Since I was getting approximately 53 emails per day about this one, I decided to make it easier and just tell you everything you need to know about private equity case studies.
Lots of people are going through private equity recruiting this time of year, so let’s take a look at what to expect and how to tackle the case study – a critical part of most buy-side interviews.
Note that these “case studies” are completely different from the “case interviews” you get in management consulting (not that I would even waste space on consultants here, but just to clarify…).
Although I labeled these “private equity case studies” above, you’ll encounter them in almost every buy-side interview, from mega-funds to tiny 4-person firms to everything in between.
Not all hedge funds do them, but any fund that does some long-term investing (as opposed to effectively day-trading) will usually make you complete some type of case study as part of the interview process.
Sometimes they’re formal and sometimes they’re informal, but they’re always important – if you screw yours up, you probably won’t be moving onto the next round or getting an offer.
No matter your profile or previous background, you’ll encounter case studies if you’re trying to move into private equity.
So even if you’re a consultant or you’re moving in from a different field altogether, you will still have to complete case studies.
No one ever says, “Oh, well you you didn’t do much modeling so we can just skip that part of the interview.”
Instead, they assume that you know how to do it and then weed out people who don’t.
Even if you are applying to PE firms straight out of undergrad, or you’re applying as an intern, you’re still likely to get case studies – multiple friends who did this had case studies pretty much everywhere.
The only exception here is senior-level hires – but then, if you’re reading this right now you’re probably not interviewing for Partner-level positions…
The case study is designed to answer 1 simple question: “Should we invest in this company?”
The firm could ask you to complete the case study in a couple different ways:
- Most Common: You get materials on the company they want you to analyze (financial statements, 5-10 page document describing it, maybe some outside research) and you have anywhere from a few days to a week to complete a short presentation.
- Part of the Interview: Some places will make the case study a part of the interview itself – they might give you basic information on the company and then give you 2-3 hours to do your work and present to them immediately afterward. More common at mega-funds.
- Just the LBO Model: This is less common, but they could also give you 30 minutes to create a “simple” LBO model of a company just to verify that you actually know how to do this.
This article will focus mostly on #1 and #2, since #3 is just a sub-set of those.
Hedge funds are less “formal” than PE firms if they ask you to do a case study at all, and in other fields like corporate development and venture capital you’ll either have more of an informal case study, or you won’t do one at all.
Case Study Ingredients
At the bare minimum, you’ll usually get some type of Word document describing the company in question (called an “Information Memorandum” (IM) or “Offering Memorandum” (OM) or “Executive Summary” in banker terminology).
It might be short (10 pages or less) or it might be quite long – dozens or even 100+ pages. If you’re analyzing a public company, they might just point you to the 10-K or 10-Q (annual report and quarterly report, respectively) instead.
It’s rare to get extremely detailed operating models because you don’t have time to go into pages of detail. Outside research is similarly rare.
The firm usually won’t give you guidance on how to value the company or how to build your models, but that’s for an entirely different reason: they want you to figure it out.
Structure: Simple FTW!
Simplicity is the most important word for your case study.
If they don’t give you a structure to adhere to, I would recommend the following:
- 1 Summary slide in the beginning.
- 2-3 Qualitative slides discussing the market, management, and anything unique to the deal.
- 3-4 Quantitative slides that go into the appropriate valuation, and what kind of returns the firm can expect.
- 1 Conclusion slide summing up everything and giving a yes/no investment decision.
Yes, for actual portfolio companies (in PE) and clients (in banking) your presentations and models will be more complex, but you do those over months and years.
Have a maximum of 3 or 4 (large) bullet points on each slide – and if you’re showing graphs or the output of valuations or your LBO model, don’t squeeze 25 different things on one page. Keep it to a max of 3-4 different charts or graphs per slide (roughly 1 per quadrant) or it gets very confusing.
Rather than trying to fit a huge mass of text on each slide – as you might do in pitch books – you want to focus on the main points only because you’re going to present live to your interviewer(s) later on.
Put too much text in your presentation and the interviewers will focus on the text rather than what you’re saying.
Do the following in 3-4 major bullets:
- Do we invest in this company? Yes or no – no “maybes” or “conditional upon” statements – they want a decision one way or the other.
- Support your decision with major points: Give 1-2 bullets to support your decision, focusing on the major items – not tiny details that don’t matter.
- Hedge your decision by pointing out the key investment risk: No investment is perfect, and everything has risks associated with it – point out the major 1 or 2 risks that are apparent with your company right here.
This may sound stupid to you, but a Partner at a middle market PE firm once told me that over half the interviewees failed to make a decision one way or another in their case studies.
Here’s an example of what you might write in your summary slide if we were considering the buyout of Harrah’s casino chain back in 2006:
- Harrah’s is a compelling investment that could generate a 5-year IRR of 15-20% with reasonable assumptions
- Supported by strong market fundamentals, success in recent international expansion, and healthy cash flow
- Current public market valuation under-values company by approximately 10%, creating solid investment opportunity
- Key investment risk is strength of US economy and risk of consumer spending falling
Yes, I realize this deal was a great example of an investment gone horribly wrong once the casino industry imploded, but these points are for illustrative purposes.
These slides are highly dependent on the company you’re analyzing – at a minimum, though, you need to think about the following:
- Market: Is this an industry that’s growing? Will it grow more quickly/slowly in future years? Do you see positive or negative trends due to technology / regulations / competitors? Where does this company stand next to the competition?
- Competition: How does this company fare against its competitors? Does it have some type of unique advantage that others can’t replicate? What about the barriers to entry?
- Growth Opportunities: How quickly can the company grow in the future? Is there any “low hanging fruit” or room to easily win more customers / revenue in the future? Do you expect it to grow faster or slower than the market as a whole?
- Risks: Every investment carries with it risks – are the key risks here related to the market, or the economy as a whole? To the competition? To government regulations? And is there any way of mitigating these risks?
- Other: If there’s anything especially notable about the management team, the products/services or other items unique to the deal, you can mention them as well – but stay away from saying, “The CEO is great!” because you have no way of knowing that.
Focus on the first 4 items because those are the main ones that impact your investment decision.
These slides should address valuation and expected returns.
The biggest mistake you can make is going into an unnecessary level of detail by doing any of the following:
- Spending hours and hours searching for EBITDA add-backs and adjustments for each company in their filings.
- Spending hours debating which pub comps and transaction comps you should be using.
- Creating a detailed LBO model that handles 500 different cases and also adjusts perfectly for items that no one cares about.
No one is going to look at how you came up with these numbers, so keep it simple and use Capital IQ (or whatever information service you use) to gather the data automatically.
A sample structure for this section might look like:
- Valuation Overview: How much is this company worth, and what methodologies are you basing it on? This is where your “football field” chart goes.
- Valuation Detail: Here you can show the pub comps and transaction comps you picked, along with your DCF output. Depending on the company and situation, you may be using different or additional methodologies as well – this is most common for real estate, energy, and financial services.
- LBO Model Output: Don’t go into a ton of detail here – just show your assumptions and the output of the model under a range of sensitivities (even though this is a simplified model, it’s still important to show sensitivity tables on the IRR and it takes 2 seconds to add).
Depending on how much output you have, these sections could comprise anywhere between 3 and 4 slides. Resist the temptation to write 20 slide chock-full of numbers – this isn’t banking.
Do a simple Capital IQ search for companies in the same industry with revenue or market caps in the same range, and if you know anyone at the relevant industry group at your firm, request that information from them.
If you’re not in banking and/or you don’t have Capital IQ access, this section will be more difficult to complete – try to get a friend who has access to send you login information, or get the information directly from friends with access.
And if you absolutely can’t get access or you are under extreme time pressure (it’s an “on the spot” case study), you can skip parts of this and just show a DCF (or DDM if it’s a financial company, etc.) to support your valuation.
You definitely need to give some indication of value here – but if you don’t have or can’t get access to all the information you need, focus on what you can do (e.g. DCF in place of public/transaction comps).
Forget about all the complex LBO models you’ve built: you want to make this as simple as possible. I’ve already written at length about what a PE interview LBO model needs to include in the article on private equity interviews, but just to recap some of that here:
- Assumptions – Purchase/Exit EBITDA multiples, leverage, growth, and profitability.
- Sources & Uses – How much debt / equity you’re using, and then how much of that is being spent on acquiring the company vs. transaction fees / paying off debt.
- Simple Income Statement / Cash Flow Statement / Debt Schedule – The Balance Sheet is not necessary if you think about it, so I would only include it if they specifically ask for it, or you need it because of an unusual investment scenario. Excluding the Balance Sheet saves you time without detracting much from your model.
- Returns & Sensitivities – Do a simple IRR calculation and show IRR over a range of purchase/exit multiples and your other assumptions.
Forget about multiple tranches of debt, PIK, PP&E schedules, asset write-ups, book/cash tax reconciliations, management option pools, and focus on the bare minimum.
You may have to stray from this if your company has NOLs (Net Operating Losses) and anything unusual that needs to be taken into account (minority interests, other unusual investments, pending divestitures etc.) but you should still focus on what you need rather than what looks cool.
The LBO modeling course in Breaking Into Wall Street covers the type of model that you could use for PE interviews.
This should not be much different from your Summary Slide in the beginning – just re-state what you had there in different words, and perhaps add more detail.
Instead of just making a yes/no investment decision, for example, you can also specify here at what price level you’d invest, either in dollars per share (public companies) or as a lump sum (private companies / divestitures).
You may also want to go into more detail on what can be done to mitigate the risks you brought up here or on the Intro slide.
Reading all this, you might be wondering, “But wait – how do I actually make an investment decision?”
And that tells you exactly why investors don’t have it easy: it’s never a clear-cut decision. But remember that your actual yes/no decision doesn’t really matter that much – what matter is how you back it up and support it with your work.
Making investment decision goes way beyond the scope of this article, but here are a few guidelines:
- The numbers matter, but mostly for initially testing whether or not something could work – if a company is already over-valued by 50%, for example, chances are it will be a bad investment. If your LBO model never shows the IRR going above 10% even with crazily optimistic assumptions, it’s also a bad idea.
- Your decision should ultimately come down to qualitative factors, with the valuation and returns you calculated to be used as support.
Your support shouldn’t be “We should invest in this company because it’s under-valued by 10%.”
You want to say, “We should invest in this company because it’s set to grow faster than the overall market, it’s light-years ahead of its competition, and on top of all that we could get a 20% IRR even with very conservative assumptions.”
So, What Matters?
Anyone reviewing your case study will be most concerned with your thought process – unlike banking, formatting and small details don’t matter much.
Your communication skills are more important than your knowledge of finance for these case study exercises – if you can’t explain your points simply and reach a solid conclusion, you won’t get an offer.
So don’t get preoccupied with minutiae – focus on your investment thesis and the major reasons you’re recommending or not recommending an investment.
Factors Outside the Slides
Your presentation style, the number of people watching, and how much time you’re given can also come into play, but it’s very difficult to generalize here because each firm does it differently.
You might present to just 1 interviewer, or it might be to all Partners at the firm – in which case you better know your stuff.
A lot of this comes down to public speaking, which again is beyond the scope of this article – but here are a few guidelines I’ve followed when giving speeches and making presentations:
- Have some notes with you, but don’t write down word-for-word what you’re going to say.
- Speak twice as slowly as you normally would and look at different people in your “audience” every few seconds (only applicable if you are presenting to multiple people, of course).
- Always practice beforehand, even if you only have 15 minutes – just practice running through it in front of the mirror and going through all your points, without reading anything word-for-word.
How Much It Matters
The case study certainly weighs in heavily, though it’s not the only factor in private equity interviews – top firms usually have many, many rounds of interviews, and even smaller and middle-market firms can take weeks or months to make a decision, simply because they can afford to be very selective about who they hire.
I would compare a case study in private equity interviews to technical questions in investment banking interviews: doing a poor job can kill your chances, but being a superstar won’t necessarily help you. Case studies are more of a way to weed out people than anything else.
As with any other type of interview, your success comes down to “fit” questions and your “story” after you’ve cleared the technical hurdles – if everyone likes you and is confident you’d do well, you have a good shot at getting an offer.
Also note that while private equity interviews are very competitive, you would be mistaken to overestimate the competition.
Most candidates have terrible “stories” and also have no idea why they actually want to do anything in life – from getting into investment banking or consulting to moving into private equity.
The last thing a PE firm wants to see is yet another person who’s trying to get in because they heard it was cool, because all their friends were doing it, or because they want to make a lot of money and have no idea how else to do it.
So if you make sure your “story” is solid, come across as a likable person, and do your case study reasonably well, you stand a good shot at getting an offer no matter how “competitive” it is.
No, I Don’t Have Any Sample Case Studies and I Don’t Have a Guide (Yet)
Before anyone asks: no, I don’t have any sample case studies because I lost all my documents from banking.
If you want to “practice,” I would suggest getting a CIM or OM on a company you don’t know well and running through the exercise above – or just pick a random public company and go through their filings.
I receive many questions on a PE interview guide, but again I don’t have anything at the moment – PE interviews are less about specific technical questions (except at mega-funds) and more about your deal / client experience and the case study. If I were to create such a guide, it would be mostly example-based and next year is the earliest it would be out.