How to choose a company to analyse given 0 assumptions?
Hi all! Per my title above, would love to get some insights / validate my train of thought from PE/modelling experts.Apologies if that’s something stupid - this is my first PE interview, so I want to get it right.
I was given a set of public companies from which I have to choose one and prepare an LBO model. My understanding is that I need to choose a company that fits the most the investment thesis (growing company, focus on revenue expansion rather pure debt math)
But this is for me the trickiest part: I quickly analysed every company and got stuck because there is none that would fit the thesis.
> 2 of them had stable/stagnant revenues in the past 3 years, OK profit margin, one operates in a segment with more barriers to entry than another one. However the one with less barriers to entry seems to be more promising
> 2 of them have great growth but are enourmously overpriced. I struggle to see how this can be grown further and sold down the line at the same multiples.
>1 seems ok but it’s a very small company with almost no financial information publicly available (float c. 5%), and esp not established enough
Question is: how do I get out of the weeds ? I don’t want to choose a random company out of 5, I get a feeling that I will be judged on my choice too.
So right now I thought to go with one of the first 2 (not so much growth, ok margins, not that overpriced). Am I doing it wrong ? Or should I just go randomly with the one where I have the most info available lol
On top of that, I need to create my own assumptions about the transaction & Debt structure. I thought to check what was the leverage level in the sector, but how should I go with the pricing?
Apologies again if that’s noob, but i would be glad to receive any guidance and help. Thank you!
To tackle your dilemma effectively, here's a structured approach based on the most helpful WSO content:
1. Choosing the Right Company
2. Validating Your Choice
3. Building Assumptions for the Transaction
4. Presenting Your Choice
5. Additional Tips
By following this structured approach, you'll demonstrate a thoughtful and methodical decision-making process, which is exactly what interviewers are looking for in a PE candidate. Good luck!
Sources: Private Credit Resources and Prep, Basic Guide Ramping Up On A Company With Public Information Part Three, Q&A: I’ve held Pre-MBA MM LBO, Growth Equity and Venture Capital investment roles for funds with $500M+ AUM to $5B+ AUM, PE professional, what's your process while judging an investment?, My Investing Framework: How to Analyze a Company
I think your approach sounds about right. The main thing is that you should be able to clearly defend your choices — I don’t think there is necessarily a single “right” or “wrong” answer in this context.
I would try to dig a bit deeper into the customer base of the companies. Look through their annual reports and see whether they disclose any customer concentration, what types of customers they serve, and whether there is a meaningful exposure to blue-chip customers or, conversely, any major customer dependencies. Also think about potential supply-chain risks or other operational dependencies.
On top of that, I would spend some time thinking about potential add-on acquisitions. How fragmented is the market? Is there a meaningful opportunity to build a larger platform through M&A? It could also be useful to look at the portfolio companies of your fund and see whether there are any similar businesses or situations where you could draw parallels.
For the debt structure, I would just make reasonable assumptions and explain them. I can’t speak as confidently for the US market since I’m more familiar with Europe, but I’m sure you can find some information on leveraged finance / private credit pricing. Broadly speaking, it’s basically a benchmark rate (e.g. SOFR) plus a spread. In Europe, debt fund financing is currently around EURIBOR + ~500 bps, with bank financing typically somewhat cheaper. The exact assumption is less important than being able to explain why you think it is reasonable.
Et et enim ipsam. Quia eum eum quo amet.
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