PE Interview - Case Study
Hi everyone,
I have an upcoming interview in a mid-cap PE firm with a 3-h Case Study. Includes a model and a presentation.
Could any of you share your thoughts on the following questions?
1) DCF / LBO
It has been discussed in similar threads not to go into too much detail with the LBO.
BUT:
- Some CIMs would not include transaction details, including valuation. It means one would need to come up with a quick DCF analysis?
- Or what is the best way to approach this?
- How detailed should the DCF should be? Some things like WACC components, detailed WC and Capex calculation might take a lot of time, but bring limited value.
- How does one define the valuation? EV divided by EBITDA of which year? Current or forecast next year?
- Then, should one take the resulted valuation as an entry multiple assumption for the LBO?
- And use the financial projections as a base case for the LBO analysis? Then, introduce best/worst case scenarios from that base (management) case from the CIM?
2) Reading the CIM
All CIMs are done in a "sales mode" and include only positive information about the firm and the industry.
How does one get the risks / threats in such a CIM?
3) Deriving important insights
A few similar threads might include posts on what to look for in the CIM. E.g. look at how diverse Company's revenues are based on customer concentration. But how exactly should one measure / assess the following indicators? Based on what?
- Company's pricing power
- Buyer / supplier power
- Risk of substitutes?
- Entry barriers?
- Position in the industry (if m. share is not explicitly given)
- Intensity of competition / industry concentration- just # of players?
- Cyclicality of the industry?
- Key drivers / risks of the industry?
- Exposure to commodity prices
- Exit opportunities (timing, multiple)?
- How much LTV to take?
Bump
I did a half day case study recently and got the job so can give you my opinion.
LBO definitely needs to be detailed. This is the bread and butter of the case study. They want to see you can put together a robust model with no supervision. S&U, I/S, B/S, SCF, debt schedule, working capital schedule, and returns are all necessary. Needs to obviously flow correctly, no technical mistakes should be made. Second thing is you should use reasonable assumptions, they are not going to give them to you. Try 8x EBITDA multiple purchase price with 5x of debt (3x term loan, 2x term loan B) and see if the result makes sense (ie they can cover the debt payments). Use sensible interest rates and have cash flow sweep to term loan A. You don't need DCF unless they ask for it, which they likely won't. You can just do one case and call it the management case. This should take about 2.5 hours if you are pretty good at this. 2) CIM - you have to use judgement and common sense. What could risks to this company and industry be? also, sometimes the CIM covers them without explicitly doing so. For instance it might indicate high capex, which is a risk, or some issue they are turning around, or some lack of barrier to entry. think hard and find some risks. 3) you're not going to quantitatively assess these. but you need to make a recommendation to either buy or not buy the company. either way, you are going to list the business and investment merits and risks. So you could say "a risk to the business is the lack of pricing power - prices have stayed stagnant the last 3 years and consumers are likely to flee to a competitor if there are material price increases." again you have to figure this kind of stuff out on your own and read between the lines in the CIM
Thanks a lot, very helpful!
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