Anybody have a minority growth equity model example / test? Interviewing soon
Have an upcoming interview at a large growth firm. It's a 90 minute test, from scratch. Anybody have resources to prep? Thank you!
For an associate role
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Just practice LBOs with no debt schedule just different option pools / preferred equity
If you are interviewing at a large firm, I would start with understanding the types of the deals that they do. Many of the larger firms will use some debt for “growth buyout” deals and the modeling is essentially the same as an LBO. GE may have some structure to their equity investments (particularly in minority deals), so know how to model common features like liquidation preference in your return analysis.
For "classic" growth equity (Series C-F), essence of the modeling is low-gearing PE. Should have triggers for rev or ebitda defined equity ratchet but otherwise same model you'd use to prep for a buyout shop. Good luck brother.
Given the test is only 90 minutes, it will likely be a pretty straightforward linking of the statements and calculating a MOIC and IRR. However, there are a few things that growth equity firms put into their modeling test that deviate from standard LBO models: (1) Primary vs. Secondary Equity Purchases and (2) Liquidation Preferences.
I've provided example questions and solutions below for both of these features. Also, I'm always happy to help, so let me know if you have any questions. If you want the Excel and case study that I used for the below exhibits, just PM me (open to anyone).
Special Feature 1: Primary vs. Secondary Equity Purchases
Description
Primary equity involves the issuance of new equity by the company, thereby increasing the company’s equity value. A secondary equity transaction consists of the purchase of existing shares from current investors (usually at a discount to pre-money equity value) in the business and therefore does not increase the equity value of the company
Secondary share purchases from employees/founders do not come with liquidation preferences or any other special terms since they are just common shares. Accordingly, firms that have conviction on the upside potential of the investment might want to purchase more secondary shares (as they capture upside through the discounted price of the shares)
Modeling Prompt – Question
It has been indicated that our firm could participate in a Series D round that is expected to be comprised of $50 million of primary equity issued at a $500 million pre-money valuation. Additionally, one of the founders has indicated he is willing to sell $30 million of secondary equity to our firm at a $350 million equity value.
After participating in both the primary equity issuance and secondary sale, how much of the company would our firm own on a post-money basis?
Modeling Prompt – Solution
Special Feature 2: Liquidation Preference
Description
A liquidation preference is an instrument typical in early-stage growth investments, whereby a new investor is guaranteed a minimum return on their investment at the exit. The liquidation preference is junior to all debt-like instruments in the capital structure but effectively ranks senior to ordinary equity.
Modeling Prompt – Question
Building off the example above, your firm is considering asking the company to add a 2.0x liquidation preference to the primary equity portion of the investment (i.e., the $50 million).
To assess the value of a 2.0x liquidation on the primary equity component, please contemplate a downside scenario where the business is sold for $600 million. Calculate our firm's return on investment (MOM and IRR) both with and without the 2.0x liquidation preference on the primary equity component.
Modeling Prompt – Solution
so useful! always shocked at the generosity of strangers.
Have a great day.
No problem. If you or anyone else has questions, just lmk
Can you please share?
Sent you PM with materials
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Sent
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Sent you over a copy of the materials!
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PM'd you the materials. Let me know if you need anything else
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Genuinely shocked at how much you went out of your way to share such insights, please could you send across the materials via PM? I'm currently interviewing for a few top GE funds atm, and getting close to the Case Study stage, so would be a massive help. Thanks in advance!
Which ones?
Sent. Good luck with your processes!
Why isn't the secondary being diluted by the Liq Pref? That true-up should dilute all others holder? Case is silent on where secondary ranks.
Distributable Equity value = $544.1
Proceeds to Series D with Liq Pred = $100 (49.5+100)
Remain Pot = $444.1
Secondary Stake of Remaining Pot = 8.6% / (1-9.1%)= 9.46%. That is once D is paid, we have claim to 9.46% of the remaining pot
9.46% *($544.1 - 100) = $41.9 or 1.4x MOIC on secondary.
My issue with above table in your post is that you can't true-up without taking it away from others...
Thank you for pointing this out and providing a rationale, I appreciate it. I've updated my comment above to reflect the dilution from the true-up issuance that results from the liquidation preference.
Good point on the liquidation preference needing to dilute other holders.
Question though - if you're reducing Distributable Equity Value by the liquidation preference (Primary), why also adjust the Secondary % Equity Ownership? Wouldn't it just be the Secondary's equity ownership applied to a now-smaller Distributable Equity Value (e.g. $444.1)? Doing both feels like double-counting; please help if I'm missing something.
Hi! Can you PM me the materials as well? Would be greatly appreciated!
S E N T
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sent it over to you as well sir
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Would you please also share to me? Thank you
your name makes me think you work at FT partners ($140k base btw), so I was hesitant to send over. that being said, i have sent against my better judgement. tell steve McLaughlin i say hi
Hey, would you mind sharing this with me?
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PMd you the materials
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Can you please share? Will be doing a GE interview soon. Thank you!
Sent
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PMed you!
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Please PM me and I will share
Bump how’d it go?
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PMd
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I hope everyone asking for the model has at least tried to recreate the exercise themselves first…
Anyone do the sixth street model test? What was it like?
Braindead easy
Like a standard lbo? Any nuances?
Could you share some details privately?
do you mind sharing over PMs?
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Would love to hear more as well over PMs if possible
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Bump
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