Private equity seems to be notoriously long and difficult. Unlike Investment Banking, PE funds have a less structured recruiting cycle and procedure, but mostly follow the below seven sections:
1. “Who 1”:your story
2. “Why”: your motivations, why PE, why our firm, why not Hedge Fund/Startup/Portfolio company
3. “What”: your deal experience
4. “How 1”: general technical questions
5. “How 1”: LBO model test (can be during the interview, or combined with case study test)
6. “Whether”: case study of a potential investment, and you prepare a memo/presentation and recommend “whether” to invest. Can be conducted on the spot or as “homework”
7. “Drink?”: if you have survived thus far and got invited to the “n”th round of interview but no offer yet, this might be the last round of “who you are” and whether you fit into their organization test
City Sail’s blog contributors have compiled the questions for section 3-6 technical questions:
For section 4. “How 1” General technical questions, there is a high overlapping of the questions asked in Investment Banking interviews, and we are not going to repeat them here. Please prepare this section along with the list in our previous blog for the IBD interview technical questions.
6. “Whether” is the question you are almost definitely going to get. We have broken down the question into small questions as a guidance and a check list for you to prepare for the case study.
I. Case study:
1) Qualitative analysis on market / industry
· Industry is growing?
· Grow more quickly/slowly in the future years?
· Positive/negative trends?
· What are the key drivers in that industry?
· Buyer power?
· Supplier power?
· Brand power?
· Economies of scale/network economies/minimum efficient scale?
· Input access?
· Is the industry cyclical? Where are we in the cycle?
· Which outside factors might influence the industry (eg. government, regulation，climate, terrorism)?
· Technology break through in the industry?
2) Qualitative analysis on competition
· Who are the market participants?
· How intense is the competition?
· Company’s position in the industry
· Unique advantage?
· Barriers to entry?
· Industry concentration?
3) Qualitative analysis on company and management
· What the company does? Whatare its key products and markets?
· What’s the main source of demand for its products?
· Differentiation on products / service
· Operational leverage / coststructure
· Margins (are they sustainable/improvable)?
· Fixed costs from capex and R&D
· Working capital requirements
· Minimum amount of cash needed to run the business
· Revenue drivers?
· 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
· How long before revenues are booked and received?
· The diversity of suppliers
· The operational gearing (What’s the fixed cost vs. the variable cost?)
· The exposure to commodity prices
· 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?
· Management experience and stability?
· Limitations of current management
4) Qualitative analysis on company’s growth opportunities
· How quickly can the company grow in the future?
· Is there any “low hanging fruit” or room to easily win more customers / revenue in the future?
· Do you expect it to grow faster or slower than the market as a whole?
· Change of asset usage (Leasehold vs. freehold, could manufacturing take place in cheaper labor place?)
· How to achieve efficiencies
5) Qualitative analysis on risks
· Are the key risks here related to the market, or the economy as a whole?
· What are the risks related to the competition?
· What are the risks related to the government regulations?
· Is there any way of mitigating these risks?
6) Qualitative analysis on anything else unique to the deal?
7) Quantitative analysis on valuation overview
· How much is this company worth?
· What methodologies are you basing it on?
· “Football field” chart?
8) Quantitative analysis on valuation backup / details
· Public comps backup?
· Transaction comps backup?
· DCF output?
9) Quantitative analysis on return the firm can expect
· Assumptions and the output of the model under a range of sensitivities?
10) Due diligence
· Change of control clauses
· Environmental and legal liabilities
· The power of pension schemes and unions
· The effectiveness of IT and operations systems
· The company’s ability toraise debt
· The exit opportunities from the investment
· The synergies with other companies in the PE fund’s portfolio
· The best timing for the transaction
12) Conclusion on investment yes/no/conditional upon? Why?
13) Hedge your decision? Key investment risks?
II. LBO Models
14) What are the assumptions you used?
15) Sources & Uses?
16) Simple Income Statement / Cash Flow Statement /Debt Schedule?
17) What is the output of the model under a range of sensitivities?
III. Deal experience
18) What was the strategic rationale of the xxx M&A transaction you listed?
19) What are the industry outlook and trends?
20) What were the comps? How did you choose them? What were they trading at?
21) How did you value the company?
22) Do you think it was a good deal? Why?
23) How did the investment/deal perform?
24) What were the sources and uses of funds?
25) What were the credit stats?
26) What were the acquisition multiples?
27) What were the projected returns?
28) What was the premium?
29) Would another financial or strategic buyer have paid more?
30) Why was it an auction/limited auction/privatesale/etc.?
31) Walk me through the model.
32) What was your role in this deal?
33) What are the drivers of growth? What were the margins? What is the growth rate of revenue? What is the growth rate of EBITDA? What is the growth rate of net income? What is their market share? Who is the customer base? Who are the suppliers? What are the fixed versus variable costs? How much maintenance versus growth capex are there? Etc.
34) What other companies could the acquirer have bought?
IV. General technical questions:
35) You buy a business at an 8.0x EBITDA multiple and you believe you can sell it in 5 years’ time at the same 8.0x EBITDA multiple. Your required return rate is 20%/year. Assume that banks are willing to lend upto 4x debt/EBITDA, and that half of the debt would get repaid after 5 years.How much do you need to grow EBITDA by within this timeframe?
36) You buy a company for 10x EBITDA. It has EBITDA of £100 in yr 1, and £150 in yr 5: what kind of multiple should we exit at to get at least 25% IRR?
37) What industry trends are key when you are looking at a potential investment?
38) How do you source potential investment?
39) If I wanted to protect the downside, how would I structure an investment?
40) Have you looked at our website? Which investment do you like most/least? Why?
41) If you could only have one financial statement, which one would you choose? Why? What if you could have 2? Why?
42) An investment banker gives you a deal book – how do you verify the information in it?
43) What should we buy next? What kind of IRR would we make? (provide high level financials/LBO model workings)
44) What different levers can be used to improve IRRs?
45) What is the advantage of a vendor loan?
46) Would you invest in an airline? Why and why not?
47) What are some characteristics of a company that is a good LBO candidate?
48) Why do private equity firms use leverage when buying a company?
49) Let’s say you run an LBO analysis and the private equity firm’s return is too low. What drivers to the model will increase the return?
50) How do you assess credit risk?
51) Company A has a potential IRR of 23% and Company B has a potential IRR of 30%. What 2 questions would you ask before you decide which one to invest in?
52) What are the 4 main drivers of the change in IRR for an LBO scenario?
53) How do you model in PIK notes?
54) Why would a private equity firm use a convertible preferred note?
55) How do you calculate amortization of intangible assets?
56) What are the uses of excess cash flow?
57) What makes for a good management team?
58) What 3 questions would you ask a CEO of a company you were looking to invest in?
59) What are the key considerations to structuring a carve-out transaction?
60) How would you decide what amount of leverage to use in building a company’s capital structure?
61) Company A has depreciation that is overstated by £10 million. Walk me through the impact of this overstatement on the financial statements
62) Tax depreciation is £20 million over 10 years, while financial statement depreciation for the asset is £10 million over 10 years. Walk me through the impact of these differences on the financial statements, assuming a tax rate of 40%.
63) Assume that your company bought an asset for £10 million, of which £7 million was financed through debt. Walk me through the impact of this transaction on the financial statements.
64) Assume that your company sold an asset for a loss of £10 million (it had originally been bought for £20 million). Walk me through the impact of this transaction on the financial statements.
65) Your company sells a yearly subscription for £120. Walk me through the impact that this sale has on the financial statements.
66) You misstated depreciation in your model. It should be £10 million higher. How does this affect the three financial statements?
67) You sold an asset where you received £500 million in cash. How does this affect your three financial statements?
68) If you merge two companies, what does the pro-forma income statement look like? Discuss whether you can just add each line item for the proforma company. Please start from the top.
69) A pen costs £10 dollars to buy. It has a life of ten years. How would you put it on the balance sheet?
70) In another scenario, at the end of the second year,the pen runs out of ink and you have to throw it away. How much is it on the balance sheet?
71) Would you rather have an extra dollar of debt paydown or an extra dollar of EBITDA?
72) If a company has seasonal working capital, is that a deal killer?
73) Give examples of ways companies can manipulate earnings.
74) What do you think is the best method of valuation?
75) Name five reasons why a company would want to acquire another company.
76) If a company acquires another company with a higher P/E in an all stock deal, will the deal likely be accretive or dilutive?
77) How do you think about the credit metric: (EBITDA – Capex)/interest expense?
78) You have a company with £100 million in sales. Which makes the biggest impact? A) Volume increases by 20 percent B) price increases by 20 percent C) expenses decrease by £15 million.
79) If a company’s revenue grows by 10 percent, would its EBITDA grow by more than, less than or the same percent?
80) How will a decrease in financial leverage affect a company’s cost of equity capital, if at all?
81) Which corporate bond would have a higher coupon, a AAA or a BBB? What are the annual payments received by the owner of a five year zero coupon bond?
82) Let’s say that I have a bond with a 5 percent coupon. What happens to the market price when the prevailing interest ratesrise to 8 percent? How are the coupons affected?
83) Why would you use options outstanding over options exercisable to calculate transaction price in an M&A transaction?
84) What could a company do with excess cash on the balance sheet?
85) What’s the difference between IRR, NPV and payback?
86) Why would a company repurchase its own stock? What signals (positive and negative) does this send to the market?
87) What are some reasons why a company might tap the high-yield market?
88) What are the three ways to create equity value?
89) What are the potential investment exit strategies for an LBO fund?
90) What are some of the due diligence questions that you would ask?
91) Given that there is no multiple expansion and flat EBITDA, how can you still generate a return?
92) Let’s say you run an LBO analysis and the resulting return is below the required return threshold of your PE firm. What drivers to the model will increase the return?
93) Assume the following scenario: EBITDA of £10 million and FCF of £15 million. Entry and exit multiple are 5x. Leverage is 3x. At time of exit, 50 percent of debt is paid down. You generate a 3x return. 20percent of options are given to management. At what price must you sell the business?
94) If you have a company with a P/E of 10x and cost of debt of 5 percent, which is cheaper for an acquisition?
95) You have two investment opportunities: Company A and Company B.
· Company A: Revenue: £100million; EBITDA: £20 million; Projected annual revenue growth: 5 percent forthe next five years; Purchase price: 5x EBITDA/4x Debt and 1x Equity
· Company B: Revenue: £100million; EBITDA: £20 million; Projected annual revenue growth: 10 percent forthe next five years; Purchase price: 6x EBITDA/4x Debt & 2x Equity
Which is the better investment opportunity based on this information?