Got this task during an Private Equity internship interview, how to handle it?
Hey Guys,
During one of my PE summer analyst interviews I got a financial report of 40 pages in front of me while the analyst said: I am going to take things out of my car now, I am back in 5 minutes and after that I want you to tell me if you would buy this company and for how much.
It was my first PE interview ever and I couldn't organize my thoughts and did not exactly know what to look at. What would you have looked at in this short amount of time and how would you have valued the company ?
balance sheet to get to enterprise value...
look at EBITDA growth and guestimate about where you think they could be in 5 years - use your assumptions to get to a value of what you could sell that company for and back into what you would need to pay today to get a 3x return based on your assumptions.
So you mean building an EV/EBITDA Multiple for today, than multiplying it by my estimated EBITDA in 5 years to get to the EV in 5 years?
Just an understanding thing: But how do I get the equity value in 5 years then? Can I just substract the items of the balance sheet today ? I mean it could be that they have changed in the 5 years?
The multiple today does not matter and is not known.
Lets just assume the company youre looking at sells something and is mature and has had $10mm of EBITDA for the last 3 years (based on financials). The company has net debt of 0 (from the BS). Lets assume it keeps that $10mm of EBITDA for 5 years.
In 5 years the company will have generated $50mm of cash (rough guess based on EBITDA). If you assume that you can sell the company for the same multiple you bought it for, then all you care about is leverage (which you can use a reasonable assumption to determine). You can do some algebra here if you want to get fancy (kidding, but actually serious), but you can now use the entry and exit values to determine where you would have had to start to get your 3x return.
Assume new financing for the deal.
Whether you have 5 or 30 minutes, the process is always the same: - Step 1: Read the exec summary to understand what the company does => growth story, mature business, turnaround, etc. - Step 2: Go through the P&L and understand the main trends (i.e. strong top-line but still poor profitability, weak top-line growth but improving margins, etc.). The growth stage and trends observed should match except if the company is going through specific events - Step 3: Check the balance sheet to quickly see if this is an asset-light / capital intensive business, if the company is highly levered or sitting on a huge pile of cash, etc. - Step 4: The CF statement will tell you if the company has a sustainable operating cycle and how much Capex is invested
Based on all these elements, you should have a decent understanding of the company and its business model. Depending on the investment style of the fund you are interviewing with, you can already tell straight away that some companies wouldn't be selected (e.g. a turnaround story for a growth equity fund). But be careful, don't say it's a bad investment, just flag it's not an investment that would fit the overall investment strategy of the firm.
If you have already done all that, the valuation discussion is much easier. Usually, your interviewer will help you a bit. If not, know the most common multiples used in the industries they invest in and the kind of multiple one could expect (e.g. an investor would pay c.6.0x NTM EBITDA for a food processing business, anywhere between 0.5x and 30.x NTM sales for a fast growing e-commerce business, etc.)
Don't forget that we care less about the answer than the way you structure your answer.
As usual, if you have any question, let me know!
Camondo
This is gold -- thank you man
This. A common problem people have is spending too much time thinking about the financials and not enough time on the business, industry and operations. It's much more important to me for you to have a concise investment thesis supported by highlights and risks about the company, and to explain why the risks are / aren't a potential deal breaker.
Some qualitative things to look for and mention: competitive landscape (what differentiates them from the competition, what's their value prop, market share and total addressable market, barriers to entry, substitute products), customer concentration and how sticky customers are, end markets served, product portfolio diversification, IP, raw material cost volatility, growth through volume or pricing, important industry trends, how cyclical is it and the end markets served, etc.
interviewer gets a gold star for multitasking abilities
tell him to go fuck himself and ask to see a senior person. i almost feel like this analyst is being a dick to you.
a more senior person would have brief you better: - we have this consumer company with US$200-500MM in sales - they have 2-3 lines of businesses and thinking about options - a strategic investor with 2x bigger in sales in looking to acquire them - what is your opinion on how this company's valuation, what is the deal rational and how to proceed with this potential transaction
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