Response to "My Private Equity Recruiting Process"
Mod Note (Andy): This comment by @Northsider was posted in direct response to @Candor's post "My Private Equity Recruiting Process"
Having been through PE recruiting on both sides of the table now, I have a few reactions:
1. I heartily disagree with the idea that having a closed deal at all differentiates you as a candidate - especially the suggestion that you're better off postponing recruiting if you haven't announced a deal by recruiting season. If you feel unprepared for the process, that's one thing; and, insofar as navigating a deal from start-to-finish buttresses your understanding, I wouldn't contest that the experience is valuable. That said, being able to list the names of the parties involved because it's announced offers you no edge, ipso facto.
After interviewing dozens of candidates and debriefing with others on still more dozens, I can report that I've never once heard an interviewer credit a candidate for having completed a transaction. You're 7 months on the job: the lion's share of candidates (even from top groups) haven't had the opportunity to close a deal, and for many I interviewed, the deals they had announced weren't the ones in which they were most involved (due to double-staffing) or that were best to discuss in an interview setting. Literally the only time I heard deal experience mentioned by an interviewer was an occurrence in which a candidate had been staffed on a transaction involving one of our portfolio companies.
2. Not being long-winded can't be stressed enough. Most candidates for PE are near-professional status with respect to buzz word memorization. Nothing will derail your interview more than a palaverous answer. Keep it short, mention the most essential details and let the interviewer determine whether more investigation is necessary. If you don't understand the question, ask for clarification rather than pontificating and hoping to cover your bases.
3. There is a huge proportion of interviewees with significant mistakes in the model test. Even candidates who reported confidence at the beginning of the interview (I always ask how they felt about the model) often had calculation errors, errata on signs (please, please, please use negative presentation - it will save you from countless embarrassing gaffes), miscues on returns waterfalls and omissions or double-counts on their S&Us. Generally, if it was clear the candidate understood the concepts and was slipped up by time pressure, it wasn't a 'ding', but those who submitted a perfect model undoubtedly differentiated themselves.
@Candor: You should be able to look at a case and say, "A is a great business, it has B, C, D, E & F going for it and given my preliminary read through it seems like it'd make for a compelling investment. That said, X, Y and Z are things I'd want to diligence further before I'd actually make a bid for the company." Obviously your answer should be more fleshed out than that.
For example in one of the case studies, I said "This telecommunications business looks great, it has a really strong growth profile, its revenues are growing at 6% a year, theirmargins are incrementally improving, their business requires very little fixed costs, their profile is very attractive, and these assumptions seem reasonable/conservative." And that was one of the points I raised among 5 or 6 other.
Although I agree with your outline and sentiment, your illustrative answer blunders into a category I would describe as "I can read numbers". If I give a candidate a case study that includes historical growth information, reporting that information back to me will score them no points. Quite the contrary, that kind of answer suggests to me that you aren't "thinking as an investor", as it were.
The most frequently attributed reason for snubbing a candidate is "P&L cathexis", if you will. For instance, when I ask candidates, "If you could only have one statistic to assess investment attractiveness, what would it be?" A plurality of banking analysts mention growth rate. Alternatively, if I present a simple comparison, "Company A with 15%margins and Company B with 10% margins, in which would you rather invest?" A frustrating portion of interviewees have a knee-jerk preference for Company A. In short, I would submit that the example answer you provided is negatively correlated with receiving an offer.
Now, obviously some candidates demonstrate their judgment when pushed further in the interview; clearly you gave plenty of satisfying answers, given your results. That said, I think the "top candidates" generally offer more thoughtful answers out-of-the-gate. For example (granting that I know nothing of the specifics in your telecom case study), "A telecom company growing at 6% organically with expandingmargins in a GDP-growth industry is clearly taking share and will likely trade at a steep multiple. However, its defensive end market exposure should mitigate cyclicality and provide juice on leverage. Given its strong cash flow conversion, even at market-clearing multiple the company should offer a solid pro forma yield. And, if I think about what kind of businesses I would want to buy in this environment, I'd rather pay up for and hence over-equitize a business with defensive demand drivers that will have air-tight coverage if we hit a down-cycle during the hold. Couple that with an out-executing management team, we can probably accelerate share gains in a recession, use our high yield to push out the exit a year or two without compromising and grow into an exit multiple that still results in attractive returns."
That answer is a bit longer, but it sticks to the essential details, avoids rambling and demonstrates second-order investment judgment without requiring your interviewer to pressure test your thesis. The problem with your answer is that it makes no headway re: whether the business is an attractive investment. Strong growth, expanding margins, strongconversion and reasonable projections are all nice in a vacuum, but some of the least attractive candidates out there exhibit all four. If you're going to point to expanding margins, I'd prefer you frame it as a diligence point: "One thing that gives me pause is the rate of margin expansion on what should be a fairly variablized cost structure. Perhaps management is pushing through price increases with limited volume growth and is at risk of ceding share to lower-cost providers in the future or being unable to maintain its growth trajectory. Alternatively, perhaps this company has fat corporate overhead expenses and there's an opportunity for cost take-out to bump margins up to industry standard. Either way, it's a key point of diligence."
Lest I seem like I'm being unnecessarily critical, I want to reiterate that I found your post very informative and I agree with the majority of the advice you propose.