So I've now been to two different LCs and one MF for their modelling test. I was always caught a bit offguard as to how the test was structured.
I would say by far the most difficult thing was to get the operating model right. Like the case study was presented in a way that all the information was scattered around sheets (e.g., different sales per business units, forecast linked to market volumes which are somewhere else in the sheet, each line having a complex add-on "e.g., R&D grow with this for 2 years, then happens this and you need to taper it down for 3 years to x").
Long story short, I was quiet surprised because I have been following most of the LBO tests online in which the real work is 99% related to the LBO and assumptions are given like:
"SG&A 20% of revenue, D&A and CapEx 10%"
And it was always just executing sources and uses, debt schedule, returns.
Honestly a bit flabbergasted because I was so used in drilling out the debt schedule, return table and focused on some more complex LBO add-ons that the tests were pushing "MGMT options, Dividend recap, Add-On Acquisitions" that never ever appeared on one of the tests. Most tests I did didn't even have a revolver.
I don't know .. I feel lost. I def. need to get much faster and think much more about excel formulas that help me to implement some of the complexities better they drilled me for.
How would you go about training for that?
Honestly I don't know. But I think it is made like this on intension. Like everybody these days can drill down a cookie cutter LBO.
I feel like all of those assumptions were just there to pressure cook you. It was not that challening but it was very challenging given the timeline. Like I said, every line had an adjustment and it was always some mental gymnatics involved. Like not "SG&A is going to 10%" - but "SG&A will change smoothly year over year until 2025 so as to lead to a margin uplift of 0.5%".
If I were to sit in my room by myself and were not stressed this would be easy to tweak around but when the pressure is on and the time is ticking this is really tough.
Also tons of different units (e.g., one in 000, one in mn, one in units) as well as different market cuts (e.g., BU1 was growing with market A, BU2 was growing below market B).
That’s a pity because I feel like this is the trickiest part of the lbo, I’ll def try to look out for some ressources and let you know if I find any
PE_prep, sorry I forgot to respond to your DM.
I'd encourage you guys to zoom out. In real associate life, your LBO is built upon a pre-built template with tweaks around the edges but not much wholesale intellectual thought. The actual meat of modeling is designing a thoughtful operating case to capture the nuances of each deal that you're evaluating.
Therefore, these tests are smartly testing your ability to actually think and defend assumptions, not just your ability to memorize how to make a cookie-cutter LBO. I totally acknowledge that time limits make it hard to do both, but the latter is actually a better test for how someone will perform at the job, so I'm glad that firms are finding means to incorporating testing for this skill.
To practice for these, once you have the basics of LBO templates memorized, I'd encourage you to practice actually building out thoughtful P&Ls (could use public companies for practice, etc.) and defending (i) how you're modeling the business, (ii) why you're picking the growth rates, operating leverage, etc. assumptions that you incorporate.
Fully agree. I think for me it was the right wake-up call. I was just so accustomized to acing thorugh LBOs (e.g., put in assumptions, build a v light operating model forecast, debt schedule, returns) that the test format caught me offguard.
Almost laughable that I obsessed in detail on how to dilute for mgmt options to account for smal nuances/changes in the distribution waterfall but those things never even showed up.
The modeling test is to make sure you know how to use excel, understand corporate finance/accounting, are thoughtful about numbers you use/assumptions you make.
The case study is about understand your work product, thought process, and business acumen.
Nothing you described is all that complicated. Eg Roll up math, LTIP, revenue builds. If you think it’s complex, it’s probably because you haven’t seen enough reps. PE firms want analysts who got tons of reps. They’re well trained and were picked time and time again for more complicated staffings … most likely because they are really good and demonstrated an ability to figure things out.
As a consultant I am slightly cooked on this one, lmao. I've build a lot of market models but tbh the tasks I had to do on the case study rarely came up (like adj. financial statements over and over).
Anyway ... now I know where to improve. On to the next ;)
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