What does Private Equity look at when buying a company?
I faced this question in an interview with Private Equity. The interviewer told me that the answer is simple, what PE looks at when buying a company, just answer a term from 3 financial statements. Gosh!! I made a few guesses but all wrong.
Could anyone help and know the answer? I will have the second rd interview soon and he prefers me to know the answer next time.
Steady cash flow is very important because private equity firms use a lot of leverage when buying companies (hence the term leveraged buyout). The cash flow is needed to pay down that debt. Another big aspect is good growth avenues. It can be difficult for PE firms to sell a company at a higher multiple than they paid for it, so they want to grow EBITDA as much as possible during the holding period to get a good return. There are a ton of things firms look for but I think these would be good answers for an interview
Agree with the above.
Market size is also important.
If the market is too small, a PEG won't be able to grow the company enough to justify an investment.
If he asked for something you can get from the 3 statements, the answer is free cash flow
Thanks bros!! Free Cashflows sounds make sense!!!
Then you get down into debt financing and they ask about FCF to Firm and FCF to Equity... Just know that CASH IS KING.
Would recommend buying a PE interview guide... this question is a softball compared to other questions you might get (though, not sure what level you're interviewing at).
I thought you had already replied all the suggestions above and they were not what he was looking for..
If you wanna try to give a different one, I would say that a PE is looking for a company with a customer acquisition cost lower than the lifetime value of the said customer and that it is scalable. Or that a situation like that can be achieved with synergies from other companies in the portfolio.
What do you guys think ?
For a certain subset of industries that is true, but not for PE overall.
In regards to cross portfolio synergies, that isn't really a thing.
Why is synergies not a thing?
Seems like it would be a great model but perhaps it doesn’t fit the buy lever flip ethos
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