PE Interview - Case Study Help (Urgent)

kanon's picture
Rank: Senior Neanderthal | 4,363

I've got a case study interview coming up in 1-2 wks. It's 3 hours to read the case, do financial analysis, and prepare a presentation/report.

I haven't gotten much clarity from the firm on the amount of financial analysis that needs to be done (re: build a simple lbo model, or do some easier calcs/valuations like multiples or DCF).

So a few things:

1) I was wondering if anyone has some sample case studies (with solutions) I can do to prep for this interview.
2) Advice from PE guys/gals that have gone through similar case studies, for example:
- how much time to allocate to quant analysis (LBO, and etc.)
- the level of detail to go into (or avoid)
- what are things you've done (or seen from candidates) that impressed you or were red flags

I know how to do an LBO model, but I'm not very speedy - so I guess that's one thing I'll practice this week.

Thanks in advance everyone!

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Comments (29)

Jan 13, 2011

Work on your LBO modeling skills. You want to be able to bang out a basic one in an hour or so, then let it guide you through what you'll present. Likely the presentation will be more of a discussion, but obviously be prepared to speak intelligently about the company and things that aren't made obvious by the numbers your model spits out.

Sounds like you will get a CIM or a teaser of some kind with background on the company, industry, historicals, and projections. Possible that the projections will be omitted and you will have to come up with them yourself and justify them. One great way to practice is to get an old CIM from someone who works at a bank (assume you do?) and use that as your "case study." Or, you can recreate the KKR case study interview, get a 10-K and 10-Q, and work from there.

You need to be able to get the model done and functioning (by functioning I mean it actually tells you something useful and works with your investment thesis), but mostly you need to be able to articulate why or why not the investment makes sense.

Jan 13, 2011

Thanks zsurf - any suggestions on where to get a 'basic' model to practice with? I have one, but I'm not sure if it's ideal. I also have access to BIWS modeling and they have a basic one, but again, I'm not sure if that's considered a "one hour model" or not.

Jan 13, 2011

Usually it involves building one from scratch, or you're given a template that varies from a basic shell to pretty much done. It can range from starting from Book1.xls, to getting your historicals/transaction assumptions typed into excel for you, to basically only having to create the cash flow sections of the model. If it's 3 hours, I would assume that it's somewhere between Book1.xls and basic shell template.

One hour model depends on your definition... keep it within your abilities. Is the model template you have on hand something you think you can replicate in about 1-1.5 hours? You definitely want to save half your time for understanding the company and rationale behind the potential investment thoroughly.

Jan 13, 2011

Obviously depends on industry for the level of detail. I'd say keep it simple, maybe 5-7 years of projections with a simple debt structure. I don't think that you'll have the time to build out something very complicated.

On the actual presentation/report, make sure you take a side, either way. They are looking for an investment recommendation, so best to be clear as to 'buy' or 'not buy'. Obviously, you will not be able to pull up market comps and stuff so I don't think you need to worry about that kind of support. I would, however, look at industry multiples for the type of investments your firm makes. High-level should be fine (and this can help you potentially get to an exit value).

Jan 13, 2011

You're going to want to keep the model simple. You will not score extra points (or that many) for having a slightly more complex model that takes into account a few extra factors, etc... what you will score a lot of points for is knowing about the company involved. Focus on things like the company's competitive advantage, position within the industry/segment, the unlocked value within the company and how you're going to access that, etc... They're going to want to see that you can think for yourself.

And I agree with HerSerendipity. Be sure you to take a side clearly --- buy / don't buy. It's fine to discuss the risks and potential negatives of a "buy" rec. and vice versa (indeed you should see both sides of the argument), but don't be indecisive! Also, as HerSerendipity mentioned, make sure that the investment is not only a good investment but that it's a good investment for THE FIRM... meaning it fits well within the investment strategy and that the return profile is somewhat close to the fund's target returns and so on. They'll be impressed if you address this big picture stuff.

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Jan 13, 2011

double

Jan 13, 2011

Thanks zsurf, HerSerendipity and Intl Pymp. Unfortunately, there's not a whole lot of transparency on the industries the firm prefers - it's fairly optimistic. I could probably find a few of their investments via CapIQ... but that's the extent of it. So if the case turns out to be a very similar company, I can look at it as a possible buy & build option.

Thanks for the heads up on the non-quant stuff. I'm curious to see if there's any good sample case studies done - just to see how much or how little can be done in 3hrs though. (For the time being though, I'll try and find a CIM like zsurf suggested).

Jan 13, 2011

If they are industry agnostic, you might at least be able to learn whether they are a more growth-oriented firm or more of a traditional LBO firm. The latter is more akin to tapping investment banks for high leverage debt financing packages, the former tends to use more equity as a % of enterprise value and less conventional financing instruments, as enterprise values tend to be smaller for growthy companies (thus making debt financings too small and illiquid to be attractive for large banks to underwrite and syndicate). Knowing the firm's "type" in terms of investment should give you a hint as to whether or not the subject you're analyzing would be viewed as an attractive asset or not.

If you have no idea, companies with defensible/dominant market positions and stable, predictable cash flows are always likable from a PE investor's perspective.

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Jan 13, 2011

^ Just curious, what are some examples of the 'less conventional financing instruments' for the more growth-oriented PE deals you mentioned?

Based on the one or two deals I can find on CapIQ on these guys - they're the latter (more traditional approach).

Jan 13, 2011

Club term loans, unitranche term loans, mezzanine debt, even private placements. Smaller banks tend to put these deals together, or even debt funds. For example, Apollo (a massive PE fund in its own right) is also a big debt investor, and puts together mezzanine financings to get small deals done or to round out the most junior tranches of larger deals. Same goes for GSO, which is the debt fund associated with Blackstone.

"Traditional" instruments would be syndicated term loans (aka term loan B) and high-yield bonds. These are larger ($100 million+, at least) tranches with enough liquidity to trade in the secondary market.

Hope this helps.

Jan 14, 2011

It varies from shop to shop but....

DO make sure you give a definitive INVEST or DONT INVEST ANSWER
DONT get caught up in overly elaborate and unnecessary details like 4 different tranches of debt, dual class share structure, etc...

Jan 13, 2011

So about the LBO model - would it be alright if I skip the balance sheet to save time?

Jan 16, 2011

you need the debt schedule from the balance sheet and you need to capture working capital change for your cash flow statement. you don't need to build out the full balance sheet (PP&E, equity account, etc.)

to capture working capital change, you potentially don't need balance sheet accounts. you could just model a cash flow line for working capital change and then drive that line as a % of change in revenue (so % driver is "working capital change as a % of change in revenue"). or you could set up a working capital BS line and just base that on a % of revenue (working capital as a % of revenue). if you have historical balance sheet data from a cim or filing, you could set up the actual Accounts Receivable and Accounts Payable accounts, etc., to show that you know how to model these accounts based on days payable or days receivable drivers, etc. i would only do the individual WC accounts if you feel like you have enough time.

Kanon:

So about the LBO model - would it be alright if I skip the balance sheet to save time?

    • 1
Jan 13, 2011

thanks bankbank - what about deferred tax liabilities? Do I have to bother with a tax schedule or can I just take the EBT x tax rate without adjustments DTL or the depreciation write-up or amortization write-up?

Jan 16, 2011

EBT x tax rate should be fine. if the company is generating negative EBT, you could build in a schedule for NOL generation and utilization.

Jan 13, 2011
bankbank:

EBT x tax rate should be fine. if the company is generating negative EBT, you could build in a schedule for NOL generation and utilization.

Thanks! Much appreciated. The one example LBO I had (which also had balance sheets and all) I couldn't do in 1 HR... it took 1.5 or more... I could be slow, but I feel like I may just be better off taking out the balance sheet (but obviously keeping the debt schedules, and maybe even showing days receivables, payable, inventory calcs as opposed to working capital as % of sales)

For those that have access to BIWS - is the basic LBO model used by Brian sufficient? Or too basic?

Jan 13, 2011

To shave time, cut out the full b/s -- in a simple LBO analysis, many of the items are flatlined anyway. Ensure you have the debt schedule (as mentioned above) and figure out how to account for change in working capital. Most growing companies will be users of cash for working capital, so the suggestion above to tie it to revenue isn't a bad shortcut. I doubt you would dig in as deep as trying to analyze DSO/DPO.... unless you notice that the balance sheet is really working-capital heavy, in which case you might want to investigate (think payment stream companies).

Don't have access to BIWS but sounds like you're on the right track.

Jan 16, 2011

Yes, skip the full balance sheet unless they specifically instruct you to include one and only the more detailed WC stuff if you have extra time and if WC is heavy for the company. as zsurf says, in a lot of cases it's a relatively small annual use of cash because the company is growing (very simply - if you sell widgets and you are growing revenue, you need to buy more widget inventory, i.e. increase your working capital, to have more widgets to sell).

In my current private equity job, we focus on a lot of companies where working capital doesn't really matter and I build tons of quick, one-page LBOs where I just leave the "change in WC" line out of the cash flow schedule or I just assume it's zero. In the situations I look at, WC usually won't move the needle on returns. However, a lot of PE firms that do more operational improvement stuff focus on companies where WC is more important, and improving WC management is often one of the places where they'll look to make their money.

zsurf:

To shave time, cut out the full b/s -- in a simple LBO analysis, many of the items are flatlined anyway. Ensure you have the debt schedule (as mentioned above) and figure out how to account for change in working capital. Most growing companies will be users of cash for working capital, so the suggestion above to tie it to revenue isn't a bad shortcut. I doubt you would dig in as deep as trying to analyze DSO/DPO.... unless you notice that the balance sheet is really working-capital heavy, in which case you might want to investigate (think payment stream companies).

Don't have access to BIWS but sounds like you're on the right track.

Jan 18, 2011
bankbank:

Yes, skip the full balance sheet unless they specifically instruct you to include one and only the more detailed WC stuff if you have extra time and if WC is heavy for the company. as zsurf says, in a lot of cases it's a relatively small annual use of cash because the company is growing (very simply - if you sell widgets and you are growing revenue, you need to buy more widget inventory, i.e. increase your working capital, to have more widgets to sell).

In my current private equity job, we focus on a lot of companies where working capital doesn't really matter and I build tons of quick, one-page LBOs where I just leave the "change in WC" line out of the cash flow schedule or I just assume it's zero. In the situations I look at, WC usually won't move the needle on returns. However, a lot of PE firms that do more operational improvement stuff focus on companies where WC is more important, and improving WC management is often one of the places where they'll look to make their money.

zsurf:

To shave time, cut out the full b/s -- in a simple LBO analysis, many of the items are flatlined anyway. Ensure you have the debt schedule (as mentioned above) and figure out how to account for change in working capital. Most growing companies will be users of cash for working capital, so the suggestion above to tie it to revenue isn't a bad shortcut. I doubt you would dig in as deep as trying to analyze DSO/DPO.... unless you notice that the balance sheet is really working-capital heavy, in which case you might want to investigate (think payment stream companies).

Don't have access to BIWS but sounds like you're on the right track.

can you please expand on how exactly companies manage WC. I know the basics: reduce inventory, decrease receivables, increase payables, but am looking for more in depth explanation on the whole process. also, for these operational focused PE firms, how do they forecast WC improvements (since it plays a big part in getting to a certain IRR range)? I assume they benchmark WC changes from past deals, take a haircut and then apply it to the current deal. So if in a previous similar deal, they reduced inventory by say 20% (during the holding period) and increased payables by 30%, they'll assume 10% inventory reduction (20%-10% haircut) and 20% increase in payables for the current deal?

Jan 18, 2011

What exactly are you asking for? Pick a company, download some K's and Q's and build the best model + deck you can in x hours... That's roughly how the case will go anyway.

Jan 18, 2011

Not sure but my guess is that a FOF case study is going to be very different from a typical PE case study that you can get insights on the threads in here. Reason being that in a FOF role you will be looking at funds and not companies. Worth reading on the websites for Calpers etc. to see what they look for in their fof investments. My guess is things like track record of the previous investments, team strenght, investment style (lbo, mezz, distressed, etc. ) matter as in a given market the fof might favour a particular style. For eg. if you have regularly been folllowing the market you would have noticed how fundraising has been difficult specially for the mega LBO funds, implying that less fofs are going for LBOs (but there is less available money generally as well).

Jan 18, 2011

You should also make note of:

$400 billion of dry powder
Reduced sizes of PE funds
PE funds closing on their low-end targets
Increase in add-on and platform acquisitions

Jan 18, 2011

I had a couple of PE FoF case studies, but they were not extremely difficult. A lot of it required paying attention to detail, as they footnoted items/instructions throughout the Excel file. For example, the case study told me to convert all amounts to USD, since some companies on the list were in EUR or GBP. Also, they gave me a list of 10 private/public companies, but the instructions said only to work on the private companies. However, I did have time constraints. I feel that I have very good Excel skills/modeling skills and was close on their first timing deadline, but I went the extra mile and footnoted additional explanations/formatted everything. A lot of it is being able to show your thought-process when you're working on these type of exercises, but you are expected to get the majority (if not all of it) correct, as the underlying case study is not extremely difficult.

PE case studies are more focused on financial modeling than the PE FoF. PE FoF wants to see your proficiency in Excel, whereas PE wants to see your ability to do an LBO quickly and accurately.

Jan 18, 2011
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Jan 18, 2011
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