Private equity tough interview questions

There was a thread titled along the lines of "3 things - PE interview question" or something like that that had a long discussion that you would find useful.

No expert, and I'm not a math major or anything, but at first thought:

If you have every other input, have your proposed solution and are just solving for one variable, I'm sure you could write an equation to back out purchase price.

That being said, depending on how complicated your LBO is, plus the fact that the IRR calculation is a Newton-Rafson calculation, you'll likely run into some nasty differential equations (maybe partial differential equations, but I wouldn't say for sure)

You should be able to slightly alter the links in your model to work backwards from your assumptions (assuming you assume an IRR) to have the purchase price calculate. Essentially, you should set up your series of cash flow streams for each year over your investment horizon (including assumptions for debt paydown each year working backwards assuming some amount of your initial financing remaining in your exit year).

Alternatively, you can just adjust the purchase price in your model, while keeping your other assumptions constant, until you get your "assumed IRR". Also, be sure your iterations in Excel are on and cranked up!

Fit is more than anything else.

Maybe I am mistaken, but given that you say that most assumptions are in place, you have your exit multiple, you have your growth rates and thus you can easily compute the equity at exit. Then you just manipulate the basic IRR Formula, which is

((EndingEquity/BeginningEquity)^(1/Holding Period in years))-1 = IRR

to get to your beginning equity.

This is as back-of-the-envelope as it gets but should suffice for interviews, I think.

Thanks. I did read that thread previously and found it really helpful. And yes, I agree that fit is very important, but a solid fundamental understanding of the math of an LBO and accounting is also very important.

If someone who has been on several PE interviews could walk us through an interview and what questions they received, that would be really helpful.

As people have noted. This should be possible.

I thought I covered this pretty well in this thread:

http://www.wallstreetoasis.com/blog/breaking-into-private-equity-from-b…

I think if you make an assumption on cash flows, keeping them constant, then yes it's possible. Otherwise, as purchase price changes so will cash flows. Maybe running sensitivity analysis on purchase price and IRR will at least give you some idea of ranges.

I was given tons of technical questions when I was interviewed for the second round of a megafund. so i would suggest you to be prepared for them.

Excel does it for you. Use the XNPV formula.

I think it is very different at every level, the higher up you get the more they want you to hit the ground running. I came out of UG and had finance major with 2 other buy side internships so i was expected to know a little. My interview was pretty much all fit with a few valuation questions but for the most part they wanted me to think the way they thought and assumed i knew nothing (which i didn't). Fit is the biggest thing as you will be interacting with a lot of people (BO, portfolio company execs, and your slew of bosses).

Goal seek IRR to the value give to you by changing purchase price cell