occur at various stages of an interview process, and additional interviews with other members of the private equity team could occur on the same day. Therefore, you should strive to be able to do these studies effectively and efficiently without draining yourself so much that you can’t quickly rebound and move on to the next interview. Make sure to take your time and build every formula correctly, since this process is not a race. There are many complex formulas in this test, so make sure you understand every calculation.

This type of LBO test will not be mastered in a day or even a week. You must therefore begin practicing this technique in advance of meeting with headhunters. Repeated practice, checking for errors and difficulties and learning how to correct them, all the while enhancing your understanding of how an LBO works, is the key to success.

• Investment Scenario Overview

Given Information (Parameters and Assumptions)

Step 1: income statement projections, step 2: transaction summary, step 3: pro forma balance sheet.

• Step 4: Full Income Statement Projections

Step 5: Balance Sheet Projections

Step 6: cash flow statement projections, step 7: depreciation schedule, step 8: debt schedule, step 9: returns calculations.

Below we provide the given information from a real-life LBO test that was given to a pre-MBA associate candidate at a large PE firm. We will use it as an example of how to build an LBO model from scratch during the interview. Remember that candidates will receive a laptop and a printout with key information regarding the transaction to complete this assignment.

ABC Company, Inc.

Scenario Overview and Revenue Assumptions:

ABC Company, Inc. is a developer of software applications for smartphone devices. The company sells two products for the various smartphones. The first is a software application called Cloud that tracks weather data. The second application, Time, acts as a calendar that keeps track of a user’s schedule. ABC Company prices Cloud at $16.00 and Time at $36.00 per software license. ABC Company sold 1.5 million copies of Cloud and 3 million copies of Time in 2010. That was the first year ABC Company generated any revenue.

Each software application requires the payment of a $5.00 renewal fee every year. ABC Company renews approximately 25% of the licenses it sold in the prior year; this renewal fee acts as a source of recurring revenue. To simplify, assume that renewals happen for only one additional year and that the recurring revenue stream is based on the prior year’s new licenses. Note that ABC Company does not incur any additional costs for renewals.

COGS assumptions (assume constant throughout the projection period):

• Packaging costs = $1.50 per unit
• Royalties to technology patent owners = $3.00 per unit
• Marketing expense = $3.00 per unit
• Fulfillment expense = $4.00 per unit
• Fees to smartphone companies = 15% of sale price (does not include renewal fees)
• ABC Company incurs a 15% bad debt allowance on total revenues (consider this as part of cost of sales, wherein ABC Company is unable to collect from customers’ credit card companies).

G&A and other assumptions (assume constant throughout the projection period):

• Rent of development property and warehouse facilities = $350,000 annually
• License fee to telecom internet providers = $1.5 million annually
• Salaries and benefits = $1.75 million annually
• Sales commissions = 5% of all sales including renewals
• Offices and other administrative costs = $750,000 annually
• CEO salary and bonus = $1.25 million annually + 3% of all sales including renewals
• Federal tax rate = 35% and state tax rate = 5% on EBT

Starting Balance Sheet:

Investment Assumptions:

Due to the depressed macroeconomic and investing environment, the PE fund is able to acquire ABC Company for the inexpensive purchase price of 5.0x 2011 EBITDA (assuming a cash-free debt-free deal), which will be paid in cash. The transaction is expected to close at the end of 2011.

• Senior Revolving Credit Facility: 3.0x (2.0x funded at close) 2011 EBITDA, LIBOR + 400bps, 2017 maturity, commitment fee of 0.50% for any available revolver capacity. RCF is available to help fund operating cash requirements of the business (only as needed).
• Subordinated Debt: 1.5x 2011 EBITDA, 12% annual interest (8% cash, 4% PIK interest), 2017 maturity, $1 million required amortization per year. (Hint: add the PIK interest once you have a fully functioning model that balances.)
• Assume that existing management expects to roll-over 50% of its pre-tax exit proceeds from the transaction. Existing management’s ownership pre-LBO is 10%.
• Assume a minimum cash balance (Day 1 Cash) of $5 million (this needs to be funded by the financial sponsor as the transaction is a cash-free / debt-free deal).
• Assume that all remaining funding comes from the financial sponsor.
• Assume that all cash beyond the minimum cash balance of $5 million and the required amortization of each tranche is swept by creditors in order of priority (i.e. 100% cash flow sweep).
• Assume that LIBOR for 2012 is 3.00% and is expected to increase by 25bps each year.
• The M&A fee for the transaction is $1.5 million. Assume that the M&A fee cannot be expensed (amortized) by ABC and will be paid out of the sponsor equity contribution upon close.
• In addition, there is a financing syndication fee of 1% on all debt instruments used. This fee will be amortized on a five-year, straight-line schedule.
• Assume New Goodwill equals Purchase Equity Value less Book Value of Equity.
• Assume Interest Income on average cash balances is 1%.

Hint: The first forecast year for the model will be 2012. However, you will need to build out the income statement for 2010 and 2011 to forecast the financial statements for years 2012 through 2016.

• Build an integrated three-statement LBO model including all necessary schedules (see below).
• Build a Sources and Uses table.
• Make adjustments to the closing balance sheet of ABC Company post-acquisition.
• Build an annual operating forecast for ABC Company with the following scenarios (using 2010 as the first year for the revenue forecast; note that 2010 EBITDA should be approximately $25 million). Assume that in 2011 there is 5% growth in units sold (both Cloud and Time units).
• Upside Case: 5% annual growth in units sold (both Cloud and Time units)
• Conservative Case: 0% annual growth in units sold (both Cloud and Time units)
• Downside Case: 5% annual decline in units sold (both Cloud and Time units)
• Build a Working Capital schedule using Accounts Receivable Days, Accounts Payable Days, Inventory Days, and other assets and liabilities as a percentage of Revenue. Assume working capital metrics stay constant throughout the projection period and assume 365 days per year.
• Build a Depreciation Schedule that assumes that existing PP&E depreciates by $1 million per year, and that new capital expenditures of $1.5 million per year depreciate on a five-year, straight-line basis.
• Build a Debt schedule showing the capital structure described earlier. Use average balances for calculating Interest Expense (except for PIK interest—assume that PIK interest is calculated based on the beginning year Subordinated Debt balance and not the average over the year).
• Create an Exit Returns schedule (including both cash-on-cash and IRR) showing the returns to the PE firm equity based on all possible year-end exit points from 2012 to 2016, with exit EBITDA multiples ranging from 4.0x to 7.0x.
• Display the results of all of these calculations using the “Upside Case.”

Note that the above description incorporates all of the information, assumptions and assignments that were given in this LBO in-person test example.

As part of the first step, build out the core operating Income Statement line items for years 2010 through 2016.

• Make a distinction between 2011 assumptions and 2012-2016 assumptions
• Take the provided assumptions and make the revenue and cost build based upon them.

• OFFSET is a simple Excel formula that is used commonly to interchange scenarios, especially if the model becomes very complex. It simply reads the value in a cell that is located an appropriate number of rows/columns away, based on the parameters given to the function. Thus, for example, =OFFSET(A1, 3, 1) will read the value in cell B4 (3 rows and 1 column after A1).

Next, build the costs related to Revenue based upon the information given in the case.

Then, build the G&A expenses from the given information.

Finally, build a simple summary schedule for the above projections.

As part of the second step, build out the transaction summary section which will consist of the Purchase Price Calculation, Sources and Uses, and the Goodwill calculation.

• This model assumes a debt-free/cash-free balance sheet pre-transaction for simplification. Without debt or cash, the transaction value is simply equal to the offer price for the equity (before fees and minimum cash—discussed below).
• The funding for this model is fairly simple: the funded credit facility is 2.0x 2011E EBITDA, the subordinated debt is 1.5x, and the remaining portion is the equity funding, which is a combination of management rollover equity and sponsor (PE firm) equity. (Note that the 5.0x 2011E EBITDA is the offer value for the equity before the M&A and financing fees and the minimum cash balance, not after. After fees/cash, it ends up being 5.25x.)
• The management rollover is simply half of the management team’s proceeds from selling the company. Since management owned 10% of the company before the transaction, it constitutes 5% of the offer price for the original equity.
• The sponsor equity is the “plug” in this calculation. In other words, it is the amount that is solved for once all other amounts are known (offer price + minimum cash + fees – debt instruments – management rollover equity).
• The total equity (including management rollover) represents about 30-35% of the funding for the deal, which is about right for a typical LBO transaction.
• Goodwill is simply the excess paid for the original equity (offer price – book value of equity).

As a next step, build out the Pro Forma Balance Sheet using the given 2011 balance sheet. To do this, you need to incorporate all the transaction and financing-related adjustments needed to produce the Pro Forma Balance Sheet. Each adjustment is discussed in detail below.

• Since this is a cash-free and debt-free deal to start, there are no Pro Forma adjustments for the cancelling or refinancing of debt.
• Cash increases by $5 million upon close because the sponsor is funding the minimum cash balance (minimum cash that is assumed to be needed to run the business).
• The New Goodwill is simply the purchase value of the equity (not including fees) less the original book value of the equity.
• The adjustment for Debt Financing Fees reflects the cost of issuing the new debt instruments to buy the company. This fee is considered an asset, and is capitalized and amortized over 5 years.
• The Debt-related adjustments reflect the new debt instruments for the new capital structure.
• The Equity adjustment reflects the fact that the original equity is effectively wiped out in the transaction—the “adjustment” amount shown here is simply the difference between the new equity value and the old one. The new equity value will equal the amount of the total equity funding for the transaction (sponsor plus management’s rollover) less the M&A fee, which is accounted for as an off balance-sheet cost.
• VERY IMPORTANT: This stage of the LBO model development (once Pro Forma adjustments have been made to reflect the impact of the transaction on the balance sheet) is a very good time to check to make sure that everything in the model so far balances and reflects the given assumptions. This includes old and new assets equaling old and new liabilities plus equity; new sources of capital equaling the transaction value, which equals the offer price for the original equity (adjusting for cash, old debt and fees), etc.

Step 4: Full Income Statement

Next, build the full Income Statement projections all the way down to Net Income. Note that a few line items (especially Interest Expense!) will be calculated in later steps. Once the Cash Flow section and other schedules are built, link all the final line items to complete the integrated financials.

• You can link the Revenue, COGS and SG&A calculations to the operating model (built in Step 1) to get to EBITDA.
• D&A will be linked to the Depreciation Schedule that you will need to build (schedule of the Depreciation of the existing PP&E and new Capital Expenditures made over the projection period).
• Interest Expense and Interest Income will be linked to the Debt Schedule that you will need to build. There will be a natural circular reference because of the cash flow sweep feature of the LBO model, combined with the fact that Interest Expense is dependent upon Cash balances. This is usually one of the last things you should build in an LBO model.
• The amortization of Deferred Financing Fees is fairly straightforward: it uses a straight-line, 5 year amortization of the fees described in the case write-up and computed in Step 2.
• The tax rates apply to EBT after all of these expenses have been subtracted out. They are given in the case write-up.

Next, forecast the Balance Sheet from 2011 to 2016. Note that we start with the 2011 Pro Forma Balance Sheet from Step 3 , not the original Balance Sheet.

• Laying out the Balance Sheet is similar to laying out the Income Statement—you’ll have to set up the framework for some line items and leave the formulas blank at first, as they will be calculated in the other schedules you will create.
• Cash remains at $5 million throughout the life of the model, as we’re assuming a 100% cash flow sweep and that the minimum cash balance is $5 million. (Cash would only start to increase if we project out long enough that all outstanding Debt is paid off.)
• Accounts Receivable (AR): Calculate AR days (AR ÷ Total Revenue × 365) for 2011 and keep it constant throughout the projection period.
• Inventory: Calculate Inventory days (Inventory ÷ COGS × 365) for 2011 and keep it constant throughout the projection period.
• Other Current Assets: Keep this line item as a constant percentage of revenue throughout the projection period.
• Accounts Payable (AP): Calculate AP days (AP ÷ COGS × 365) for 2011 and keep it constant throughout the projection period.
• Other Current Liabilities: Keep this line item as a constant percentage of revenue throughout the projection period.
• Total Deferred Financing Fees are computed based upon the Debt balances and percentage assumptions given in the model. Deferred financing fees are then amortized, straight-line, over 5 years.
• The Credit Facility and Subordinated Debt line items will link to your Debt schedule. Their balances will decrease over time as a function of the cash available for Debt paydown (since the case write-up specifies a 100% cash sweep function).
• Equity (specifically Retained Earnings) will increase each year by the same amount as Net Income, because there are no dividends being declared. If dividends were to be added into the model, you would calculate ending Retained Earnings as Beginning Retained Earnings + Net Income – Dividends Declared.
• As discussed earlier, the balance sheet has the pleasing feature that if it balances, the model is probably operating correctly! Now is another good time to make sure everything balances before proceeding.

Next, forecast the Cash Flow Statement as requested in the Exercises section.

• Start with Net Income and add back non-cash expenses from the Income Statement, such as D&A, Non-Cash Interest (PIK), and Deferred Financing Fees.
• Next, subtract uses of Cash that are not reflected in the Income Statement. These include the increase in Operating Working Capital (which you calculated using your balance sheet) and Capital Expenditures (which is calculated here or, alternatively, could be calculated in the Depreciation Schedule to be built shortly).
• Next, calculate the change in cash, which will be interconnected with the Debt schedule. In this case, the model is assuming a 100% cash flow sweep (after mandatory debt amortization payments), so cash should not change after the 2011PF Balance Sheet amount of $5 million.
• Even though the amount is not changing, the Cash line item should link back to the Balance Sheet. This is because the model could later be used to relax the assumption that 100% of excess cash is swept to pay down Debt. If it’s less than 100%, Cash would accumulate, and that would need to tie in to the other financial statements.

Next, forecast the Depreciation schedule as requested in the Exercises section.

• The original PP&E is depreciated $1 million annually, as stated in the assumptions.
• New Depreciation is calculated based on the annual investment in Capital Expenditures over the projection period. This new Depreciation is created using a waterfall (see above): each year new Capital Expenditures occur and need to be depreciated; each year, Capital Expenditures from previous projection years in the model may have to be partially depreciated in that year. The sum of all of the component Depreciation line items (one row for each year, plus the Depreciation on the original PP&E) gives the total Depreciation Expense for the year.

Note that this model is less complex than it could be. Given that Capital Expenditures do not change each year, and that each new Capital Expenditure is depreciated according to the same simple schedule, the numbers and calculations are fairly straightforward. Here, we’re simply assuming that new Capital Expenditures are expensed evenly over a 5 year period (using straight-line depreciation), as specified in the case write-up.

Next, forecast the Debt Paydown and Interest Expenses for each year via the Debt Schedule, as requested in the Exercises section.

• WARNING: Be very careful about changing formulas once you have built the iterative calculation. If you do so and introduce an error, it could bust your entire model if you’re not careful. This is because the error will travel all the way through the iterative calculations and end up everywhere! If you run into this problem, break the circular reference entirely (by deleting it), reconstruct the calculations for the first forecast year (2012), and then copy and paste them across the columns, one year at a time (2013, then 2014, etc.). Many PE professionals have spent late nights in the office trying to recover from an accidental error introduced into a circular LBO model formula!
• The non-discretionary portion is the required amortization payments made on debt (in this case, there is only required pay-down for subordinated debt).
• The discretionary portion is the sweep portion of the remaining LFCF less required amortization. Since we’re assuming a 100% cash flow sweep, all of the LFCF is used to pay down debt—first the Senior Credit Facility, then the Subordinated Debt. The cash flow sweep and required payments will help you calculate the beginning and ending balances of both of the debt tranches.
• Also note that we need to include a fee for the availability of the unused portion of the RCF, even if the business never uses it—this is a typical, annual commitment fee arrangement for revolving credit facilities.
• The interest rate on the debt is a floating rate (this means an interest rate that is dependent on LIBOR, according to the assumptions provided). We need to calculate interest based on this rate times the average S/RCF balance over the year.
• The 8% cash interest is calculated based upon the average of the debt balance, just like with the S/RCF.
• However, the 4% PIK (non-cash) interest will accrue based upon the beginning debt balance, not the average.
• Because of this difference (and the fact that one source of interest uses cash and the other does not), we need to make sure we’re using separate line items for the two types of Interest Expense.
• We also need to be aware of the mandatory amortization payment of $1 million per year, provided in the assumptions. This amount will get paid down out of LFCF no matter what.
• Interest Income on Cash is fairly easy to calculate—it is the Cash interest rate (1%) times the average balance throughout the year. This amount will increase Cash.
• Total Interest needs to be linked to the Income Statement.
• Non-Cash Interest needs to be added back to Net Income in the Statement of Cash Flows to assist in deriving LFCF (it’s a non-cash expense).
• Any LFCF that is not used to pay down Debt needs to link to the Cash line item of the Balance Sheet. (In this model none will, but you should include this measure in case the model is later used to either relax the 100% cash sweep assumption, or to project financials beyond the point at which all debt has been paid off).
• All Debt balances paid down by LFCF need to link to the Debt line items on the Balance Sheet.

In the final step of the LBO test, build out the Returns calculation required in the Exercises section.

• For each year, we simply take EBITDA multiplied by a range of purchase multiples to get to a total Exit Value for the company (Transaction Enterprise Value, or TEV).
• Next, we subtract out Net Debt (which is dependent on the 3-statement model you just created) to get to Equity Value.
• Next, we calculate the portion of the Equity Value that belongs to the management and the sponsor by using the initial equity breakdown for each party.

LBO Case Study: Conclusion and Final Comments

We hope that this case study provides some insight into all of the considerations that need to be made in building a realistic LBO model based on a case study in a Private Equity interview, and that the 9-step breakdown helps you simplify the task into easy-to-replicate and easy-to-execute steps.

No one becomes an expert LBO modeler overnight, so the key to doing well in this portion of the process is practice, practice, and more practice. With enough sample LBO cases, you should be able to master the steps needed to confidently build a fully functioning, professional LBO model on interview day.

Good luck with the modeling case and with the interviews!

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PE Case Study - LBO with CIM

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Hey guys, I looked for a clear answer to the following case study in the old discussions, but I couldn't find any: what's the best way to approach a LBO exercise with a full (50+ pages) CIM and no assumptions given in terms of sources (including type and cost of debt ) and entry/exit multiples? The task is simply to get to an IRR and discuss the returns in a short investement memo.

Thank you!!

I dont understand the question. Read the CIM and come up with operating assumptions. Use basic transaction assumptions and make an LBO .

I'm sure the firm gave you instructions...

What do you mean by "basic transaction assumptions"? If you have no idea about the sector (i.e. you don't know at which ev / ebitda company are trading), what are your entry and exit multiples going to be? What about cost and maturity of debt? Just putting a random 5 years bank debt at 7%? Thank you!!

Do a quick comps to find out current trading multiples and assume entry equals exit (unless you can very reasonably argue otherwise). Similarly you could also look at debt / ebitda ratios of public peers and (depending on the size of the target) discount that to account for risks associated with smaller firms. Although I'm not entirely sure you should be fine staying away from mezz and using a senior A (yearly 5 year amortization) and senior B (bullet in year 6) at 4%-5%.

The main issue is that you aren't given any comps set and you haven't got any internet connection (i.e. you have ONLY the CIM), hence there are no benchmarks or peers. And I don't think that the fact that they specify they want a LBO for valuation purposes will change anything as you would need exit and entry as well as debt assumptions. Am I missing anything? Thanks!

In that case I would argue that they are trying to test your reasoning. Try to get a grasp of multiples of major industries and what drives valuation in those industries, then apply that to the CIM you are presented with. As far as debt is concerned, try to think like a bank; a company that has a clean balance sheet or a company that has successfully grown and consistently paid down debt over the years is more likely to be able to attract higher multiples (north of 3x ebitda) than a company with a relatively unproven business model in a highly complex industry. Hope this makes sense, just my two cents!

ctrlaltelite: In that case I would argue that they are trying to test your reasoning. Try to get a grasp of multiples of major industries and what drives valuation in those industries, then apply that to the CIM you are presented with.

I tend to agree, if you come out with like 5x Rev you should provide a reasonable explanation for that, but without data and little/no knowledge of industry/sub-sector (or even more if you don't have info about it - though not the case) if you say 1x or 1.5x or 2x Rev that is clearly not the point of the whole valuation. The reason why they ask you to model an LBO is to test your reasoning as well as your modeling skills. At the end of the day, if you build a working, effective lbo model and it turns out the proper multiple is 5x Rev for whatever reason, it's a matter of a second to change it.

I definitely agree that without a valid reason you have to use the same multiple both entering and exiting.

As for the debt - the point is to check if you have any rough ideas about how the banking world works - in this case, you can't end up with a D/E of 5 or 10 as banks will not lend that much to a firm. You can use some kind of metric to determine how much (e.g. D/E or multiple of EBITDA , they are both a starting point... Remember: valuation is both a science and an art, so there's not 100% right response).

PE Case Study - Model & Presentation with CIM ( Originally Posted: 04/02/2018 )

I have an upcoming case study round where I will be given a CIM to build a model and prepare a few slides that I will have to present incl. Q&A. This will be my first full case study, so my question is how do you approach this most efficiently? I will have 2-3 hours for the whole exercise. How would you divide up the time and what are the most important areas to cover in the slide deck? I would have thought to include 1 page exec summary upfront, 1 slide about the market developments, 1 page business overview incl. historic performance, 1 page forecasts of key financials / business plan, 1 page transactions overview / assumptions + IRR sensitivities, 1 page potential risks / further ares for DD.

Does this sound reasonable for the time / is there anything major missing that you would include?

In terms of the operating assumptions for the model - is this usually just replicating the business plan assumptions from the CIM and making necessary downwards / upwards assumptions based on the industry outlook? Also, how often is it required to build a full three statement model? I would assume time is pretty limited and the full 3 statements might be a bit too much?

Hey mirus, I swear if I had a silver banana for every lonely thread I posted too I'd be richer than @compbanker ...

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If we're lucky, the following pros may have something to say: EuroGorilla bule Radu-Georgescu

I hope those threads give you a bit more insight.

Think your intuition is right - I wouldn't build in a balance sheet just do I/S, working capital and debt schedule . And DO NOT worry about formatting, just make sure the valuation you arrive at makes sense and focus all additional time on the qualitative part

30mn reading + business understanding (what is the USP, product etc) 1h preparing commercial slides 1h LBO (i guess it depends on the background whether you need 1h for your LBO /commercial work) 30mn check + formating (primarily slides)

from experience, focus on 3-4 key value creation/DD items with a more detailed answer; in the end: it doesnt matter whether you got an IRR of 14% or 22% , more importantly you need to demonstrate critical thinking, business acumen as people want to see whether you can have a smart discussion over the company

All great comments so far. 

Personally, I think it's a tough one. I did this SaaS LBO case study, a full 3-statement with LBO features --- multiple debt tranches, cash sweep , rollover equity, option pool, dividend recap, etc. --- and with the b/s balanced and all formulas correct, somehow I ended up with a 9x MOIC over a 5-year horizon. It's obviously too high for pretty much any company, but it'd be really helpful if I have some SaaS specific knowledge (I don't have that much) to know if that number is not THAT weird.

The hypothetical Co. is a SaaS company who just started to generate revenue in transaction close year.

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