“Working on the buy-side.”
We tend to focus on the end result rather than the process to get there.
At least, that’s my theory behind the sheer quantity of bad answers I’ve heard in private equity, hedge fund, and other buy-side mock interviews over the past year.
Your thought process, whether conscious or subconscious, might be something like:
“Aha. I worked in investment banking, therefore I should move to the buy-side next. It’s my destiny!”
And then when the interview comes along, you answer all the questions “fine” – at least in your own mind – but then fail to get a call-back.
You could have made many mistakes.
But if I had to guess, it would be one or more of the 5 most common buy-side interview mistakes I’ve seen and heard:
Mistake #1: Failing to Form an OPINION on Deals / Clients / Investments
I was doing a mock interview with a client last year when he started describing one of his deals, a private placement for an online content company.
He described the entire process, the company’s financials, how he honed in on details they used pitch the company to investors, and more.
Then I asked him a simple question:
Me: “So, if you were an investor, would you do the deal and fund this company?”
Interviewee: “What? Oh, no, it’s a horrible business model, expenses are out of control, and it doesn’t use capital very efficiently.”
So why didn’t you say that in the beginning?
On the sell-side, everything has “robust earnings growth,” but you need to be far more critical when you’re investing your own money.
If you’re a current or former banker, you are almost certainly focusing too much on the “how” and the “what” when describing your experience, and ignoring the “why” and “what next?”.
Hint: Most deals / investments are NOT that great, and you can never (or rarely) go wrong by explaining why you wouldn’t do a deal.
So if you can’t decide, a negative bias trumps a positive bias, and both of those trump nothing at all.
How to Fix It: Before you even write about a deal on your resume, think about it from the perspective of an investor and make a decision on why you would / would not invest (for equity/debt financing, minority stakes, etc.) or buy / not buy the company (for M&A and LBO deals).
Then, after you’ve finished giving the overview in an interview, make sure you state: “Overall, I would / would not do this deal because…” and explain your reasoning.
Mistake #2: Failing to Explain the Downside Risk / Possible Mitigants
In another interview, I asked a client working at a mid-market private equity fund how he thought about the risk in one of his deals, and possible ways to mitigate it.
“There was some risk that the company’s revenue growth might be lower than our projections, but we looked at the IRRs in a sensitivity table and we were confident that it would perform reasonably well even if revenue growth fell by 15-20%.”
This isn’t a terrible answer because at least he has some sort of explanation…
But it’s also not ideal.
You have to think about the worst-case scenario when you’re describing a deal like this.
If the company goes bankrupt, what happens? Could you get any of your equity back?
Forget about “missing” revenue growth forecasts by 15-20% – what if the entire company fails?
You may think this is me being overly dramatic or cynical, but companies fail or severely under-perform all the time… and other times, they survive but can’t be sold.
It is more difficult to mitigate risk if you’re acquiring an entire company, but you can still think about options such as acquiring a smaller stake (and giving more to management) or selling off divisions or other assets.
How to Fix It: Instead of just considering “misses,” think about the worst-case scenario and quantify your losses.
And then cite specific methods to mitigate risk, whether they’re protective options for public market investments or some of the methods above for buyouts of entire companies.
You don’t need to have used any of these methods, but you should be able to describe how you could have used them to reduce risk.
Mistake #3: Failing to Explain Your Previous Experience in the Context of This New Role
This one is common if you’re moving from a fund that pursues one strategy to one that does something completely different.
For example, you’ve worked at a traditional PE fund that invests in companies’ equity, and now you’re moving to a credit fund.
You might be tempted to give the “real” reason for your move, even if it has nothing to do with the fund’s actual strategy.
Here’s one example:
“I started out working in investment banking, and then I switched to private equity because the fund was new and fast-growing at the time, and I could learn a lot there. Recently, though, we’ve turned our attention to portfolio companies and I haven’t been working on as many deals. So your new credit fund excites me because of the growth opportunities and because I would be analyzing both equity and debt.”
The interviewer’s next thought will be: “Hmm… so what happens when he/she gets ‘bored’ here after we’re out of ‘growth mode’?”
And yet, I’ve heard variations of this response dozens of times.
How to Fix It: The best solution is to pretend that this fund’s strategy was your plan all along, and that everything before it was just a step in the process.
This will require spinning the truth, but we’re talking about finance interviews here, not lie detector tests.
Here’s a “made-over” version of the story above:
“I started out working in investment banking, and got interested in debt back then because of a few DCM deals I was exposed to.
I wanted to learn how to think and operate like an investor, so I joined a fast-growing PE fund and got the chance to work directly with lenders there.
Over time, I became more and more interested in the debt side of deals because it requires more analysis and you need to understand the real downside risk in more depth.
So I’m excited about working in credit investing because I get to combine my interest in debt with the skills I’ve gained at my current fund, and become a credit investor in the future.”
Mistake #4: Failing to Explain Your Impact on a Deal or Investment
Admittedly, you will not always make a specific impact on a deal… sometimes you’re just running the process and you don’t have any earth-shattering insights that change everything.
In yet another recent interview (after TV shows and Excel, mock interviews are my 3rd favorite hobby), a client was describing a buy-side M&A deal where the buyer dropped out mid-way through:
“We were advising an $x billion company with strong cash flows, and they were looking for add-on acquisitions or potentially a buy-back or dividend.
A large conglomerate was putting a side business in the same industry up for sale, mostly because it was too small for them.
Our client liked it because there was an opportunity to turn it around and boost sales, and it was complementary to some of its verticals. I ran the master merger model for the deal and coordinated the process.”
You can guess my next question:
“So how did you impact the process?”
If an interviewer asks you that, it means that you have not articulated how you made a difference.
How to Fix It: In this case, he didn’t exactly do anything amazing to save or kill the deal…
But he did discover discrepancies in the seller’s calculations for a big expansion they were betting on – a “Highly speculative and costly opportunity that probably won’t work”-type scenario.
And doubts about that expansion, along with several external factors, led the buyer to drop out of the process.
In this case, the interviewee should mention this outcome at the beginning and point out how his work saved the client money and prevented them from making a bad acquisition.
Then, he could still use the description above in the middle…
And at the end of his response, he could mention the discrepancies he found and how his bank’s client used the work to conclude that the deal wouldn’t work.
Bonus points if he then mentions whether he agrees or disagrees with their decision.
Mistake #5: Failing to Know the Numbers and Details of What You Did
He even listed and described one of his debt deals.
So my question was simple:
“Can you describe what you did for [Company X] in that debt deal?”
“Um, I’m not sure, it was a long time ago and I don’t remember it that well.”
Put simply, ANYTHING on your resume is fair game.
If you don’t know something well, remove it.
This is particularly important in buy-side interviews because small details matter, and often mean the difference between making money and losing (a lot of) your own money.
You don’t need to know every last number, but if you can’t even give approximate multiples for a deal you worked on, or the accretion / dilution range for an M&A deal, or the range of potential IRRs for a buyout, you’re in trouble.
This mistake is also common when responding to “Tell me about a market that’s interesting” questions.
Once I asked that to a client who had worked in healthcare and bio-tech, and he responded by saying, “Oil & gas!”
Then I proceeded to ask him heaps of technical questions on the sector that he couldn’t answer – at all.
It is a really, really, really bad idea to name an industry that you have no expertise in, especially when the industry is very technical.
How to Fix It: Cut deals that you no longer remember in detail.
It’s much better to focus on only 2-3 deals, or even 1 deal, rather than list 5-10 (or more) deals, most of which you barely remember anything about.
I also suggest creating a 1-page summary of each deal, for 2 reasons:
- Writing down all the information will help you remember it.
- You can bring that with you to ensure that the numbers are right in front of you… and also in front of the interviewer.
And if you’re asked to discuss a market or industry you find interesting, make sure it’s one where you’ve worked on at least 1 deal before…
Whither the Buy-Side?
I get almost as many comments and emails asking me how to “start an online business” as I do about how to “work on the buy-side.”
Both inquiries have something in common: they’re focused on the magical end result rather than the process required to get there.
But there’s another similarity as well: I have to restrain myself to avoid taking out my AK-47 and killing everyone.
The 5 mistakes above are important because unlike the questions you get in entry-level IB interviews, buy-side interview questions reflect what you do on the job as an investor.
If you can’t form a quick opinion on deals, or you can’t see the holes in a company’s business plan, for example, you won’t make it very far on the job.
So if you’re making the mistakes above, you need to re-think your responses…
…But you also need to ask yourself something different:
Are you in it for the right reasons?
Your own beach in Thailand would be nice…
You might want to fix the 5 mistakes above first, though.