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You should prep beforehand and see how the fund manages leverage for it's historical acquisitions (take into account the interest rate and fixed income environments). This should help you build a profile for how they typically approach transactions.
Look at credit agreements for portfolio companies pre-acquisition by the fund you are interviewing with. For some deals, the banks remain in place and the deal does not shift to a different group within the bank, due to the pre-existing relationship with the company and knowledge of the business / how it operates. In these situations, the take away is that the overall facility remained in a similar structure, and that amortization should be similar, if not slightly deferred to accommodate additional leverage in the form of bonds or mezz.
Furthermore, if you have historical financials, you can work backwards to solve for historical amortization and interest. When taking into account FCF, it gives you an idea of what the business has been able to re-pay (amort. and optional) on it's debt, and at what cost.
HYB / Mezz assumptions would be dependent upon the current environment, which you should know.
The fund should give guidance on general structure on the junior debt, given the affect PIK interest can have on things. If you understand how PIK interest works, it's not hard if you have to make your own assumptions.
Hope this is helpful.
Goodluck!
-EightAceTres
This is good advice / pointers, and would say do all the things laid out here if this was a take home test where you have a little more time to spin your wheels if you can't already do this stuff in your sleep.
But given that you'll likely have a 3-3.5 hour time limit taking this on-site, I'd try to stay as basic as possible. What these guy's are likely testing you on is your command of basic LBO concepts and that you have the chops to model them out effectively within a condensed time frame.
Instead of trying to nail down really specific market data beforehand, I'd spend more time on thinking about how you're going to identify any (or lack there-of) investment merits that'll drive attractive returns at exit. Spend your extra time thinking through what strategic advantages the target may have or if they lack the growth profile to capture any upside and are just a debt service / paydown mule. Build a most-plausible "base case" and then build in a toggle for a downside case if you genuinely think there are potential risks / concerns that will materially impact the analysis.
Make reasonable assumptions, and if you're shaky / unsure on your input, footnote in the model / presentation and state your basis / source.
I've done a lot of these, both on-site and take home, and from my experience they pretty rarely deviate in format. You can almost count on the fund giving you a set of deal parameters: likely debt equity mix, entry multiple, exit timing (5 years), any management roll-over, what to do with any existing debt, any noteworthy operating drivers, etc. They could hand you a set of SEC filings, ER report or a hardcoded set of excel financials, to build out.
Whenever I've done really well on case studies in the past, I've always followed this work flow: 1) Thoroughly read the instructions, skim through any research / financials provided trying to find anything commensurate with the instructions; 2) Straight-line operating drivers and build-out the cash flows / sweep and debt schedule shell first, stress test it quickly; 3) Do returns analysis w/ dummy value's, gut-check model; 4) Spend rest of time thinking out drivers and rationale and plug in transaction assumptions.
Good luck.
Dude, on tests, they don't care about the best most accurate assumptions, just make them realistic. Get the functionality of the model done primo!
Wonderful advice/points from @stringerbell @eightacetres Really valuable insights, thanks for this.
Thanks a lot guys! Very helpful.
Follow StringerBell's advice. I just went through associate interviews. I've always got debt/equity mix and entry/exit multiple assumptions.
leveragebro, do you mean the case study instructions gave you the debt/equity and entry/exit multiple assumptions? Was this for a public company? Thanks!
I was sometimes given the entry multiple, sometimes exit multiple, sometimes leverage. Sometimes a combination, or even all 3. If they don't give it to you, make a reasonable assumption.
For example - one case I did gave an entry multiple and leverage multiple, no exit. In the model outputs I printed for them, I ran 3 cases of the model: downside (margin detereoration), base (everything flat), upside (margin expansion). It's also wise to throw in a sensitivity table showing what happens to IRR under different entry and exit multiples. It's all guesswork anyway, the point of an LBO is to see how the numbers fit together and whether or not the deal works, before wasting time and diving deeper into the idea.
I'm going through this currently - they just gave me a CIM and nothing else (take home LBO with instructions to make an "intermediate level" model. However, no assumptions were given on entry/exit, leverage, etc. Any pointers on going through it in that context?
Depending on how much time you are working with, you can ask a few intelligent questions and see if they give you any guidance. This would depend on the firm you are applying for, however - I was sometimes encouraged to ask follow-up questions to take home LBOs, but there are a couple of places where I definitely would NOT have done it, just based on the "feel" of their culture.
In the event that you don't want to / can't ask questions, just make reasonable assumptions. It helps if you can provide some support for why you picked the assumption that you made (point to previous transactions for entry / exit multiples, for example, and to current industry research for typical leverage given the assets you are working with).
I think it is also very important to sensitize your assumptions once you do make them. If you pick 7.0x entry, then show them what 5.0 - 9.0x would look like. Show a downside case, base case, upside case at the very least. It only takes an extra 10 minutes to build in data tables and create new cases in your model, and it's a step that will go a long way as a "sanity check".
Also, here's an idea - maybe include a page on your model outputs discussing (in a few bullet points) any assumptions you came up with, and why. As long as your model's functionality is there and your assumptions aren't too crazy, they really shouldn't matter all that much.
Croc the point of the modeling test is to see if you understand the fundamentals of 3 statements, accounting and LBOs
if you have to make assumptions, just use some logical reasoning to back it up
For my test it was just some made up private company with given assumptions (note this was a short-form Excel LBO, 1.5 hrs)
I have yet to get asked a paper LBO or a long-form Excel LBO
I've had one paper LBO test over the phone, it's more a function of demonstrating of how well you understand the three statements and how it ties into an LBO scenario. It was awkward at first but I got through it no problem. Maybe practice once or twice on your own and you'll be OK.
So I'm doing a take home lbo model and investment memo test.
I'm done with the model and working on the memo. Anyone have recommendations on format? The firm has asked for a 1 page investment memo in word that includes a final investment recommendation.
My thoughts are: - Company Overview - Investment pros / cons - Base Case financials with revenue/ebitda broken out and resultant IRR / MOM of cash - Investment Recommendation with basic justifications
investment recommendation first.
In my 2 case study interviews, I got given cap structure assumptions in 1 but not in the other.
Here was my approach when I wasn't given them (resulted in getting the offer): - Structure the debt as 2/3 senior and 1/3 junior. Make it all cash pay (absent obvious cashflow issues that necessitate PIK or toggle) but referred to the possibility of using PIK/toggle in my memo. - Priced the sr / jr tranches in line with the last LBO deal I worked on. - Made base leverage quantum correspond to a 1.1x/1.2x DSCR in year 1 (assumes cashflow is non-lumpy) - Specified that I was using an aggressive leverage assumption, roughly simulating cash-sweep in initial yrs, with most recent market pricing I was aware of. - Sense check for debt as % of total entry cap. - Show returns outputs sensitising the key assumptions (e.g. entry leverage.)
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