PE interview question - If you can only know 3 things for an investment analysis?

I received this PE interview question awhile back and I was wondering how one would answer this? If I wanted to evaluate an investment opportunity for PE and I can only ask for three things, what would I ask for and why? No details are provided about the company (not what it does, not what industry it's in, so on...) Can any of you veteran or PE-based monkeys help me out? I'd like to know how to approach something like this in the future.

Private Equity Interview Question: Three things for Investment Analysis

If I wanted to evaluate an investment opportunity for private equity and I can only ask for three things, what would I ask for and why?

There are two alternate solutions to this question. Each of these solutions approaches the question from a slightly different angle. The first focuses some basic facts about a company. Those basics are EBITDA, Revenue, and Industry

The second answers the question in a more quantitative manner. This answer proposes using CAGR, LTM EBITDA and cash conversion. This solution is more thorough and would allow you to make a reasonably informed investment decision. It is worth noting that both solutions are based on understanding how private equity firms invest. Let's quickly define the measures used in both explanations.

  • EBITDA: a useful measure for a companies cash-flows.
  • Compound Annual Growth Rate (CAGR): measurement of the compounding growth over years of an investment .
  • Cash Conversion: a measure of how long it takes a company to convert initial investment in working capital to subsequent cash collection.
  • Revenue: Money brought into a company by it's core business activities.
  • Industry: groups classified by their primary business activities.

EBITDA, Revenue, Industry

[quote alexpasch - Corporate Strategy Director]By Industry I mean specific (i.e. what it does, ideally as specific as possible), so not just "healthcare" but rather "hospital company" or "medical device company"...something that will at least give you enough to get a good idea of a good comp group With these three things, you could put it in a comps and get a good idea as to valuation and company efficiency (i.e. multiples relative to peers, EBITDA margins, etc.). You could then compare valuation to industry fundamentals and see if you think that's reasonable. I used to work in PE, that's how I would answer the question. Ideally you want historical, current and projected revenue and EBITDA, but that could be violating the spirit of the question (i.e. you could just ask for all of the financials as one of the three things, lol) I would not answer insider trading, even if I were interviewing for a big megafund that did a lot of public to private. For most companies it is insignificant, and not one of the top three things I would ask for (granted it can be important sometimes, but the question is more what are the three absolute most important things for a quick go-no go investment). EV/EBITDA is better than P/E ratio. P/E can vary depending on leverage and in PE capital structure often changes after the investment is made. [/quote]

CAGR, EBITDA, Cash Conversion

User @Marcus_Halberstram", an industry CEO, shared the following overview: You have to understand what they're trying to determine with this question. And my view is they're trying to determine if you understand private equity investing, how/why it works and how to analyze an investment. If you're given the choice of 3 pieces of info: I'd ask for 5 year Revenue CAGR(%), LTM EBITDA($) and cash conversion(%). From there you can ball park an internal rate of return (IRR) in about 5 minutes in Excel. For this type of quick "should we spend any time on this" type analysis, you're not going to dig into the industry and management team. You're not going to build out a big elaborate model and make all these assumptions based on the industry you're given. After you answer this question, the interviewer will give you your 3 asks, and you'll have to give him an answer without any follow-up questions. The problem interviewers get into is they get intimidated by these sort of questions and tend to give very broad and general answers, which doesn't work for a "should I invest in this company"-type question. You need to get specific in your answer as to what data you would need, so that you get specific answers from the interview. From there you have to be able to say YES I would invest or NO i would not. If you get your 3 asks... can you give him an investment answer? Lets take a shot at it... Example one: free cash flow (FCF), industry and management experience.
  • Free cash flow
    • Company will generate $450 million over the next 5 years
  • Industry
    • healthcare/pharmaceuticals. They manufacture pharmaceuticals for race horses
  • Management
    • the CEO has 25 years of experience in pharmaceutical manufacturing, undergraduate degree in biochem and an MBA
    • CFO has 20 year experience at a big pharma company
    • COO similar background.

Almost all members of an executive teams will each have 15-30 years experience, some sort of higher education degree etc... they'll all be "impressive" on paper.

Should you invest in this company?

Example two: Business Model, 5 yr growth opportunities, management team
  • business model
    • company manufactures pharmaceuticals for race horses; they develop, design, manufacturer, market and distribute their products throughout the world to elite race horse trainers; raw materials are typical medicinal ingredients, not high volatility in pricing. Seek to differentiate themselves by working closely with trainers to identify bespoke products for particular breeds of horses.
  • 5 year growth opportunities
    • 5 year growth opportunities lie in developing new products to sell to existing customers and increasing market share in the industry. If you had asked for a specific qualitative figure you would have gotten something more concrete.
  • management team
    • the CEO has 25 years of experience in pharmaceutical manufacturing, he has an undergrad degree in biochem and an MBA,
    • CFO has 20 year experience at a big pharma company
    • COO similar background

Should you invest in this company?

Example 3: CAGR, LTM, EBITDA
  • Compound Annaul Growth Rate
    • 5 yr rev cagr is 5%
  • Last twelve months EBITDA
    • LTM EBITDA is $70 million
  • Cash Conversion
    • Cash conversion is 50% (unlevered)


  1. Estimate deal size based on EBITDA x purchase multiple (informed by CAGR)
  2. Ball park FCF generation over the next 5 years by applying cash conversion % to EBITDA and growth that FCF by CAGR each year.
  3. Apply a boilerplate capital structure to come up with an IRR.

Understand the business model, the industry outlook, where comps are trading at, any potential fatal flaws (i.e. material litigation, environmental liability issues, etc...). The only reason you care about revenue is because it drives your EBITDA, if you can get to EBITDA you don't care about revenue. The only reason you care about EBITDA is because it drives FCF and because it drives valuation.

You want to keep your answers as simple as possible, Therefore you want assumptions to be as simple as possible, you purchase the company outright, no breakage costs, etc..

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