Why You Can’t Break Into Private Equity as a Foreigner in China
Despite my repeated warnings that emerging markets don’t care about you – only people who know the language, have connections, and are qualified to work there – this question won’t go away:
“I really want to work in China! How can I break into finance there? I’ve studied Mandarin for 5 years and I can read faster than Chinese people now! Show me how to get into PE!”
I’ve gotten tired of answering that one, so today you’ll hear from someone much better qualified to answer it than me: a reader who works in private equity in China.
He’ll tell you all about:
- How to network your way into the industry and how it’s different from PE in the US/Europe.
- Why foreigners are getting pushed out of the industry and why you’d have to be “crazy” to go work there these days.
- What you should do instead if you want to do business in China.
- How the pay and work culture differ from other parts of the world.
How It All Began
Q: Can you walk us through your background and how you broke into private equity in China?
A: Sure. I was a newly minted MBA, and back in 2005-2006, China’s PE market was much less developed.
I went to AVCJ’s annual conference in Hong Kong, networked like mad there, and got an internship helping a small fund with a capital raise. That fund later went on to become the #1 PE fund in China, and I rode their coattails to success.
I still believe that conference, among others, is the best way to break in but today it would be almost impossible to follow the same path if you’re a foreigner.
There are way too many local Chinese who work or study abroad and then return home, and too many bankers eager to move into PE.
And even though I’ve been here for years, even I have been getting pushed out of the industry – just like all other foreigners.
To be frank, I wish I had heeded the warnings of others and had spent the time breaking in to PE in the US/EU instead. Now, nearly six years later, I don’t think I’ve had the experience and training I would have had in the more developed markets.
So, if you’re a foreigner, be kind to yourself – don’t try to get into PE in China. If you absolutely must have your China experience, feel free to come over, but focus more on “bridging” roles, like investment banking, sales & trading, and so on.
PE is a local market, and in China, it is hyper-local. Five years of Mandarin won’t cut it; heck, near-native-fluent Chinese won’t cut it.
Even foreign-born Chinese, Taiwanese, Singaporeans, and people from Hong Kong have a tough time finding roles here because they’re also too foreign. You were either born and raised here, or you weren’t – and if you weren’t, you’ll always be an outsider no matter how much baijiu you can drink.
Now, if you are from mainland China, then there’s still a lot of opportunity.
I would recommend coming here in that case, because there’s more going on and if you can hack the local game you can get some great deal exposure and you might even make a fortune in the process.
Q: OK, let me stop you right there because I want to return to that topic of how you actually break in at the end.
So most foreigners would face a near-impossible battle to get in, but what is the private equity industry in China like?
What types of deals and companies do you focus on, and is it mostly local firms or international ones that make investments?
A: The industries themselves are diversified – you see manufacturing, state-owned-enterprise commercialization, consumer/retail, clean-tech, software and IT, energy, construction, infrastructure, healthcare and so on.
Many firms are still generalists with certain sectors of expertise / focus, but a few sector funds have sprung up as the market has matured – there are a few healthcare funds, a few clean-tech funds, a few technology funds, and a few consumer / retail funds.
Local funds and international funds are completely, 100% different animals.
The local funds staff huge teams – sometimes up to 100 investment professionals in a firm – and the pay therefore is lower, there’s often little formal training. You may struggle to get noticed and find a mentor, and it’s tough to navigate the political environment.
But the local firms do most of the deals, whereas international firms are having trouble closing anything.
Some of the regional funds (such as Barings, HSBCPE, Actis, etc.) are able to get some good deals done, but PE firms such as Carlyle, TPG, and so on, don’t see much action here.
- Local PE Firm: More deal exposure, but no structured training, and lower compensation.
- International PE Firm: Brand, better pay and training, but lower chance of closing deals – which will hurt your CV.
Friends here have been frustrated at both types of firms – those at local firms feel underpaid and under-appreciated, and those at international firms complain about never closing deals.
Q: Right, so you’re stuck between a rock and a hard place there.
What’s your average day like in terms of responsibilities and work? Is it mostly due diligence and modeling, or do you get more “random” tasks?
A: So far I’ve focused more on fundraising and investor relations than anything else. When I first joined this firm I started out as a deal guy, but once there were more skilled locals in the market, my role was shifted to fundraising.
I actually don’t mind that since I enjoy fundraising more than deals – analysis and due diligence can get repetitive, and you see companies at such a high-level that everything starts to look the same after awhile.
The good part about fundraising is that I get a lot more exposure to Limited Partners than if I were in the US or EU – there’s a lot of potential there for future networking since they all know who I am now.
Sometimes it does get repetitive telling the same story to potential investors, but that’s true of any sales job or even if you’re the CEO of a company.
Q: So they’re pretty much limiting the investment/deal work to locals?
A: Yes. Again, I would actively discourage foreigners from trying, unless you really have native-level Mandarin (beyond just “fluency”).
The nature of the job for locals or returnees, however, is compelling.
The deal professionals get to explore very interesting companies across a whole spectrum of industries, and the work includes due diligence and business analysis, which involves researching an industry by speaking with experts, interviewing the company’s management, and speaking with competitors.
You do some financial modeling, but it’s not really meaningful – at least not in the traditional sense.
Most businesses are growing so quickly that standard models are meaningless. With 50-100% revenue growth rates, analyses like the DCF break down and even valuation multiples don’t tell you much if the company is growing at that rate.
Investors spend their time on industry and management team analysis, and most of their time is spent deciding which industry is best to invest in, whether the target company can become a market leader, and whether or not they can trust the management team.
Trust is still a major issue in China, and you can’t depend on legal documents to be truly binding – they are a framework, but interpretation and enforceability are questionable.
So half of your due diligence time might be spent understanding the psychology of the management team – particularly the founder. If you’re depending on your closing documents to protect you, then you’re already in trouble before the ink is dry.
What about the pay and work culture there? I’m assuming that pay is lower on an absolute basis, but higher relative to the cost of living?
A: Pay varies greatly between local and international firms. Foreign firms here pay about average global pay for PE – so between $150K and $250K USD all-in for associates.
Local PE firms pay less – maybe around $90K USD for new associates.
In 1990 or 2000 those figures might have been a ton of money in China, but over the past 10 years the cost of living here has skyrocketed and places like Beijing and Shanghai aren’t as cheap as they used to be.
They are still less expensive than New York, and so you won’t starve on $90k per year. But it just isn’t the bargain it used to be. The tax rate is also higher than in Hong Kong – up to 30-40% vs. about 15% in HK – so that also eats up a good chunk of your pay.
Bottom-line: you will make less in PE here compared to the US / Europe, and you’ll make significantly less working at a local firm. You have to decide if it’s worth it, and that trade-off makes little sense unless you’re truly committed to staying in this market for the long-term.
Q: What about carry? Since the market is less developed do they give that to associates or anyone less senior than MDs?
A: Carry is almost always restricted to the senior MDs here.
There is a very patriarchal/monarchical feeling at many of the firms – you’re either a rain-making MD who brings in deals, or you’re commoditized execution.
This may sound just like the US and EU, and to a certain extent it is – just a more extreme version of the usual investment banking hierarchy.
It’s not unheard of for just a few guys at the top to get all the carry and for everyone else to get nothing. That creates a situation where the guys at the top are making literally millions (or billions) and everyone else below them is making base pay, keeping their fingers crossed for bonuses, and hoping to climb up the pyramid for a shot at some equity… hopefully… someday… maybe.
That said, those who did manage to get a slice of the carry are probably looking at returns that could easily fund a comfortable retirement in just a few years’ time. Many of the funds have returned 3-5x, and have had IRRs of over 100%, so the carry really is making some people incredibly wealthy.
Again though, carry is not awarded to the non-MD investment professionals. Yes, it can be similarly lopsided in the US/Europe, but at least as you move up you’ll earn progressively closer to what MDs and Partners make, and eventually you will get carry even if you’re not the top person at the firm. In China, carry is just shared among a small number of hands.
Foreigners, Abandon All Hope?
Q: Let’s go back to why it’s so tough for foreigners in the China PE market. Do you have any foreign co-workers, or are they all locals from mainland China who worked or studied abroad and returned home?
A: There are fewer than 10-15 foreigners working full-time in the entire PE industry in China, and we all know each other.
Most of us have been pushed out from deal work and, like me, focus more on fundraising and investor relations.
Q: OK, but I’m sure there must be a few foreigners there in high-up positions? One of our other interviewees mentioned that the MD at her firm was foreign.
A: There are some exceptions. For example, a few foreigners got in 5-10 years ago as founding MDs of their firms, so they have unique positions.
But the rest of us – other investment professionals – have been mostly pushed out. There was one other guy who was relocated to Asia by a major international PE shop, but he was then axed to free up the position so that a local could be brought in instead. And he was a senior officer with 10 years+ of PE experience and fluent Mandarin.
Q: OK, point taken – but wouldn’t knowing the language give you a big advantage and let you compete more effectively with people from mainland China?
Becoming 100% fluent in written and spoken Mandarin has about a 1% chance of helping you break into private equity here.
These “exceptions” I’ve referenced were already 100% fluent in the language and could read and write extremely well, and they were still pushed out.
Most of the foreigners here are now in fundraising roles, even if they worked at bulge bracket investment banks before and earned MBAs from top schools.
No one is interested in foreign professionals anymore, and it’s not even about the language – it’s that the work culture and deal environment here are so local.
It’s not like some countries (the US and UK) where anyone who can learn the language can advance to the top. They heavily favor locals and will tolerate foreigners, but will never fully accept them.
That’s why I’m making such a strong recommendation against coming here to work in PE – it’s just not realistic with the current state of the market.
You could spend years studying and learning the language, then more years struggling to break in, only to find yourself sidelined and underutilized because they don’t care how good you are or how much experience you have, only that you’re not a mainland Chinese who can bring in deals and charm the local entrepreneur.
Q: Not exactly the rosiest picture there…
Let’s say that someone is really interested in doing business in China – would you tell them to just give up altogether, or just to forget about PE?
A: If you’re from here originally, have family/connections, and want to go back home, China is great. There are opportunities in PE, banking, consulting, and entrepreneurship – you name it. The rapid growth engenders opportunity.
But if you’re a foreigner, and you absolutely, positively can’t get China out of your mind, then you can take your best shot.
However, if you want to make the leap I would steer clear of PE and focus on other areas like investment banking, investor relations, consulting, or being the CFO of a company.
In those areas, international experience/exposure is more valued and you don’t actually have to be Chinese to fulfill the role.
Oh, yes, and make sure you get to 100% fluency in Chinese – reading, writing, speaking, and listening; obviously reading and writing are the hardest parts and will consume 95% of your time.
Q: Out of curiosity, why do you think there is such a strong bias against foreigners in PE?
A: Similar to venture capital in the US, Europe, and other markets, private equity is a hyper-local business here. You need to be here on the ground communicating directly with management teams to have any chance of winning good deals.
They favor locals because they know that they have connections and are better able to reach local businesses; plus, they understand the culture implicitly and won’t get “rejected” by entrepreneurs nearly as much as foreigners.
Also, both the local and international firms must project an image of being local from a marketing standpoint – whether they are showing their local chops to entrepreneurs, the government, and especially their own LP investors.
Q: So we’ve established why you don’t want to work in PE as a foreigner in China.
But let’s say that someone reading this is from mainland China, has studied or worked abroad, and is returning home – how would he or she go about breaking into private equity?
A: It’s all about networking and conferences here. You need to go to the AVCJ conference in Hong Kong and the SuperReturn China conference, and then do a lot of networking with people you meet there. Bring 300 or so business cards, meet everyone, and try to set up side-line meetings in advance.
You should also connect with friends who work at the firm you’re interested in and who can help you get in touch with the senior staff (MDs or CEOs). Business school classmates and alumni can also help.
Some of the larger domestic firms have also been going to business schools lately to recruit there, so that’s another option as well.
If you’re returning home and want to be here long-term it’s still a great time to get into the industry, since you can join a fast-growing firm and rise to leadership. The competition is tough, but it’s possible to break in and advance, and the rewards are certainly there.
It definitely gets more competitive each year, but since most PE firms are looking for people with very specific profiles you have a much better shot of getting into PE here than you would by competing with the broader market in the US or Europe.
Q: Are there any differences they should be aware of with recruiting, CVs/resumes, and interviews?
A: The main difference is that you don’t need investment banking experience to get into private equity here.
Technically this is not true in developed countries, either, but let’s be honest: the majority of people who break into PE have done banking or something similar like management consulting or Big 4 Transaction Advisory Services.
But in China, most PE professionals are not from an investment banking background, so they don’t expect you to have that experience either.
It’s really about networking, meeting the right people at conferences, following up with them and being persistent until they give you interviews.
CVs/resumes are not much different, and in interviews they’ll ask similar questions though there’s obviously less focus on modeling and deal experience; it’s more about “fit” and your general knowledge of how to analyze businesses.
Q: Great, thanks for your time. And I hope your situation improves and that you can find a better role in the future.
A: No problem – enjoyed sharing my story even if it sounded a bit pessimistic at times. And yes, I’m working on other roles right now….
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Should You Start Out In Private Equity or at a Hedge Fund Rather Than In Investment Banking?
“I read your articles on the myth of the buy-side job and why finance doesn’t guarantee you $10 million and your own beach in Thailand.
But I still want to do finance – I just don’t want to do investment banking. I’m an Economics major, I have a 3.7 GPA and I have no industry contacts.
Do you think I should start in private equity instead? How can I do it?”
This is a very common “strategy” I get questions about.
But is it a good idea?
The Usual Argument
Usually the logic goes something like the quote above – you want to do finance, but you want to skip all the grunt work, pitch books, and all-nighters.
Plus, the only reason to do investment banking in the first place is for the exit opportunities – right?
How do you get in?
Many places do some undergraduate recruiting and there are “Analyst” (just out of school) positions in addition to Associate positions (what you would get after working in banking).
And if you’re an “Analyst” no matter which type of firm you’re at, isn’t it better to skip straight to the finish line?
Elements of Truth
There’s some truth to this logic.
While there’s grunt work no matter what you do, there is less of it on the buy-side.
And coming from banking, there’s usually some lifestyle improvement – at least you have weekends now – unless you go to the biggest funds, where it’s exactly the same.
It’s difficult but possible to get into a lot of funds – mostly middle-market ones – straight out of undergraduate, so it’s more plausible than all the emails I get from high school seniors wondering how they can become Managing Directors.
But as always, there’s a catch.
Actually, multiple catches.
They’re not enough to make this strategy a flat-out horrible idea, but they are enough to make you re-consider whether you really want to do it.
Can You Even Do It?
Problem #1: Can you actually get into a PE firm or hedge fund straight out of undergraduate? Or if you’re in business school, can you go straight from your MBA to one of these fields?
Most of the time the answer is no.
At the bare minimum you need some type of finance internship (private equity is best but other fields can work) to have a fighting chance – without that, it’s a long-shot at best.
If you’re at the MBA-level, it’s very, very tough to pull off unless you’ve been a full-time investment banking analyst before business school.
Especially when the economy is bad, these firms are flooded with ex-bankers with solid deal experience… so if you don’t even have that it’s an uphill battle.
This doesn’t mean that you can’t get into PE or work at a hedge fund eventually – it’s just that it’s difficult if you’re directly out of school without any finance experience.
Pay – Not What You’re Expecting
Problem #2: Please, don’t expect $10 million and your own beach in Thailand even if you do manage to get in.
Yes, there’s the potential to earn more on the buy-side because you’re an investor rather than a salesman – the key word there being “potential.”
If you move into PE or HFs coming from investment banking, you’ll get paid more once you take into account the bonus and carry potential.
But if you move in straight out of school – or from another non-traditional background – you’ll often get less than you would as an investment banking analyst.
Two real-world examples of this:
- One friend did a PE internship his junior year, then went to a larger PE firm for his full-time job. His base salary was less than what banking analysts got, and the bonus was less as well. He did get some upside – like a bonus for any deal he brought in – but overall he made less than a banking analyst.
- Another friend moved over from equity research to PE and not only got paid less than a banking analyst, but was also “demoted” to an Analyst once again despite having several years of finance experience.
Don’t expect to make significantly more – or even the same amount of money – as you would if you had started off on the sell-side.
The long-term potential is higher, but it takes years to get there.
The Myth of the Buy-Side Job
Still one of the most commented-upon articles on this site, everything in The Myth of the Buy-Side Job still applies here.
If you think valuing companies, following the market, and working in Excel are boring, then you won’t like anything on the buy-side either.
Certain points in that article ring even truer if you move in directly from school – for example, you might work more as a private equity analyst than as an investment banking analyst.
Regardless of what your title is, you’re always ranked according to how much experience you have – so if it’s nothing, you’ll be below anyone with some experience.
The social aspect (i.e. Do you talk to people during the day or are you isolated?) might be better if you’re coming in with a “class” of others, but it’s still well below what you would get at a large investment bank – which hurts you both socially and for networking purposes.
What Exit Opportunities?
This is the most commonly overlooked drawback: your exit opportunities are more limited if you start out on the buy-side.
You can go from banking to almost any other finance role because it gives you the broadest skill set.
But as you move up, you become more and more niche.
And that “nichifying” process starts earlier if you skip banking altogether.
Do PE and you can move to other PE firms… work at a hedge fund and you can go to other hedge funds.
But the longer you do it, the more specialized you become – so if you haven’t worked on cross-border European telecom M&A deals between €500MM and €1B then you might be out of luck if you’re looking for something new.
If you know with 100% certainty exactly what you want to do in the future, go ahead and do it.
But if there’s any doubt in your mind, it’s better to start out with whatever gives you the most options.
So, Should You Do It?
The million dollar question: if you get the opportunity should you go to the buy-side rather than starting out in investment banking?
Of all the points above, the one on exit opportunities is the most serious. You can always make up for lost money or sneak in with the odds stacked against you, but you can’t erase experience from your resume.
So if you’re certain you want to be in one of these fields in the long-term, you have the means to get in, and you understand all the trade-offs, go ahead and do it.
But please, don’t expect to go from the mail room to Ari Gold just because you’re in a slightly different industry.
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Private Equity Case Studies in 3,017 Words
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.
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