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Wouldn't it make more sense to give them more of a case type question to get a better understanding of how they reason through a problem? Is your goal to try and stump the applicant?
I already ask "thinking" questions and we already give case studies. Goal is not to stump the applicant but to make sure they have strong fundamentals, which is why I said "fair" technicals.
Ask about pensions or the translation of subsidiary accounts reported in different currencies at a group level.
Credit rating agency pension-related adjustments is a good one. Affiliate accounting is also good (i.e. you pay cash to raise your stake in a JV from 19% to 49%, what happens to NI? What about 51%? If there is a dividend what are the tax implications).
How do you do this
.
You could ask things like "would you rather have $100 million of cash or $100 million of EBITDA?"
Stuff on capital structure...
What type of return an investor would need on a particular tranche if the interest on another tranche is x%.
If we buy a business at 6.0x EBITDA, and exit in 5 years with no multiple expansion how much EBITDA growth do we need for a 20% IRR, if we assume that have 4.0x leverage on entrance EBITDA and we pay down 50% of debt within the time period.
Things like the above...
isnt that just math in your head as opposed to strong fundamentals? your question about capital structure tranches sounds good though
These questions really stumped me. Can someone comment on how to answer the questions above.
Can you give us the answers please? Tell me if I'm right or wrong.
$100 million of EBITDA because you should get a multiple on it. Not a question. x% plus something else, I think we need more information, but not positive I don't think you need any growth. You put $25 down to buy a $100 business. If you paid off 1/2 the debt (50%*$75 = $37.5), your equity value would be worth $62.5 ($25 + $37.5 = $62.5), which is about a 150% return, which is about a 20% IRR for 5 years. Am I close?I would ask more questions -- need to know what the multiple is, but more importantly, what capex, working capital needs and interest payments are (i.e. what actual FCFE is -- $100mm of cash is way better than $100mm of EBITDA less $100mm of interest and capex). Seems a little simplistic on its face but maybe I'm not being creative enough?
If you buy a business at 6x and put down 2x, then you've put $33.3333 down to buy a $100 business, not $25. EBITDA needs to increase ~20%, or the difference between a ~15% IRR and 20%/5 years, compounded.
Can someone please clarify this question...not sure that I understand it.
Assume $10m EBITDA times 6x multiple. $60m purchase ($20 equity + $40 debt). 1.2^5 = ~2.5...so a 5 year IRR of 20% needs to provide 2.5x the intitial investment. Therefore you need $50 of equity value on exit (20 * 2.5). Since half the debt will be paid off there will be $20 of debt on exit implying and EV of $70m (50 + 20). $70m divided by the 6x multiple implies year 5 EBITDA of $11.7m
Thanks, keep them coming.
"Why do you unlever beta in a DCF?"
One specifically for PE, ask the candidate what they think is a preferable metric of a successful exit on a five year return; rate of return or exit multiple? First guess would likely be IRR as industry standard, but it always looks pretty boss cutting a check back to the LP's 3-4x on their initial check the sent you.
M+A accounting questions think are fair game. Pro forma B/S step-ups, treatment of deferred rev. / taxes.
Not sure what type of PE shop you're at; at my fund, we only manage tax exempt LP money. One thing that through me for a bit of a loop initially was going from modeling out extensive tax scenarios visa-vi NOL carry forward / back valuation, book / cash dep. etc. Maybe an idea to consider, thinking about valuation from a cash flow perspective vs. GAAP.
You're not giving us the whole picture.
What sector/group?
As you move up people expect you to know your space/group/sector so the questions are tailored to that space. If you've been doing retail for years you better know the retail numbers and what could go wrong/what retail issues could come up.
At year 5 and on you've usually carved out some sort of niche.
A simple but very important question that I missed in my lateral interview yesterday - what are some of the levers we can pull that will affect a sponsor's willingness to pay?
I don't do a lot of LBO's, so I don't really have a head for it - I kept thinking about the operating structure of the company about how can we drive up EBITDA / spit out cash so I targeted the expense structure. My interviewer was like all that stuff is constant, so I wasn't sure what he was gaming at.
At the end he was driving toward what effects IRR - namely purchase price, leverage, and exit multiple ( what we can sell the company for after our holding period). It's a simple concept that illustrates that you understand basically the entire concept of an LBO.
How do you calculate beta, what are the shortfalls and in what cases is it totally unreliable.
Given the B/S, IS, estimates for the company's funding requirements, assume you are asked to develop a capital structure that justifies a single -A credit rating. This target would require an EBIT-to-interest coverage ratio of, say 9.5 in your company industry. In addition, your structure must be robust enough in a downturn to retain at least a minimum rating of BBB+, giving it unrestricted access to debt markets. Your interest coverage should not drop below 7.5, even in the face of a 20 % earnings decline. You also want enough flexibility to make an acquisition of $1 Bn and retain the minimum rating.
Interesting, thanks guys. Such a weird way to talk about levering EBITDA instead of the asset you buy. To clarify, if some company has $100 in EBITDA per share and is trading for $400 per share, when someone says they're levering it 4X, how much leverage are they using? Does that mean they put $100 down and use $300 of leverage to buy 1 share?
Well first and foremost you are thinking about a singular investor trading in a stock. No one in banking thinks of it this way. "Levering" in the banking/PE context means issuing debt instruments in order to fund the enterprise's activities and expenditures (think financing). No one thinks about leverage as you are thinking of it (borrowing money to short a stock or to enter into a long position in a stock on margin).
This isn't weird, it is a standard way of viewing a firm's capital structure which is consistent across the industry. Everyone who you talk to will know what you mean you say "we're looking at a buyout with a 7.0x entry multiple and we're looking to put three and a half turns on it."
If you're asking people with 5 years IBD experience technical questions, you're a complete fucking tool
Apologies, however, you're the fucking tool if you're under the impression 5 yr.'s banking = 5 yr.'s of PE experience (btw, the OP stated these were for 2-3 yr. analyst). Cease to comment on this topic as you do not know what you're talking about. thx.
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