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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.

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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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Private Equity Sache Study: Example, Prompts, & Presentation

Private equity case student are an important separate of the private equity recruiting process because they allow firm to evaluate a candidate’s analytical, investing, and presentation abilities. 

In this article, we’ll look the the various types is private equity case studies and offer advice on how to prepare used them. 

This guide will online you ace our following private equity case study, whether you’re an seasoned analyst or new on this field.

Genres Of Secret Equity Case Learn

Case studies are very common in private equity interviews, and it can a key part of that overall recruiting process.

When you’re extremely possibly in encounter ampere lawsuit study of some kind during your recruiting process, there is appreciable variety in which types of case studies you might face. Private Equity Workshop Materials

At I cover of major types:

Take-home assignment

In-person lbo modeling assignment.

For this rechtssache study, you’ll get some company information (e.g. a 10-K or a CIM) and be asked go assess whether oder not you’re likely at invest. 

Generally, you’ll get between 2-7 days to prepare a comprehensive presentation or investiture reminder over your recommendations that you’ll present to the interviewer.  To support your investment recommendation, you’ll be expected to complete a full LBO prototype .  The prompt may give constant details or assumptions to inclusion in aforementioned model.

This artist of test is most common during “off-cycle” hiring over the year, since firms have more time to allow you to complete the assignment. 

This will pretty similar to that take-home assignment. You’re given company select, will build a financial model, and decide whether you would invest.  Private Equity Presentations: Are Of Tall Tales?

The difference here a the period you’re given up complete the case. You’ll generally get between two to three hours, press you’ll typically complete the case study in the firm’s office, though einige firms are becoming newly open to completing the assignment remotely.  Showcase Objective. • This presentation is planned to deploy a high level review of the economic structure of Private Equity (“PE”) fund investments.

In save case, you’ll typically with complete einen LBO model. There is usually no presentation instead investment notation. Rather, you’ll do the model and then have a short discussion afterward. 

This is a brief, more dense version of an LBO model. You can complete a paper LBO with a piece of hard and a pen. Alternatively, thou may exist asked to discuss it verbally with the interviewer. 

Rather than through an Excel spreadsheet, you use can actual sheet are paper to show autochthonous calculations. You don’t go into all the detail but focus on the essence about the model instead.  NB Privately Equity Partners: Company Presentation

In this article, we’ll be focusing the the first-time second types of case studies because group are the most widely used. And if you’re interested, here is ampere deep fall on Paper LBOs . 

Private Equity Case Examine Prompt

Regardless of who type of case study you’re asked up do, the prompt from the interviewer will ultimately ask you till rejoin: “would you invest within this company?” Private Equity Workshop Presentation ... Examples of Waterfall Finance ... A recently example: consistently strong execution management.

To answer this question you’ll need toward make on the provided materials about to company and complete a leveraged buyout model to determine whether there is a high enough return. Generally, this is 20% button higher. 

Usually, prompts also provide you with certain assumptions that you bucket use to build your LBO model. For examples:

• Pro forma capital built
• Financial assumptions
• Acquisition and exit multiples

Some individual net firms provide you in the Excels template needed for an LBO model, when additional prefer you for make one from scratch. To be complete to achieve that. 

Private Equity Case Study Presentation

As you’ve seen above, if you get a take-home assignment as a case study, there’s a fine chance you’re left to have to present your investment comment in the interview. 

There will usually be one or twin people from the resolute present for your presentation. 

Each PE resolute has a different ask proceed, some could expectations you to introduce first additionally when ask questions, instead the other type about. Either method, be prepared by questions. The questions are where you ca stand out!

While private equity employee a there the assess your skills, it’s did all about my findings or what your model said. The interviewers are also looking at your communication competencies and whether you have strong caution to detail.  Private equity investiture deck powerpoint presentation slides

Remember, are the home company interview process, no detail is too small. So, the more you provide, aforementioned better. 

How To Do A Private Equity Case Study

Let’s look along the step-by-step process to completing a box study for the home equity personnel process:

• Step 1: Read and digest this material you’ve been given. Read through of materials extensively also get an understanding of which company. 
• Step 2: Build adenine bases LBO models. I recommend using that ASBICIR method (Assumptions, Sources & Uses, Balance Leaves, Total Statement, Cash Flow Statement, Support Expense, and Returns). You can followed these steps to construct any model. 
• Step 3: Build advance LBO model features, if the prompts call for it, you can jump to any advanced features. Of course, you want to get through the entire scale, but your number 1 priority is to finish the core financial print. If you’re running out of time, I would skip with reduced time on advanced functionality.
• Step 4: Take a step endorse and form your “investment view”. I would tries to answer above-mentioned questions:
• What assumptions need to be present for this to being a good deal?
• Under what circumstances would you do one deal? 
• Something is the biggest risk in the dealer? (e.g. valuation, growth, and margins). 
• Get is the biggest truck concerning returns in the deal? (e.g. valuation, growth, and debt paydown).

How To Succeed In A Confidential Equity Case Study

On are a few of my tips for getting through that private common fund case study successfully. 

Get the basics down first

It’s high easy to want to jump under an more complex thingies initially. If you go in and they start asking you to complete complex LBO modeling features like PIK preferred equity, getting to that might be turn the top of your list. 

But I recommend taking a step back the starting with the fundamentals. Received that out one pathway before moving on until one complicated stuff. 

The fundamentals earth you, getting you through the things you know you can do easily. It also gives her time to indeed think about those sophisticated ideas. 

How nuanced investment judgment; don’t be too black-and-white

When giving your investment recommendation by a private shareholders fund them shouldn’t be giving a simple yes or no. 

It’s boring and presents you cannot space to elaborate. Instead, go in with what pricing would make you interested in investing and why. Don’t being shy to grave in here.  NB Individual Equity Mates Update

Know where there is a value-creation opportunity in the deal, and mentioned the key assumptions thou need to believed to create that value.

Additionally, if you is recommended that the participation move forward when carry up things you would require to know before closures a deal. You may highlight the press risks of the investments, or key things you’d want to ask management if you may meet with them.  of disclosures and fairness of show; and (c) are being provided ... [See Investment included Private Operating Companies used example.

At the end von the day, financial mold your a commodity skill.  Every capitalist can does it.  Whatever will really fixed you apart is select you think about the deals, and the nuance you taking to analyzing them.  Illustrative financial statements: Home Shareholder

Your winning per talking about the model

Along these cable, yours don’t triumph by building this best model. Modeling is just a check-the-box thing int the interview process to shows you can accomplish it. The poll need on know you can do the basics with no glaring errors. 

Whats matters lives showing that you can discuss the investment intelligently. It’s about bringing a sensible recommendation to the tab at the information up back it up. 

As Do I Prepare For A Private Equity Case Study?

There a no one-size-fits-all when it comes to preparing for a individual equity case study. Everyone remains different. 

However, the best thing you can go is PRACTICE, PRACTICE, and other TRAINING!

I know of a recent patron that successfully obtained an offer from multiple mega resources . She practice until she was competent to built 10 LBO models from scratch without either errors conversely help … yes, that’s 10 models! 

Now, about it takes 5 alternatively 20 practice kasten studies doesn’t matter. The whole point is to get to a set location you feel confident enough to do an LBO model quickly while under pressure.  Learn about different types by private equity case studies and how to excel included them. Aforementioned guide coverage prompts, presentations, and homework tips

There is no way around that pressure in a private company interview. The heat will be on. So, yourself need to prepare yourself on that. You need to felt confident to yourself and your capabilities.  Private Shareholders Casing Study: Example, Prompts, & Presentation

You’d be surprising how pressure can leaves you stumped for an answer to a question that you definitely know.

It’s also an great idea to how about the types of questions the private equities interviewer might beg you about your investment make. Prepare your answers as way as available. It’s important that you stick to autochthonous rifles also when aforementioned situation calls for it, because interviewers allow push back on your returns to see how you react.. 

Yourself need to have your answer to “would it invest in dieser company?” ready, and also how you got to that answer (and what new information might change your mind).   

Another thing that gets a lot von people is restricted time.  If you’re running out of date, double down on the rudiments or the main part about the model.  Make sure you nail those.  Also, you can make “reasonable” premises if there’s information you want you had, but don’t have access into. Just make sure to flag it to your interviewer  Apex 10 VC Pitch Decks, Examples and Templates

Instructions major is modeling to a private equity case study? 

Sculpt is part and parcel of private shareholder case surveys. Your basics what to be correct furthermore there should may no obvious bug. That’s why practicing is to major. You want to focus up the presentation, but your calculations need to be correct first. They do, after select, make up their final decision. 

How can I stand out off other candidates? 

Knowing insert stuff covers the basic. To stand out, you need to be an subject in showing how you came to a decision, a adherent for details, press inquisitive. Anyone can do the calculations with habit, but individual who thinks clearly furthermore brings nuance to their diskussion of the financial will thrive in interviews. 

Intimate equity case studies are adenine difficult but necessarily part of the private equity recruiting process . Candidates can demonstrate their analytic abilities and impress potential employers by understanding to various types the sache studies and how to approach them. 

Success in private equity suitcase studies necessitates twain technical and soft skills, from evaluate economic statements to talk the participation case with your interviewer. 

Anyone can ace ihr continue private equity case study and land their dream job are the private equity industry with aforementioned right preparation additionally spirit. If you’re looking to learn more nearly private impartiality, you can read my recommended Private Capital Sell.

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

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

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

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

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

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

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

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

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

A good business versus a good investment

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

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

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

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

Research the fund – find the angle

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

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

You need to think through these questions and issues:

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

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

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

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

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

- What are the key drivers in that industry?

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

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

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

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

- Its position in the industry

- Its growth profile

- Its operational leverage (cost structure)

- Its margins (are they sustainable/improvable)?

- Its fixed costs from capex and R&D

- Its working capital requirements

- Its management

- The minimum amount of cash needed to run the business

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

- What's driving them

- Where the growth is coming from

- How diverse the revenues are

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

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

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

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

- The diversity of suppliers

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

- The exposure to commodity prices

- The capex/R&D requirements

- The pension funding

- The labour force (is it unionized?)

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

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

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

- Industry concentration

- Buyer power

- Supplier power

- Brand power

- Economies of scale/network economies/minimum efficient scale

- Substitutes

- Input access

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

- Scalability

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

- Disposals

- How to achieve efficiencies

- Limitations of current management

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

- Change of control clauses

- Environmental and legal liabilities

- The power of pension schemes and unions

- The effectiveness of IT and operations systems

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

- Your LBO model

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

- The company's ability to raise debt

- The exit opportunities from the investment

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

- The best timing for the transaction

BUT: keep things simple.

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

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

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

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

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

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

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

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

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

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Best Private Equity Case Study Guide + Excel Model + Example

The most important part of the private equity interview is the case study round. After meeting a few people and going through a number of interviews, you will most likely get hit with a case study where you have to analyze whether a company is a good leveraged buyout target or not.

Your performance during the private equity case study round will determine whether or not you will get an offer. It is the most important part of the interview process, so you need to make sure you are well prepared and create a work product that sets you apart from the other candidates you are competing against.

Private Equity Case Study Example + Full LBO Excel Model

Private Equity Case Study Example + Model

It’s hard to know how to complete a full private equity case study if you don’t actually have experience working in private equity. With just an investment banking background or someone who is straight out of undergrad, you just don’t have the experience to understand how to structure and write a good case study.

Make sure you get access to a full private equity case study that was used in a real interview. You can use this as a reference on how to write your response and build the LBO model with all the key outputs.

Get access here before reading on. It becomes much easier to build a proper LBO model and complete a case study when you can refer to one that is already fully completed.

The case study was written by a private equity professional and includes a:

• Real Private Equity Case Study Example and Response
• Full Detailed LBO Excel Model

How is a Private Equity Case Study Structured

The private equity interview process is a lot more structured relative to hedge fund interviews. Most interviews happen during “on-cycle” recruiting your first six months in investment banking right out of undergrad. This is the best time to land an offer as you have dozens upon dozens of firms that are fighting to get the top talent to work at their firms. People will land offers after a matter of days after answering the basic private equity interview questions because of all this competition.

Unlike hedge fund case studies , private equity case studies are a bit different as it depends on if you are interviewing during the rush of on-cycle recruiting where firms fight for talent. You can expect the case study to be structured in either three ways:

• LBO Modeling Test

If you are going through the crazy all-out blitz of private equity interviews during on-cycle recruiting, you will like get either of the first two types of case studies, the modeling test and/or the paper LBO.

For an interview that is done outside of this period and at most of the smaller middle-market funds, you may get a longer take-home case study that is more comprehensive. It really just depends on the firm and how they conduct interviews.

1. LBO Modeling Test

The LBO modeling test is used in person during on-cycle recruiting very frequently. Usually when on-cycle interviews start, you’ll get invited along with other candidates to do a modeling test over the course of a few hours, then proceed with the usual interviews either before or after.

There is no reason why anyone can’t pass the modeling test. All it takes is practice after practice, just like how you’d get good at anything else. Back when I was an investment banking analyst, the only way I would learn how to do anything was by looking at previous models done by prior analysts saved on the shared drive and recreating those models from scratch over and over again. It’s the best way to learn how to get good at any type of Excel model – looking at precedent then recreating from scratch.

Wall Street Prep was another tool I used back during my investment banking analyst days. There is a course that was specifically created for Private Equity interviews and LBO modeling that teaches you everything you need to know. It was the best resource I was able to find to get prepared for private equity interviews and teaches you how to complete a full LBO model step-by-step from start to finish.

Start preparing today and sign up for the course below if you really want to break into private equity. I promise you will have a very low chance of landing a private equity offer if you do not know the basics of how to build an LBO.

Get 15% off if you use the coupon code in the link below:

Private Equity Masterclass: Step-By-Step Online Course​

A Complete LBO and PE Training Program. Whether you’re preparing for an LBO Modeling test or you want to learn to build an LBO model and become a better PE professional, this course has you covered.

Special Offer: Get 15% Off On Wall Street Prep’s Private Equity Course

2. Paper LBO

The paper LBO is used during interviews to make sure you have spent the time to learn the basics of how an LBO works. Usually, you are given a set of assumptions, a pen/paper and asked to work through a paper LBO live during the interview without the help of a computer or calculator.

 You need to be able to walk through how to:

• Calculate the purchase price
• Calculate sources and uses
• Build a simple income statement and projections
• Build to levered free cash flow
• Calculate the exit value, IRR and multiple on invested capital

The Wall Street Prep course above walks through how to do all this in detail and provides a few paper LBOs that you can use for practice.

3. Private Equity Take-Home Case Study + Written Memo

Now the full-blown take-home case study is the hardest and most in-depth analysis a private equity firm can ask of you during interviews. Outside of on-cycle recruiting, this is the most common type of case study that is given. Most firms will give you a week to work on it independently at home.

This case study round is the most important part of the interview. If you do not have a well-written case study with a good backup model that you can present to the interviewer, you will not get an offer.

The majority of case studies will ask either two questions:

• Look into XYZ company and tell us whether it’s a good LBO target
• Find an attractive LBO target and give us your thoughts

To answer the first question, you need to screen a universe of public companies and find one that could be an attractive target. You need to find a business that has the following characteristics:

• Growing market dynamics – markets that have structural tailwinds is a good place to start
• Strong competitive advantages – study Porter’s Five Forces if you haven’t already
• Stable recurring cash flows – business is going to be levered up in a buyout so it needs to have positive EBITDA and stable cash flows to pay off interest payments
• Low working capital / capex needs

Quickly eliminate all companies in your screen that have:

• Negative EBITDA
• High capex needs (capex is >75% of EBITDA)
• High valuation (EV/EBITDA is > 15x)

You can quickly eliminate companies in your screen that have negative EBITDA or high capex needs. Once you’ve found your target company (or if already given one), then you can start working on the actual meat of the case study.

Steps to Finish a Private Equity Case Study

This guide will walk you through all the steps required to complete a case study, from start to finish. You will learn everything from what documents you need to download, to how to build the LBO/model with all the key outputs, to how to actual write a good memorandum/presentation, to all the common mistakes to avoid.

• Download and organize all documents in one folder
• Research the industry to understand trends and key metrics
• Read the filings and take notes
• Input financials in Excel and build the LBO model
• Work on the presentation / memo

1. Download and organize all documents in one folder

You want to have everything in one folder that you can quickly access. Key websites to use for company filings are:

• www.sec.gov/edgar/searchedgar/companysearch.html – for direct access to filings
• www.Bamsec.com – access to filings in an organized fashion
• You want to save down (at the very least) the latest 10K and the prior four 10Qs, last four transcripts, earnings releases, investor presentations and supplements
• Other sources if you have access to them: Bloomberg, CapIQ, FactSet
• Sell-side research – sell-side research is how you gauge market expectations and quickly understand the business. Most initiating coverage reports will give a good overview of the company, its strengths, weaknesses and competitive landscape. Ask around for others to send you research if you don’t have direct access
• Other write-ups online – read all of the articles on Seeking Alpha and look at ValueInvestorsClub.com. Research on Seeking Alpha is usually very bad, but there may be articles that do a good job summarizing any fundamental pressures / tailwinds

2. Research the industry to understand trends and key metrics

If you have access to sell-side research, then go through the latest industry analysis for your target company or initiating coverage reports. When a sellside research firm initiates coverage, they write up a very in-depth review of the company. These reports provide a very good summary of a company and the industry it’s in with all relevant metrics.

If you don’t have access to sell-side research, then go through prior investor presentations of the company or any of its peers. There should be an industry/market overview and benchmarking metrics vs. peers in these presentations.

If you do not understand what is happening in the industry that the company is in, you will not know if there are any big headwinds or tailwinds that are directly impacting the company. A lot of private equity LBOs focus on growth and consolidation within an industry, so you need a good understanding of the market and what the growth opportunities are.

3. Read the filings and take notes

Create a new word document to copy and paste anything notable that you read. You can create sections in your notes for company overview, revenue / cost drivers, fixed versus variable costs, industry tailwinds/headwinds, key questions for items you don’t understand or need to follow-up with management on, etc.

The most important part of every 10K/10Q is the management’s discussion and analysis section (MD&A). This is where the company talks in detail about how the business has performed over the quarter/year relative to prior year’s performance. You should focus on the sections of the MD&A that talk about the revenue and cost drivers. Make a table in Excel and copy and paste commentary every quarter on what impacted revenue growth and margins (COGS and SG&A). Once you lay it all out in Excel, the fundamental picture of the Company becomes clearer and you can see what has had a major impact on recent results.

The most important thing you should read are the transcripts and investor presentations. Management usually gets into more detail on the overall strategy and key tailwinds / headwinds of the business. Additionally, you can gauge what the sell-side is most focused on in the Q&A section at the end of every transcript.

Lastly, read the risk section of the latest 10K to note what the Company finds to be the biggest risks to its overall performance. Pay close attention to the top few items listed here as you want to see what the structural/secular challenges are to the business.

4. Input financials in Excel and build the LBO model

Since private equity interviews can start very quickly after you start your first job in investment banking, most do not know how to properly build an LBO model. Every single private equity firm builds an LBO when looking at any investment. If you want to work in private equity, you need to make sure you spend time understanding an LBO, how it works and how to build one in your sleep.

Like I mentioned before, sign up for Wall Street Prep if you don’t know how to build an LBO. It’s the best resource available to learn how to build a LBO model and provides step-by-step instructions using a real public company example.

5. Work on a presentation or write a memo

Once you have done all the research and finished the modeling, you need to create outputs in a presentation or word doc format. The interviewer may specify what kind of output they prefer, but if not than do what you most comfortable with.

This presentation/memo will be what your interviewer will focus on, so the outputs need to be nicely formatted just like how you create outputs in investment banking. Formatting may not seem that important to you, but showing that you can present analysis in a clean, formatted manner without errors is what will set you apart from your peers.

Continue reading below to learn everything you need to know on what to include in this presentation or memo.

Private Equity Case Study Presentation / Memo

Background and company overview.

If you had to screen to find a company, briefly summarize the criteria you used to choose your company. List the financial metrics and any other factors you used when making the decision.

Then you need to summarize what that company does in around five sentences. If you were provided the company to analyze, the interviewer already knows what the company does so no need to go that much in depth as you can describe more in person if asked. Make sure to describe how the company makes money (a revenue breakdown), where they make money (what markets drive the most revenue), who their customers are (customer concentration), etc.

This is the easiest section as you can open up the latest 10K and within the first few pages there is a business description section that outlines what the company does. You should also check the latest investor presentations (if available) and sell-side research initiating coverage reports as they usually give good overviews of the company.

You need to make sure you yourself understands what the company does and what the revenue and cost drivers are. Anybody can copy the business descriptions written by the Company and sell-side research. You should make sure you know the company well enough to be able to talk about it without looking at your notes.

Investment Thesis/Highlights

Here you list out the top reasons why a company is a good leverage buyout target or not. The most common investment highlights discussed in a potential target can be:

• Attractive market dynamics due to XYZ reasons – could be due to fragmented market / consolidation opportunities, growing market dynamics, geographic expansion lack of competition, etc.
• Multiple ways to win – private equity firms love businesses that don’t just rely on one avenue of growth, so point out all the different ways value can be created either through revenue growth, expense rationalization, multiple expansion, etc.
• Recurring revenues – leverage buyout targets need to have steady cash flows since the business is going to be levered up in an acquisition and so cash flows need to be steady to support high recurring interest payments on the debt. Revenues need to be stable, recurring and non-cyclical in nature.
• Asset-light business – Also, PE firms like businesses that are asset-light (low capital expenditures or working capital requirements) and have low variable costs (little need to increase the expense base to grow revenues, also known as operating leverage).
• Valuation – if a company is underappreciated in the public markets and trades at a low valuation relative to peers, then returns can be very high if you can somehow grow/fix the business and make it more attractive at exit in the future. High LBO returns come from both growing cash flows and multiple expansion. Usually, you want to assume the same exit multiple (the multiple you sell the business for) in your model compared to your entry multiple (the multiple you purchased the business for). Purchasing a business at a high multiple and selling it at a lower multiple in the future will lead to significantly lower returns and can be a big risky.

Like I mentioned earlier, make sure you understand Porter’s Five Forces to understand the main competitive advantages/disadvantages a business can have.

Recommendation to Investment Committee

Summarize whether or not you think the company you chose to analyze (or were provided) is a good LBO target or not. Everything depends on the purchase price, so if you mention that it is not a good LBO target then make sure to describe why and at what price do you think makes the deal attractive.

Financials/Return Summary

Your LBO model should have summary outputs that describe how attractive the deal looks from a financial perspective. At minimum, you need to show:

• Returns at various prices
• Sources and uses
• Pro forma capitalization
• Sensitivity table on returns, showing IRR/MOIC at various premiums and exit multiples
• 5-year levered free cash flow bridge
• Main model assumptions

The private equity case study example shows you all of these outputs and more, which you can replicate for your model.

Here you talk about the main risk factors and any potential unexpected events that would cause the firm to lose money on its investment. Look in the Risk Factors section of the 10K or sellide research to understand what the main risks are to the business. Analyze the most important risk factors to see if they have any merit and the potential implications to your analysis if the risk factor is realized. Examples of risks include technology disruption, realization of synergies / other cost savings initiatives, commodity price changes, wage or cost inflation in general, cyclicality/seasonality, changes to regulations, etc.

Outstanding Diligence Questions

Depending on the company, there may or may not be very detailed information on the company in public filings. Usually the bigger the market capitalization, the better the disclosures are.

You want to show the interviewer a list of diligence items you would still want to ask from the company to better understand the business. These questions should be around unit economics, profitability by segment/region, strategic plan over the next five years, cost structure plans/initiatives, etc.

Model Output/Exhibits

Either in a separate PDF or in the exhibits, you want to have a full output of the entire LBO model. At most private equity firms, associates print out the full model to discuss key assumptions with others on the deal team and to make sure everything is working properly. Make sure your Excel is nicely formatted and is already in print format.

The model should have all the outputs described above as well as full detailed 3-statement financials, revenue build and the levered free cash flow waterfall.I know this seems like a lot of work, but it’s the minimum that you need to do for a take home private equity case study.

General Tips and Common Mistakes to Avoid

Get Access to a Real Private Equity Case Study Example + Excel Model

If you need an example case study used in an real interview, then get instant access to one in the link below. You can use this as a reference as you complete a case study to make sure you are building the LBO model correctly, having all the key outputs, and learning how to put it all together in a written memo.

Check your model for errors

One of the worst things you can do is send a model that has a huge bust that changes all the outputs and return metrics. It’s the quickest way to get axed during the interview process, so make sure you spend time going through each cell of your model after completion to make sure there are no errors.

Spend time properly formatting the case study

Being able to cleanly present your analysis is a very important skill in private equity. Most firms create decks and go to investment committee to present a deal, so you need to show that you can format properly and present financials in a clean manner.

There are a ton of people applying for the same job as you are, so you need to figure out a way to differentiate yourself. If you were previously or currently an investment banker, then you should have no problem properly formatting the Excel model and the memorandum.

Understand the firm’s investment style

Every private equity firm has their own approach to making investments. Make sure that you understand the types of investments the firm likes to make and the key qualities to look for.

Then if given a case study, point out these key qualities. It’s good to show that you can analyze investments in a similar manner as the private equity firm you are interviewing at if possible.

Prepare for the most common private equity interview questions

Private equity is one of the most sought career paths and one of the Best Paying Jobs in Finance and Wall Street . There are so many young, smart, Ivy League educated investment bankers trying to break into private equity, so you must make sure you stand apart from the crowd in both your case study and when answering the most common private equity interview questions .

Don’t lie or try to bullshit if asked a question you do not know the answer to

The problem with a lot of smart people in this industry is that they are reluctant to say “I don’t know” and tend to talk as if they know what they are talking about. Interviewers will easily see through the bull shit as they likely know the company well and have heard others talk about the company.

Be a “straight shooter.” Be honest if you do not know the answer to a question and say you will follow-up with the interviewer. That said, you should know the company and industry inside out before presenting the case study and be confident when you speak about facts that you know are true.

Memorize key metrics

When discussing the case study in person with the interviewer, make sure you are an expert in the company and can answer questions on the spot without having to reference your written case study. Key metrics you should know off the top of your head include EBITDA, capex, interest, margins, market cap, total enterprise value, leverage, valuation metrics, valuation metrics versus peers, IRR/MOIC, etc.

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• Partnership Perspectives Home
• New Harbor Capital Home

AI and Machine Learning in Private Equity: A Case Study

Feat. Blueprint Prep, a New Harbor Capital portfolio company

In today's ever-evolving technological landscape, private equity firms must remain agile and adaptable to stay on top of advancing technology such as artificial intelligence (AI) and machine learning. AI has the power to revolutionize how private equity firms operate, streamlining processes and unlocking the power of data for firms.

In this Partnership Perspectives blog post, we will highlight some ways in which private equity firms like New Harbor Capital and our portfolio companies are beginning to think about and deploy AI.

Identifying Relevant Investment Opportunities

The deal origination process is the heart of any private equity firm’s operations. Firms are constantly looking for new investment opportunities, but it can be challenging to identify relevant deals in a competitive market. AI can help private equity firms identify relevant investment opportunities by analyzing large datasets and identifying patterns and trends that would be difficult or impractical to spot manually. AI can also conduct industry research and competitor analyses to supplement a private equity deal team’s sourcing efforts.

Enhancing the Due Diligence Process

Due diligence is a critical step in the private equity investment process, where firms meticulously assess the risks and opportunities associated with a potential investment. AI can support and streamline the due diligence process by automating repetitive tasks like data aggregation and analysis. AI can quickly and efficiently analyze financial statements, contracts, and other legal documents to identify potential red flags or risks associated with a target company. This not only saves teams time, but also enhances accuracy, ensuring firms gain a comprehensive understanding of a potential investment.

Streamlining Operational Efficiency

AI can modernize operational efficiency for private equity firms by automating repetitive tasks and streamlining internal processes, such as meeting scheduling, compliance and regulatory reporting, and project management, freeing up human capital as a result. This allows private equity professionals to redirect their efforts toward more value-added activities, like deal origination and relationship management.

Blueprint Prep: A Case Study in AI-Powered Personalized Learning

New Harbor is not only leveraging AI at a firm level to gain a competitive advantage - we are also encouraging our portfolio companies to do the same. One example is Blueprint Prep , a leading platform for high-stakes test preparation and continuing education. Blueprint has been using AI to drive personalized learning at scale for several years.

Founded in 2005, Blueprint Prep is a leading platform for test prep related to high stakes exams, certification and licensure in the U.S., offering live and self-paced online courses, private tutoring, self-study materials, and question banks for pre-law, pre-med, and medical school students, as well as residents, practicing physicians, PAs, and NPs.

Blueprint began its journey with AI by focusing on personalized and adaptive practice question banks. The Blueprint team has developed machine learning models that feed each learner the highest-value practice content at every step of their journey. They also use AI tools to build personalized study plans for students.

Most recently, Blueprint released a first-gen AI feature : a conversational AI chatbot that acts as a tutor for MCAT students, helping them understand the strategy behind certain exam questions. The AI chatbot, named Blue, is the first of its kind in the MCAT test preparation market. It can provide students with personalized guidance on how to tackle Critical Analysis and Reasoning Skills (CARS) questions through genuine one-on-one conversations while adapting in real time to their individual learning needs.

The launch of Blue comes at a time when interest in the use of AI in medical school and healthcare education is on the rise. AI offers medical schools the ability to provide a more personalized curriculum that can adjust to each student's needs. As the demand for medical education increases, AI technology is fast becoming necessary to meet the evolving needs and preferences of students.

Blueprint’s Founder and CEO, Matt Riley, believes that AI will continue to be a disruptive force in the education and online learning industry: “In our space, AI will be incredibly beneficial to learners. No longer will they need to labor through piles of content without knowing how to drive results. With AI, we can now make the entire learning journey more efficient and enjoyable, which will unlock tons of untapped human potential.”

As private equity firms strive to maintain competitiveness amidst a constantly evolving technological landscape, the adoption of AI and machine learning will be increasingly important. By embracing AI’s capabilities, private equity firms can gain a distinct advantage — identifying more relevant investment opportunities, enhancing the due diligence process, streamlining internal operations, and adeptly managing risks. As AI continues to advance, private equity firms that embrace and integrate it into their operations and workflows will be at a significant competitive advantage.

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Bridging private equity’s value creation gap

For the past 40 years or so, private equity (PE) buyout managers largely invested capital in an environment of declining interest rates and escalating asset prices. During that period, they were able to rely on financial leverage, enhanced tax and debt structures, and increasing valuations on high-quality assets to generate outsize returns for investors and create value.

Times have changed , however. Since 2020, the cost of debt has increased and liquidity in debt markets is harder to access given current interest rates, asset valuations, and typical bank borrowing standards. Fund performance has suffered as a result: PE buyout entry multiples declined from 11.9 to 11.0 times EBITDA through the first nine months of 2023. 1 2024 Global Private Markets Review , McKinsey, March 2024.

Even as debt markets begin to bounce back, a new macroeconomic reality is setting in—one that requires more than just financial acumen to drive returns. Buyout managers now need to focus on operational value creation strategies for revenue growth, as well as margin expansion to offset compression of multiples and to deliver desired returns to investors.

Based on our years of research and experience working with a range of private-capital firms across the globe, we have identified two key principles to maximize operational value creation.

First, buyout managers should invest with operational value creation at the forefront . This means that in addition to strategic diligence, they should conduct operational diligence for new assets. Their focus should be on developing a rigorous, bespoke, and integrated approach to assessing top-line and operational efficiency. During the underwriting process, managers can also identify actions that could expand and improve EBITDA margins and growth rates during the holding period, identify the costs involved in this transformation, and create rough timelines to track the assets’ performance. And if they acquire the asset, the manager should: 1) clearly establish the value creation objectives before deal signing, 2) emphasize operational and top-line improvements after closing, and 3) pursue continual improvements in ways of working with portfolio companies. Meanwhile, for existing assets, the manager should ensure that the level of oversight and monitoring is closely aligned with the health of each asset.

Second, everyone should understand and have a hand in improving operations . Within the PE firm, the operating group and deal teams should work together to enable and hold portfolio companies accountable for the execution of the value creation plan. This begins with an explicit focus on “linking talent to value”—ensuring leaders with the right combination of skills and experience are in place and empowered to deliver the plan, improve internal processes, and build organizational capabilities.

In our experience, getting these two principles right can significantly improve PE fund performance. Our initial analysis of more than 100 PE funds with vintages after 2020 indicates that general partners that focus on creating value through asset operations achieve a higher internal rate of return—up to two to three percentage points higher, on average—compared with peers.

The case for operational efficiency

The ongoing macroeconomic uncertainty has made it difficult for buyout managers to achieve historical levels of returns in the PE buyout industry using old ways of value creation. 2 Overall, roughly two-thirds of the total return for buyout deals that were entered in 2010 or later, and exited 2021 or before, can be attributed to market multiple expansion and leverage. See 2024 Global Private Markets Review .   And it’s not going to get any easier anytime soon, for two reasons.

Higher-for-longer rates will trigger financing issues

The US Federal Reserve projects that the federal funds rate will remain around 4.5 percent through 2024, then potentially drop to about 3.0 percent by the end of 2026. 3 “Summary of economic projections,” Federal Reserve Board, December 13, 2023.   Yet, even if rates decline by 200 basis points over the next two years, they will still be higher than they were over the past four years when PE buyout deals were underwritten.

This could create issues with recapitalization or floating interest rate resets for a portfolio company’s standing debt. Consider that the average borrower takes a leveraged loan at an interest coverage ratio of about three times EBIDTA (or 3x). 4 The interest coverage ratio is an indicator of a borrower’s ability to service debt, or potential default risk.   With rising interest expenses and additional profitability headwinds, these coverage ratios could quickly fall below 2x and get close to or trip covenant triggers around 1x. In 2023, for example, the average leveraged loan in the healthcare and software industries was already at less than a 2x interest coverage ratio. 5 James Gelfer and Stephanie Rader, “What’s the worst that could happen? Default and recovery rates in private credit,” Goldman Sachs, April 20, 2023.   To avoid a covenant breach, or (if needed) increasing recapitalization capital available without equity paydown, managers will need to rely on operational efficiency to increase EBITDA.

Valuations are mismatched

If interest rates remain high, the most recent vintage of PE assets is likely to face valuation mismatches at exit, or extended hold periods until value can be realized. Moreover, valuation of PE assets has remained high relative to their public-market equivalents, partly a result of the natural lag in how these assets are marked to market. As the CEO of Harvard University’s endowment explained in Harvard’s 2023 annual report, it will likely take more time for private valuations to fully reflect market conditions due to the continued slowdown in exits and financing rounds. 6 Message from the CEO of Harvard Management Company, September 2023.

Adapting PE’s value creation approach

Operational efficiency isn’t a new concept in the PE world. We’ve previously written  about the strategic shift among firms, increasingly notable since 2018, moving from the historical “buy smart and hold” approach to one of “acquire, align on strategy, and improve operating performance.”

However, the role of operations in creating more value is no longer just a source of competitive advantage but a competitive necessity for managers. Let’s take a closer look at the two principles that can create operational efficiency.

Invest with operational value creation at the forefront

PE fund managers can improve the profitability and exit valuations of assets by having operations-related conversations up front.

Assessing new assets. Prior to acquiring an asset, PE managers typically conduct financial and strategic diligence to refine their understanding of a given market and the asset’s position in that market. They should also undertake operational diligence—if they are not already doing so—to develop a holistic view of the asset to inform their value creation agenda.

Operational diligence involves the detailed assessment of an asset’s operations, including identification of opportunities to improve margins or accelerate organic growth. A well-executed operational-diligence process can reveal or confirm which types of initiatives could generate top-line and efficiency-driven value, the estimated cash flow improvements these initiatives could generate, the approximate timing of any cash flow improvements, and the potential costs of such initiatives.

The results of an operational-diligence process can be advantageous in other ways, too. Managers can use the findings to create a compelling value creation plan, or a detailed memo summarizing the near-term improvement opportunities available in the current profit-and-loss statement, as well as potential opportunities for expansion into adjacencies or new markets. After this step is done, they should determine, in collaboration with their operating-group colleagues, whether they have the appropriate leaders in place to successfully implement the value creation plan.

These results can also help managers resolve any potential issues up front, prior to deal signing, which in turn could increase the likelihood of receiving investment committee approval for the acquisition. Managers also can share the diligence findings with co-investors and financiers to help boost their confidence in the investment and the associated value creation thesis.

It is crucial that managers have in-depth familiarity with company operations, since operational diligence is not just an analytical-sizing exercise. If they perform operational diligence well, they can ensure that the full value creation strategy and performance improvement opportunities are embedded in the annual operating plan and the longer-term three- to five-year plan of the portfolio company’s management team.

Assessing existing assets. When it comes to existing assets, a fundamental question for PE managers is how to continue to improve performance throughout the deal life cycle. Particularly in the current macroeconomic and geopolitical environment, where uncertainty reigns, managers should focus more—and more often—on directly monitoring assets and intervening when required. They can complement this monitoring with routine touchpoints with the CEO, CFO, and chief transformation officer (CTO) of individual assets to get updates on critical initiatives driving the value creation plan, along with ensuring their operating group has full access to each portfolio company’s financials. Few PE managers currently provide this level of transparency into their assets’ performance.

To effectively monitor existing assets, managers can use key performance indicators (KPIs) directly linked to the fund’s investment thesis. For instance, if the fund’s investment thesis is centered on the availability of inventory, they may rigorously track forecasts of supply and demand and order volumes. This way, they can identify and address issues with inventory early on. Some managers pull information directly from the enterprise resource planning systems in their portfolio companies to get full visibility into operations. Others have set up specific “transformation management offices” to support performance improvements in key assets and improve transparency on key initiatives.

We’ve seen managers adopt various approaches with assets that are on track to meet return hurdles. They have frequent discussions with the portfolio company’s management team, perform quarterly credit checks on key suppliers and customers to ensure stability of their extended operations, and do a detailed review of the portfolio company’s operations and financial performance two to three years into the hold period. Managers can therefore confirm whether the management team is delivering on their value creation plans and also identify any new opportunities associated with the well-performing assets.

If existing assets are underperforming or distressed, managers’ prompt interventions to improve operations in the near term, and improve revenue over the medium term, can determine whether they should continue to own the asset or reduce their equity position through a bankruptcy proceeding. One manager implemented a cash management program to monitor and improve the cash flow for an underperforming retail asset of a portfolio company. The approach helped the portfolio company overcome a peak cash flow crisis period, avoid tripping liquidity covenants in an asset-backed loan, and get the time needed for the asset’s long-term performance to improve.

Reassess internal operations and governance

In addition to operational improvements, managers should also assess their own operations and consider shifting to an operating model that encourages increased engagement between their team and the portfolio companies. They should cultivate a stable of trusted, experienced executives within the operating group. They should empower these executives to be equal collaborators with the deal team in determining the value available in the asset to be underwritten, developing an appropriate value creation strategy, and overseeing performance of the portfolio company’s management.

Shift to a ‘just right’ operating model for operating partners. The operating model through which buyout managers engage with portfolio companies should be “just right”—that is, aligned with the fund’s overall strategy, how the fund is structured, and who sets the strategic vision for each individual portfolio company.

There are two types of engagement operating models—consultative and directive. When choosing an operating model, firms should align their hiring and internal capabilities to support their operating norms, how they add value to their portfolio companies, and the desired relationship with the management team (exhibit).

Take the example of a traditional buyout manager that acquires good companies with good management teams. In such a case, the portfolio company’s management team is likely to already have a strategic vision for the asset. These managers may therefore choose a more consultative engagement approach (for instance, providing advice and support to the portfolio company for any board-related issues or other challenges).

For value- or operations-focused funds, the manager may have higher ownership in the strategic vision for the asset, so their initial goal should be to develop a management team that can deliver on a specific investment thesis. In this case, the support required by the portfolio company could be less specialized (for example, the manager helps in hiring the right talent for key functional areas), and more integrative, to ensure a successful end-to-end transformation for the asset. As such, a more directive or oversight-focused engagement operating model may be preferred.

Successful execution of these engagement models requires the operating group to have the right talent mix and experience levels. If the manager implements a “generalist” coverage model, for example, where the focus is on monitoring and overseeing portfolio companies, the operating group will need people with the ability (and experience) to support the management in end-to-end transformations. However, a different type of skill set is required if the manager chooses a “specialist” coverage model, where the focus is on providing functional guidance and expertise (leaving transformations to the portfolio company’s management teams). Larger and more mature operating groups frequently use a mix of both talent pools.

Empower the operating group. In the past, many buyout managers did not have operating teams, so they relied on the management teams in the portfolio companies to fully identify and implement the value creation plan while running the asset’s day-to-day operations. Over time, many top PE funds began to establish internal operating groups  to provide strategic direction, coaching, and support to their portfolio companies. The operating groups, however, tended to take a back seat to deal teams, largely because legacy mindsets and governance structures placed responsibility for the performance of an asset on the deal team. In our view, while the deal team needs to remain responsible and accountable for the deal, certain tasks can be delegated to the operating group.

Some managers give their operating group members seats on portfolio company boards, hiring authority for key executives, and even decision-making rights on certain value creation strategies within the portfolio. For optimal performance, these operating groups should have leaders with prior C-suite responsibility or commensurate accountability within the PE fund and experience executing cross-functional mandates and company transformations. Certain funds with a core commitment to portfolio value creation include the leader of the operating group on the investment committee. Less-experienced members of the operating group can have consultative arrangements or peer-to-peer relationships with key portfolio company leaders.

Since the main KPIs for operating teams are financial, it is critical that their leaders understand a buyout asset’s business model, financing, and general market dynamics. The operating group should also be involved in the deal during the diligence phase, and participate in the development of the value creation thesis as well as the underwriting process. Upon deal close, the operating team should be as empowered as the deal team to serve as stewards of the asset and resolve issues concerning company operations.

Some funds also are hiring CTOs  for their portfolio companies to steer them through large transformations. Similar to the CTO in any organization , they help the organization align on a common vision, translate strategy into concrete initiatives for better performance, and create a system of continuous improvement and growth for the employees. However, when deployed by the PE fund, the CTO also often serves as a bridge between the PE fund and the portfolio company and can serve as a plug-and-play executive to fill short-term gaps in the portfolio company management team. In many instances, the CTO is given signatory, and occasionally broader, functional responsibilities. In addition, their personal incentives can be aligned with the fund’s desired outcomes. For example, funds may tie an element of the CTO’s overall compensation to EBITDA improvement or the success of the transformation.

Bring best-of-breed capabilities to portfolio companies. Buyout managers can bring a range of compelling capabilities to their portfolio companies, especially to smaller and midmarket companies and their internal operating teams. Our conversations with industry stakeholders revealed that buyout managers’ skills can be particularly useful in the following three areas:

• Procurement. Portfolio companies can draw on a buyout manager’s long-established procurement processes, team, and negotiating support. For instance, managers often have prenegotiated rates with suppliers or group purchasing arrangements that portfolio companies can leverage to minimize their own procurement costs and reduce third-party spending.
• Executive talent. They can also capitalize on the diverse and robust network of top talent that buyout managers have likely cultivated over time, including homegrown leaders and ones found through executive search firms (both within and outside the PE industry).
• Partners. Similarly, they can work with the buyout manager’s roster of external experts, business partners, suppliers, and advisers to find the best solutions to their emerging business challenges (for instance, gaining access to offshore resources during a carve-out transaction).

Ongoing macroeconomic uncertainty is creating unprecedented times in the PE buyout industry. Managers should use this as an opportunity to redouble their efforts on creating operational improvements in their existing portfolio, as well as new assets. It won’t be easy to adapt and evolve value creation processes and practices, but managers that succeed have an opportunity to close the gap between the current state of value creation and historical returns and outperform their peers.

Jose Luis Blanco is a senior partner in McKinsey’s New York office, where Matthew Maloney is a partner; William Bundy is a partner in the Washington, DC, office; and Jason Phillips is a senior partner in the London office.

The authors wish to thank Louis Dufau and Bill Leigh for their contributions to this article.

This article was edited by Arshiya Khullar, an editor in McKinsey’s Gurugram office.

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Private Equity: How to Analyze a CIM Effectively?

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All, I work at a middle-market fund (started about 8 months ago here) and wanted to learn from someone qualified (associate level or above) who works on the buyside what the best and most efficient way to analyze a CIM is (Confidential Information Memorandum, for those who're not aware is a 40-50+ pg book that basically markets a company to potential strategic/financial buyers and is usually put together by an investment bank working on behalf of the client, the company.

It contains critical confidential information on the company's history, business model, operations, financials, management etc. i.e. anything an investor would need to learn about the company to be able to make an informed decision and submit a non-binding initial letter of intent if they're interested in buying the company.

We typically receive a flood of CIMs every week - some we can reject outright because we don't invest in a particular sector, but a lot of others legitimately sound like great businesses at first glimpse. I am normally intimidated by the amount of CIMs I need to read and analyze (and I'm sure everyone who works at a junior level at a fund has this problem) and haven't yet perfected a structure or a systematic slice-and-dice method that can make me more efficient at analyzing CIMs . My VPs have been helpful as resources on best practices, but we don't seem to have a formal structure because everyone obviously has personal preferences. SO MY QUESTION IS: WHAT'S THE BEST WAY TO DO THIS?

Mod Note (Andy): Throwback Thursday, this was originally posted 3/3/2012, user @Sil" pointed out this week that the comments in this thread are very high quality / helpful so I thought it would be good to add this to the frontpage.

How to Analyze a CIM in PE?

When working in private equity as an analyst one your main jobs will be looking through proposals for buyouts that you firm will evaluate as potential buyout candidates. These proposals are called CIMs .

What is a CIM?

A CIM is a confidential information memorandum is a document that investment banks prepare with companies in a sell-side M&A process. Sometimes this is also known as an offering memorandum or an information memorandum. The packet of information gives buyers information about the business, management and financials, and the market. The CIM can be more than 50+ pages long.

What to Look for in a CIM - Financials

Our users shared financial thresholds and metrics that they look at. Typically, analysts look at EBITDA figures and cash on cash returns.

firebi234: My personal requirements are: Low capex - usually less than 5% of revenues Strong EBITDA margins - ~20% Revenue growth - CAGR of 10%+ Sanity check of market size vs projected revenue growth That should generally return strong IRRs. But really it should be based on your fund's investment criteria.

Ricqles: The most important thing is looking at financials obviously after screening for industry you would do. Look at their assumptions on EBITDA or cash and do a quick back of the envelope analysis on how type of returns you can get. You wouldn't want to waste time on stuff you can even get 2x cash on.

What Makes a Good Take Out Target – Qualitative?

CompBanker - Private Equity Vice President: I've been screening CIMs for a number of years now and the truth is that everyone has their own personal style. I prefer to review them at night or over the weekend when I can have a period of uninterrupted reading. I usually start by doing a 30 second flip through the financials to get a high level impression on size, margins, growth, and most importantly, ability to generate free cash flow. Then I go to the beginning of the book and just start reading. I find the most important thing to identify is competitive differentiation - essentially what will enable this business to continue growing and win market share from competitors. I try to determine the value add that the company's products or services provide to the customer base and any barriers to entry - this helps me understand the company's margins both historically and through the projected period. I need to figure out the buying criteria, aka whether the company is competing on price, service quality, or some other metric. Finally, industry plays a very important role, primarily because it dictates the base rate that I can expect the company to grow at over the next five years. There are obviously other things that come into play (recurring revenue, customer concentration, cyclicality, etc), but usually these things can all be determined based on the business model anyways.

User @red08" shared a good sniff test look through of a CIM:

red08: I do a quick flip through the book: Company and the industry Financial metrics (rev and EBITDA growth, margins, capex, cash flow gen); quick comps for valuation range How they cycled Value-prop (reason to exist) Mgmt team Then I go back to page 1 and start.

User @johndoe89" shared a detail review based on multiple years of PE experience:

johndoe89 - Hedge Fund Vice President: Financial Fit: I recommend starting from the financials in the back. If your fund is anything like mine, you will be pretty restricted in terms of the size of the cos. you can invest in. For eg, in our case, if the co. as below $5M in EBITDA , we would only consider it if the story was really really compelling (an industry or management team we knew well or had invested in before). This helps screen out a lot of companies that you're gonna be on the fence about if you start reading CIMs the traditional way from the front. Transaction Structure: Look at the transaction structure section next and jot down what type of deal is on the table. Generally its some generic crap like they'll consider all kinds of proposals but in some cases they'll explicitly say they're only looking for a majority buyout or only looking to bring on a minority investor. That can help save time if your fund doesn't do it. FCF Generation Ability: Always do a back of the envelope to compute the company's FCF profile (EBITDA-Capex). Shitty companies won't give you this calc but it'll only take 2 mins for you to realize from the EBITDA and capex numbers that the company doesn't generate much free cash, in which case you won't be able to put on too much leverage. You should generally have EBITDA and Capex given. If Capex isn't available, ask the bankers. Industry Tailwinds (or Headwinds): Spend some time reading through the industry and make sure the industry has strong tailwinds/ is growing at a high single digit rate. A lot of times you could be looking at a growing asset but in a shitty industry. In that case you really have to spend time figuring out the secret sauce because a shitty industry can bring down even the best company along with it. Generally stay away from those. Organic vs Acquisition Driven Growth: On that note, really scrutinize organic vs acquisition driven growth. A lot of companies (especially those previously owned by PE) make several acquisitions over the course of the fund's investment. Try to figure out what is the true organic growth rate for the platform company and attempt to segregate performance of the add-ons. Call w/ Bankers: Generally we always did a call with the bankers after going through the CIM and jotting down our questions. This quickly helped kill opportunities due to transaction dynamics that weren't discussed in the CIM . Not sure how it works at your fund but try to get these calls in asap after reading the CIM . It ll help you not waste time. Finally, a classic bad associate habit is killing a deal because you just don't have the time and interest to work on it. I understand that. Just try and commit to developing a good legitimate set of reasons for killing one. Otherwise senior folks start to think you're trying to brush off work. Be careful about this one as it happened to one of my fellow associates.

Distressed Asset Confidential Information Memorandum

Distressed PE investing can require a different skill set and our users shared their thoughts.

NewGuy - Hedge Fund Portfolio Manager: Slightly different perspective, but as a distressed guy, I usually see these after the company's debt starts being offered at attractive levels. I usually model the company's capital structure and LTM financials quickly, then if interesting break out a few prior year financials for like for like comparisons. After this, I tend to quickly flick through the CIM when I realise I don't actually know what the company does yet. It's very easy for me to read as I can just skip past all the growth assumptions and focus on the company's key value drivers and market positioning. I rarely spend more than 1 hour looking at a CIM .

Cries - Asset Management Vice President: Same here, but I'm also on the distressed credit side. sketch out the cap stack with all relevant terms, pricing, and cumulative interest exp sketch out last 3 yrs high level financials, then form expectations about the near & medium term (if im familiar with the industry or biz model) calculate cumulative leverage, FCF multiples, and interest coverage at each level of cap stack read the business description & and MD&A provided go back to the beginning and read through from pg1

Read More About CIMs on WSO

• CIM ( Confidential Information Memorandum) Production
• PE Case Study - LBO With CIM
• Need Help Formatting CIM

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i see nobody is commenting so i will drop a line. i used to be in M&A so i did a bunch of those. I dont work with CIM specifically but i look at a lot prospectus so it's more or less the same

the most important thing is looking at financials obviously after screening for industry you would do. Look at their assumptions on EBITDA or cash and do a quick back of the envelope analysis on how type of returns you can get. You wouldn't want to waste time on stuff you can even get 2x cash on

then i personally like to look at the management bios first, to see if they are credible guys

then looking more into the company to get a sense of their competition and market share of the industry

if all these pass i will take a deeper look into their detailed descriptions.

returns should be the single most important filter

You can make good returns on almost anything as long as the price is low enough! If it is being shopped around with a CIM , 9 times out of 10 everybody is going to have similar return requirements, so the price is just going to end up reflecting that. The question is: why will I pay a bit more than the next guy and still make my returns?

My personal requirements are:

Low capex - usually less than 5% of revenues Strong EBITDA margins - ~20% Revenue growth - CAGR of 10%+ Sanity check of market size vs projected revenue growth

That should generally return strong IRRs. But really it should be based on your fund's investment criteria.

Thanks a lot guys! Ricqles my approach is actually a lot similar to yours. I hope we can get a discussion going here on people's different perspectives, think we all stand to learn a lot. The problem is it's really hard to find experienced PE professionals lurking around here as much as "sophomore non-targets", so its difficult to solicit top-quality advice with a few exceptions of course.

I understand that's the market Patrick's going after anyway, but I would think there'd be more people like Compbanker etc. giving back after picking up so much from here over the years. Most people write posts like "Thanks WSO! I made it" and keep hustling blah blah, but they go completely AWOL right after and get entrenched in their jobs (which is understandable, but taking time out to give a little bit of advice to the junior folk never hurts).

I've been screening CIMs for a number of years now and the truth is that everyone has their own personal style. I prefer to review them at night or over the weekend when I can have a period of uninterrupted reading. I usually start by doing a 30 second flip through the financials to get a high level impression on size, margins, growth, and most importantly, ability to generate free cash flow . Then I go to the beginning of the book and just start reading.

Unlike the posters above, I find the most important thing to identify is competitive differentiation -- essentially what will enable this business to continue growing and win market share from competitors. I try to determine the value add that the company's products or services provide to the customer base and any barriers to entry - this helps me understand the company's margins both historically and through the projected period. I need to figure out the buying criteria, aka whether the company is competing on price, service quality, or some other metric. Finally, industry plays a very important role, primarily because it dictates the base rate that I can expect the company to grow at over the next five years.

Once I figure out the above, I'm usually in a pretty decent position to make a call on whether I like the deal. There are obviously other things that come into play (recurring revenue, customer concentration, cyclicality, etc), but usually these things can all be determined based on the business model anyways.

I agree. Competitive differentiation is important. As historical data might help, but historical is historical, never guarantee a future.

Thanks for this post - how will you go about reviewing the CIM in during 2-3 hour case study? (Incl model and investment case write up)

All I ask myself is.. Why does this business exist? If I like the answer and the financials make sense we're good to go.

If you're getting a CIM from an investment banker it's probably a crappy opportunity anyways so don't stress.

The market has become so efficient now though, that if you're at a mid-to-large sized fund that looks companies typically above 15m of EBITDA , it's extremely hard to find non-banked deals. I even get add-on opps these days with just a couple of million in EBITDA .

Comp - thanks a ton for the advice, that's very helpful, +1 for you. I'm trying to figure out why WSO won't show the credits I bought to be able to award you, will distribute once i get that worked out. All the othes- really appreciate it too.

johndoe89: Comp - thanks a ton for the advice, that's very helpful, +1 for you. I'm trying to figure out why WSO won't show the credits I bought to be able to award you, will distribute once i get that worked out. All the othes- really appreciate it too.

Done Comp, I've thrown a couple others out that I owe you, thanks again for all the help.

Slightly different perspective, but as a distressed guy, I usually see these after the company's debt starts being offered at attractive levels. I usually model the company's capital structure and LTM financials quickly, then if interesting break out a few prior year financials for like for like comparisons.

After this, I tend to quickly flick through the CIM when I realise I don't actually know what the company does yet. It's very easy for me to read as I can just skip past all the growth assumptions and focus on the company's key value drivers and market positioning . I rarely spend more than 1 hour looking at a CIM .

NewGuy: Slightly different perspective, but as a distressed guy, I usually see these after the company's debt starts being offered at attractive levels. I usually model the company's capital structure and LTM financials quickly, then if interesting break out a few prior year financials for like for like comparisons. After this, I tend to quickly flick through the CIM when I realise I don't actually know what the company does yet. It's very easy for me to read as I can just skip past all the growth assumptions and focus on the company's key value drivers and market positioning. I rarely spend more than 1 hour looking at a CIM .

• sketch out the cap stack with all relevant terms, pricing, and cumulative interest exp
• sketch out last 3 yrs high level financials, then form expectations about the near & medium term (if im familiar with the industry or biz model)
• calculate cumulative leverage, FCF multiples, and interest coverage at each level of cap stack
• read the business description & and MD&A provided
• go back to the beginning and read through from pg1

I work at a MM investment bank in on the M&A team. I write a number of CIMs , and I can attest to the fact that focusing on the financials is the best place to start.

Typically a lot of the other information in the CIM focuses on positioning the company. As a result, these sections can be difficult to filter through. In the end, our job is to sell the company; therefore, we will apply the lipstick as needed to get buyers interested in our client. This is especially true in the the investment considerations and capabilities/products sections.

I agree with Ricqles. The company needs to pass the sniff test from a financials, returns, and investment criteria standpoint before you try to weed through the more qualitative sections of the CIM .

Ricqles would you mind elaborating on the back of the envelope returns calculations that you perform to screen companies?

Thanks guys on your advice and reviving this thread

Usually just start with the introduction to get a general feel for what the company does. Then turn to the financials and start writing down questions as I go. Check to make sure it's at least 10% cash flow margins, decent revenue and/or EBITDA growth, make sure capex requirements aren't ridiculous, check the historical working capital requirements. If anything strange catches my eye I'll write down a question for the bank so by the time I'm done I have a short list of questions to ask. Look for environmental/legal issues. Check the bios of the people in charge. Look at the employees and see if there have been any labor issues or high turnover. Check for customer/supplier concentrations that might be a risk to price into the purchase price. Write down if the building is owned by the company/seller. Start trying to get an idea of what future capex requirements could be based on the limited info provided.

Overall it takes me like an hour on reviewing a CIM to prepare for an IOI. We usually don't spend a lot of time on CIM's unless we get past IOI stage, at which point we'll look much closer.

First thing you do when you get a CIM from a bank is discount management projects by at least 10% lol

I do a quick flip through the book:

• Company and the industry
• Financial metrics (rev and EBITDA growth, margins, capex, cash flow gen); quick comps for valuation range
• How they cycled
• Value-prop (reason to exist)

Then I go back to page 1 and start.

deleted extra post

Someone reached out to me to ask if I had any tips on this topic after having spent a few years in PE . The below is my chicken scratch. Hope you all find them helpful.

Financial Fit: I recommend starting from the financials in the back. If your fund is anything like mine, you will be pretty restricted in terms of the size of the cos. you can invest in. For eg, in our case, if the co. as below $5M in EBITDA , we would only consider it if the story was really really compelling (an industry or management team we knew well or had invested in before). This helps screen out a lot of companies that you're gonna be on the fence about if you start reading CIMs the traditional way from the front.

Transaction Structure: Look at the transaction structure section next and jot down what type of deal is on the table. Generally its some generic crap like they'll consider all kinds of proposals but in some cases they'll explicitly say they're only looking for a majority buyout or only looking to bring on a minority investor. That can help save time if your fund doesn't do it.

FCF Generation Ability: Always do a back of the envelope to compute the company's FCF profile (EBITDA-Capex). Shitty companies won't give you this calc but it'll only take 2 mins for you to realize from the EBITDA and capex numbers that the company doesn't generate much free cash, in which case you won't be able to put on too much leverage. You should generally have EBITDA and Capex given. If Capex isn't available, ask the bankers.

Industry Tailwinds (or Headwinds): Spend some time reading through the industry and make sure the industry has strong tailwinds/ is growing at a high single digit rate. A lot of times you could be looking at a growing asset but in a shitty industry. In that case you really have to spend time figuring out the secret sauce because a shitty industry can bring down even the best company along with it. Generally stay away from those.

Organic vs Acquisition Driven Growth: On that note, really scrutinize organic vs acquisition driven growth. A lot of companies (especially those previously owned by PE) make several acquisitions over the course of the fund's investment. Try to figure out what is the true organic growth rate for the platform company and attempt to segregate performance of the add-ons.

Call w/ Bankers: Generally we always did a call with the bankers after going through the CIM and jotting down our questions. This quickly helped kill opportunities due to transaction dynamics that weren't discussed in the CIM . Not sure how it works at your fund but try to get these calls in asap after reading the CIM . It ll help you not waste time.

Finally, a classic bad associate habit is killing a deal because you just don't have the time and interest to work on it. I understand that. Just try and commit to developing a good legitimate set of reasons for killing one. Otherwise senior folks start to think you're trying to brush off work. Be careful about this one as it happened to one of my fellow associates.

Good luck all!

Just to add to excellent responses by Compbanker and others...

In addition to knowing if the financials make sense and what the competitive differentiation / value-add is, I like to ask "Is the company making the right amount of money for the value they offer?" and "What can we, the new owners, do differently to change their trajectory?"

There's a couple of ways to triangulate on the first question (analyze customer ROI, compare pricing for similar services in other areas, etc.) but this helps you both avoid businesses that are overearning and identify potential catalysts for a price reset up.

As a quick case study, looking at cable businesses I generally think they are making too little money vs. the value of what they offer. These are monopoly providers with limited competition outside of cities and a product (high speed data) which is increasingly valuable to customers, and yet they bump their prices only 3-4% a year. You can argue that they monetize that increasing utility through high video bills, etc... but at the end of the day if all of your internet providers doubled your monthly price, you'd probably still pay it.

On the other hand, we were looking at online ad networks a while back... these businesses basically aggregated bad banner ad inventory on low-traffic websites to create enough traffic to sell to advertisers. No real value-add there, but worst was they were routinely charging 100% markups to do this aggregation. You saw a number of them go public on the industry tailwinds and high cash flows from this markup, but they've all crashed as dollars and margins flow away from them. Classic example of businesses over-earning even in a growing industry.

On the second question, "What can we, the new owners, do differently to change their trajectory?", it really depends on your firm's style and background--the most obvious answer is if you can merge the target with an existing portfolio company and unlock business logic and financial synergies, but many other examples abound. For example, the Vista Equity guys are famous for completely changing the operations of businesses they acquire, most of the time creating huge financial savings that other buyers can't get. That'll help you differentiate your bid and take from everyone else, who are just bidding the CIM .

Thanks for the replies on this

AndyLouis , could we get this included in one of the Hall of Fame threads? This thread is immensely helpful.

yeah good idea ill get it in there

I interned at a middle market bank so I was on the other side (I was putting together CIMs)...I'd say focus on: 1. EBITDA growth: does it seem like the company can grow more on this? 2. Working Capital: An interesting thing for middle market companies to look at 3. Customers - how diversified / concentrated is their customer base? (important for middle market companies)

And obviously the other important things such as cash flow, revenue streams etc. Opportunities to grow organically through acquisitions, expansion of business lines etc.

• Financials - what are their margins, what is prior growth and what is forecasted growth
• Exec Summary - if I can't tell what the business does or what their competitive advantage is after reading these 10 pages it probably isn't for us (strict TMT / bus. services focus). First look at a CIM is typically no more than one hour for our Associates and myself - I only spend more time with one if the associates think we can skip the banker call and go straight to an IOI.

I typically look at how straight the text boxes are, then check and make sure that there are no formatting or data error sin the footnoes (most common place for them), and that similarly formatted pages have the exact same positioning of all boxes / headers / graphics / words etc (this is not so much a mistake as it is over-the top professionalism). After that I see If I look the Cims overall format (ie background color, font style etc.). If it only has one or two mistakes in it MAX, then I will buy the company for 10 BB +, but definetly not over 12 BB .

In a previous life I worked in private equity.

We used to keep notes on why we abandoned or pursued different opportunities. Often times I would pull these notes when examining a business and see what the hesitations and the positive notes were. Using these as a guideline, analyze the project so that you're thinking like your bosses -- not only training you to better examine your deals but also allowing you to increase the percentage of deals that close.

This is not a foolproof method, but it helps. (Note: the following assumes that the company meets your size minimum, is not a distressed deal, and is in an industry your fund would potentially invest in.)

1) Flip to financials. Graphs should be moving up and to the right. Margins should be above 15% ideally.

2) Read the quick description of what they do at the front. If it's an industry I'm not familiar with at all, I'll typically do a quick google search "XYZ industry trends" and "XYZ M&A news". If you are smart, this has already got your wheels turning about potential pit falls in the industry in question, competition, etc.

3) Quickly calculate LTM EBITDA . Now look at what EBITDA they are projecting for the current year. If there's a big jump, make a note of it. Also make a note of any drops in revenues in the historical financials listed in the CIM .

4) Call the associate on the deal (if not associate, call MD). Say "I have taken a quick look at the CIM here, but you know this company inside and out--can you give me your take on it? What are the key focal points, from your perspective?" The banker, who likely put the book together, will then explain in 3-5 minutes the highlights of the document it would have taken you two hours to read. Yes, they're telling the glossy version of the story, but so is the CIM .

5) Ask: Why are they looking to sell? If the banker says "the owner feels that valuations have gotten really favorable in his industry" or something along those lines, that means the owner is going to sell to the highest bidder. I usually get off the call soon after getting that response. If he says something like "the owner is in his 50s, he's built a great business, but his whole net worth is tied up in it; he wants to take some chips off the table and have a capital partner to grow it for a few more years" or something along those lines, keep listening.

6) Refer to your calculations from 4. If the EBITDA margin is expected to have a big jump in the current year (which is likely the EBITDA the company is hoping to get valued on), ask how. If it's going to drop, ask why. If revenues have dipped in the past, ask what happened (often times this is either due to it being affected by the cycle, commodity price fluctuations, or having a big customer leave) (if it's the latter, ask why the customer left).

7) Assuming you haven't dinged the deal yet, ask about their growth plans. If it's M&A: do they have targets lined up? How many? If it's new geographies: how is that going to affect margins?

8) Ask the banker if he thinks those goals are realistic? He will almost always say yes, so ask why. Then the sneaky part: After he's finished telling you all the great things they're going to do to grow, say the following "Yeah. That makes sense. A lot has to go right here to his these projections, but they seem like they're doing a great job. So you think these things are achievable, even though they're stretch goals?" and then listen very carefully.. A good banker will correct you and say they're not stretch goals. But most bankers aren't good. This part is tricky because you have to be chummy (hence why are you are talking to the associate, not the MD) and make them comfortable enough to potentially accidentally admit something. They don't always come right out and say it, but they will often say something that gives you a clue on where to look for issues (i.e. yeah, they'll hit the goals. the e-commerce goals are steep but they've got a great new team) or something like that.

9) Ask about their competitors, what's the biggest risk to market share, etc.

10) Ask the valuation question. But do it subtly. Try saying "Do you have any idea what the owner is expecting or what his goals are?". That doesn't usually get it out of them, but sometimes. If he says, "we don't want to throw any hard numbers out there" say "Yeah man, I hear you. No worries. Out of curiosity though, and I just mean ballpark here, what are typical multiples looking like in the space these days? We haven't done a deal here before, just want to get a range."

11) If I have made it to this point without getting off the call yet, I usually ask if the owner has any non-financial things that are important to him (i.e. taking care of his employees, he's wary of losing control, scared of leverage, wants help hiring, wants help improving accounting or operations, etc). This is extra credit but it helps your bosses start to think about how they can really sell themselves to the owner if it goes to a management meeting.

TL;DR: Don't read the CIM , make the banker give you the highlights, write it up and email the summary to your boss. Takes 20-30mins.

Bump for an old thread with a shitload of good information.

My approach is a bit different. I skim the biz description and then I read the financials. With a basic understanding of the business - I ask myself what would I need to believe to make an acceptable return on this business. Is this a growth story, if so what are the growth drivers? Is it an acquisition story, if so what does the acquisition landscape look like. Etc. The bankers projections and the historical financials generally give you a clear path to what is going to drive returns. If the answer is I can't imagine how that would happen or my firm will never go for this, then I stop, otherwise I make a quick bullet point list of what I would have to believe to want to recommend this investment. I try to make it as specific as possible. Then I read the CIM . If after I've read the details it seems like there is a case supporting my "need to believe list" I ask myself what are the key risks. After writing down my initial key risks I ask myself do I still think this is interesting and are these the type of risks our firm underwrites. If the answer is yes, then i do a quick (10 minute) pff analysis. With that in hand, I then send an email up the food chain which says: "I gave this a quick read and think it is interesting because there is a path to a [ ]% return. I describe the path at a high-level. "My key concerns are (a), (b) and (c)." I then try to add an action item list of how i can learn more about the concerns prior to the bid date.

I've never worked in PE but I was just curious about the process to get to the CIM .

Are there any gating items that you guys think about when getting a teaser and signing the NDA to get the CIM?

Or is the thought that the teaser won't give you enough information, so lets just sign the NDA and get the CIM?

Typically when we get a teaser and a NDA, there is actually a bit of negotiation surrounding the NDA but I suppose this might be a bit more of a streamlined process for a Sponsor vs a Corporation.

Confidential Information Memoranda ( Originally Posted: 02/25/2011 )

How many of you guys in PE , Lev Fin/Restructuring, other groups actually read the CIMs sent to you by other bankers..cover to cover?

If you do read CIMs , how many of the ones you receive actually get read?

ive noticed that lately that i dont even read them anymore. i just flip to the relevant sections, build the model, and copy/paste everything for equity, credit, deal memos.

I'll typically read the whole thing. Might skim over some sections and for our credit approval meetings will borrow some charts and graphs for a thesis and pitch .

guess i've been in banking too long then.. any other responses?

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Mastering the LBO Model: Step-by-Step Walkthrough & Example

Leveraged buyouts (LBO) models are one of the most important analytical tools for investors and bankers to understand. 

Whether you are entering the financial world in an advisory role in investment banking, or as an active investor in equity, understanding the leveraged buyout model is crucial. 

The first part is understanding the mechanics of the LBO model: how it works, and what it’s designed to do. Once you understand that, we can move on to “thinking like an investor” – calculating the return on an LBO model to see whether a deal can work. 

What is an LBO model?

An LBO model allows you to calculate the financial return on the acquisition of a company purchased with debt (“leverage”), usually by private equity firms. The financial return is usually calculated with IRR and multiple-on-money (MoM) from the model. 

LBO models are found throughout many sectors of finance and banking. Basically, if the firm invests in businesses, or advises investors who want to buy businesses, you will run across the LBO model.

Because the LBO model is so important, it comes up frequently in investment banking and private equity interview questions . Whether you meet the LBO in its simplified paper LBO form or as a full Excel-based analysis, you will need to know the LBO model inside and out.

What does an LBO model do?

The LBO model allows equity investors and debt lenders to see if a deal can be profitable, or how profitable it can be. It can be manipulated to see if the deal is workable at different debt levels or financing structures. 

In an LBO deal, the company in question is bought with majority debt financing. Because of this, the company’s earnings and cash flow are mostly used to pay off the debt. 

Both equity and debt stakeholders use the LBO model to gauge whether financial return metrics (like IRR) or credit metrics (like Times Interest Earned Ratio ) are adequate to approve the deal. 

The full LBO model includes calculations and projected financial statements for each year that the investor or lender would be invested in the deal. 

In general, you can think of an LBO model as a 3-statement financial model with a detailed debt schedule and pro forma balance sheet attached to it.  

However, below is a full list of the components of an LBO model:

• Proforma capital structure – including debt structure, cost of capital, sources of debt and other capital, and debt-to-equity ratio.
• Proforma financial statements – a 3-statement model, including a balance sheet, income statement, and cash flow statement. 
• Debt repayment schedule – This may be more or less complicated depending on the structure of the deal. It may be as simple as a set amount paid every period, or may include extras like excess principal payments. 
• Returns analysis – This is usually based on the internal rate of return calculations on the deal, based on the free cash flow, debt paydown rate, and company growth rate. Some simpler LBO calculations may use the multiple of money (MoM) instead, which shows the return on investment, but without accounting for the time value of money like IRR. 

Another easy way to remember the components of an LBO model is the acronym ASBICIR. This stands for: 

• Assumptions: Start with the assumptions about the business. What will the purchase price be? What is the assumed interest rate for the debt? What is the EBITDA percentage?  Etc. 
• Sources and uses: How much of the deal will be financed with debt?  How much equity will the sponsor put into the deal?
• Balance sheet: Create a proforma skeleton balance sheet that includes cash balance, debt and equity balance for the beginning and end of each year during the deal.
• Income statement: Create a proforma skeleton income statement for each year in the deal that includes gross income, EBITDA, interest, and taxes. 
• Cash flow statement: Create a proforma skeleton statement of free cash flow that includes net income, depreciation and amortization, capital expenditures, and any change in net working capital. 
• Interest: Calculate how much interest, and how much principal, was paid over the course of the LBO. The total amount paid should be roughly equal to the free cash flow, since the assumption is that the free cash flow is used almost entirely to finance the deal and build equity.
• Returns: To find the final return on the deal, you will need the exit EBITDA multiple. This gives you the final value of the company based on its final-year earnings. The end value of the company is this EBITDA-based value less the remaining debt load of the company. Comparing this to the beginning value of the company gives you the multiple of money for the deal. 

This acronym has a double benefit. Not only do you remember the parts of the model, but it also gives you a basic workflow when creating a model or solving an LBO model in a private equity case study situation. 

What is the difference between a DCF and an LBO?

The difference between a discounted cash flow (DCF) model and an LBO is subtle but important. They use similar metrics and calculations, but the end goals are different. 

The DCF model is used to determine the value of the company itself based on its free cash flow. This does not change based on the funding sources used to buy the business. You could use a DCF model to determine a business’ value whether you were funding it with debt or equity. 

The end goal of a DCF calculation is a value estimate for the business. I’ll emphasize the word estimate here – a DCF model is theoretical by nature and includes many more assumptions than an LBO does, mainly an assumed discount rate. 

The LBO looks at how the free cash flow in the business can be used to cover the debt service when debt is used to finance the acquisition. In a leveraged buyout model, the main purpose of the cash flow is to cover the debt payments and gradually decrease the leverage over time. The main end goal of an LBO is to determine if the deal is workable when financed with debt. While the LBO might be calculated with different purchase prices to see if it changes the outcome, the purchase price or business valuation isn’t the main point of the LBO. 

If you look around my website, you’ll find a lot of information about LBO’s and not a lot about DCF’s. There’s a reason for this: most bankers and investors prefer the LBO model. It gives them more concrete information without theoretical assumptions. 

What are the three drivers of returns in an LBO?

An LBO is more than just a go/no-go analysis for a deal. It also shows how the company can bring value to its investors, and to itself, over the course of the leveraged buyout. There are three main drivers of value in an LBO deal: 

• Valuation: The end goal of an LBO is to answer the question: how much more money will we have at the end of this deal than at the beginning? The quick answer to this question is the multiple of money (MoM), which compares the money invested to the end value of the company. If you’re fancy, you can use the IRR of the deal, which takes the time value of money at an estimated discount rate into account as well. 
• EBITDA expansion: In most simple LBO models, the EBITDA percentage is assumed to be constant throughout the lifetime of the deal. However, if the company is growing well and is paying down debt, it is possible for the EBITDA percentage to increase – especially in SaaS companies. A more profitable company means a better company valuation, and a higher return on the LBO. 
• Deleveraging: The cash flow on the business must be enough to cover both principal and interest payments, and ideally send extra to the principal as well. Deleveraging the deal reduces the risk over time, and sends more money to the equity section of the balance sheet, leading to a higher end valuation. 

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How to build an LBO model

To be honest, most private equity firms and other investment professionals who regularly create LBO models have pre-built Excel templates for this. 

However, if you want to understand the ins and outs of an LBO, or are practicing for a private equity interview , use the ASBICIR acronym (mentioned above). 

Walk me through an LBO model

A private equity interview (or investment banking interview) could have the question “Walk me through an LBO.”   When this interview question comes up, know where to start. 

The first step is to create a beginning valuation for the company right now – year 0 of the deal. This creates the implied equity value of the company. If the LBO model has the assumption that it is a “pure” LBO with no cash or outside debt as part of the transaction, the equity value is also the beginning enterprise value of the deal.

In order to find the equity value, you need the entry multiple assumption from the LBO model. Depending what information you are given, multiply the entry multiple by either the last 12 months (LTM) or the next 12 months (NTM) EBITDA. This gives you the entry value for the LBO deal. 

Remember the ASBICIR formula? This reminds you what comes next. 

The next step is to make the sources and use tables for the deal.  The sources are the places where the firm can raise capital for the acquisition – debt sources and equity sources. The uses are how the firm will use the money raised. Most of this is the buyout itself, but a small percentage is also the transaction and closing fees. Watch your assumptions carefully to be sure you don’t miss anything important – most of the deal assumptions relate to the deal financing.

Now you’re ready to get into the meat of the calculations – creating the proforma income statement, cash flow statement, and debt repayment schedule for each year of the deal. 

After you have all the years of the financial statements, the final step is calculate returns based on the financial projections and debt paydown that you’ve modeled. This will lead to an ultimate IRR.

LBO Example

Below I’ll walk through a simplified example of an LBO to show you the basic mechanics.

Assumptions  

• The company is valued at $100 million. This valuation is based on a $20 million EBITDA in the first year and a 5.0x entry multiple. 
• Financing will be a 75/25 split between debt and equity. 
• Cost of debt will be 8% interest for an 8-year term. Payments during the loan period will be interest-only, with full repayment at the end of the term. 
• The EBITDA margin will stay constant over the course of the deal. 
• The EBITDA growth rate will be 10% YoY. 
• Depreciation and amortization is assumed to be $5 million per year. 
• Capital expenditures are assumed to be 10% of sales each year. 
• Operating working capital is assumed to increase by $3 million each year.
• Tax rate is 35% per year. 
• Exit multiple is assumed to be the same as the entry multiple.
• Assume no transaction or financing fees

Sources & Uses:

• Sources:   $75 million in debt, $25 million in sponsor equity
• Uses:   $100 million in seller proceeds

Balance sheet / Income statement / Cash Flow statement:

In this simplified example, I’ll forgo the balance sheet (outside of the debt schedule – covered later).

So, the next step is to start assembling the income statement based on the information given and calculated. 

• Year 1: Revenue: $100 million EBITDA: $20 million
• Year 2: Revenue: $110 million EBITDA: $22 million
• Year 3: Revenue: $121 million EBITDA: $24.2 million
• Year 4: Revenue: $133.1 million EBITDA: $26.62 million
• Year 5: Revenue: $146.4 million EBITDA: $29.3 million
• Year 6: Revenue: $161 million EBITDA: $32.2 million

Less depreciation: 

• Earnings before tax year 1: $15M
• Earnings before tax year 2: $17M
• Earnings before tax year 3: $19.2M
• Earnings before tax year 4: $21.6M
• Earnings before tax year 5: $24.3M 
• Earnings before tax year 6: $27.2M

Less interest:

• Earnings before tax year 1: $9M
• Earnings before tax year 2: $11M
• Earnings before tax year 3: $13.2M
• Earnings before tax year 4: $15.6M
• Earnings before tax year 5: $18.3M 
• Earnings before tax year 6: $21.2M

Less taxes:

• Net income year 1: $5.75M
• Net income earnings year 2: $7.05M
• Net income earnings year 3: $8.48M
• Net income earnings year 4: $10.05M
• Net income earnings year 5: $11.8M
• Net income earnings year 6: $13.7M

Next, calculate the company’s cash flow available for debt service in years 1-5. The first step is to go from Net Income to FCF.  You’ll typically do that by taking Net Income and adding back depreciation, and subtracting CapEx and changes in NWC. 

Companies typically have many line items that need to be added back to net income.  I won’t walk through every calculation here.  But let’s assume that eventually for our company, we calculate the free cash flow is: 

• FCF Year 1: $1.75M
• FCF Year 2: $2.05M
• FCF Year 3: $2.48M
• FCF Year 4: $3.05M
• FCF Year 5: $3.5M

To simplify things, we’ll add these together to get the cumulative FCF over the life of the LBO: 

• Total free cash flow: $12.58M

Assume that all free cash flow will go to debt paydown over the life of the deal to reduce the debt level (and increase the equity value of the company) at exit.

Now we have the information we need to calculate the ending valuation of the company and the IRR over the life of the LBO. 

We can calculate the end value of the company: 

• Ending EBITDA x exit multiple: $32.2M x 5 = $161.5M

Calculate end debt level: 

• Beginning debt level – free cash flow: $75M – 12.58M = $62.52M
• Note, in a full LBO model, we’d calculate the full debt schedule where debt is paid down each year out of free cash flow in that year

Calculate ending equity value: 

• Ending enterprise value of the company – ending debt level: $161.5M – $62.52M = $98.98M

Calculate the multiple of money: 

• Ending equity value ÷ beginning equity value: $98.98M ÷ $25M = 3.9x

Estimate the IRR based on the MoM and a 5-year timespan: 

For investors and analysts, understanding the LBO model is critical. This article provided an in-depth guide to developing an LBO model, including its definition, purpose, differences from the DCF model, the three drivers of returns, a step-by-step walkthrough, an example, and a template. 

For more in-depth information about the LBO model and how to prepare for a paper LBO , see the other articles in my private equity preparation series .

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BCTI Unveils PwC-Authored Case Study Spotlighting Unilever's Social Impact Strategy

Geneva, 11 April 2024 : The Business Commission to Tackle Inequality (BCTI) has unveiled its latest case study report, “ How Unilever builds and delivers its social performance strategy ”, offering insights into effective strategies for addressing inequality within the private sector. The report, created by PwC, highlights Unilever's exemplary journey in defining and implementing a robust social impact strategy across its business and value chain. 

“The need for social performance is finally catching up with the more tangible actionable agenda on climate. By developing ambitious and material strategies, business can generate new opportunities and mitigate social risks. And with this, create value for humanity to flourish.”, said Wendy van Tol , Partner, Sustainability Transformation Services at PwC. 

The case study, a practical application of the framework outlined in Chapter 3 of the BCTI flagship report “ Tackling inequality: An agenda for business action ”, illuminates Unilever's approach to tackling inequality through its Sustainable Business Transformation Framework. Unilever's strategy is depicted as a step-by-step process, guiding C-suite members on making tangible progress in the "S" of ESG (Environmental, Social, and Governance) initiatives. 

Key highlights from the report include: 

• Baselining and maturity assessment : Unilever's initial assessment of existing policies, projects, and partnerships to address inequality issues laid the groundwork for reflection on business strategies and priorities. 
• Prioritizing action areas and setting targets : The company's commitment to prioritizing action areas based on material interest and optimal impact on people, extending from its operations and workforce to its wider value chain. 
• Strategic integration and implementation : Unilever's integration of its social impact strategy throughout the business, emphasizing the business case for sustainability and its potential to drive growth, reduce costs, mitigate risks, and build trust. 
• Social performance review : Clear definitions of each target, coupled with impact studies, enable Unilever to evaluate the value created for workers, the business, and the wider economy. 
• Communications on progress : Unilever's transparent reporting mechanisms, including its Annual Report & Accounts and global website, ensure stakeholders are informed of progress and sustainability efforts. 

The case study illustrates how Unilever's ambitious work on living wage can serve as an example of putting a people positive agenda at the heart of corporate operations – an intrinsic part of the mission of the Business Commission to Tackle Inequality providing practical insights and inspiration for businesses seeking to address inequality within their spheres of influence. 

"Unilever's commitment to addressing inequality at the heart of its strategy and management processes and share its lessons learned, challenges, and opportunities along the way are a great example of how the Business Commission seeks to make a difference. Only by collectively raising the bar and walking the talk on this important agenda can we move at the pace that the equity agenda requires.", commented Carolien de Bruin , Senior Director Equity Action at WBCSD. 

Click here to access the full case study report.  

About BCTI 

The Business Commission to Tackle Inequality (BCTI) is a cross-sector, multistakeholder coalition of organizations and their leaders with the mission of mobilizing the private sector to tackle inequality and generate shared prosperity for all. The BCTI is coordinated and powered by the World Business Council for Sustainable Development (WBCSD). The BCTI will kick off its next two-year phase of work with 80+ Commissioners later this month. Visit us at www.tacklinginequality.org . 

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 151 countries with over 360,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com . 

About Unilever 

Unilever is one of the world’s leading suppliers of Beauty & Wellbeing, Personal Care, Home Care, Nutrition and Ice Cream products, with sales in over 190 countries and products used by 3.4 billion people every day. We have 127,000 employees and generated sales of €59.6 billion in 2023. For more information about Unilever and our brands, please visit www.unilever.com .

WBCSD news articles and insights may be republished in accordance with the  Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License , and in accordance with our  Privacy Policy . All Content must be featured with due credits.

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