Private Equity Interviews 101: How to Win Offers
Ah, private equity.
The promised land.
The only reason most bankers want to go into investment banking.
Too bad the exceptionally difficult interviews keep them out!
Or do they?
Private equity interviews can be challenging, but for most candidates, winning interviews is much tougher than succeeding in those interviews.
You do not need to be a math genius or a gifted speaker; you just need to understand the recruiting process and basic arithmetic.
Still, there is more to PE interviews than “2 + 2 = 4,” so let’s take a detailed look at the process:
How to Network and Win Private Equity Interviews
The PE recruiting process differs dramatically depending on your current job and location.
Here are the two extremes:
- Investment Banking Analyst at a Bulge Bracket or Elite Boutique in New York: The process will be highly structured, and interviews will finish at warp speed. In some ways, your bank, group, and academic background matter more than your skill set or deal experience. This one is known as the “on-cycle” process.
- Non-Banker in Another Part of the U.S. or World: The process will be far less structured, it may extend over many months, and your skill set and deal/client experience will matter a lot more. This one is known as the “off-cycle” process.
If you’re in between these categories, the process will also be in between these extremes.
For example, if you’re at a smaller bank in NY, you may complete some on-cycle interviews, but you will almost certainly also go through the off-cycle process at smaller firms.
If you’re in London, there will also be a mix of on-cycle and off-cycle processes, but they tend to start later and move more slowly than the ones in NY.
Interviews in both on-cycle and off-cycle processes test similar topics, but the importance of each topic varies.
The timing of interviews and start dates, assuming you win offers, also differs.
The Overall Interview Process
Regardless of whether you recruit in on-cycle or off-cycle processes, or a combination of both, almost all PE interviews have the following characteristics in common:
- Multiple Rounds: You’ll almost always go through at least 2-3 rounds of interviews (and sometimes many more!) where you speak with junior to senior professionals at the firm.
- Topics Tested: You’ll have to answer fit/background questions, technical questions, deal/client experience questions, questions about the firm’s strategies and portfolio, market/industry questions, and complete case studies and modeling tests.
The differences are as follows:
- Timing and Time Frame: If you’re at a BB/EB bank in NY, and you interview with mega-funds, the process starts and finishes within several months of your start date at the bank (!), and it moves up earlier each year. Interviews at the largest firms start and finish in 24-48 hours, with upper-middle-market and middle-market firms beginning after that.
By contrast, interviews start later at smaller PE firms, and the entire process may last for several weeks up to several months.
- Importance of Topics Tested: At large funds and in the on-cycle process, you need to complete modeling tests quickly and accurately and spin your pitches and early-stage deals into sounding like real deals; at smaller funds and in off-cycle interviews, the reasoning behind your case studies/modeling tests and your real experience with clients and deals matter more.
Firm-specific knowledge and fitting your investment recommendations to the firm’s strategies are also more important.
- Start Date: You interview far in advance if you complete the on-cycle process, and if you win an offer, you might start 1.5 – 2.0 years later. With the off-cycle process, you start right away or soon after you win the offer.
The Main Topics Tested in Interviews
There is not necessarily a correlation between the stage of interviews and the topics that will come up.
You could easily get technical questions early on, and you’ll receive fit/background and deal experience questions throughout the process.
Case studies and modeling tests tend to come up later in the process because PE firms don’t want to spend time administering them until you’ve proven yourself in previous rounds.
However, there are exceptions even to that rule: For example, many funds in London start the process with modeling tests because there’s no point interviewing if you can’t model.
Here’s what to expect on each major topic:
We have covered these in previous articles, so I’ve linked to them above rather than repeating the tips here.
Since on-cycle recruiting takes place at warp speed, you’ll have to draw on your internship experience to come up with stories for these questions, and you’ll have to act as if PE was your goal all along.
By contrast, if you’re interviewing for off-cycle roles, you can use more of your current work experience to answer these questions.
While these questions will always come up, they tend to be less important than in IB interviews because:
- In on-cycle processes, it’s tough to differentiate yourself – everyone else also did multiple finance internships and just started their IB roles.
- They care more about your deal experience, whether real or exaggerated, in both types of interviews.
The topics here are similar to the ones in IB interviews: Accounting, equity value/enterprise value, valuation/DCF, merger models, and LBO models.
If you’re in banking, you should know these topics like the back of your hand.
And if you’re not in banking, you need to learn these topics ASAP because firms will not be forgiving.
There are a few differences compared with banking interviews:
- Technical questions tend to be framed in the context of your deal experience – instead of asking generic questions about WACC, they might ask how you calculated it in one specific deal.
- More critical thinking is required. Instead of asking you to walk through the financial statements when Depreciation changes, they might describe companies with different business models and ask how the financial statements and valuation would differ.
- They focus more on LBO models, quick IRR math, and your ability to judge deals quickly.
Most interviewers use technical questions to weed people out, so poor technical knowledge will hurt your chances, but exceptional knowledge won’t necessarily get you an offer.
This category is huge, and it presents different challenges depending on your background.
If you’re an Analyst at a large bank in New York, and you’re going through on-cycle recruiting, the key challenge will be spinning your pitches and early-stage deals into sounding like actual deals.
If you’re at a smaller bank, and you’re going through off-cycle recruiting, the key challenge will be demonstrating your ability to lead, manage, and close deals.
And if you’re not in investment banking, the key challenge will be spinning your experience into sounding like IB-style deals.
Regardless of your category, you’ll need to know the numbers for each deal or project you present, and you’ll need a strong “investor’s view” of each one.
That’s quite a bit to memorize, so you should plan to present, at most, 2-3 deals or projects.
You can create an outline for each one with these points:
- The company’s industry, approximate revenue/EBITDA, and multiples (or, for non-deals, estimated costs and benefits).
- Whether or not you would invest in the company’s equity/debt or acquire it (or, for non-deals, whether or not you’d pursue the project).
- The qualitative and quantitative factors that support your view.
- The key risk factors and how you might mitigate them.
If you just started working, pick 1-2 of your pitches and pretend that they have progressed beyond pitches into early-stage deals.
Use Capital IQ or Internet research to generate potential buyers or investors, and use the company-provided pitch materials to come up with your projections for the potential stumbling blocks in the transaction.
For your investment recommendation, imagine that each deal is a potential LBO, and build a quick, simple model to determine the rough numbers, such as the IRR in the baseline and downside cases.
For the risk factors, reverse each model assumption (such as the company’s revenue growth and margins) and explain why your numbers might be wrong.
If you’re in the second or third categories above – you need to show evidence of managing/closing deals or evidence of working on IB-style deals – you should still follow these steps.
But you need to highlight your unique contributions to each deal, such as a mistake you found, a suggestion you made that helped move the financing forward, or a buyer you thought of that ended up making an offer for the seller.
If you’re coming in with non-IB experience, such as internal consulting, still use the same framework but point out how each project you worked on was like a deal.
You had to win buy-in from different parties, get information from groups at the company, and justify your proposals by pointing to the numbers and qualitative factors and addressing the risk factors.
Understanding the firm’s investment strategies, portfolio, and exits is very important at smaller firms and in off-cycle processes, and less important in on-cycle interviews at mega-funds.
If you have Capital IQ access, use it to look up the firm.
If not, go to the firm’s website and do extensive Google searches to find the information.
Finding this information should not be difficult, but the tricky point is that firms won’t necessarily evaluate your knowledge by directly asking about it.
Instead, if they give you a take-home case study, they might judge your responses based on how well your investment thesis lines up with theirs.
For example, if the firm makes offline retailers more efficient via cost cuts and store divestitures, you should not present an investment thesis based on overseas expansion or roll-ups of smaller stores.
If they ask for an investor’s view of one of your deals, they might judge your answer based on your ability to frame the deal from their point of view.
For example, if the firm completes roll-ups in fragmented industries, you should not look at a standard M&A deal you worked on and say that you’d acquire the company because the IRR is between XX% and YY% in all scenarios.
Instead, you should point out that with several roll-ups, the IRR would be between XX% and YY%, and even in a downside case without these roll-ups, the IRR would still be at least ZZ%, so you’d pursue the deal.
In theory, private equity firms should care about your ability to find promising markets or industries.
In practice, open-ended questions such as “Which industry would you invest in?” are unlikely to come up in traditional PE interviews.
If they do come up, they’ll be in response to your deal discussions, and the interviewer will ask you to explain the upsides and downsides of your company’s industry.
These questions are more likely in growth equity and venture capital interviews, so you shouldn’t spend too much time on them if your goal is traditional PE.
And even if you are interviewing for growth equity or VC roles, you can save time by linking your industry recommendations to your deal experience.
Case Studies and Modeling Tests
You will almost always have to complete a case study or modeling test in PE interviews, but the types of tests span a wide range.
Here are the six most common ones, ranked by rough frequency:
Type #1: “Mental” Paper LBO
This one is closer to an extended technical question than a traditional case study.
To answer these questions, you need to know how to approximate IRR, and you need practice doing the mental math.
The interviewer might ask something like, “A PE firm acquires a $150 EBITDA company for a 10x multiple using 60% Debt. The company’s EBITDA increases to $200 by Year 3, $225 by Year 4, and $250 by Year 5, and it pays off all its Debt by Year 3.
The PE firm sells its stake evenly over Years 3 – 5 at a 10x EBITDA multiple. What’s the approximate IRR?”
Here, the Purchase Enterprise Value is $1.5 billion, and the PE firm contributes 40% * $1.5 billion = $600 million of Investor Equity.
The “average” amount of proceeds is $225 * 10 = $2,250, and the “average” Exit Year is Year 4 (no need to do the full math – think about the numbers – and all the Debt is gone).
So, the PE firm earns $2,250 / $600 = 3.75x over 4 years. Earning 3x in 3 years is a ~45% IRR, so we’d expect the IRR of a 3.75x multiple in 4 years to be a bit less than that.
To approximate a 4x scenario, we could take 300%, divide by 4 years, and multiply by ~55% to account for compounding.
That’s ~41%, and the actual IRR should be a bit lower because it’s a 3.75x multiple rather than a 4.00x multiple.
In Excel, the IRR is just under 40%.
Type #2: Written Paper LBO
The idea is similar, but the numbers are more involved because you can write them down, and you might have 30 minutes to come up with an answer.
I’ve previously shared a worked-out example of a 30-minute paper LBO, so I’ll link to it once again here.
With these case studies, you need to start with the end in mind (i.e., what multiple do you need for an IRR of XX%) and round heavily so you can do the math.
Type #3: 1-3-Hour On-Site or Emailed LBO Model
These case studies are the most common in on-cycle interviews because PE firms want to finish quickly.
And the best way to do that is to give all the candidates the same partially-completed template and ask them to finish it.
You may have to build the model from scratch, but it’s not that likely because doing so defeats the purpose of this test: efficiency.
You’ll almost always receive several pages of instructions and an Excel file, and you’ll have to answer a few questions at the end.
The complexity varies; if it’s a 1-hour test, you probably won’t even build a full 3-statement model.
But if it’s a 3-hour test, a 3-statement model is more likely. If you do build all three statements, the other parts of the model will be simple.
There are no 3-statement projections, but there is some complexity in the returns calculations. The full solutions and several other examples are in our Interview Guide:
Type #4: Take-Home LBO Model and Presentation
These case studies are open-ended, and in most cases, you will not get a template to complete.
The most common prompts are:
- Build a model and make an investment recommendation for Portfolio Company X, Former Portfolio Company Y, or Potential Portfolio Company Z.
- Pick any company you’re interested in, build a model, and make an investment recommendation.
With these case studies, you must fit your recommendation to the firm’s strategy rather than building a needlessly complex model.
You might have 3-7 days to complete this type of case study and present your findings.
You might be tempted to use that time to build a complex LBO model, but that’s a mistake for three reasons:
- The smaller firms that give open-ended case studies tend not to use that much financial engineering.
- No one will have time to review or appreciate your work.
- Your time would be better spent on industry research and coming up with a sold investment thesis, risk factors, and mitigants.
I don’t have a great example of an open-ended case study, but the Dell LBO presentation is a good example of the type of recommendation you’d make.
Your model can be far simpler, and the presentation itself can be 3-5 pages instead.
Type #5: 3-Statement/Growth Equity Model
At operationally-focused PE firms, growth equity firms, and PE firms in emerging markets such as Brazil, 3-statement projection modeling tests are more common.
The Atlassian case study is a good example of this one, but I would change a few parts of it (we ignored Equity Value vs. Enterprise Value for simplicity, but that was a poor decision).
Also, you’ll never have to answer as many detailed questions as we did in that example.
If you think about it, a 3-statement model is just an LBO model without debt repayment – and the returns are based on multiple expansion, EBITDA growth, and cash generation rather than debt paydown.
You can easily practice these case studies by picking companies you’re interested in, downloading their statements, projecting them, and calculating the IRR and multiples.
Type #6: Consulting-Style Case Study
Finally, at some operationally-focused PE firms, you could also get management consulting-style case studies, where the goal is to advise a company on an expansion strategy, a cost-cutting initiative, or pricing for a new product.
We do not teach this type of case study, so check out consulting-related sites for examples and exercises.
And keep in mind that this one is only relevant at certain types of firms; you’re highly unlikely to receive a consulting-style case study in standard PE interviews.
Whither Case Studies?
I’ve devoted a lot of space to case studies, but they are not as important as you might think.
In on-cycle processes, they tend to be a “check the checkbox” item: Interviewers use them to verify that you can model, but you won’t stand out by using fancy Excel tricks.
Arguably, they matter more in off-cycle interviews since you can present unique ideas more easily and demonstrate your communication skills in the process.
PE Interviews: What NOT to Worry About
The topics above may seem overwhelming, so it’s worth pointing out what you do not need to know for interviews.
First, skip super-complex models.
As a specific example, the LBO models on Macabacus are overkill; they’re way too complicated for interviews or even the job itself.
You should aim for Excel files with 100-300 rows, not 1,000+ rows.
Next, skip brain teasers; if an interviewer asks them, you should drop discussions with the firm.
Finally, you don’t need to know about the history of the private equity industry or much about PE fund economics beyond the basics.
Your time is better spent learning about a firm’s specific strategy and portfolio.
The X-Factor(s) in Interviews
Besides the topics above, competitive tension can make a huge difference in interviews.
If you tell Firm X that you’ve already received an offer from Firm Y, Firm X will immediately become far more likely to give you an offer as well.
Even at the networking stage, competitive tension helps because you always want to tell recruiters that you’re also speaking with Similar Firms A, B, and C.
Also, leverage your group alumni and the 2nd and 3rd-year Analysts.
You can read endless articles online about interview prep, but nothing beats real-life conversations with others who have been through the process.
These alumni and older Analysts will also have example case studies they completed, and they can explain how to spin your deal experience effectively.
How to Prepare Efficiently
The #1 mistake in PE interviews is to focus excessively on modeling tests and technical questions and neglect your deal discussions.
You can avoid this, or at least resist the temptation, by turning your deals into case studies.
If you follow my advice to create simplified LBO models for your deals, you can combine the two topics and get modeling practice while you’re preparing your “investor’s views.”
If you only have 10-15-minute intervals of downtime, break case studies into smaller chunks and aim to finish a specific part in each period.
Finally, start preparing before your full-time job begins.
You’ll have far more time before you start working, and you should use that time to tip the odds in your favor.
The Ugly Truth About PE Interviews
You can read articles like this one, memorize PE interview guides, and get help from dozens of bank/group alumni, but much of the process is still outside of your control.
If the mega-funds decide to kick off recruiting one day after you start your full-time job in August, and you’re not prepared, too bad.
If you went to a non-target school and earned a 3.5 GPA, you’ll be at a disadvantage next to candidates from Princeton with 3.9 GPAs no matter what you do.
So, start early and prepare as much as you can… but if you don’t receive an offer, don’t assume it’s because you made a major mistake.
Offer: What Next?
If you do receive an offer, you could accept it on the spot, or, if you’re speaking with other firms, you could shop it around and use it to win offers elsewhere.
If you’re not in active discussions with other firms, you’re crazy if you do not accept the offer right away.
No Offer: What Next?
If you don’t get an offer, follow up with your interviewers, ask for feedback, and ask for referrals to other firms that might be hiring.
If you did reasonably well but came up short in a few areas, you could easily get referrals elsewhere.
If you did not receive an offer because of something that you cannot fix, such as your undergraduate GPA or your previous work experience, you might have to consider other options, such as a Master’s, MBA, or another job first.
But if it was something fixable, you could take another pass at recruiting or keep networking with smaller firms.
To PE Or Not to PE?
That is the question.
And the answer is that if you have the right background, you understand the process, and you start preparing far in advance, you can get into the industry.
And if not, there are other options, even if you’re an older candidate.
You may not reach the promised land, but at least you can blame it on someone else.
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