I have an interview coming up at a hedge fund. Part of the job description seems to being doing comps and multiples to evaluate investments. I think I know the basic idea behind these (compare the financial ratios and other company data vs. similar companies in the industry), but I don't actually know how to do them. I want to be able to walk my interviewer through the process. How many companies do I select for comparison? How do I find and select them? What ratios should I use? Things like that.
Also, here's the job description. The fund has $1bn divided among three funds (multi-strategy, small-cap long/short, and distressed). The job is intended for MBAs, but somehow I caught the eye of the main interviewer there (he said I was a "suitable" candidate) despite the fact that I'm only an undergrad sophomore.
• Conduct fundamental investment research driving toward specific buy/sell recommendations
• Prepare financial analysis of company financial statements
• Investigate and analyze industry dynamics
• Conduct screening for investment ideas based on financial ratios and other criteria
• Compile comparable valuation analysis
• Review sell-side research and company filings to understand and summarize the investment “story”
How useful do you guys feel this internship could be towards securing a junior-year internship at a bank (in IBD or S&T) or a HF?
very useful if they have contacts.
That job description is basically what an IB analyst does on a daily basis - if you get this job it's basically perfect preparation. Only problem is it is not at a bank, which hurts you a little bit, but in the end it will be really useful.
Even without having great contacts at the hedge fund, you will be able to leverage this experience to catch the attention of recruiters assuming you go to a target. If you don't go to a target you will have to network a bit more but still looks like great experience, especially since you're getting it as a sophomore.
They're really not hard to put together. Just remember "multiples and margins". Comp sheets are usually a combination of multiples (i.e. forward P/E, P/E, FCF/EBITDA multiples, etc.) and margins (gross margin, ebit margin, r&d margin, sg&a margins, ROE, ROA, ROIC, etc.). The key is to see which companies appear out of step with peers and investigate why those differences exist. Many funds will have their own comp templates using data from Baseline, CapIQ, or Bloomberg, but it's important to make sure your numbers are normalized (i.e. backing out unusual/one-time charges).
As many similar companies as you can. If there is only one comparable competitor, use one. If there are five, use five. Obviously more is better, but most comps will be 4-5 peers. Most companies will identify their competitors in the annual report.
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