Hi everyone,
Someone please educate me. As I have gained some practical experience in the field, I was wondering - what is the point of grilling students on financial modelling (i.e. giving them some cases to create some arbitrary model in 1-1.5hrs), especially in PE recruiting? In most of real life scenarios, you take the template of the model and adjust it as necessary - it is efficient and no one cares about ''how good'' the model is if it shows everything what is needed to be shown (i.e. adding some insane detail which really no one cares about, nor it really drives the investment). As a result, in my view, there are only a couple of reasons to test this:
- Understand candidate's Excel proficiency under limited time
- Understand candidate's basic knowledge of how DCF's, LBO's, how capital structure works (on limited basis) and etc (again, under limited time)
- Have a reasonable basis to ask them questions and maybe see candidate's thinking
Anything else?
So, I guess the question is, why we do have these tests? Is it to filter out the candidates more quickly/efficiently? Or do these skills are of such importance because assuming it is MF/UMM interview process, most of the returns are derived from financial engineering rather than being able to predict industry trends/optimize inefficiencies in cost structure and etc.
Otherwise, please tell me whether I am missing something. I understand that these skills are commoditized and it is a ''check'' in the box and it seems that utility of being a ''good financial modeler'' is a bit low.
Many thanks.
I think for an IB SA role, they don't have this as much. I remember recruiting and recruited for a UMM PE shop and I had to do a case study for the company and I also recruited for another LMM PE shop in a T2/T3 city and they also had me do a case study as well but neither one of them included LBO modeling in the case studies. Both firms were decently reputable within the space as well.
However, going back to your point, I think for PE it makes sense to know financial modeling to the T especially since most people do the 2 year program in banking, get financial modeling on the spot and come into PE with really good modeling skills. So, I think it would make sense for PE companies to test those skills at a minimal level for UGs to see if they are willing to put in the work apart from just sourcing companies to see if they would be good long term fits at the firm when they become associates at one point.
Thanks for taking the time to answer.
For your first point - yes, I was referring more to PE
For your second point - it makes sense. Per my understanding, it partially intertwines with the point I was trying to make earlier - that this is one of the quickest ways to filter out the candidates (and it shows their motivation and whatnot). Correct me if I am wrong here.
Can you elaborate more on your last sentence? Because I think I incorrectly understood it (i.e. modelling > sourcing).
I find the excel model case study a terrible way to vet candidates. Exploring conceptual understanding is as valuable with non of the fluff of a highly polished model test. Which in practice ends up being garbage in garbage out anyways.
I personally feel like I slipped into PE and the case study was highly rated by my interviewers. But candidly in retrospect I had n effing idea what I was doing or talking about.
I ended up being a good associate but by monkey-see monkey-do from what my senior associates were doing at the time—and we barely modeled at all at my firm. Excel speed was only helpful at the margins.
To me this method of filtering candidates is one more artificial gatekeeping strategy that non-traditional candidates are always 5 steps behind on. Ready to accept your monkey shits (#LegaciesAreTheRealDEIs)
Would be much better time spent if the interviews were geared towards understanding how a business makes and loses money in the real world, IMO.
Why do I get the feeling that you are underselling yourself haha
Anyways, I agree with your point of view but then I would like to flip it. In your last point, you have mentioned that it is more important to understand how business makes/loses money. Fair enough. However, I assume you are referring to more sophisticated answers (sarcasm intended) than "XYZ sells wood pellets and they incur costs by procuring wood" or whatever. Yet, in your sentence before the last one you said that '' To me this method of filtering candidates is one more artificial gatekeeping strategy that non-traditional candidates are always 5 steps behind on". In my perspective (correct me if I misunderstood something here), non-traditional candidates are always behind and they may have a harder time figuring out a more nuanced answer to ''how business makes money" based on their past experiences - because it requires access to not only materials (i.e. you can learn modelling from probably 100s of websites) but more importantly - to quality reviews/reports/industry insights where you can understand the business in more nuanced way. I am not even referring to network aspect which can be even more important here.
Valid points and granted it's been years since I went through this so it's probably not the same as it used to be.
I think my view is also biased by the middle market. What I mean is that to me a candidate who can answer your question on pallets, and intelligently walk through the operation, business risks, thinks to look out for, growth strategies etc... is as valuable whether they can put it in an LBO or not. It's more about general knowledge, aptitude and instinct. I know a case of a Goldman > HBS > PE associate who is is still struggling with these notions. they also made it through the modeling filter process and obviously the pedigree helped. Conversely, I know a guy from a total non-target who was brilliant with strong business instict and became the best performer at my fund.
my comment on non-traditional candidates is more so geared towards: (1) if you have a parent/sibling/cousin/golf or tennis club buddy in the industry that's essentially handing you the cheat sheets you need (including putting you on to the GOAT @WSO) (2) are in the prep school target school pipeline, these are barriers that are easy to clear early. But someone with a good business general knowledge, aptitude and/or instict will always fail in the head to head with these marginal differentiators that are meaningless.
Put simply, the modeling test obfuscates who may be a true strong long term performer and who is simply a pipeline product.
Amazing - many thanks for your thoughtful reply.
I fully agree with your point (again) but your answer creates another question for me. You talk about a candidate which can walk you properly throughout the business itself - in your experience, how much of this can be "taught" or "learned" and how much of this is, I don't know, a way of thinking/instincts (I am not sure how to phrase this correctly)? I realize that this is a very nuanced question and which depends on multiple variables - most likely I dont even know some of them. My question even touches on your last points - i.e. you can have the best pedigree and still dont understand how the business operates.
All good questions,
I’m assuming you’re young so sorry if these quick thoughts seem obvious:
1. Accounting knowledge and deep grasp are critical, but beyond the cookie cutter questions, I think understanding working capital dynamics well is crucial. The fine tune of this happens on the job, but having a good pre-job grasp of the implications of this is much more important to me than someone who memorizes market multiples or running the returns sensitivity tables.
As far as technicals go I think clearing this bar is definitely most important, as well as understanding a liquidation waterfall.
2. Ability to think about growth strategies or risk outside the box matters to me. I think a generally well read and rounded person can do this especially to the extent they’ve studied “business” broadly
3. I think a good grasp of macro matters, so you’re not lost as to why a valuation environment is dropping / increasing for exogenous reasons
4. I think some “decision making under stress” is something you gain with life experience, in situations that are outside of your control. There are many ways interviewers test this. But to the extent model testing does this, it’s very specific and not necessarily something a non-traditional candidate will come across.
5. Last on this list but perhaps most important is writing quality and ability. (1) because it’s actually the most used “technical” on the job skill, and (2) because good writers tend to be good thinkers.
Yes it’s a nuanced question. Hopefully these give you a sense of how I think about it.
Different funds do it differently but in credit you live and die by the model at many shops especially on the downside
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