Stage Two: The Skills Test
You may have managed to polish up your interview skills, impressed in the first round and made it through to the shortlist, but this is where the nitty gritty ability to do the day-to-day job is assessed. The skills test will usually comprise of two elements a case study presentation and an hour-long test of your financial modelling skills.
In the case study, candidates are given a certain amount of information about a company and then asked, simply, whether they would invest in it or not. This is, after all, pretty much the day job. A favourite trick of PE firms is to throw in a portfolio company, with weaker candidates often seizing the opportunity to say what a good investment it is.
You dont know if its a company they wished theyd never bought, so dont assume you need to be positive, says McManus. The key here is to highlight the difference between a good business and a good investment. A poor performing company might be an awful investment, but if the business has potential, its up to the PE firm to spot that potential. Take a view, have an opinion even if its contrarian PE firms will not hire sheep.
The modelling test is only an hour, so its never overly-complex. A lot of candidates over-complicate the model and, in a time pressured environment, fail to complete the task over-stretching yourself within a tight deadline is most peoples downfall, says McManus.
Qwhat Is Pik Interest And What Are Its Typical Features
PIK Interest is a form of non-cash interest, meaning the borrower compensates the lender in the form of additional debt as opposed to cash interest. PIK interest typically carries a higher interest rate because it has a higher risk to the investor .
From the perspective of the borrower, opting for PIK conserves cash in the current period and thus represents a non-cash add-back on the CFS. However, PIK interest expense is an obligation that accrues towards the debt balance due in the final year and compounds on an annual basis.
Ask For References And Hire An Investment Bank
As institutional investors, private equity firms have been around the block a few more times than founders. As such, theyre very skilled at marketing themselves as the right fit, even if the underlying dynamic doesnt quite line up.
For founders who dont have years of M& A experience to see past the marketing and correctly profile a private equity firms position, there are two primary ways to ensure theyre finding the right fit:
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Interview Questions And Answers
Generally, there are four types of question four types of questions you will encounter in a PE interview:
Question 1: Why are you interested in Private Equity? Or Why are you interested in our firm?
Answer: This is a common Private equity Interview Question.The interviewer wants to understand how much passion and interest you have for private equity and their firm.
To answer the first question, you need to give a background of your work and tell the reason why you have chosen to come into private equity.
For the second part of this question, you should show how you know about the firm and how your goals and the firms goals are in alignment.
Question 2: Describe a time that you failed. Why did you fail, and what did you learn?
Answer: There are three key things employers are looking for when they ask this question:
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They want to see that youre accountable and upfront, instead of making excuses.
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Next, they want to see that you can learn from your mistakes and use the experience to get better.
To make the impression, your answer should contain these points:
Question 3: What are your proudest accomplishments?
Answer: With a question about the greatest or proudest accomplishment, you are given the opportunity to choose a story you want to highlight in the interview. There is no limit for you to talk about teamwork or leadership or a work accomplishment.
Question 4: What are your strengths and weaknesses?
Intrinsic value
Beware The Extended Private Equity Interview Process
If you cant seal the deal after the third interview, one nine-year industry veteran advises, there might be no deal to seal in your private equity job interview process.
Its usually a bearish sign if you dont get an offer after three rounds of interviews, said Washington-based attorney Stephen Kaplitt, who formerly practiced M& A law.
Early in his career, he interviewed at a Manhattan law firm and ended up going through an endless battery of meetings. After all that wasted time, it was clear that the partners wanted a securities lawyer, which matched Kaplitts experience, rather than an M& A specialist, which matched his aspirations. He has since moved to the other side of the screening desk and is now doing the interviewing for private equity jobs.
He recounts with palpable regret making a young attorney jump through multiple hoops before declining to make an offer. In that case, according to Kaplitt, the issue was neither the candidate nor mismatched needs, but politics and turbulence within the firm.
Smaller firms tend to be more informal. Bigger firms tend to be more process-oriented, he said. At the time, he was working for the U.S. federal government hard to find a bigger firm than that and there were five people who, even if they werent my boss, influenced my decision.
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Private Equity Interview Preparation For Fit Questions
Here are some examples of fit questions:
- Why private equity?
- Walk me through your resume.
- What makes you a good teammate?
- What are your strengths and weaknesses?
All of these questions will pop up invariably as you go through your PE interview, so how do you ace them?
There are two aspects to answering these questions flawlessly. First, know your story and tell it like a master bard. When they ask you about yourself, they’re judging whether they would want to work with you. These questions hold serious weight use them to make yourself a desirable coworker.
Second, have a few backup stories in mind. Stories that effectively portray you as a good teammate, a problem-solver, a go-getter. Have these stories and apply them to whatever the interviewer is asking you. Make sure your resume lines up with these, and check out WSO’s free Private Equity Resume Template for more. Tell them with confidence, clarity, and relevance, and you’ll be putting yourself in good territory.
Here Are Profiles Of Three Startup Companies Have A Look At Them And Tell Us In Which Company You Would Invest
Be aware of the pitfalls. All profiles may report some flaws, and there may be no clear winner. Or, the best answer can be that you wouldnt invest in any of the companies they presented.
Study the materials carefully, and try to explain your reasons. In private equity it is often hard to tell what a good investment is, since we do not know how things will pan out Therefor the key is to show them that you can do some analysis, and have your reasons for investing, or for not investing in something. Think out loud, and explain your reasoning. If you manage to do so, there isnt anything like a bad answer.
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Private Equity Interview Questions Behavioral And Technical
The chance to get into Private Equity is always competitive and challenging. In the top-notch private equity firm, the interview questions are much difficult to sort out the best from the rest. So, the more you prepare, the higher chance you pass the interview.
If you are new to Private Equity, you can have a look at these following resources
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 youre in banking, you should know these topics like the back of your hand.
And if youre 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 WACC, 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 wont necessarily get you an offer.
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How Many Investments Will The Partner Have Active At One Time
When a partner joins your board, you wont have them all to yourself, as partners oversee the performance of multiple portfolio companies at a time. Before you get to that point, youll want to determine how much bandwidth theyll have so you can continue the conversation with eyes wide open.
If a partners attention is divided between 10 or more portfolio companies, you can expect that you wont get much of their time. If youre 1 of 5, the partners availability will be much more open.
Q What Is A Leveraged Buyout
An LBO is the acquisition of a company, either privately held or publicly traded, where a significant amount of the purchase price is funded using debt. The remaining portion is funded with equity contributed by the financial sponsor and in some cases, equity rolled over by the companys existing management team.
Once the transaction closes, the acquired company will have undergone a recapitalization and transformed into a highly leveraged financial structure.
The sponsor will typically hold onto the investment between 5 to 7 years. Throughout the holding period, the acquired company will use the cash flows that it generates from its operations to service the required interest payments and pay down some of the debt principal.
The financial sponsor will usually target an IRR of approximately ~20-25%+ when considering an investment.
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You Need To Have A Hard Opinion On The Valuation
McManus says too many people are unwilling to say something definitive when it comes to valuation. If youd invest would you do it at any price? And if you wouldnt invest if the price was low enough, would the answer still be no?
“You will almost certainly be asked what you would pay for the business included in the case study,” she says. “Too many people wimp out at this stage and will start putting caveats around the pricing decision. Dont. If theres one thing you can be sure of, its that if you dither around on pricing you wont get the job,” she warns. “Dont make life difficult for yourself, just deduce an Earnings-Before-Income-Taxes, Depreciation and Amoritization figure, think of a sensible multiple, usually between 5 and 8 and multiply the two together. Be brave: state a specific price. It works.”
Another current 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.”
Tell Us About Your Biggest Professional Failure
Failures belong to life of every single investor. Tell them about a bad decision you made, one that cost you a lot of money, or even your reputation, or even your former job.
Your attitude matters the most for the interviewers. Show them that you can admit making a mistake, and that you actually learn from your failures, and that they help you to become better in what you do. Sure enough, something has not panned out the way you wanted in your last occupation. Otherwise you would not be sitting in the room with them today. But you learned your lesson, improved, and now you are ready to move on.
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Type #: 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 companys 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. Whats 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 .
So, the PE firm earns $2,250 / $600 = 3.75x over 4 years. Earning 3x in 3 years is a ~45% IRR, so wed 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.
Thats ~41%, and the actual IRR should be a bit lower because its a 3.75x multiple rather than a 4.00x multiple.
In Excel, the IRR is just under 40%.
Talking About Deal/client Experience
This category is huge, and it presents different challenges depending on your background.
If youre an Analyst at a large bank in New York, and youre going through on-cycle recruiting, the key challenge will be spinning your pitches and early-stage deals into sounding like actual deals.
If youre at a smaller bank, and youre going through off-cycle recruiting, the key challenge will be demonstrating your ability to lead, manage, and close deals.
And if youre not in investment banking, the key challenge will be spinning your experience into sounding like IB-style deals.
Regardless of your category, youll need to know the numbers for each deal or project you present, and youll need a strong investors view of each one.
Thats quite a bit to memorize, so you should plan to present, at most, 2-3 deals or projects.
You can create an outline for each one with these points:
If you just started working, pick 1-2 of your pitches and pretend that they have progressed beyond pitches into early-stage deals.
Use Capital IQ or Internet research to generate potential buyers or investors, and use the company-provided pitch materials to come up with your projections for the potential stumbling blocks in the transaction.
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Why Not Venture Capital
Both PE & VC invest in the equity of private companies, but with some major differences. Similar to the way you would answer why not hedge funds, you should frame your response based on these differences.
Private equity invests in established businesses with a proven track record. Whereas VCs invest in early-stage companies. So youll be working with companies that are in completely different stages of their lifecycle.
Because venture capital invests in early-stage companies, these investments have higher chances of failure. Venture capitals investment style is to invest in a whole bunch of companies with a small equity check. Many will fail, but all they need is one company to be a home-run, and that one successful investment will carry the fund. So you can argue thats not the type of investment style that you want to develop.
Private equity firms often acquire the entire enterprise. Venture capital firms acquires only a portion of the equity ownership. So you have more control in private equity and can be more involved with the operations of your portfolio companies.
Private equity investments usually involve debt financing. Debt financing often make up over 50% of the total funding sources. Venture capital investments are usually all equity. So youll gain exposure to both credit and equity. As a private equity investor, youll learn much more about credit than you will in venture capital.
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 youre 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 youre not prepared, too bad.
If you went to a non-target school and earned a 3.5 GPA, youll 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 dont receive an offer, dont assume its because you made a major mistake.
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