PE Associate Questions Recieved - On-cycle 2022

Want to open the flood gates on PE interview questions to help all parties involved going through 2022 on-cycle.



Round - Initial/Final

"Q" - "Question"

PA - "Proposed Answer"

I'll go first...

Size: MM

Round - Inital

Q: What are the different types of debt covenants? Use cases for these covenants?

PA: Maintenance covenants require the borrower to maintain a certain equity cushion or debt coverage cushion to maintain their ability to repay its debt. Incurrence covenants prevent the borrower from taking certain actions which could be detrimental to existing lenders such as taking on more debt or paying out cash dividends to equity holders.

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Comments (23)

  • Analyst 2 in IB-M&A
Sep 16, 2021 - 3:26pm

Thanks. I'll add later. But want to clarify on the above. You mean incurrence covenants not insurance covenants right?

An insurance covenant are a term you sometimes here, but it's literally it's name. To make sure you have insurance on the real asset you borrowing against

  • Analyst 1 in IB-M&A
Sep 16, 2021 - 8:29pm

This will be great if we can get it going, very interested. Thanks for doing this

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Sep 17, 2021 - 9:44am

Sharing a few that I got this week...


Size: MM

Round - Initial / Superday

Q: For a growing company, would you rather have a $1 increase in price, volume or decrease in costs and why?

PA: Price given it drops directly down to the bottom line. 

Q: You have a company with $4mm in EBITDA that you buy for 5x with all debt in Y1. You sell 2 years later at 9x with EBITDA growing $1 each year ($6 EBITDA at Y3). Assume CF conversion of 50%, how much value was created from multiple expansion, EBITDA growth, and CF generation?

PA: Buy for $20mm using all debt. CF each year is 1/2 of EBITDA so 2, 2.5 and 3 in each year = 7.5mm. Sell for 9x of Y3 EBITDA = $54mm 

54mm - 20mm of debt + 7.5mm of cash flow = 41.5. 7.5 is attributed to cash flow, (9-5) * 4 (EBITDA at Y1) = 16mm attributed to multiple expansion, and (6mm-4mm) * 9 = 18mm attributed to EBITDA growth

Also saw a few more complex paper LBOs including PIK debt, earn outs, buying and selling midway through the year so having to calc LTM figures, etc.

Most Helpful
  • Associate 1 in PE - LBOs
Sep 17, 2021 - 12:40pm

A $1 decrease in costs equally drops to the bottom line while also boosting margins. Assuming a base case of $100 revenue and $50 costs:

Price increase: $101 - $50 = $51 dollar margin, 50.5% margin (51/101)

Cost decrease: $100 - $49 = $51 dollar margin, 51.0% margin (51/100)

The dollar contribution to the bottom line is the same but a higher margin relative to the rest of the industry gives you grounds for a higher valuation. Of course, no one is paying up for a 0.5% margin difference but the principle stands true.

The flip side of that is realizing a dollar increase in your product/service further proves the stickiness/demand for it and can be pointed to as evidence of being a truly differentiated offering, or it could just mean you're a few months ahead of the competition with your pricing. There's nuance everywhere, and it's funny how important storytelling (PoSiTiOniNg) really is in M&A.

There isn't really a right answer, as is the case with most of these questions that aren't looking for a return percentage/MOIC. What's important is explaining the thought process.

EDIT: I should caveat that "grounds for a higher valuation" also depend on the industry at hand and how the company is being valued by buyers and who those buyers are. If you're selling a SaaS company that has a 1:1 comp which a buyer is referencing for their bid and that comp was valued off a revenue multiple, it makes sense that a price increase would increase the value more than a cost decrease. Vice-versa if the company is an industrial manufacturer.

Sep 20, 2021 - 1:46am

There is a second answer--you are factoring mult. expansion at the Y1 EBITDA and EBITDA growth at the expanded exit multiple.  You could do the reverse, so that (9-5) * 6 (EBITDA at Y3) = 24M attributed to mult expansion, and (6M-4M) * 5 = 10M attributed to EBITDA growth.  Gets you to the same place.

  • Analyst 1 in IB-M&A
Sep 17, 2021 - 3:57pm


Q: how would you value a private company without access to comps/ precedent transaction multiples and only having the historical financial statements?

Pretty sure I botched this but did get into a conversation about analyzing historical revenue and margin trends, capex requirements etc. and trying to make assumptions re growth to do a DCF.

If anyone has a solid answer, would appreciate more insight.

  • Analyst 2 in IB-M&A
Sep 21, 2021 - 11:25am

Since it's a MM fund interview I would probably go with an LBO to value rather than a DCF. Instead of using a discount rate, you target an IRR to determine value today.

  • Analyst 1 in IB - Cov
Sep 18, 2021 - 3:00am

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