Some Thoughts on Private Equity Case Study Interview

TheKing's picture
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When you go through the interview process with private equity firms, particularly if you move along in a process at a middle market PE shop, you will almost certainly be asked to do a case study.

Guide to the Private Equity Interview Case Study

So, just what is the PE case study? While it varies from firm to firm, here's what it generally will look like. You get a copy of a CIM (Confidential Information Memorandum), usually from an old sell-side process that the PE firm took part in, and are asked to throw together a basic LBO and write up a basic buy-side investment memo.

The fun of this sort of process is that the end product is often very much in your hands. In my interview process, I ended up going with a two page memo that more or less condensed the important parts of the CIM, analyzed the pros / cons of the business, and included a SWOT analysis. While I went for brevity, I've also seen people throw together brief PowerPoint decks. If you aren't given a particular format, you can run with it in whatever way you think will be most effective.

Format aside, let's breakdown some of the important elements to keep in mind when you're putting together a memo for a Private Equity Case Study.

Now, given that you're generally given a pretty short time table to put together your memo, let's first have a look at some of the main factors you should focus on when you read through the CIM and analyze the company.

Is the Target Company a Good Buyout Recommendation?

Remember, you're trying to determine whether or not the target company is a good candidate for a leveraged buyout. This means more than simply plugging management's numbers into an lbo model with basic debt assumptions. It means taking a holistic approach to analyzing the company. So, what are some of the main things you might want to focus on?

  • Historical and projected growth and profitability
  • To ensure that the company will be able to handle the additional debt brought on through an LBO while also providing for a strong return on investment through growth in revenue and profitability

  • Diversity of customers / products
  • A company might have strong financials at first glance, but you'll want to make sure they aren't overly concentrated in one product area or with one customer. Customer concentration issues can be problematic, particularly if the business itself doesn't have specific technology or process advantages over its competitors. If there is any notable concentration, it had better be able to prove that it's got sticky customer relationships, so to speak

  • Differentiating factors of the business
  • This ties in with points 1 and 2. Does the target company have specific technology or processes that will enable them to continue to grow and maintain margins going forward, or are they susceptible to margin erosion as competition increases

  • Industry focus
  • Is the company in a growing industry? How will it handle potential economic turmoil? How well is the target positioned in its industry? Is it a leader? Note that leader doesn't necessarily mean that it has the most dominant market share, it could be a leader in a niche segment of its broader overall industry.

  • Management
  • What's the management team like? Is it a founder-owned business? Has the team been together a long time? How built out is the team?

    The strength of the management team is very important, and it plays a particularly important role in the middle market. Oftentimes, you'll look at companies with very thin management teams. Or companies with owners who are looking to cash out and take a smaller role in the company going forward. These cases allow a PE firm to potentially add value by placing solid professionals into management roles.

  • The Exit
  • A company can be an absolute cash cow, but you'll need to be able to exit the investment at some point over a reasonable time frame (generally 5 years) in order to generate a suitable return on investment for your investors. You'll want to have some ideas as to where suitable buyers might come from. Is it a business that will likely be sold to another financial investor? Or perhaps the play is to grow the company and then sell it to a larger player in its industry. Obviously you won't be expected to tell the future, but you'll certainly want to have an evidence-based rationale for what you believe might happen. And saying "an investment banker will figure it out" doesn't count as an answer.

CIM and Private Equity Case Study Interview

Now, reading a CIM will get you pretty far. You'll learn a great deal about the target company, its growth prospects, its industries, and its alleged upside potential. However, the CIM is a sales document. Bankers are paid big bucks to put together top notch marketing materials to get their clients a lot of dough in a sell-side process. So, while you can glean a ton of useful information from a careful read-through of a CIM, you'll also want to have something of a skeptical eye. Invariably, you'll have questions and concerns that you'd like to raise with management in the next round of the sell-side process.

Questions to Ask About Case Study for PE

What sorts of questions might you ask? It's tough to boil it down to a few solid questions on a generic basis, but let's give it a shot anyway. Here are some examples:

  • What is the biggest challenge your company faces?
  • Who are the most important members of your team and why?
  • What are your company's pain points and how can we help to address them?

This is a great time to come up with specific questions based upon issues you uncovered in your read-through of the CIM. Do they have concentration issues? Do you want to ask about specific patents they hold? Now is the time to ask those questions and cover those issues.

So, now you've done a deep dive into the target company, you've addressed its strengths and weaknesses, and come up with some additional questions for the management team...what's left?

The LBO Model in Private Equity Case Study

In my view the importance of the model is not necessarily to ensure that you are an LBO kingpin. What's most important is that you can put together a competent model with reasonable assumptions. It's not about showing off with tons of bells and whistles, it's about using the information you have to create a reasonable LBO model and intelligently interpreting the results within the context of everything else you know about the target company.

You'd be shocked at how overly complicated people can make this portion of the case study. Don't over-think it. At the end of the day, you're not necessarily going to be hired because you are an excel grunt. That's certainly part of it, but senior folks are going to also want to make sure that you understand the investment process on a holistic basis. Not simply the process of an LBO, but the rationale behind why you would or would not buyout a company. A great case study combined with solid interviews and a decent understanding of the technical aspects of leveraged buyouts are the keys to successfully navigating a private equity interview process.

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Comments (113)

Feb 26, 2013

Great stuff.

Feb 26, 2013

Very informative.

Feb 26, 2013

Great information

The dragon dozes off in the spirit which is its dwelling.

Feb 26, 2013

+1 Solid stuff!

Feb 26, 2013

great stuff thanks king

WSO's COO (Chief Operating Orangutan) | My Linkedin

Feb 26, 2013

Do any of you have advice on an interview for a pe role right out of undergrad?

What kind of modelling will they test you on?

Feb 26, 2013

spot on. great post. would be great to hear some of the feedback you (or others you know going through the same process) might have heard throughout the process that might help those currently auditioning for a PE role.

Feb 26, 2013
skylinegtr94:

spot on. great post. would be great to hear some of the feedback you (or others you know going through the same process) might have heard throughout the process that might help those currently auditioning for a PE role.

If you've got some questions or some specific topics you'd like to see addressed, feel free to throw them out there in a comment. If anything warrants a separate post, I might put it together for later this week. If there are some quicker questions, I might be able to answer them here.

Fire away.

Feb 27, 2013
TheKing:
skylinegtr94:

spot on. great post. would be great to hear some of the feedback you (or others you know going through the same process) might have heard throughout the process that might help those currently auditioning for a PE role.

If you've got some questions or some specific topics you'd like to see addressed, feel free to throw them out there in a comment. If anything warrants a separate post, I might put it together for later this week. If there are some quicker questions, I might be able to answer them here.

Fire away.

I was thinking more on feedback during the interview process, areas you may have stumbled or shown well. Any war stories? People always tend to like hearing about those. Also, anything where they thought you were the greatest person to walk the earth? Appreciated in advance.

Feb 26, 2013

Good stuff man. His last point about not going overboard on the case is really important. I went way, way over board on my first two PE interviews. Did all sorts of unnecessary shit, and worse things I couldn't talk to particularly well.

One thing you can do on the modeling part to help you stand out, is try to put together your spreadsheets more like an investor and not like an investment banker. Like don't spend a bunch of time doing all sorts scenario analysis, sensitivity tables and charts. I know sensitivity tables look cool, but sadly you can't actually write a check for every "+/-" .5 movement along the horz. / vertical axis.

Focus more on some of the other bullets King listed above meshing with your model / analysis instead of a bunch of paste in graphics for a book.

Sack up and make a case if your pretend case study is either a "big-x" deal or a pass.

Feb 27, 2013

Yeah just to piggy back off of what Stringer said and the excellent post by TheKing, make sure that you actually make a decision based on the analysis. I have had friends who built great models but didn't come right out and provide their opinion. As a result they didn't get offers for those processes.

Have conviction and come right out and say "I would invest in this company." or "You shouldn't invest." Then state your case... "The projected returns are attractive (IRR is X%), they have X% market share, profitability and growth prospects and based on the analysis I see value creation opportunity during the defined investment horizon.

It makes sense to note that there are some potential risks, because obviously no deal is a pure slam dunk with no considerations, but don't be wishy washy. You need to make a call and support that call with your findings.

Feb 28, 2013

Thanks TheKing, very useful information. By the way, what advice would you give to someone that doesn't have much live deal experience given the weak dealflow of the group? How can I spin my experience when most of the work thus far is just pitches?

Feb 28, 2013

Thanks King.

Feb 28, 2013

Great stuff.

If they haven't already, WSO should make a compendium of well-written, informative posts by users. Feel like I'm searching for a needle in a haystack when I'm looking for these types of posts.

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Feb 28, 2013

Great post. Any perspective regarding off-cycle PE recruiting and/or lateraling from shop to shop? Would you suggest that the best course of action is simply to work through headhunters such as Oxbridge, SG Partners, CPI, etc. Anyone else that I am missing?

Oct 23, 2013

Just came back to read this for the 3rd or 4th time so thought I would give it a bump.

Oct 23, 2013

Hey! Did you ever receive anything for the case study??? Could really need some help on this.
thanks

Oct 23, 2013

Bain has one on their website. Check out the sample cases.

Oct 23, 2013

Some cases on wall street oasis, search for them. But mostly expect to do an IRR for an LBO in Excel. You can gooogle and find "LBO IRR Models filetype:xls". Good luck man!

Oct 23, 2013
Chris-Matteo:

Some cases on wall street oasis, search for them. But mostly expect to do an IRR for an LBO in Excel. You can gooogle and find "LBO IRR Models filetype:xls". Good luck man!

I'm quite certain he isn't still wondering about this.

Oct 23, 2013

Vault, PE casebook by Lerner

know how to do an lbo model, know M&A concepts, know market players (themes like tech, buyout, global, china, etc), and look up some recent PE transactions in the news

see also:

http://tradingevents.blogspot.com/p/recommended-re...

www.tradingevents.blogspot.com/

Oct 23, 2013

I'm curious too - thanks.

Oct 23, 2013

bump

Oct 23, 2013

In a similar situation and checked out the PE VC casebook by lerner today. Turns out it wasn't actually a book of cases so I'm curious too.

Oct 23, 2013

Do you not have friends or colleagues who have gone through or are going through the process?

Oct 23, 2013

Everyone at my BB had access to network drives and internal sample case study/modeling templates for buyside interviews. Why aren't you asking your colleagues and peers? There's actually not much to it, I don't recommend any of the "case studies" that are offered out there. You're a current investment banker, there's no one with better information than you (supposedly).

If you can't do a simple LBO/operating model or talk about deals that YOU'VE done then no guide is going to help you. If you're actually considering paying for some older ex-banker/random guy to give u a model/advice then there is absolutely no hope for you. Pick a favorite model you or someone else has done at your BB and recreate it.

Know your deals, know the reasoning behind it, know how to talk intelligently and then practice building models from scratch (nothing hard, 1 pager LBOs, quick operating models). The rest is up to fit and how much they like you.

Oct 23, 2013

I am not concerned about the interviewing portion or the modeling, I know my deals cold and I can speak to them very well. And I know that all the questions asked will be questions I have dealt with through all my deal experience. But that is still very different than the case study format where you have to take a CIM and put together an investment thesis in a couple hours (potentially in an industry you do not know).

I would hope that a guide would give a list of questions that are commonly asked, which of the assumptions and investment drivers are the most discussed and questioned and what areas the PE firms will drill down into. For example, should I spend valuable time during the case study justifying a leverage multiple? I would assume given the limited time and resources (at least for an in person case study) that it would be ok to use a reasonable assumption and just discuss the sensitivity around adding more or less leverage. But if I knew that it is typical for them to ask a lot of questions around why I picked leverage then I would grab a few comps, see their leverage levels, FCF numbers and ratings and pick my leverage based on that. Same question for entry and exit multiples, for margin assumptions, for rates, for competitive positioning of the company etc.?

Hopefully you see what I am getting at now, in a case study there is not enough time to fully vet all of these. I would feel fine answering all these questions with unlimited time and resources, but given that I do not have those things, where should I focus my time in order to be best prepared to answer the questions I will likely be asked and defend the drivers that are most commonly questioned in a case study. I think that a guide or a practice run would help me see what to expect so I can budget my time accordingly. That is more what I am looking for in a guide. With that clarification in mind, any suggestions?

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Oct 23, 2013

It depends on the firm and interviewer. I was never asked one real "technical" in my process -- I did my case study and the rest of the interviews were about my thought process (pertaining to the case and otherwise).

Oct 23, 2013

Yeah, I know what you're saying but given that I've went through dozens of PE interviews, there is no "list of questions". It's exactly what I just said in my first post so study your deals and learn about each firm (deals done, strategies, etc.) before each interview and you'll be fine.

And to answer your questions, you will be asked to justify EVERYTHING in your model and it totally depends on what the interview wants. Turnaround/distressed PE firms had me talk about debt tranches all the time but other than that there was no real consistency in what questions were asked more.

If you know your deals and you can model, there is absolutely no need to pick up a guide, it will not help whatsoever.

Oct 23, 2013

check out the interview guide at http://www.streetofwalls.com/
helped me a ton.

Oct 23, 2013

gotta quick question for ya -- how would you account for turnover in your model? Thanks.

Oct 23, 2013
ddp34:

gotta quick question for ya -- how would you account for turnover in your model? Thanks.

You know he's talking about revenue and not people right? :)

if you like it then you shoulda put a banana on it

Oct 23, 2013

I think he's talking about inventory and A/R turnover.

Oct 23, 2013
Nilokas:

Hi folks,

I've got a private equity case study to do but some information are bothering me.

For this case study, I've got projections of Turnover, EBITDA, EBIT and net income for the next 3 years.

I also have the projected financial debt (I guess, it's the pre-existing one, not the debt from the aquisition) and projected cash position.

What I wanted to do for my lbo model was to calculate FCF from EBIT and use all of them to repay the acquisition's debt.

However, I don't know what I'm suppose to do with the projected cash position. Should I use it and calculate the difference between each year in order to identify the cash flow of the year ?
Doing so, I obtian cash flows far above the cash flows I calculate using the traditional method starting from EBITDA. (So basically, I don't understand where the amount of cash position comes from)

I don't know if I'm really clear, and I would appreciate any help.

Thanks guys

First - you need to work out what the new capital structure will be and for that you need to know what is the debt / equity split.

For simplicity sake - I would use any existing cash within sources & uses. So you will have debt (lets assume its 4x EBITDA + Cash on b/s + Equity from the sponsor - which will be your plug to get to the Total).

Now you have a Debt number and your cash is zero.

However, before you get to a FCF to pay down any debt you need to make some assumptions around interest cost, tax, Capex & working capital as you don't mention if these have been provided or not.

You could assume that all the debt is in 1 tranche and lets say you charge 6% interest on it.

If you are in the US - just use 35% as the tax rate.

You don't mention if any capex assumptions have been given or not - you could use D&A as a proxy (EBITDA less EBIT) and model capex as 100% of D&A or alternatively ramp up slowly to 100% over years (PE firms usually don't buy mature assets and capex and D&A being imply that the firm only invests in sustaining capex and as such has no expansion).

Working capital - this is tricky but again you could simply run with a 5% of sales assumption and then take the difference between prior and current year and roll forward.

So now you take your EBITDA (remember D&A is non-cash so get to FCF you should use EBITDA) less interest less tax expense less capex +- Change in Working Capital

This should now give you free cash flow. Now you could use this FCF no in its entirety to repay debt and as such your cash balance will continue to remain zero as you go through future years up to the point your debt has been paid down completely, at which point you will start to build a cash position.

Remember, the above assumes there are no dividend distributions to the sponsor.

Oct 23, 2013

Hi !

Thanks for your answer.

What's really bothering me is how the cash position has been calculated in the assumptions (already given in the exercice).

Because, correct me if I'm wrong, if I take the difference of cash position between Year N and Year N+1, I obtain Cash flows of year N right ?

If true, do you think I should use this amount as the starting point for repaying new debt and interest ? (WHich means I don't have to make any calculation using EBITda, capex, NWC, taxe etc.)
If not, what's the meaning of this information ?

First, I wanted to do like Optimus said, EBIT - taxe, - interests, - capex etc.. to obtain cash flows.
But when I do so, I obtain cash flows far from what I can find in the previous method.

SO basically, why did they give me information about cash position in my exercice ?

ps: The only assumptions I got are revenues, ebitda, ebit, net income, Cash position and financial debt.

Oct 23, 2013
Nilokas:

Hi !

Thanks for your answer.

What's really bothering me is how the cash position has been calculated in the assumptions (already given in the exercice).

Because, correct me if I'm wrong, if I take the difference of cash position between Year N and Year N+1, I obtain Cash flows of year N right ?

If true, do you think I should use this amount as the starting point for repaying new debt and interest ? (WHich means I don't have to make any calculation using EBITda, capex, NWC, taxe etc.)
If not, what's the meaning of this information ?

First, I wanted to do like Optimus said, EBIT - taxe, - interests, - capex etc.. to obtain cash flows.
But when I do so, I obtain cash flows far from what I can find in the previous method.

SO basically, why did they give me information about cash position in my exercice ?

ps: The only assumptions I got are revenues, ebitda, ebit, net income, Cash position and financial debt.

Cash position btw Y N & N+1 is not the cashflow. Has there been changes in debt? Part of the FCF could have been used to pay down debt, additionally, difference btw N & N+1 debt is not necessarily all resulted from cash payment, there could have been a recap. Calculate FCF (let's called the number A) use Optimus method, then calculate the difference btw cash (N+1) and cash (N) (let's call this number B). (A) - (B) =(C) is the cash you used to pay down debt during year N. If there is a difference between (C) and (debt difference btw N+1 and N), the difference is probably due to recap.

Oct 23, 2013

I'm late to the party here, but for the sake of anyone reading this, my view regarding projected cash balance is that it would be completely irrelevant in this case. As mentioned above, projected cash balance would include any changes in the capital structure (recaps, debt changes). Since you are modeling an LBO for a private equity firm, you are supposed to layer in your own capital structure - one that makes sense for the sponsor given the returns. This means you would cake any existing cash, apply it to the transaction in a sources & uses table (some reasonable assumptions will have to be made here) and project cash yourself using the operational projections along with your capital structure (interest rate will be a driver of cash, as well as debt repayments).

Also, I don't think you would need to assume working capital as 5% of sales (for example). Since you have been given turnover. You were given turnover - if this refers to working capital turnover (which I would assume it is), then it's a simple formula:

Working capital turnover = sales / working capital

http://www.investopedia.com/terms/w/workingcapital...

Oct 23, 2013

Could you elaborate on what you are looking for? Are you referring to modeling case studies?

"You'll never live if you're just too scared to die..."

"Tomorrowland you are so beautiful!"

Oct 23, 2013

Not modeling, just a book or collection of particular investments made by PE firms, including the reasons the target appeared attractive (where PE firm was trying to add/extract value), and how these strategies evolved in reality.

Oct 23, 2013

Also interested. Will shell out SBs for good recs!

Oct 23, 2013

Check out Merchants of Debt and King of Capital - they are the histories of KKR and Blackstone

Oct 23, 2013

I would suggest Googling "PE offering memorandum". You can find some OMs from various MM groups on the internet. These OMs show past investments, entry multiples, and most importantly to your question, the investment thesis. They can skew a bit towards the marketing side, but they are also a great introduction into how a PEG is structured and how they are looking for value in various investments.

Oct 23, 2013

1) Just assume a reasonable earnings multiple based on industry / growth profile / comps, that's often how it's done in real life anyway when you have a private deal.

2) Base rate + interest margin = the interest on that particular class of debt

there is an introduction to lbo modeling section on macabacus - that should be very helpful if you're unfamiliar

Oct 23, 2013

Thanks Jec! 1) might be difficult since the company in question is operating in a highly obscure industry in a hypothetical market. Any advise on that?

Oct 23, 2013

Well then just assume something in a reasonable range ~10x earnings or something. alternatively you could work backwards to a price based on target IRR. i wouldn't sweat this too much as long as you can justify your assumptions in some way.

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Oct 23, 2013

I would also suggest an EBITDA multiple, since an earnings multiple would capture the current capital structure and in an LBO scenario you usually want to layer in a new capital structure. EBITDA multiple ignores the capital structure, which is cleaner IMO.

Oct 23, 2013

Agree with jec. Backsolve entry multiple by assuming say 25% irr

Oct 23, 2013

He can't really back solve for IRR since I'm guessing he doesn't have an exit multiple either. And unless there's something unique here (e.g. Turnaround-type story), you'll likely want to enter and exit at similar multiples. Multiple expansion is tough to underwrite.

Broader point still stands, though. OP, I promise it's not THAT obscure. You can find multiples of companies in similar industries--again, the goal is just to be close and to have some evidence to justify your choice

Oct 23, 2013

Any specific property type?

Oct 23, 2013

Let me know if you want to trade @"GeneParmesan".

Oct 23, 2013

Office would be a great start.

"China wants to eat your lunch"

Oct 23, 2013
Gene Parmesan:

Any specific property type?

Would love a multifamily or office if you have one. Thanks!

Oct 23, 2013

I would be interested as well. Thanks.

Oct 23, 2013

I have a detailed multifam model with sensitivity tables and GP/LP waterfalls. Im willing to trade it for an office or retail model. PM if interested.

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Oct 23, 2013

I have an office development model if you would like to make a trade. pm me.

Oct 23, 2013

If you have a brokerage background, it would probably be helpful to get some training on how to create investment models so you fully understand the pieces rather than just understanding how to input some assumptions. I'd recommend reaching out to Bruce Kirsch (or similar) to get started.

Oct 23, 2013

I'd be interested in trading. I have a big4 mixed use development model.

Oct 23, 2013

If someone has a good retail or multifam model, pls PM me

Oct 23, 2013

Marina, PM and let me see if i can help you.

To the guys, Throwing my hat into the exchange ring: PM me with model types that you have to share and I will tell you what I have as well.

Oct 23, 2013

*Also, if anyone has a professional/industry grade development model for evaluating a residential rental or condo project (with in case of rental an 80/20 affordable housing component; and retail components and multi tier distribution/waterfall component), I have models to trade for it.

Something that I can use when someone gives me a model in the same genre/deal niche, to take all of their deal assumptions and put them a new model to evaluate their project. Maybe some guys implant a 2-3 pages 'mini-model' in the existing model to check its feasibility and value, but I think it is best to take all the controlling assumptions and put it into your own distinct model.

Oct 23, 2013

anyone got a detailed multifamily model with monthly proforma projections?

Oct 23, 2013

I've gone through 2 of these (albeit for PE analyst programs). Personally I was given the names of the companies (portfolio companies for one of them) a few days ahead of time. Read through their latest 10-k and latest 10-Qs. Know why it made sense to enter the investment (or potential investment), what are the revenue/cost drivers, what are upside levers a PE shop could pull, and what are the risks they face (and how to hedge the risk if possible). Very heavy on knowing the business and thinking like an investor, also need to remember numbers.

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Oct 23, 2013

For operations I will assume they are looking for your insight on; Supply chain, productivity, sales (B2C/B2B) and what the potential improvement opportunities are for unlocking value.

Supply chain would look at bottlenecks, logistics and queuing for instance.

Oct 23, 2013

Thats an interesting one, do us all a favor and keep us posted about your progress and final results please :)
I never encountered such a case study, I guess I would have interpreted "operational" as everything above/to EBIT and financially as credit ratios, interest cover, leverage, etc

But Kevins answer might be more viable than mine, so I would suggest that you just work through the material and take a judgement based on the information available in the decks they gave you

Oct 23, 2013

First off, keep us posted. This is definitely an interesting case, and not something you hear about frequently on here.

As to your question, I think the question is whether this is a PIPE or not and that should resolve how you approach this. The PE Shop wants to know how their investment is doing from both the operation standpoint with respect to many of the aspects that Kevin discussed and financially, which includes how their liquidity, A/R, A/P, DSO/DIO, DPO, Revenue Metrics, Growth Metrics, debt servicing, inventory ratios, Net Income, Fixed Asset costs, Solvency Ratios (Quick, Cash, straight Solvency), things like that. They want your take on how the company is doing, and given the information provided, if you have any insight on how to find ways to improve growth on either side of the board. Keep that stuff in mind when you review the documents because you are valuing these companies what you can do to extract more growth.

Oct 23, 2013

I took an elective class on this. I think the below should be what you're looking for, on top of what the three previous posts suggest:

-book on supply chain mgmt (try dl-ing a pdf of this book: http://cachon-terwiesch.net/2e/) -knowing what the key performance indicators are (dashboard!)
-deep understanding of business models, including customer analysis
-risk assessment
-distribution
-rescue plan: if you invested and f up, what's the alternative? read this article on turnarounds https://hbr.org/2000/05/cracking-the-code-of-change
most importantly, knowing how to tie these up with the financials is crucial. you have to dig into the financials and tease out many levels beyond that, and from the sound of it, this PE shop is def operationally-focused so you better get down to the units-level. good luck!

Oct 23, 2013

For the operational piece I think you want to focus on how the company has progressed on its core initiatives or key performance indicators. The original investment memo should give some idea of what the 100 day plan was / focus areas post investment and the board decks will give updates on where the company stands in terms of progress to the core initiatives and KPIs.

Sep 17, 2016

Hello,

In two weeks I will have to take a modelling test at a PE shop in NYC. They will give me a 60-page CIM and 2 hours to skim through it, build a LBO and provide them with an investment memo (bullet points).

How would you do it? What are the important elements I should put in the investment memo? Should I build a lbo model with IS, BS, CF or just IS and CF?

I am not sure how I would do it within an hour..

Thanks!

    • 1
Mar 8, 2018

Hey - this is great. How do you think the process will be for a 1 hour case study? It's hard to imagine that one would be expected to read the IM or CIM, do a model and a few slides in that time frame...

Mar 8, 2018

If I understand your question well enough, they are not expecting you to make a pro-forma balance sheet which would require the historical data (wouldn't you have it in the documents BTW?). I would say that what they want you to build is a balance sheet forecast on the basis of the cap structure at closing provided in the transaction sources.

Mar 8, 2018

Apologies for not being clear. I have 4 yr historical data & 5 yr projections for both income statement (up to EBIT) and balance sheet (up to current liabilities) along with depreciation and capex. Only other details I'm given are the transaction sources which include a Revolver, Senior Debt A & B, Subordinated Debt and Equity. Other notes include the breakdown of equity needs with mgmt rollover.

Mar 8, 2018

My approach would be to assume no debt and to assume that shareholders' equity in the four years prior to the transaction is based purely on retained earnings. Easy enough to just add net income from each preceding year to the old RE balance.

Mar 8, 2018

I tried that approach but BS didn't tie out when I tried matching the given projected total assets with current liabilities and the new debt and equity acquired. Goodwill is included in the projections. Am I missing something here?

Mar 8, 2018

P.S. I am given no RE balance to add the net income to in either 4-yr historical data or 5-yr projections.

Mar 8, 2018

Is it fair to assume that the oldest year in your historical data is the year the company was founded? If that is the case, I would assume an RE balance of 0 at the beginning of that year, and an RE balance equal to the net income at the end of year 1.

Mar 8, 2018

No, the company was founded in 1982. The actuals are from 2008-2011 and projected out from 2012-2016. I've been scratching my head and trying numerous methods but I just can't seem to move on with the model without SH Equity. I need to tie at least one year of the balance sheet so I have a base or maybe not. I've been working on this all night. Can't figure it out.

Mar 8, 2018

I still can't figure from your question why you need the historical data. We Europeans have another way to present the Balance Sheet, but I'll give it a shot American way:

Normal adjustements you make to your BS using your S&U are:
- Cash-on-hand decreased by the amount used in your Sources of funds for the transaction
- Deferred Financing Fees up by the amount of fees paid
- Goodwill & Intangible assets up by the difference between existing BV of Equity and the Equity Purchase Price
- Add to new liabilities as provided in the Sources
- New shareholder equity = (Equity contribution - other fees and expenses)

Basically what you are going to want to forecast I guess is how debt is paid down going fwd to calculate the return on your mezz.
For that you need to take your EBIT, convert it in FCF do a debt repayment schedule and model the total debt service over the course of the plan (interest + pcpal repayment).

Your goodwill is the only plug in your BS where pre-close SE is inputed, and has no significance on your Mezz IRR going forward. Wrong?

Mar 8, 2018

are you sure they are asking you to build the whole 3 statement model? It sounds like a quick cash flow model to me

Mar 8, 2018
Ricqles:

are you sure they are asking you to build the whole 3 statement model? It sounds like a quick cash flow model to me

I agree.

Mar 8, 2018

Here are the directions for the case study unless I am misreading them:

* Information memorandum
-Limited to 15 pages

* Financial model
-Fully integrated income statement, balance sheet, cash flow model
-5 year analysis; annual
-Calculate pertinent financial covenants
-Calculate any pertinent performance statistics
-IRR & Cash-On-Cash for all securities

Do you guys still think its a quick cash flow model? If so, I might as well start on that.

Mar 8, 2018

when they said "fully integrated", it might just mean to connect all of them together (i.e. the projection of nwc affects the cash flow, etc). I don't see any reason of even having the equity section in the BS when you are just looking at the IRR and return.

Mar 8, 2018

I suppose you are right. If that's what I assume then, I'd simply have to calculate cash int. exp./income based on terms and use that along with changes in nwc for FCF. Then I could just make a capitalization chart, credit statistics, IRR and Cash on cash return schedules.

Mar 8, 2018

yes, i assume you know that you should build up a debt schedule as well

Mar 8, 2018

yup, thanks.

Mar 8, 2018

Just FYI, I ended up making a long-form LBO Model. It seems that it all ties out in the end. I simply just used Total Assets less Total Liabilities to derive the SH Equity assuming that company had no leverage for historical data. I'm glad I did this exercise, I ended up learning a lot more from scratch. I recommend the book "Investment Banking" by Joshua Rosenbaum and Joshua Pearl. It's very thorough in its explanations. Happy modeling guys!

Mar 8, 2018

is this for a first round? what fund?

Mar 8, 2018

No, final round. Its a Mezz Fund focused on the middle market transactions.

Mar 8, 2018

how did the interview go?

Mar 8, 2018

valuation in PE is no different than valuation in IB..

Mar 8, 2018

I will be doing a lbo model but the valuation will be affected by my Entry Multiple - I'm not sure what the right multiple would be, as this would dictate what the equity purchase price is.

I dont think the scope of the case study is to do a DCF, or comps analysis (there are no comps, as its a very small company with no public competitors).

Mar 8, 2018

I'm an undergrad student so I literally have no idea what I'm talking about here, but aren't there industry standard multiples you can pull off Bloomberg for that sort of thing?

Mar 8, 2018

There are always comps, and a good PE firm will have access to them. Also, as alluded to above, you can pull industry standars/average multiples (which is just a proxy for comps). Also, you can run out a DCF to get a sense of what those multiples should generally look like from a valuation standpoint.

Mar 8, 2018

value the company focusing on returns, checking if that valuation makes sense for the seller, and if investment return satisfy the risk involved in the company's financing package / operations.

I would first do a very short LBO test to get a valuation, build the operating model, and caluclate returns. Then finish with a quick DCF.

You should focus on capital structure more than growth. Your assumptions need to make sense for the business operations.

again, I would focus on analyzing the capital structure.

Mar 8, 2018
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