Private Equity Interview Questions & Answers

Private Equity Interview Questions

Private Equity Interview Questions And Answers

    1. Question 1. What Are The Limitations Of A Dcf Model?

      Answer :

      While discounted cash flow analysis is the best method available for assessing the intrinsic value of a business, it has several limitations. One issue is that the terminal value represents a disproportionately large amount of the value of the total business, and the assumptions used to calculate the terminal value (perpetual growth or exit multiple) are very sensitive. Another issue is that the discount rate used to calculate net present value is very sensitive to changes in assumptions about the beta, risk premium, etc. Finally, the entire forecast for the business is based on operating assumptions that are nearly impossible to precisely pin down.

    2. Question 2. What Are The Most Important Factors In A Merger Model?

      Answer :

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

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

    3. Question 3. What Indicators Would Quickly Tell You If An M&a Deal Is Accretive Or Dilutive?

      Answer :

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

    4. Question 4. What Assumptions Is An Lbo Model Most Sensitive To?

      Answer :

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

    5. Question 5. Given Two Companies (a And B), How Would You Determine Which One To Invest It?

      Answer :

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

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

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

    6. Question 6. What Do You Know About Us And Why Do You Want To Work At Our Firm?

      Answer :

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

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

    7. Question 7. What Do You Think About Some Of Our Portfolio Companies?

      Answer :

      Research in advance on the firm’s website and write down notes on the portfolio companies you find the most interesting.

      Know about their:

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

    8. Question 8. What Is Your Firm’s Investment Strategy?

      Answer :

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

    9. Question 9. Why Not Work For Hedge Fund / Portfolio Company?

      Answer :

      This is a trick in Private equity interview. Because through this question, the interviewer is trying to understand whether you have a real interest for private equity or your ultimate goal is to exit private equity and join something else.

    10. Question 10. What Makes A Great Private Equity Associate/ Researcher/deal-maker?

      Answer :

      Private equity firms want three things:–

      • To find new, recurring & better investment opportunities.
      • To make more money &
      • To save more money.

      As a private equity employee, your job would be the same.

    11. Question 11. What Industry Trends You Will Look At When You Are Looking For A Potential Investment?

      Answer :

      • Market position & competitive advantage: Before LBO, it’s important to know the market position & competitive advantage of the potential investment. The characteristics would include high entry barriers, strong customer relationships & high switching cost.
      • Stable & recurring cash flows: Without continuous and stable cash flow, no PE firm would buy an investment.
      • Multiple drivers to trigger growth: This one is crucial. Only one driver wouldn't propel the company to an extensive stage. More drivers, better-diversified growth strategies, and better execution would be essential for long-term growth.
      • Strong management: Most of the companies in the industry should have strong management team so that the PE firm can get strategic guidance toward better future.

      These are the keys that a PE investor would look at before thinking of an LBO. Other than these, he would also look at changing habits of the customer, enhanced automation, application of disruptive technologies etc.

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