Paper LBO Model for SA interviews?
I was wondering if anyone has had to do a paper LBO model while interviewing for a SA stint. If so, what bank was this at? Thank you for your time.
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Pretty sure this would only happen if you have interned at a PE fund before or claim to know a ton about LBO's and the interviewer wants to see if you are overepping your hand. Not the norm.
This is wrong—it was standard at my bank.
Had one for my Gugg SA Superday
did you have previous IB/finance experience? i have a Gugg SA coming up and haven't gone over paper LBOs yet
LionTree, HL RX
Blair does it
How detailed were Blair's LBO tests?
Are they like the ones in this video?
Or do you have to build the entire model?
These are very similar. It’s on paper, so there aren’t going to be complex numbers it’s just testing your ability to know how the concept works. An example:
A company makes 100m revenue a year and grows at 10% with 50% EBITDA margins. Purchase multiple was 10x using 4x leverage. You exit at year 5 for 10x and all the fcf is used to pay down debt.
What is irr, what is moic, what was sponsor equity?
You might need to write out the top line revenue so year 1: 100 year 2: 110 year 3: 121 year 4: 133 year 5: 146
then the 50% ebitda for each year.
You will then figure, ok, it was bought for 500m and 200 was debt. So 300 was equity. That 200 of debt gets paid off, then there are additional profits that are added to the amount earned (too lazy to do the math). In addition to the 10x 73m or 730m exit price.
Calculate the irr and moic on that 300m initial equity and the exit price+ the fcf earned after all debt was paid off.
congrats, you just did a LBo MoDeL
Very genuinely, much of the technicals for this industry are very straightforward and not difficult, it’s just hard to understand where to start and you have a bunch of undergrads just yanking each other off making things 1000x more complicated than it is. Another one for you all: walk me through an income statement:
+Revenue
-COGS (anything involved in producing 1 good or service)
=Gross Profit
-Operation Expenses (also known as opex, this includes things like Sales and Marketing, General and Administrative, Research and Development. It’s every cost that isn’t attributed to making 1 of the product a company produces. So an office, a salesperson, a ceo salary, all go into this bad boy.)
=EBIT (earnings before interest, taxes)
-Interest (you know this because ebit was earnings before interest and taxes and you shouldn’t get taxed then subtract debt right? It makes sense before the IRS gets you, you subtract the debt you need to pay.
-taxes
=Net income
Now, the tricky concept: Deprecation and amortization are included in the income statement, but they aren’t cash expenses and sometimes aren’t lines broken out. Instead they are hidden in the COGS and OPEX lines at times. Basically, let’s say you bought a pizza maker and it will last 5 years, that cost is recorded on the income statement, but you didn’t actually pay that amount out, the machine just got older. As a result, many people will add those costs back to EBIT to get EBITDA (Earnings before interest taxes depreciation and amortization) to give an idea of how much cash that business generates each year. The cash generated each year is important because that number is going to inform how much debt you can afford to take on and more debt means more profit if you grow an asset and the multiple either stays the same or gets bigger. (Don’t ask about what happens if the multiple gets smaller—we don’t talk about that in the industry and it hasn’t happened since 2008, so it probably will never happen and PE firms will continue to be the best place to be right?)
Currently a sophomore so haven't gone through the process firsthand yet, but an analyst at Moelis told me some different concepts that I should expect, which included paper LBO. After practicing it a few times, I don't think it's too hard. I was intimidated at first because I wondered how a "full" LBO model could ever be done in 10 minutes. They cut out all the bells and whistles. Just google "Paper LBO", first few links will show you it's quite simple.
EB my firm does
Simple LBO = Buying an apartment complex with a mortgage and using the rent to pay off debt and make complex sexier/more attractive to sell in 5 years time.
I always explain it like this and draw up a simple IRR/cash Flow waterfall. Has not failed...yet!
Had to do one for Blackstone SA
Best way to learn it: http://www.streetofwalls.com/finance-training-courses/private-equity-tr…
Had a paper LBO for Citi EMEA off-cycle
Yeah had to do one for PJT SA in London, no prior experience of IB or PE. The mergers and inquisitions youtube videos were a godsend!!
It's not that bad when I had to do it. I used Conceptual Fundamentals - LBO Modeling this udemy class to learn it in a couple hours.
Yep for both Moelis and Evercore this year
.
Had to do one for PJT Rx, HL Rx, and EVR for IB and Blackstone, Ares, and Vista for PE summer analyst programs. Like a few of the other comments have mentioned, the basic mechanics arent complicated at all and its either a you know it or you don't kind of deal in interviews. The only hard one I got was PJT's which was tricky as it involved certain distressed elements, but that's to be expected with RSSG.
MS Menlo did one. Was on excel but same concept
they gave you a modeling test as a SA?
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as a prospect i am just curious - why do interviewers ask about paper LBO? always thought that LBO is not commonly used in banking in general?
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Look. If someone asks you to perform a paper LBO it allows them to ask everything that is expected from an SA/FT within one question/topic.
You're can delve into accounting, valuation and the ability to make easy assumptions/simplifications/guesses (i.e. Depr = Capex, sales grows with X%, how much IRR is this with MoM XYZ over 5Y). You can also see how someone performs mental tasks under time pressure and the ability to work on stuff that ties together.
IMO its one of the best things to ask an applicant! Makes it easy to weed out candidates that don't know their technicals. It can definitely be learned easily but takes a bit more work than to know how the 3 statements tie together!
Very genuinely, you might flak from others, but very little of the information used in interviews matters for the full-time role. The truth is, much of the job is being a glorified note taker, exec assistant, graphic designer, etc. for the first year, then eventually you model businesses, but it’s not rocket science and is more often than not just reading a prior example and copying it.
Just like multiplication tables, it takes practice to fully understand simple LBO models. so I suggest you scout out the internet. If you want a good place to start, try the Street of Walls Paper LBO Model Example.
Not that you are doing anything wrong, but when studying financial concepts, my advice is to not try to remember steps - try to actually understand the concepts. It’ll come more as a breeze to explain during interviews.
If you need to go back to the basics in order to comprehend LBOs better, then I’d read up/google on the topics of leverage, debt vs. equity (including the different types of debt), cash sweep, sources and uses, credit analysis (credit risk, credit support, and credit capacity) unlevered vs. levered FCFs, minimum cash requirement, calculating IRR, and 3 ways to create value in an LBO (delever, operational improvements, multiple expansion).
lmk if you have any more specific questions.
I did a few however they were quite straightforward.
When you guys say paper LBO's, are you guys talking about the questions they do in this video?
Like where they tell you the entry and exit multiple as well as leverage and EBITDA growth rate? Or are we talking full-fledged model? If the latter, that's hard.
When you're done with Street of Walls, I'd recommend the "Conceptual Fundamentals - LBO Modeling" course on Udemy. It's just $20 and walks you through a more complicated LBO.
When I’m interviewing candidates I ask analysts 3 and above to do a paper LBO. I think it is overkill to ask an intern/1st year analyst etc. I do the LBO test because at that point in your career (at my bank at least) we need people who can do an LBO and teach those junior to them.
As an aside I also do a working capital paper test which is a good test of their skills.
BofA does for lev fin
Possible at any of the EBs
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