“Dear Andrew,

Thank you very much for your recent application to the Texas-Pacific Group. Your resume and glowing recommendation from your MD were both somewhat impressive. We applaud your efforts to transition from Banking into Private Equity, it is definitely the right move right now. We were considering extending you an offer, actually, but upon review of the quiz you inadvertently submitted to for the New York Post, we regret to inform you that we will be unable to offer you a position at our firm.

Please note that you did score an 87%, which is nothing to be ashamed of. It turns out to a B+ with our generous scaling, and you know what they say—at least you won’t be lonely at the fat part of the bell curve. We only take A’s though. Have you considered a position at Hellman & Friedman?”

-Only 87% Tool, The Leveraged Sellout

Ah, private equity.  The promised land.  What you slave away for as a banker: the chance to become the next Steve Schwarzman.  But unless you have an inside connection with Steve himself, you’ll have to go through a few interviews to get to paradise.

The Format Of Private Equity Interviews

They tend to be very similar to investment banking interviews - generally a phone screen or initial in-person screening interview, followed by a “superday” where you meet with a good portion of the Associates, Principals and Partners at the firm.

The difference is that the interview process goes beyond that - you can have multiple interviews with the same people, and you usually have to do some sort of Case Study, either in advance or on the spot, which you then present to a group at the firm.

Beyond just the Case Study, you will also typically be tested on Leveraged Buyout modeling, either on the spot at your interview or as part of the Case Study.

You should also keep in mind that 99% of PE firms are smaller than investment banks and do not need nearly as many people.  Thus they can afford to be much more selective about new hires.  Banks, by contrast, will tend to be less disciplined with recruitment.

Private Equity Interview Questions

Private Equity Firms care about two points when interviewing you:

1. Your background and “fit” with the firm, group and industry.
2. Your deal experience.

In addition, there may also be some rudimentary technical questions in the “screening” round just to verify that you actually know enough to do the job.  If, for example, you can’t calculate Total Enterprise Value, then you should not be doing PE and that’s an easy “ding.”

Some firms, particularly the mega-funds, like to go in-depth on technical questions and ask all sorts of obscure things that never come up on a regular basis.

“Fit” Questions

In terms of the “fit” questions, you want to have a good “story” around how and why you ended up where you are (just as with banking interviews).  Avoid stating the typical “bad” reasons to do finance jobs: money and prestige (even though many people do indeed do finance jobs for these very reasons).  And, of course, models and bottles (even though you can afford them now).

Instead, you want to focus on your interest in investing and if you’re coming from a banking or sell-side background, why you are more interested in investing as opposed to selling.  Standard reasons: adding more value, acquiring more in-depth knowledge, and gaining more responsibility.

One note on fit questions: in my reasons NOT to do investment banking post, I recommended against saying, “entrepreneurial work environment” as a primary reason for wanting to do banking.

For PE positions, this is more acceptable as it is a more entrepreneurial environment and in some cases members of the firm go on to work at portfolio companies or start companies of their own.  If you are a senior, partner-track hire, you don’t want to give the impression you will leave and do this, but for pre-MBA hires it’s not quite as taboo.

Since private equity interviews tend to be quite informal and more conversational than banking interviews, establishing rapport with everyone is essential.  If you can’t do this, your chances of getting the job are about as slim as JPMorgan honoring Bear Stearns offers.

Picking Deals To Talk About

Private Equity firms generally want Analysts with good M&A and LBO deal experience.  They don’t really care about IPOs or anything capital markets-related; they acquire companies, and that’s what they care about.  Yes, to exit an investment they could take a portfolio company public, but the bankers and lawyers handle most of that process so in-depth knowledge is not as important.

The first step here is deciding which deals to speak to.  As I wrote in my post on Private Equity Resumes, it’s best to pick either transactions that were unusual in nature or ones where you contributed a lot (or both).  “Standard” sell-side M&A processes are not great; divestitures, distressed M&A, and LBO deals are much better.

For the “complex” M&A deals, you generally have a lot of good qualitative issues to bring up in the interview (e.g., selling off parts of a company vs. the whole thing, figuring out standalone cost structure, dealing with subsidiaries and complex legal structures, closing before you run out of cash), while LBOs are good because you can talk about the numbers and why the deal worked from a financial perspective, as well as your knowledge of the process and debt-raising.

Oh, one last thing: you do NOT need closed deals or even announced deals.  Just make them anonymous if they’re not yet public.  You don’t want to end up in jail, or almost in jail, as a result of your interviewing efforts.

How To Talk About Deals

When you go through your deals, you want to start by giving a brief overview of the company, industry and major deal points:

You: “One deal I worked on was the $45B LBO of TXU by a KKR-led consortium of private equity firms.  The Company had around $10.9 billion of revenue and $5.6 billion of EBITDA and provided electricity to the Texas utility market.  The deal, struck at the height of the buyout boom, to a certain extent represented just how far private equity firms would go to find good deals, and also showed the cyclical attractiveness of the utilities sectors.  There were a whole host of major issues, from regulatory to environmental, associated with the deal.”

Interviewer: “Of course, that was all over the news in early 2007.  Let’s talk about the financial metrics of the deal, maybe you can walk me through the numbers here.”

At this point, you would go into the revenue and EBITDA multiples and industry-specific metrics you looked at.  Also go into the LBO analysis you did, the growth rates and margins you assumed, and the IRR your models predicted.

Interviewer: “I understand that, as part of the deal, the Company agreed to not build certain power plants.  Can you discuss that?”

Here you can go into the financial analysis you did to show the impact of not building those 8 coal plants they originally agreed to.  You really need to play up “unique” points like this where you did something out of the ordinary.  Explain the financial assumptions you made about each plant - required costs, projected power output and revenue generation, and then the effect eliminating them had on the LBO model.

You can also go into the regulatory and environmental considerations and all the deals that were struck with governments and environmentalists here, which are great to talk about.

Interviewer: “Great.  Let’s talk about the debt on the deal.  Can you walk me through what kind of package your bank(s) put together?”

Go over the basics - the total amount of debt raised, how many tranches and the kind of tranches - e.g., bank debt, high-yield, etc. - as well as the interest rates and covenants.  You can also go into different debt packages offered by various banks competing for the business and why one bank was chosen over the other.

Those are the major points to get across if you discuss an LBO with a private equity firm - basic overview, financial metrics and modeling, major issues and deal points, and the debt involved.  For regular M&A deals the discussion would be similar, but you’d be speaking about the accretion/dilution model rather than the LBO model and may not have to discuss debt at all.

Don’t go off on random tangents when going over deals.  Just remember, your hourly wage is just barely higher than a McDonald’s worker’s, whereas theirs is much higher.

But Wait, What If I Don’t Have Any Deal Experience?

If you come from a consulting or other non-investment-banking background, you may not have worked on any M&A deals.  If this is the case, you need to find close substitutes.  For consulting, these might be due diligence projects on deals or projects focused on operational improvement of a company.

If you’ve done equity research or some type of investment/asset management before, you want to discuss companies you initiated coverage on, invested in, or recommended investing in.

A dialogue similar to the one above should be your goal - you want to go through the basic overview, the numbers, and the “deal points” or main issues you confronted.  You also want to go over major risks and mitigating factors.  If we take the TXU example, investment risks might be all the regulatory issues and mitigating factors might be bribing all the environmentalist groups out there.

If you worked in corporate finance or corporate development before, you can speak about partnerships you worked on, integration work, or any other long-term project that consumed a lot of time and required significant analysis.

If you fall into none of these categories, why are you applying to private equity jobs again? :)  (You can get in from other backgrounds but it’s much harder.)

Case Studies

Another major point in most private equity interviews is the case study.  Typically, a private equity firm will give you an Offering Memorandum, filings, and other documents on a company and then you will make an investment decision one way or the other.

Usually you’ll create a PowerPoint or Word presentation and will submit some type of Excel model as well.

Case studies are a broad topic and I couldn’t do everything justice here, but here are a few of the major points:

• Make sure you actually make a decision one way or the other.  This may sound elementary, but you’d be surprised how many people complete case studies and don’t say, “yes” or “no.”
• Provide a summary page/slide in the beginning with your investment decision and back it up with 3-5 key points.  Also make sure you go over major risks and mitigating factors on this page, and give an estimate of returns as well.
• Keep this brief and to the point.  You simply don’t have time for anything else.
• Each page/slide should cover a separate point - industry, management team, financial performance, company’s products/services, major risks and mitigating factors, areas for further diligence, the output of your financial model, and how you would structure the investment/buyout.
• Don’t worry too much about formatting, just make sure it’s readable.  This may come as a shock if you are from an investment banking background.

At some firms, you will have to do this on the spot and you’ll have very limited time; at other places you will have a few days to a week or more time to craft this.  In any case, don’t go crazy and spend 100 hours doing this or anything - they understand you have limited time, so focus on what’s important and don’t go overboard with the rest.

And DON’T have your graphics department format your presentation.  That would be bad if your MD happened to walk by and see…

LBO Modeling

As I’ve alluded to throughout this post, some private equity firms will give you modeling tests and expect you to build an LBO model in real-time at interviews.

As with case studies, I would suggest keeping your models simple.  Go with the bare minimum that’s required because you don’t have time to get fancy.

In practical terms, this means do the following:

1. Basic sources and uses - don’t try to get fancy here with equity rollovers, PIK, 10 tranches of debt or anything.  Go with a simple view that has the purchase price and debt/equity used.  Maybe do 1-2 tranches of debt but keep things simple.  You need to get across that you understand the basic concepts behind an LBO model, not the super-advanced stuff.
2. Basic income statement - just do basic projections here, with revenue growth, SG&A or whatever expenses you have as a % of revenue and go down to EBITDA.  You can make a few basic assumptions to get to net income as well for the cash flow statement, but again don’t go overboard.
3. Basic balance sheet - Have the basics, like Cash, Accounts Receivable, Accounts Payable, PP&E and Debt, and use easy assumptions for these.  You should include acquisition effects like the new debt and any cash used as well as goodwill, but I would keep this as simple as you can while still making it, um, balance.
4. Basic cash flow statement - Net income, add back D&A and the change in working capital and subtract CapEx to get to your cash flow available for debt repayment.
5. Basic debt structure - just do the bare minimum in terms of Excel functions here and assume you can use all Free Cash Flow for interest/principal repayment each year.  Should just be a couple MIN functions.
6. IRR calculation at the end and maybe a few sensitivity tables on purchase price, exit multiples, and growth rates/margins.

This is a very high-level overview of how I’d build a “simple” LBO model - you can look forward to a more in-depth guide and working Excel model soon (I hope).

Simplicity is very important because you’ll only have 1-2 hours, at most, for this exercise.

Selling vs. Buying

Beyond just understanding the format of interviews, interview questions and practicing case studies/LBO modeling, it’s important to keep in mind something else with private equity interviews:

Do an equal amount of “selling” and “buying.”

This was actually advice given to me by a well-known headhunter and may be the only good advice I’ve received from a headhunter.

While you definitely want to push your own case and “sell” yourself as much as possible in interviews, you also want to pretend you’re a buyer and do some diligence on the firm.  If it turns out there’s a big cultural misfit, for example, you want to bail out early on.  Or if there’s a lot of cold-calling involved and you hate that, you similarly want to forget about the firm.

Since PE hires are much more long-term than banking ones, you really want to do your diligence; it probably won’t be some 2-year job that you can forget about afterward.

People often overlook this and just take the first opportunity available to them, but this is a serious mistake with private equity recruiting.

Differences Between Private Equity And Hedge Fund (And Other) Interviews

Although I’ve described private equity interviews above, hedge fund interviews are similar and will also tend to involve case studies and/or investment recommendations.  They will be less focused on deal experience and more focused on fit and knowledge/interest in the public markets, and it’s probably not necessary to practice LBO modeling with a hedge fund unless it’s a PE-like one.

Venture capital interviews will be even more focused on fit and personality and less on finance/deal experience.  They will also want to see good market knowledge since startups are so dependent on the relevant market(s).

Corporate development job interviews will be somewhere in between VC and PE interviews; they won’t be as focused on modeling and LBO modeling is unlikely to come up, but they will want to hear about your deal experience and analytical skills.

Timeframe For Interview Decisions

Going back to the theme of private equity firms being far more selective than banks when it comes to recruiting, the interview timeframe is generally much longer.

There are some exceptions - for example, at KKR, Bain, Blackstone and other mega-funds, they make decisions quickly and move in weeks rather than months.  This is simply because they compete for mostly the same people and therefore start interviews early.

Middle-market and growth equity firms will take much longer to make decisions and often shove you through multiple rounds, dinners and breakfasts and all sorts of hoopla to reach a “yes” decision.

They treat you as an investment opportunity and have to do very thorough due diligence before making a “yes”decision.

This is logical, as Private Equity firms make much longer-term hires than investment banks do, and therefore approach you as more of an “investment” rather than a number-crunching monkey as banks would.

Final Words: How To Prepare With Limited Time/Resources

So how do you prepare for private equity interviews if you’re an investment banking analyst with limited time at your disposal?  I would suggest the following:

1. Make a list of all the deals you’ve worked on and decide which are the best 3-4 to speak about in interviews.  Make sure these are also the ones on your resume.  Your bias should be toward complex M&A deals and LBOs.
2. Refresh yourself on the details of these deals, including background information, financial metrics, debt packages/covenants and what you personally contributed.
3. Practice constructing simple LBO models.  Get it down to where you can create a basic model from nothing in half an hour.

Amazingly, even though this post is already lengthy I’ve only scratched the surface of buyside interviewing here.  There are lots of other topics I plan to explore and upcoming guides, so stay tuned.

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Tags: Case Studies, LBO Deals, LBO Models, M&A deals, Private Equity, private equity firms, private equity interviews, private equity resumes

Coming Soon: Breaking Into Wall Street

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