Help with these 3Q for PC interview please !

1) Regarding the leverage ratio and investment criteria: Based on the most helpful WSO content, the leverage ratio (Debt/EBITDA) is a critical metric in determining whether an investment aligns with a fund's criteria. If the fund specifies a maximum leverage of 4×, it typically means the total debt in the capital structure should not exceed 4× EBITDA. In your example, the revolver of $300M, TLB of $100M, and unsecured bond of $200M would total $600M in debt. If the EBITDA is $150M, the leverage ratio would indeed be 4× ($600M/$150M), which aligns with the fund's criteria. However, if the total debt exceeds 4× EBITDA, the investment would likely not meet the fund's requirements. Always confirm whether the fund's definition of leverage includes all forms of debt or only specific tranches.

2) Determining if an opportunity is of interest: After modeling FCF, debt repayment, and key ratios, you should focus on metrics like the Fixed Charge Coverage Ratio, Leverage Ratio, and EBITDA trends. Based on WSO's top-rated threads, here are some guidelines: - Fixed Charge Coverage Ratio: Should ideally be above 1.5× to ensure the company can comfortably cover its fixed obligations. - Leverage Ratio: If it exceeds industry norms or the fund's criteria (e.g., 4×), it signals higher risk. - EBITDA trends: A stable or upward trend is favorable, while declining EBITDA is a red flag. To assess risk, consider downside scenarios. Even if you can't model a full downside case in 1.5–2 hours, you can stress test key assumptions (e.g., a 10% revenue decline) to see how it impacts cash flow and debt coverage. If a small revenue miss leads to insolvency or covenant breaches, it's a risky investment.

3) Translating non-quantitative factors into investment decisions: Non-quantitative factors like client distress, churn, or supplier negotiation power can be incorporated into your analysis by assessing their potential impact on financial metrics. For example: - Client distress or churn: Could lead to revenue decline, which would reduce EBITDA and worsen leverage and coverage ratios. - Lack of supplier negotiation power: Could increase costs, compress margins, and reduce cash flow. - Industry risks: If the industry is in decline or highly volatile, it adds to the investment's risk profile. While these factors are qualitative, you can quantify their impact by adjusting assumptions in your model (e.g., lower revenue growth, higher costs) and observing the effect on key metrics. Additionally, consider the probability and severity of these risks when forming your overall investment thesis.

For more insights, you can explore WSO threads like "Thinking like an Investor: The key financial metrics" (url: https://www.wallstreetoasis.com/forum/private-equity/thinking-like-an-i…) and "PE professional, what's your process while judging an investment?" (url: https://www.wallstreetoasis.com/forum/private-equity/pe-professional-wh…). Good luck with your case study!

Sources: Thinking like an Investor: The key financial metrics, https://www.wallstreetoasis.com/forum/private-equity/thinking-like-an-investor-the-key-financial-metrics?customgpt=1, PE professional, what's your process while judging an investment?, PE professional, what's your process while judging an investment?, PE interview question - If you can only know 3 things for an investment analysis?