modeling test - private equity

Sure...send me a pm if you would like to discuss

I'm sure you already have many more relevant skills than I did when I interviewed for PE -- the types of tests I had to do were building basic LBO and cash flow models from scratch and I'd be allotted anywhere between 1.5-3.0 hours. But if you have any specific q's just let me know

Most likey you will be given 3 years of historical financials with a set of assumptions and asked to project out the various financial statements. Upon completion you will probably be asked to value the company on a DCF or LBO basis (most likely the latter) to determine whether or not the opp would be a good investment and meet the partner IRR threshold.

Numi,

I would be interested to hear more about your experience as well. We should keep the conversation on the board (and not PMs) if possible so as to educate other members as this is a highly relevant question.

jbs,

appreciate the insight. by valuing on an lbo basis, do you mean using a multiple of ttm ebitda? dcf tends to be a bit speculative if you're working with a private company.

on a side note - the reason i asked for PMs is because i wanted to make sure that only those already working in private equity provided answers. i'm all for a better wso community; that said, many members respond to questions they aren't necessarily qualified to answer. subsequently, many threads can get encumbered with information that isn't 100% true.

-m

I think you should keep it in the public arena if you wouldn't mind. Like the previous poster, I would appreciate reading any information provided.

As a side note, wouldn't it be possible for someone with no knowledge to just PM you? Unless you are asking for background info, I would think PMs might be equally problematic.

Regards,

Chris

LBO valuations require to project unlevered cash flows over a period of time, then structure an appropriate acquisition debt (which depends on the firm, sector, risks, sensitivity analysis and of course market conditions). From there, depending on the returns you expect on your equity, you can determine how much you are ready to pay for the asset, usually assuming an exit multiple equal to the entry multiple.

please read my OP. i am already in PE and am familiar with how an LBO is structured. my question is more centered on what is expected when preparing a model for an interview since there's limited time (2-3 hours)

what i was trying to ask jbs is if it would be okay to simply use a ttm ebitda multiple in the modeling test to arrive at ev, or if a more in-depth analysis would be required.

Here are my impressions of modeling tests. You will probably be given certain financial statements and baseline assumptions, as junkbondswap mentioned. They may also provide you with some background data, from which you are expected to forecast annual P&L, balance sheet, and cash flow statement, and make sure all of this stuff is fully integrated. Summary financials are generally fine, and you can usually drive them off of growth rates or percentages of sales or expenses.

Once you've set up the financials, you'll probably want to start thinking about laying on the capital structure. They may tell you what assumptions to make in terms of multiples or leverage if they are looking more to test your mechanical fluency; however, in other cases, they may expect you to come up with your own ideas about valuation and leverage in order to see how you think about investing, as well as how knowledgeable you are about the terms and covenants of loans in the current marketplace. Personally, I find the most intriguing thing about the pre-MBA role in private equity to be the opportunity to learn how people value businesses; the next most interesting thing for me is to learn how people grow them. Obviously these two things are inextricably tied to one another, and so if you're not given any assumptions for valuation or leverage, that's when you need to step out of the spreadsheet monkey role and start thinking like a general partner. If I were looking to hire someone, I'd want to make sure that the person had the potential to develop similar intuition as well, which is why you should definitely make sure your assumptions are reasonable (e.g. 15x TTM EBITDA valuation multiple or 8 turns of debt are probably NOT going to be sensible for a leveraged investment).

Getting back to the mechanical side of things, they may ask you to come up with a reasonable debt structure (including revolver, senior term loans, and sub debt). They may also ask you to put together a loan amortization schedule, or take into account other things like PIK or management fees into your model. Most of this stuff shouldn't be totally foreign to you if you're already in PE, but spend time double- and triple-checking your model to make sure that everything ties.

Normally, if they ask you to build an LBO model, they won't also ask you to do a DCF. You can drive valuation off of TTM EBITDA. At the end, obviously check to make sure that your IRR makes sense. This definitely depends on your assumptions, which you can generally defend or at least support if you're thoughtful about them. However, if you get an IRR of over 60% or if you're assuming an 80%-20% debt to equity structure, you will probably run into some problems when they ask you to walk them through the model. Just make sure that if you're allowed to present your own assumptions, make sure they check out; and if the firm gives you your assumptions, make sure you follow all the instructions.

You can build your model in any way that makes sense, and again, you will generally be allotted anywhere between 1.5 to 3.0 hours to complete the assignment if done in person. I personally found the examples straightforward enough such that I could build everything on one worksheet.

I hope this helps. Let me know if you have any other questions.