When you go through the interview process with private equity firms, particularly if you move along in a process at a middle market PE
shop, you will almost certainly be asked to do a case study.
So, just what is the PE case study
? While it varies from firm to firm, here's what it generally will look like. You get a copy of a CIM
(Confidential Information Memorandum), usually from an old sell-side process that the PE
firm took part in, and are asked to throw together a basic LBO
and write up a basic buy-side investment memo.
The fun of this sort of process is that the end product is often very much in your hands. In my interview process, I ended up going with a two page memo that more or less condensed the important parts of the CIM, analyzed the pros / cons of the business, and included a SWOT analysis.
While I went for brevity, I've also seen people throw together brief PowerPoint decks. If you aren't given a particular format, you can run with it in whatever way you think will be most effective.
Format aside, let's breakdown some of the important elements to keep in mind when you're putting together a memo for a Private Equity Case Study.
Now, given that you're generally given a pretty short time table to put together your memo, let's first have a look at some of the main factors you should focus on when you read through the CIM
and analyze the company.
Is the Target Company a Good Buyout Recommendation?
Remember, you're trying to determine whether or not the target company is a good candidate for a leveraged buyout
. This means more than simply plugging management's numbers into an lbo model
with basic debt assumptions. It means taking a holistic approach to analyzing the company. So, what are some of the main things you might want to focus on?
- Historical and projected growth and profitability To ensure that the company will be able to handle the additional debt brought on through an LBO while also providing for a strong return on investment through growth in revenue and profitability
- Diversity of customers / products A company might have strong financials at first glance, but you'll want to make sure they aren't overly concentrated in one product area or with one customer. Customer concentration issues can be problematic, particularly if the business itself doesn't have specific technology or process advantages over its competitors. If there is any notable concentration, it had better be able to prove that it's got sticky customer relationships, so to speak
- Differentiating factors of the business This ties in with points 1 and 2. Does the target company have specific technology or processes that will enable them to continue to grow and maintain margins going forward, or are they susceptible to margin erosion as competition increases
- Industry focus Is the company in a growing industry? How will it handle potential economic turmoil? How well is the target positioned in its industry? Is it a leader? Note that leader doesn't necessarily mean that it has the most dominant market share, it could be a leader in a niche segment of its broader overall industry.
- Management What's the management team like? Is it a founder-owned business? Has the team been together a long time? How built out is the team?
The strength of the management team is very important, and it plays a particularly important role in the middle market. Oftentimes, you'll look at companies with very thin management teams. Or companies with owners who are looking to cash out and take a smaller role in the company going forward. These cases allow a PE firm to potentially add value by placing solid professionals into management roles.
- The Exit A company can be an absolute cash cow, but you'll need to be able to exit the investment at some point over a reasonable time frame (generally 5 years) in order to generate a suitable return on investment for your investors. You'll want to have some ideas as to where suitable buyers might come from. Is it a business that will likely be sold to another financial investor? Or perhaps the play is to grow the company and then sell it to a larger player in its industry. Obviously you won't be expected to tell the future, but you'll certainly want to have an evidence-based rationale for what you believe might happen. And saying "an investment banker will figure it out" doesn't count as an answer.
CIM and Private Equity Case Study Interview
Now, reading a CIM
will get you pretty far. You'll learn a great deal about the target company, its growth prospects, its industries, and its alleged upside potential. However, the CIM is a sales document.
Bankers are paid big bucks to put together top notch marketing materials to get their clients a lot of dough in a sell-side process. So, while you can glean a ton of useful information from a careful read-through of a CIM
, you'll also want to have something of a skeptical eye. Invariably, you'll have questions and concerns that you'd like to raise with management in the next round of the sell-side process.
Questions to Ask About Case Study for PE
What sorts of questions might you ask? It's tough to boil it down to a few solid questions on a generic basis, but let's give it a shot anyway. Here are some examples:
- What is the biggest challenge your company faces?
- Who are the most important members of your team and why?
- What are your company's pain points and how can we help to address them?
This is a great time to come up with specific questions based upon issues you uncovered in your read-through of the CIM
. Do they have concentration issues? Do you want to ask about specific patents they hold? Now is the time to ask those questions and cover those issues.
So, now you've done a deep dive into the target company, you've addressed its strengths and weaknesses, and come up with some additional questions for the management team...what's left?
The LBO Model in Private Equity Case Study
In my view the importance of the model is not necessarily to ensure that you are an LBO
kingpin. What's most important is that you can put together a competent model with reasonable assumptions.
It's not about showing off with tons of bells and whistles, it's about using the information you have to create a reasonable LBO model
and intelligently interpreting the results within the context of everything else you know about the target company.
You'd be shocked at how overly complicated people can make this portion of the case study. Don't over-think it. At the end of the day, you're not necessarily going to be hired because you are an excel grunt. That's certainly part of it, but senior folks are going to also want to make sure that you understand the investment process on a holistic basis. Not simply the process of an LBO
, but the rationale behind why you would or would not buyout a company.
A great case study combined with solid interviews and a decent understanding of the technical aspects of leveraged buyouts are the keys to successfully navigating a private equity interview process.
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