is it ok to suggest a 'NOT buy' in a PE case interview?
Hi, everyone. I'm practising writing investment memos based on CIMs for a 30 min PE case study interview. I built easy LBO model for the financial part. For both cases so far, my LBO outputs both suggested 'NOT buy'. I know the case study is to test whether I can articulate investment theses and back then up with solid rationals. However, whether it's OK to write a 'NOT buy' investment memo in a case study? Becase I assume a traditional IM is a 'BUY' one.
Yes - you’ll say no ~100% of the time in PE. Read the CIM with skepticism.
Really? I ask this because I searched on Google and almost all IM structure tutorial or slide templates are constructed for a 'BUY'. i.e. catalyst, rick management, post acquisition plan, etc. I just wonder whether a 'NOT' buy IM contains fewer parts than a 'BUY' IM.
Its easier, for someone breaking in, to write a ‘BUY’ but you should stick to your analysis and not take the easy way out. There’s no one size fits all approach in PE. Are you really gonna change your rec to BUY if your model is spitting out 11%?
Do the work and decide the rec, pretty simple. Anecdotally, I said no for the case study at my current firm.
Thank you. I'm just afraid that the CIM provided is one of their previous deal. So if I say sth bad to that company, I'm afraid the interviewers will not be very happy. What kinds of questions they asked you regarding your 'NOT' buy IM?
I would frame it this way: what would you have to believe from an EBITDA growth / multiple perspective in order to do the deal? And what does that EBITDA growth likely imply wrt market share, pricing, cost savings, etc.
For what it’s worth, I shot down the company they gave me hard. Turned out to be a very successful investment in the portfolio but the points I made aligned with the risks that saw pre-investment so went well
I would argue that the main reason you should really say "no" to a deal based on a CIM case study is if, based on your analysis, you determine that for some reason the business actually doesn't fit within the scope of the types of investments that the fund looks at.
For example, if you were at an infrastructure fund that is focused on achieving high single digit / low double digit returns on highly certain regulated or firmly-contracted investments, and the CIM makes it clear that the investment actually doesn't fit that criteria because its contracts have no minimum volume requirements and are short term in nature, then it would be a reason to pass on the opportunity. Or, if based on your analysis, you come to the conclusion that you disagree with the growth / stability drivers presented in the CIM such that this is a melting business and you actually don't think you can confidently point to an exit at a reasonable multiple, that could be another reason to say it should simply be passed on.
But often, the CIM analysis case study "situation" is to determine what you should submit as a first round bid, so unless a situation like the two I cited are in play, if the business does in fact fit the mandate of the fund, there should be some price that is acceptable, and that should be what you suggest you bid in at. One way or another, a potentially more important point will be articulating the risks in the investment and areas of further diligence, which you can really do regardless of recommendation (whether framed as things that could be dealbreakers or dealmakers).
This is spot on, not sure why it was down-voted.
I think the other point to mention here is that most firms that I've seen give case studies based on opportunities they've spent at least a fair amount of time diligencing and in many cases actively pursued. With the limited information, time and expertise you as an interviewer have, shutting it down and saying it doesn't at least merit a bid at x value, can risk coming across the wrong way to people.
I downvote because I can.
Agree with this. I think with most case studies the point is for the team to see if you can spot similar things they like about a situation and get on the same page. I don' think many places are interested in trying to "trick" candidates with bunk case studies. If it is cash flowing / has assets, then at some multiple it makes sense to buy - I wouldn't shy away or feel like something is "wrong" if you conclude they need to pay 4-5x or something.
I would say most interviewers will know the case study company well, so they’ve spent time reviewing it if that tells you anything. Most case studies I saw were either prior portfolio companies or investment opportunities the fund took very far in diligence, but lost.
We're not really looking for a hard yes/no, but whether we should submit an IOI or spend more time reviewing the deal. I'd rather someone say "it looks interesting because of a, b and c, but I'd really want to dig into x, y and z to get more comfortable" and discuss it rather than just outright kill what could be a good opportunity (because we know how to mitigate the xyz through prior experience). Either way I think it’s fine to say conclude yes or no, so long as you have a well thought out thesis to support it
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