What exactly is expected when building an operating model from scratch in a Private Debt interview?

In a Private Debt interview, building an operating model from scratch typically involves creating a simplified three-statement model with a focus on key metrics relevant to credit analysis. Here's what you can expect and how to prepare:

Expectations for the Operating Model

1. Simplified Three-Statement Model:

   • The model will likely focus on revenues, EBITDA, cash flow, and leverage ratios rather than a fully detailed investment banking-style model.
   • The goal is to assess the debt capacity of the business and evaluate downside protection.

2. Granularity of Assumptions:

   • Revenue Growth: Use reasonable and defensible assumptions based on industry trends or comparable companies.
   • Margins: Focus on EBITDA margins, ensuring they align with industry benchmarks or historical performance.
   • Capex and Working Capital: These should be straightforward but realistic. Highlight their impact on free cash flow and debt repayment capacity.

3. Key Metrics to Highlight:

   • Leverage ratios (e.g., Debt/EBITDA).
   • Interest coverage ratios.
   • Free cash flow generation and its sufficiency to cover debt obligations.

4. Defending Assumptions:

   • Be prepared to justify your assumptions with data or logic. For example, if you assume a certain revenue growth rate, explain why it’s reasonable based on market conditions or comparable companies.

Preparation Tips

1. Practice LBO Models:

   • While not identical, LBO models share similarities with private debt models, especially in terms of debt structuring and cash flow analysis. Focus on the debt side rather than equity returns.

2. Study Comparable Companies:

   • Create a list of 5-10 public comparable companies and analyze their capital structures, leverage ratios, and financial performance. This will help you benchmark your assumptions.

3. Understand Credit Metrics:

   • Familiarize yourself with key credit metrics like Debt/EBITDA, interest coverage, and free cash flow conversion. These are critical in private debt analysis.

4. Resources for Practice:

   • WSO’s Private Equity Master Package includes LBO modeling and case studies that can be adapted for private debt preparation.
   • Seek out free LBO modeling tutorials or templates, as they often include simplified models that can be tailored to private debt scenarios.

What a Private Debt Case Typically Looks Like

• You may be given a CIM (Confidential Information Memorandum) or a brief with financial data and assumptions.
• The task could involve:
  • Building a model to assess the company’s debt capacity.
  • Pricing the debt and determining reasonable leverage levels.
  • Analyzing downside risks and presenting a credit thesis.

By focusing on these areas and practicing with relevant materials, you’ll be well-prepared to tackle the operating model test in your Private Debt interview. Good luck!

Sources: Private Credit Resources and Prep, Seeking advice on Corporate Banking modeling, Interviewing For Infrastructure Investment Roles, Private Credit Interview Advice, Private Equity Interview Questions - 13 Topics to Know