MM Interview - Mock Portfolio
Been asked to build a mock portfolio as part of an interview process for a MM. What are the main things to hit? What should I be solving for? Any specific advice welcome.
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When building a mock portfolio for a middle-market (MM) interview, here are the key points to focus on:
Investment Thesis: Clearly articulate why you are selecting each investment. Highlight the rationale behind your choices, such as growth potential, valuation, industry trends, or competitive advantages.
Diversification: Ensure your portfolio is well-diversified across sectors, geographies, or asset classes to mitigate risk. Be prepared to explain your diversification strategy.
Risk-Return Profile: Balance the portfolio with a mix of high-risk/high-reward and stable investments. Show that you understand the risk tolerance of the MM firm and align your portfolio accordingly.
Valuation Metrics: Use relevant valuation metrics (e.g., EV/EBITDA, P/E ratios, DCF analysis) to justify your selections. Be ready to explain why these metrics are appropriate for the companies or assets you’ve chosen.
Market Trends: Incorporate current market trends and macroeconomic factors into your portfolio strategy. This demonstrates your awareness of the broader market environment.
Exit Strategy: Highlight potential exit strategies for each investment. Whether it’s an IPO, strategic sale, or dividend recapitalization, show that you’re thinking like an investor.
Storytelling: Present your portfolio in a structured and compelling way. Use a clear narrative to tie your selections together and explain how they align with the MM firm’s investment philosophy.
Quantitative Support: Back up your decisions with data. Include financial projections, historical performance, and any other quantitative analysis that supports your investment choices.
Tailor to the Firm: Research the MM firm’s focus areas (e.g., specific industries, deal sizes, or investment strategies) and tailor your portfolio to align with their preferences.
Be Ready for Questions: Expect to be grilled on your choices. Be prepared to defend your selections, explain your thought process, and discuss alternative scenarios.
For more insights on preparing for MM interviews, check out this thread: https://www.wallstreetoasis.com/forum/private-equity/a-non-targets-pers…</a">A Non-Target's Perspective - My MM PE Recruiting Process. It provides valuable advice on how to articulate your deals and think like an investor.
Sources: Case study interview for MBB consulting - 24 of my best tips on how to get in, Case study interview for MBB consulting - 24 of my best tips on how to get in, https://www.wallstreetoasis.com/forum/investment-banking/sa-interview-prep-techniques?customgpt=1, A Non-Target's Perspective - My MM PE Recruiting Process, A Non-Target's Perspective - My MM PE Recruiting Process
They are checking to see whether the expected volatility and net/factor exposures are consistent with their risk limits. So, keep those as tight as possible.
How are expected volatility and factor exposures calculated? I assume the exact calculation can vary shop to shop? Can I argue that my calculation of a certain factor is more valid than the shop's (either in general or for a particular set of positions)?
The exact formula might vary a small bit, but they are based on historical volatility and factor correlations showed by the stocks you include.
Arguing with risk depts is usually not a great idea unless you are highly experienced and with a track record that backs you up.
The point is to persuade them that your style is compatible with their limits. Not to convince them that they're setting the wrong limits.
What if you believe historical volatility is wrong and not a true measurement of realistic volatility ?
Then use a forward looking measure, but be prepared to defend your choice.
Frankly even if you're right, most times it's not what risk wants to hear. Much less if you don't have a track record.
If you get hired and blow up, they will be blamed for not diligencing you properly. Understandably, they don't want that type of exposure.
Always curious but never got answer - how much does the PM or BD track the mock portfolio returns throughout the interview process? If the interviews take 2-3 months they have a decent idea of your stock picking from this after an EPS Season, no?
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