Private Equity Recruiting Process (From Banking)

Since I've been getting a lot of questions, I thought I would write a post about what I wish I had known when prepping for PE. I currently work at an UMM private equity fund and had previously done two years in banking. These are just my recommendations based on my experience so please take them with a grain of salt.

5 things you need to prep:

1) Behavioral Questions

I would make a list of behavioral questions and write out answers to them. Common questions include (1) Why did you pick (college, major, your current job, your current group, your current city) (2) Why do you want to move to (private equity, specific firm, city of firm, type of firm (MF, UMM, MM), accomplishments, challenges etc. You can really find questions like these on any interview site.

2) Case Studies

For me, this was the most important part of recruiting, and basically represents how to think as an investor. Almost every interview I went to had some variation of "why is this company a good or bad investment?" My approach was split up into the following framework, which now that I'm at a PE firm isn't necessarily what I look for. I would work on structuring an answer for these cases that works for you. I personally started off by commenting on the industry, citing how the company was doing in terms of their levers for FCF / paper LBO, explaining some additional things I would diligence, and concluding on whether I would invest. Cases could also come with a model and investment memo where I would basically type out positives, negatives and additional diligence items with a conclusion.

My rough framework:

• A) What typically makes a good LBO candidate: Low purchase multiple, steady and predictable free cash flows, value add from the PE firm (organic growth such as expanding stores, cost cutting opportunities, inorganic growth like bolt-ons), limited capex and working capital requirements, good exit strategy
• B) Generally good companies: Growth in industry, competitive advantage / barriers to entry, good management team, resilience to downturn, high growth margins (since it's hard to move substantially)
• C) PE due diligence: Industry (Porter's five forces), company operations (price or volume growth, fixed or variable cost structure, ROIC, recession-resistance), company financials (basically everything in a paper LBO like capex, working capital, projected financials), strategic initiatives (any non-core business lines, room for improvement, legal or regulatory risks) and exit strategy (industry consolidation, IPO possibility)

3) Deal Experience

If you're recruiting as a first year, there is a possibility that you'll have next to no experience given the timeline (probably mid September but don't quote me on this). It doesn't really matter what you did on the deal / pitch since we're aware it'll probably be along the lines of "spread some comps or built a DCF". What matters more is you can explain whether the company or deal is a good PE investment. I would memorize all the numbers you need for a paper LBO + price / volume growth + fixed / variable costs (obviously numbers can be rounded) and read up on the industry. I would then apply the case framework that you developed onto your individual deals. You can basically practice this portion of the interview by yourself by asking what you did on the deal, whether it's a good investment, and how you made certain assumptions for projections, etc.

4) Models

Models are basically just a check in the box to make sure you understand LBO mechanics. It's largely about memorizing how to build them. I used the WSO guide for the paper and 1 hour LBOs, and I just built 3 statement LBOs off templates from my banking group. You can find a bunch of paper LBOs through a quick Google search, and I would know how to do them quickly since it's often done in earlier interview rounds. You can build models off any company's financials really so you don't necessarily need a template. When I actually did models for the interviews, I received a PIB (10-Ks, 10-Qs, industry reports, etc.). My approach was I built a fully functioning model in terms of mechanics but no revenue growth, steady margins, etc. and as I was reading the PIB, I filled out some assumptions. I thought this was helpful since flat projections make the model easier to troubleshoot.

5) Technical Questions

I would go through LBO / buyout specific questions such as impacts on IRR / MoM. I mostly went through the WSO guide for this. I'm sure there were questions from the banking recruiting materials as well.

Process / Other

Headhunters
These include, but are not limited to, Amity, Bellcast, CPI, Dynamics, Glocap, GoBuyside, and HSP. When I was recruiting, CPI and HSP covered the most MF / UMM clients. Each HH covers a subset of PE clients, and in certain cases one HH will cover a firm on-cycle and another HH will cover the same firm off-cycle. I would reach out to headhunters after you have prepped behaviorals for why you want to go to PE and what types of funds you want to go to. HH will likely email you if you're in a typical IB group, but you can always ask 2nd years in your group for their HH contacts, and HH should be more than happy to set up meeting.

Generally most people say they want a certain size for the latest fund (i.e. $1B+ / $10B+ MF) and industry focus. You can also ask to receive a list of the firms that HHs cover from the 2nd years in your group and cite specific funds that you're interested in during the meeting. HH will also ask about deal experience and I would use the same approach outlined above (what you did, if you think it's a good investment) but in a simplified form unless they ask more. Generally it's important that headhunters like you so you can get interviews. If you're getting interviews from certain HHs and not others when recruiting kicks off, I would email other HHs about the interviews you're getting to see if they can slot you in. e.g. "I'm interviewing for xyz firm today, but was more interested in abc firm. I was wondering if abc firm has any availability or has kicked off recruiting"

Misc

On-Cycle: *Super hectic with a lot of overlapping interviews. No one really knows when it'll start and there will be a lot of buzz every week leading up to it. If you do well, the firm will likely keep you there (some of my interviews were 10+ hours) so I would prioritize firms that you're excited about if you have too many interviews. If you're interviewing later in the day and are doing well, the interview will likely continue the next day or until you can meet partners.
*Exploding Offers: I've mostly heard of offers expiring the same day or when you leave so you'll likely not get to shop around.
Locations: I've heard of people traveling to NYC as soon as recruiting kicked off, but I personally don't have that experience.
Work Teams: Some banks are more supportive of recruiting than others, so I would talk to your group's 2nd years who have recruited on who in your group is going to be okay with covering for you / who you can talk to for a recommendation in case it's needed.
Off-Cycle: I don't have too much experience with this but you can still get MF / UMM interviews. It'll be a more drawn out process, but I think it'll still be similarly competitive based on how early on-cycle is.

Additional Prep

I've heard of people reading a bunch of industry primers (from research analysts) and books like Competition Demystified / other investing books if you're just generally interested in the PE industry.

Prep Plan
I would focus on everything except deal experience during your training period given how early the recruiting process has been. Good luck!