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May 31, 2024
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Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
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Based on the highest ranked content on WSO, both COMPS (Comparable Company Analysis) and DCF (Discounted Cash Flow) are important valuation methods that are often tested during the Private Equity recruiting process. However, the LBO (Leveraged Buyout) model is typically the most critical for PE interviews. Here's a breakdown:
LBO Model: This is the most relevant for PE interviews because it directly relates to the type of deals PE firms engage in. Candidates are expected to be proficient in building LBO models, which demonstrate the potential returns a PE firm could expect from an acquisition using a significant amount of borrowed money.
DCF Model: While not as central as the LBO model, a DCF is a fundamental valuation technique that PE firms use to determine the intrinsic value of a company by projecting its future cash flows and discounting them back to present value. Understanding DCF is beneficial and sometimes required.
COMPS: Comparable Company Analysis involves valuing a company based on the metrics of similar companies. It's a less common model in PE interviews but knowing it can showcase a well-rounded skill set in financial modeling.
During a PE recruiting modeling test, you may be primarily asked to build an LBO model, but having a solid grasp of DCF and COMPS can certainly be advantageous and may be required in some cases. It's best to be prepared for all three to demonstrate versatility and comprehensive valuation skills.
Sources: PE Recruiting: Deciding what firm is the best fit, PE recruitment process in London, Is H1-B required for Private Equity Recruiting (on-cycle), Recruiting process after spending two years as PE Analyst, please help Invited to Lateral On-Site Modeling Test. How To Prep for Op. Model/M&A/DCF?
Those are all used congruently. Comps help find a entry/exit multiple, and an LBO model is just a DCF model with an added debt piece. 99% of deals in PE are using leverage so learning how to build an LBO effectively would cover all 3 topics.
I was just wondering if they usually have you do COMPS during the modeling test
Depends on the firm and position, but more than likely no. In a 1-2 hour modeling test, you don't have enough time to go do a bunch of research on what comps would be for the fake deal. Especially if you're entry level and aren't trained where to look or have enough years in the field to have a sense on what multiples transactions have been going for recently.
Got it, thank you!
Why are you capitalizing comps
Bro thinks it’s an acronym
No, just an excel and/or paper LBO. Have recruited off-cycle for a number of UMM / MFs personally and have friends that have gone through a bunch more processes, and no one was asked to run comps or a DCF. May be some technical / verbal interviews with questions are them, though.
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