Are you planning to interview for private equity jobs in the near future and are nervous or anxious about the LBO modeling test during the interview?

Private equity firms typically require candidates to take a financial modeling test as part of the interview process, where candidates are asked to build a working LBO model under time pressure, analyzing a company / potential investment opportunity.

The stakes are high, because compensation for private equity associate positions can be very lucrative — often ranging from $200,000 – $350,000 or more annually. That’s 4 – 7x the national household median income by the time you are 24 or 25 years old.

The good news is nailing the LBO modeling test is a highly trainable skill. Unfortunately, many Wall Street LBO modeling courses cost thousands of dollars for a couple days of classroom instruction. 

But our Private Equity Training Videos provide the same hands-on, step-by-step training — at a fraction of the price — on how to build both complex and rapid-form LBO models that the live classes offer. Moreover, there’s no risk of “falling behind” in our course, because you can watch and learn at your own pace and review our examples as many times as you need to develop a strong understanding of how to model PE transactions.

Our LBO modeling course provides tactical knowledge and training on how to nail your LBO modeling test, making it the perfect solution for candidates who have no previous private equity experience, as well as candidates who are looking for a PE modeling refresher.

Our videos will show you how to:

• Think intuitively about the mechanics of LBO finance
• Model leveraged buyouts efficiently in Excel
• Communicate your results effectively with a PowerPoint presentation

All of our training video packages grant you access to all the videos in that package for 1 full year.

Check out our course syllabus below and watch the first training video here!

We also offer LBO + DCF discount combo packages.

COURSE SYLLABUS (PLUS, PRO PLANS)

A. Essential LBO Concepts and Examples

1. Overview and Agenda
2. Key Principles and Theory of a Private Equity Transaction
3. Capital Sources to Fund an LBO Transaction
4. Debt Overview: Key Debt Instruments
5. Equity Overview from the PE Investor’s Perspective
6. What Determines Debt Capacity?
7. Paper LBO Examples

B. Key financial modeling shortcuts in Excel

1. Using Excel Efficiently: Core Settings
2. Using Excel Efficiently: Number Formats
3. Excel Shortcuts Overview
4. Excel Shortcuts (general & cell editing)
5. Excel Shortcuts (row & column editing, navigation)
6. Excel Shortcuts (to change visual appearances)

C. Building a 4-hour integrated LBO model with detailed supporting schedules

1. Setup Transaction Summary
2. Calculating Offer Value
3. Opening Balance Sheet
4. Filling in Uses of Capital
5. Build the Pro Forma Income Statement
6. Filling in Sources of Capital
7. Calculating Goodwill
8. Pro Forma Balance Sheet
9. Income Statement Projections
10. Setup Working Capital
11. Working Capital Projections
12. Setup Cash Flow Statement
13. Forecast Depreciation Schedule
14. Forecast Amortization Schedule
15. Other Balance Sheet Items
16. Prepare Cash Flow Statement for Debt and Interest
17. Setup Debt and Interest Schedule
18. Filling in the Debt Schedule
19. Filling in the Interest Schedule
20. Finish Forecasting the Three Statements
21. Calculating Leverage and Coverage Ratios
22. Calculating Equity Returns Using EBITDA
23. Calculating Equity Returns Using Net Income

D. Building a 60-min short-form LBO model

1. Setup Transaction Summary
2. Setup Detail Sheet
3. Filling in the Historical Income Statement
4. Filling in Key Balance Sheet Items
5. Filling in Historical Debt and Interest
6. Calculate Historical Free Cash Flow and Drivers
7. Calculate Transaction Value, Sources and Uses
8. Calculate Pro Forma Accounts
9. Forecast Drivers
10. Forecast Income Statement, CapEx, Net Working Capital
11. Forecast Debt and Interest
12. Forecast Free Cash Flow and Cash Balances
13. Finish Detail Sheet
14. Calculate Returns Using EBITDA

E. Creating LBO PowerPoint slides to present to the interview committee

1. Writing the Executive Summary
2. EBITDA, Free Cash Flow, and Returns Slide
3. Free Cash Flow, Debt, and Industry Footprint Slides
4. Qualitative Slides and Final Presentation

FREQUENTLY ASKED QUESTIONS

Q. Will these training videos really help me learn how to build an LBO model under time pressure so I can nail my modeling test interview?

For most private equity firms, proficient knowledge of the private equity industry is not sufficient to get the job. You can’t just talk the talk; you need to walk the walk. You need to be able to actually build an LBO model and analyze and evaluate an actual investment opportunity. This is a core technical skill you will use every single day on the job, which is why most firms dedicate 4-8 hours testing you on it.

That’s where our videos come in. We walk you step-by-step through the process of building an LBO model. First, we start with an overview on LBO transaction theory and how to calculate returns using just a pen and paper – so you understand the intuition and logic. Then we show you how to maximize your efficiency using key Excel shortcuts and tricks. We then actually build 2 LBO models together from scratch, starting from a blank Excel sheet, with no custom plugins or macros, so everyone is on a level playing field. Finally, our Plus and Pro packages show you how to crank out an efficient and effective PowerPoint presentation to present your investment findings and analysis.

These are the key skills you will need to demonstrate during your LBO modeling test on your interview day. We show you step-by-step exactly how to develop, strengthen, and master these skills, so that you are in the best position to walk in and nail your LBO modeling interview.

Q. Is it worth it to pay $200+ for the training videos?

We feel strongly that our training videos offer incredible value for PE interview candidates.

Quite simply, the stakes for success or failure in your PE interviews are high. Compensation for entry-level PE associates is very lucrative — often $200,000 – $350,000 or more annually. That’s 4 – 7x the national household median income by the time you are 24 or 25 years old. Once you’ve been in the job for several years, the pay can quickly rise to half a million or more per year.

That means your investment in yourself through purchasing our training videos will pay off many hundreds of times over just in your first year on the job, and it only goes up over time when you look at your earnings over the years after getting your foot in the industry.

What’s also important to remember is you usually only get one shot interviewing for private equity roles. If you don’t land a PE job in the year your “class” is being recruited, it’s really hard to come back in a subsequent year and recruit / interview again. By then, there will be a new class of PE recruits flooding the market from consulting firms, investment banks, accounting firms, and corporate strategy departments. PE headhunters will be focusing their time on this new class and it’s super hard to get their attention when they’re so preoccupied with fresh candidates coming out of 2-year rotational programs.

That makes the risk of not being totally prepared for your PE interviews very, very costly, because it could mean missing the chance of a lifetime to enter the buy-side investing world — and all the big paydays that come with it.

So ask yourself, how much is it worth it to not be totally informed and prepared for your PE interviews, and potentially lose the opportunity to break into the profession altogether?

By contrast, how much is it worth it to invest in yourself by purchasing our training videos and potentially winning a lucrative private equity job? Think about it this way: with your new PE salary, you can earn back your investment in our training videos in just your first DAY on the job — with more than enough left over to buy your friends and family beer to celebrate!

The post Private Equity and LBO Modeling Training Course appeared first on Private Equity Interviews: The Official Guide - PRIVATE EQUITY INTERVIEWS: THE OFFICIAL GUIDE.

Looking to break into investment banking? Anxiously preparing for corporate finance interviews? Want to jump start mastering financial modeling so you can hit the ground running in your new job?

The stakes are high, because salaries for entry-level analysts and associates in banking and finance are lucrative — often $110,000 – $230,000 or more annually when combining base and bonus. That’s 2 – 5x the national household median income coming straight out of college or grad school.

Succeeding in finance requires strong analytical skills in analyzing and valuing companies. This demands a strong understanding of the mechanics and business judgment involved in modeling financial statements and discounted cash flows.

The good news is: financial modeling and discounted cash flow (DCF) analysis are highly trainable skills. The bad news is: Wall Street modeling classes can cost thousands for just a one-day class.

That’s where our training videos come in. 

Using a well-known public company as our case study — Chipotle Mexican Grill — our 3 Statement and DCF Modeling Video Training Course provides hands-on, “roll-up-your-sleeves,” step-by-step training — at lower cost than competing courses.

We teach you how to build fully integrated financial and valuation models, just like the live classes. But there’s no risk of “falling behind,” because you can learn at your own pace and watch our examples as many times as you need to master financial modeling.

Our training videos focus on critical tactical knowledge and skills, making it the perfect solution for fast learners with no prior finance experience, or experienced candidates who need a financial modeling refresher.

We will teach you how to:

• Build a fully integrated 3 statement financial model in Excel
• Build a DCF analysis using both perpetuity growth and EBITDA multiple methods
• Build detailed supporting schedules linking back to the 3 statements
• Analyze a public company 10-K filing to efficiently extract data needed for your model
• Troubleshoot your model accurately and efficiently when accounts don’t balance or reconcile
• Understand key concepts related to depreciation, amortization, goodwill, circularity, unlevered vs. levered cash flow, terminal value, weighted average cost of capital, capital asset pricing model, and enterprise vs. equity value
• Think intuitively about financial statement mechanics, analysis, and corporate valuation
• Model very efficiently using Excel shortcuts

Check out our course syllabus below and watch the first financial modeling training video here for free! We’ve now also made our second training video free as well.

We also offer DCF + LBO discount combo packages.

3-STATEMENT MODELING TUTORIAL VIDEOS (PRO PLAN)

3-statement modeling overview: building a fully integrated 3-statement model of a lemonade stand

1. Financial statement analysis: overview
2. Lemonade stand model: income statement template
3. Lemonade stand model: balance sheet and cash flow statement templates
4. Lemonade stand model: COGS
5. Lemonade stand model: building the income statement to the EBITDA line
6. Lemonade stand model: building the income statement to the EBIT line
7. Lemonade stand model: building the income statement to the net income line
8. Lemonade stand model: building the balance sheet
9. Lemonade stand model: building the cash flow statement
10. Finishing the lemonade stand model
11. Lemonade stand model: learning points recap

Plus: Finished 3-statement lemonade stand model in Google Spreadsheets

Using Excel like a boss: 

1. Number formats
2. Summary of key shortcuts
3. Excel shortcuts: demo 1
4. Excel shortcuts: demo 2
5. Excel shortcuts: demo 3
6. Excel shortcuts: demo 4
7. Excel shortcuts: demo 5

Building a fully integrated 3-statement financial model of Chipotle Mexican Grill: 

1. Overview and learning goals for this course
2. How the 3 financial statements link together
3. Building out the core statements: learning goals and steps
4. Overview of Chipotle’s 10-K
5. Building the income statement template to the EBITDA line
6. Building the rest of the income statement template
7. Building the balance sheet template
8. Building the cash flow statement template
9. Bringing in historical financials: overview
10. Bringing in historical financials to the EBITDA line
11. Bringing in the rest of the historical financials
12. Formatting historical financials on the income statement
13. Calculating historical ratios and drivers on the income statement
14. Bringing in historical financials onto the balance sheet
15. Formatting historical financials on the balance sheet
16. Forecasting ratios and drivers on the income statement
17. Forecasting the income statement to the EBITDA line
18. Working capital schedule: overview and steps
19. Building the working capital schedule template
20. Bringing in historical data into the working capital schedule
21. Calculating historical ratios and drivers on the working capital schedule
22. Forecasting ratios and drivers on the working capital schedule
23. Forecasting account balances on the working capital schedule
24. Linking the working capital schedule back to the core statements
25. Depreciation, amortization, and indefinite-life intangibles
26. Goodwill
27. Building the depreciation & amortization schedule template
28. Bringing in historical data into the depreciation & amortization schedule template
29. Forecasting the depreciation & amortization schedule
30. Linking the depreciation & amortization schedule back to the core statements
31. Other long-term items: overview and steps
32. Building the other long-term items schedule template
33. Bringing in historical data into the other long-term items schedule
34. Calculating ratios and drivers on the other long-term items schedule
35. Forecasting asset account balances on the other long-term items schedule
36. Forecasting liability account balances on the other long-term items schedule
37. Linking the other long-term items schedule back to the core statements
38. Finishing the income statement logic: overview and steps
39. Finishing the income statement logic: implementation
40. Shareholders’ equity & shares outstanding schedule: overview and steps
41. Building the shareholders’ equity & shares outstanding schedule template
42. Bringing in historical data into the shareholders’ equity & shares outstanding schedule
43. Pulling 10-K data into the shareholders’ equity & shares outstanding schedule
44. Forecasting account balances on the shareholders’ equity & shares outstanding schedule: Part 1
45. Forecasting account balances on the shareholders’ equity & shares outstanding schedule: Part 2
46. Forecasting account balances on the shareholders’ equity & shares outstanding schedule: Part 3
47. Linking the shareholders’ equity & shares outstanding schedule back to the core statements: Part 1
48. Linking the shareholders’ equity & shares outstanding schedule back to the core statements: Part 2
49. Preparing for the debt & interest schedule: overview and steps
50. Preparing for the debt & interest schedule: implementation
51. Building the debt & interest schedule: overview and steps
52. Building the debt & interest schedule template
53. Building the debt & interest schedule waterfall
54. Building the debt & interest schedule: long-term debt
55. Building the debt & interest schedule: revolving credit facility
56. Building the debt & interest schedule: calculating net interest expense
57. Linking the debt & interest schedule back to the core statements
58. Dealing with circularity in the model
59. Why doesn’t it balance? Reconciling the balance sheet: Part 1
60. Why doesn’t it balance? Reconciling the balance sheet: Part 2
61. Why doesn’t it balance? Reconciling the balance sheet: Part 3
62. Why doesn’t it balance? Reconciling the balance sheet: other tips
63. Finishing the integrated 3-statement model

DCF MODELING TUTORIAL VIDEOS

Layering a DCF analysis on a fully integrated 3-statement financial model of Chipotle Mexican Grill: 

1. Discounted cash flow analysis: overview
2. “Free cash flow to the firm” or “free cash flow to equity”?
3. Terminal value
4. Weighted average cost of capital
5. Capital asset pricing model
6. Present value
7. Equity value
8. Building the DCF template
9. Deriving tax-affected EBIT
10. Calculating unlevered free cash flow to the firm
11. Setting up the weighted average cost of capital template
12. Calculating the component rates of weighted average cost of capital
13. Finishing the weighted average cost of capital calculation
14. Calculating terminal value: perpetuity growth method
15. Calculating terminal value: EBITDA multiple method
16. Finishing the discounted cash flow analysis

FREQUENTLY ASKED QUESTIONS

Q. Will these training videos really help me succeed in my banking interviews and help me hit the ground running in my finance job? 

Nailing investment banking and corporate finance interviews and succeeding in a high-pressure finance job from Day 1 requires a strong understanding of key finance, accounting, and corporate valuation principles. Having the technical training and skills to confidently build 3-statement models and DCF valuations and critically analyze and evaluate companies is the key skill set that will distinguish you in interviews and help you excel in the job. This is why it’s critical to develop a rock-solid understanding of how to model and forecast financial statements and value companies accurately and efficiently in Excel.

That’s where our videos come in. We walk you step-by-step through the process of building fully integrated financial and valuation models. With our Pro Plan, we first start with an overview on financial statement analysis and then immediately apply those principles to building a simplified, but fully integrated, 3-statement model of a lemonade stand business. With this simplified example, we cover all the key concepts of interlinking and forecasting the 3 statements, which helps you understand the intuition and logic of how the core financial statements fit together. This provides a strong foundation for us to build a full-fledged 3-statement model using a public company 10-K in the next part of the course. We also show you how to maximize your efficiency in Excel using important shortcuts and techniques.

We then extend the knowledge from our simple 3-statement example and actually build a fully integrated financial model of Chipotle Mexican Grill, complete with detailed supporting schedules that link back into the core statements, as well as a discounted cash flow analysis that evaluates free cash flow using both the perpetuity growth method and the EBITDA multiple method. We do this step-by-step from the ground up starting from a blank Excel sheet, with no custom plugins or macros, so that everyone is on a level playing field. We also provide plenty of visual explanations of key finance concepts to augment your understanding of financial modeling, including deep-dives on depreciation, amortization, goodwill, circularity, unlevered vs. levered cash flow, terminal value, weighted average cost of capital, the capital asset pricing model, and enterprise vs. equity value. And we even provide troubleshooting tips on how to efficiently and accurately diagnose problems in your model when accounts don’t balance or reconciliations don’t tie.

These are key skills you will need to succeed in a high-stakes finance job. And we show you step-by-step exactly how to develop, strengthen, and master those skills so that you are in the best position to nail your finance interviews and hit the ground running in your new job.

Q. Is it worth it to pay $200+ for the training videos?

We feel strongly that our training videos offer tremendous value for motivated banking and finance job candidates.

Quite simply, the stakes for success or failure in your finance interviews and job performance are high. Salaries for entry-level banking analysts and associates span anywhere from $110,000 annually on the low-end to $230,000 or more annually on the high-end, when factoring in base and bonus together. That’s 2 – 5x the national household median income — all for a finance job candidate coming straight out of college or grad school. After you’ve been in the job for a few years, moreover, compensation can quickly increase to many hundreds of thousands of dollars annually.

That means your investment in yourself through purchasing our training videos will pay off hundreds of times over in your first year on the job alone, and that only goes up when you evaluate your long-term future earnings after getting your foot in the door.

So the risk of not being totally prepared, either for your interviews or for your first 100 days on the job itself, can be very costly because it could mean blowing an important chance to build a lucrative career in finance — and the large paydays that come with it.

So ask yourself, how much is it worth it to not be totally prepared for your break into the finance field, and potentially messing up a great career opportunity?

By contrast, how much is it worth it to invest in yourself by purchasing our training videos and potentially winning a lucrative banking or finance job? Think about it this way: with your new finance salary, you can earn back your investment in our training videos in just your first DAY on the job — with more than enough left over to buy your friends and family a beer to celebrate!

The post New 3 Statement and Discounted Cash Flow (DCF) Financial Modeling Online Training Videos appeared first on Private Equity Interviews: The Official Guide - PRIVATE EQUITY INTERVIEWS: THE OFFICIAL GUIDE.

Alrighty campers. Today, I’m gonna teach you all about paper LBOs.

I’ll show you how to develop a gut instinct for whether a PE deal is attractive or not.

If you follow along and practice a few times on your own afterward, you’ll soon develop an instinct within 5 minutes of looking at a deal / company.

Why is this important?

Because you WILL be asked to do this on the fly in interviews by just about all PE firms.

So developing this instinct and judgment on your own and searing it into your brain is critical.

What is a paper LBO?

A paper LBO is exactly what it sounds like: modeling an LBO and calculating returns using only a paper and pencil.

You might be allowed to use a calculator, but you might not. So it’s best to assume you’ll have to do all the math in your head.

Given that, I have 2 guidelines:

• One, SIMPLIFY your assumptions as much as possible. But be transparent and call out when you simplify something. You can say it’s something you would go into more detail if you had more time (or a computer).

• Two, use round numbers to make estimates easier to compute in your head. If you are dealing with decimals, round them. Say you’re doing this to simplify calculations and it shouldn’t change the answer about whether to invest. Again, you can say you’d go into more detail if you had more time, or a computer.

It’s definitely OK to use round numbers and simplify assumptions. In fact, it’s highly recommended.

That is MUCH better than trying to be a superhero and calculate to the 2nd decimal place on everything and then making MISTAKES.

Mistakes in a paper LBO easily snowball and blow up your calculations.

You can end up with results that make no sense. And that’ll just make you look stupid. Those situations don’t result in offers.

Don’t do that…

Keep things simple. Focus only on the key stats you need.

The key stats you need to calculate returns / deal attractiveness are:

• The entry multiple
• The exit multiple
• What the multiple is keyed off of (typically EBITDA, but you should confirm)
• Revenue, if EBITDA is not given to you directly
• EBITDA margin, if the amount is not given to you directly
• Depreciation & Amortization amounts or %
• CapEx amounts or %
• Starting debt amount
• Interest %
• Terms of any mandatory debt repayment schedule (e.g., linear repayment, bullet payment)
• Estimated change in net working capital (if not given, you’ll have to deduce the difference between non-cash current assets and non-debt current liabilities, then compute the change in net working capital for each period)
• Cash taxes

Focus like a laser beam on extracting these stats from the problem and you’ll be well-positioned to evaluate the deal efficiently.

Let’s jump into our example to show you what we mean.

Let’s say PE Capital Partners is evaluating whether to invest in TargetCo, a regional brick and mortar retail chain with 50 stores across 8 states.

The company sells general purpose merchandise just like Wal-Mart does, but it’s less than 10 years old and appeals to younger shoppers who want a cleaner shopping experience.

PE Capital is considering a purchase for 5.0x LTM EBITDA. LTM Revenue is $500M. PE Capital will borrow 60% of the purchase price and invest 40% equity capital. The weighted average interest rate for all debt is estimated at 8%.

The credit agreement provides that $30M must be amortized annually. PE Capital plans to use all excess free cash to pay down principal.

TargetCo’s revenue is expected to grow organically 7% annually for the next 5 years, at which time PE Capital plans to sell the company. The company’s biggest revenue drivers are electronics and household products.

Over the last few years, TargetCo has fairly consistently booked EBITDA margins of ~20%. Capital expenditure hovers around 5% of revenue annually. Net working capital is roughly 3% of revenue per year. The company depreciates ~80% of its CapEx each year. The company’s tax rate is 40%.

Whew! I just threw a lot of facts at you.

In your PE interview, your paper LBO case might be simpler, or it might be more complicated. It might have lots of extraneous information. It might be a 3-page print out with 80% irrelevant details.

The point is, it can take lots of different forms. So whatever it is, you’re gonna have to quickly organize the facts and pull out the critical pieces of info you need.

To use your time efficiently, I strongly urge you to work backward. Start with the END RESULT you want, and then back into the data you need to compute that result.

In this case, it’s easy to determine the ENTRY purchase price.

But to evaluate the EXIT price and equity return, you’ll have to know what final year EBITDA is, and how much debt is left at the end of the holding period.

After you know that, the equity return is easily calculated as:

(Total exit price – remaining debt) / Original entry equity

That is the formula for determining your multiple-of-money return.

Burn that formula into your BRAIN, because you are going to ruthlessly solve for each piece of that formula.

The most computationally intensive piece is by far the remaining debt amount after 5 years. That will always be the variable that takes the most arithmetic to solve.

You can solve for the other pieces fairly easily.

To solve for the entry purchase price, you just need the purchase multiple and the starting EBITDA amount.

To solve for exit price, you need the purchase multiple and the ending EBITDA amount.

So let’s start with those.

For the entry price, we take LTM revenue of $500M, compute LTM EBITDA of 20% which is $100M, and multiply by the entry multiple of 5.0x.

That’s a $500M purchase price.

Since we know the debt vs. equity split is 60 / 40, we determine right away that the transaction is $300M debt, $200M equity.

So our original entry equity is $200M.

For the exit price, absent other information, you should always assume you’ll use the same multiple you purchased at, in this case 5.0x LTM EBITDA.

Why?

Because, even if we did nothing during the time we own the company, as long as we paid a FAIR price for it, we should be able to assume the next buyer will also pay a fair price for it — as reflected in the purchase multiple.

Of course, that assumes we did not overvalue the company in the first place!

And assuming we as PE investors actually IMPROVE the company, say, by growing revenue above organic rates or by optimizing costs, then we may arguably get an even HIGHER purchase multiple at exit because we’ve actually done the hard work of improving the company.

For now, let’s calculate the exit price by taking Year 5 EBITDA and simply multiplying it by our original 5.0x multiple.

It’s gonna take a bit of math, so let’s work quickly through it.

Revenue grows at 7% annually and EBITDA is 20%.

So, starting with $500M LTM revenue, quickly calculate Year 5 revenue. (Remember: no calculators.)

I like to use this little shortcut:

First, I know 10% of $500M is $50M, so half that is $25M, which is 5%.

Second, I know 1% of $500M is $5M, and double that is $10M, which is 2%.

5% + 2% = 7% (annual revenue growth). So that means $25M + $10M + $500M is Year 1 revenue growth.

Scribble that onto your paper, like this:

At end of year…

Now I do the same shortcut for Year 2.

10% of $535M is $53.5M. Half that is $26.75, which a double decimal, which makes my head want to explode.

So I’m gonna round up to $54M and take half that instead, which is $27M. That’s close to 5%.

Good enough for government work, as they say.

When I do this, I’ll probably orally call out my rounding move to be transparent about why I’m making this simplification (i.e., it’s good enough for an estimate, it’ll yield the same answer, and it’s faster to compute).

1% of $535M is $5.35M. Double that is $10.7M. Decimals make my head want to explode. So I’m gonna simplify and round up to $11M, which is my 2% estimate.

Now I’ll just add $27M + $11M + $535M:

Keep going.

10% of $573M is $57.3M. Half that is $28.65M. My head wants to explode. Round up to $29M for 5%.

1% of $573M is $5.73M, double that is ~$11.4M. My head wants to explode. Simplify and round down to $11M for 2%.

Add it up: $29M + $11M + $573M.

Keep ripping through.

10% of $613M = $61.3M, half that rounded down is $30M.

1% of  $613M = $6.13M, double that is $12.26. Explode. Round down to $12M.

$30M + $12M + $613M:

Last lap.

10% of $655M = $65.5M, half that rounded up is $33M.

1% of  $655M = $6.55M, double that is ~$13M.

$33M + $13M + $655M:

Voila.

Now you have revenue estimates for 5 years. It’s not decimal accurate, but it’s good enough for a paper LBO for sure.

Don’t get complicated and try to do decimals unless you are a FREAK OF NATURE whiz at doing quick math.

Be open and transparent about your rounding moves and your interviewer will be fine with it.

In fact, some people only round to units of 10 or 5, like this:

That will create slightly larger computation errors, but is largely still correct.

The fact that we’re at least calculating to the single integer level means our analysis is already pretty sophisticated.

Anyway, final year LTM revenue of $701M means final year LTM EBITDA at 20% margin is ~$140M (rounding for simplicity).

$140M at a 5.0x multiple is $700M.

So ~$700M is our exit price.

Now, remember the key stats we said you should focus like a laser beam on earlier?

You can now cross some items off that list.

• The entry multiple
• The exit multiple
• What the multiple is keyed off of (typically EBITDA, but you should confirm)
• Revenue, if EBITDA is not given to you directly
• EBITDA margin, if the amount is not given to you directly
• Depreciation & Amortization amounts or %
• CapEx amounts or %
• Starting debt amount
• Interest %
• Terms of any mandatory debt repayment schedule (e.g., linear repayment, bullet payment)
• Estimated change in net working capital (if not given, you’ll have to deduce the difference between non-cash current assets and non-debt current liabilities — which is net working capital; then figure the change in NWC for each period)
• Cash taxes

We’ve used all those pieces to calculate our exit price.

Now we just need to know how much debt is left at the end of Year 5 to calculate our multiple-of-money return.

We’re gonna need our EBITDA numbers for all the interim years to compute our debt paydown, so let’s fill those in now (rounding where appropriate).

EBITDA is 20% per year, so:

With our EBITDA numbers in place, we now have to compute annual free cash flow to determine how much debt to pay down each year.

Free cash flow is:

EBITDA
Less: CapEx
Less: Interest expense
Less: Cash taxes
Less: Change in net working capital  

To compute interest expense, you’ll need to know how much debt is paid off each year. ‘Cause the way we’re going to compute interest is as a simple percent of beginning of year debt (to keep things simple).

To compute cash taxes using the 40% tax rate, we first need to know the interest expense amount and the depreciation / amortization amount, since both are tax-deductible.

Finally, computing CapEx and net working capital is straightforward. We know CapEx is 5% of revenue and NWC is 3%. We also know depreciation is 80% of CapEx.

So let’s just estimate these statistics and fill them into our paper chart quickly, using round numbers, no decimals:

Now let’s compute interest expense, which is 8% of beginning of year debt. We’ll have to compute this simultaneously with calculating each year’s debt paydown.

That’s because the amount of debt we amortize each year determines next year’s beginning of year debt balance.

In turn, that determines the year’s interest expense, cash taxes, and free cash available for debt repayment. There is a corkscrew-like circularity in the formula, which you should Google if you’re not familiar with it.

So we have:

Cash taxes are computed as:

(EBITDA – Depreciation – Interest expense) * 40%

For Year 0 (LTM), cash taxes are: (100 – 20 – 0) * 40% = $32M.

We won’t compute free cash for Year 0 because we don’t know what the change in NWC was from the prior year. But it doesn’t matter ‘cause we only need to start our analysis from Year 1.

So in Year 1, let’s now compute interest expense, cash taxes, and free cash flow.

Interest expense is 8% of $300M, or $24M.

So pre-tax earnings are: (107 – 21 – 24) = $62M.

Cash taxes are 40%, or $24.8M, but let’s round up to $25M for simplicity.

Now we can compute free cash flow for Year 1. It’s:

EBITDA                                   107
Less: CapEx                             27
Less: Interest payments     24
Less: Cash taxes                     25
Less: Change in NWC             1

$31M in free cash. Let’s fill that in:

As you can see, we also went ahead and reconciled beginning to ending debt amounts.

We know we have to pay back $30M off the debt note each year, and we use all excess cash to pay down additional principal.

In this case, we’ll amortize $31M off the note in Year 1, leaving a balance of $269M at the end of Year 1.

Let’s crank through Year 2:

We first calculate interest as 8% of $269M, or ~$22M.

Then we compute cash taxes: (115 – 23 – 22) * 40% = $28M.

Then we compute free cash flow:

EBITDA                                   115
Less: CapEx                             29
Less: Interest payments     22
Less: Cash taxes                     28
Less: Change in NWC             1

We get: $35M.

Backing that out from our debt balance leaves $234M in debt left.

As you can see, there’s a fair amount of arithmetic to solve the debt paydown amount for each year.

Being able to work quickly, accurately, and efficiently with pencil on paper, and without having to rely on a calculator, is a very critical skill.

Repeating the computation process for each remaining year, and rounding to whole numbers where appropriate, leaves us at the end of Year 5 with:

Final year ending debt is $96M.

So now we can finish our formula:

(Total exit price – remaining debt) / Original entry equity

Our entry was $500M, $300M debt and $200M equity.

Our exit is $700M.

Remaining debt is $96M.

The multiple-of-money is:

(700 – 96) / 200 = ~3.0x.

So, in 5 years, we triple our money by investing in TargetoCo with 60% debt and just riding the company’s organic momentum. (Remember: we haven’t suggested anything to improve the company and accelerate sales or cut costs yet.)

We have a good idea of the IRR as well, which will be ~25% annually.

I know that because I’ve already memorized that, over a 5-year hold, the following multiples of money translate approximately into the following IRRs:

2.0x MoM → ~15% IRR

2.5x MoM → ~20% IRR

3.0x MoM → ~25% IRR

3.7x MoM → ~30% IRR

You should do the math yourself to validate these numbers, and then once you do, burn them into your BRAIN so you don’t have to think about them anymore when you’re doing your analysis.

Now, this paper LBO also shows you exactly how much of the value is created from the company’s operations vs. from juicing returns using leverage / debt.

If we used zero debt in the transaction, we would have spent $500M in equity capital upfront, and received ~$700M at exit, for a net return of $200M which is a 40% return over 5 years, or an IRR of ~7% annually.

With debt financing, our IRR is ~25%, and we take home a net return of ~$400M after 5 years.

So leverage can create value.

But generally speaking, if that’s the ONLY card to play in a deal, the deal may not be worth doing. (In real life, it’ll be haaaaard to book a 25% IRR using leverage alone.)

There might be other places to deploy capital that will yield a higher risk-adjusted return — especially considering that private equity is pretty much illiquid until the fund retires.

Based on personal experience, a 3.0x MoM (~25% IRR) over 5 years is generally the target you have to try and hit for a PE deal to be attractive.

And to hit a 3.0x return, you’re usually gonna have to truly create some value by rolling up your sleeves and getting involved operationally.

You’ll have to grow EBITDA. In fact, one heuristic I’ve internalized is that you should basically shoot to roughly double EBITDA over 5 years to achieve a worthwhile return.

Double EBITDA.

Now, how can you do that?

Well, there’s really only 2 ways: increase sales, or decrease costs.

You can:

• Grow revenue by volume (desirable)
• Grow revenue by price (not desirable, because not sustainable)
• Reduce costs without adversely impacting revenue (by trimming fat / operating costs, optimizing supplier relationships / reducing COGS, managing working capital more efficiently)

Whether through one of these methods or a combination of them, the truly value-added PE investors, the top-quartile ones, will proactively grow EBITDA beyond organic levels.

In doing so, they generate a higher return and IRR for their LPs than mediocre PE investors.

You want to be able to vocalize THESE kind of insights when you tear down paper LBOs in your interview.

It shows your interviewer you not only have a strong grasp of the financial analytics. But you also see the big picture of where private equity returns come from: how much from organic lift, how much from leverage, how much from operational improvements, how much from multiple expansion, etc.

Demonstrating mastery of these concepts, along with the financial details, is what will set you apart and get you to the next round.

So, study what I’ve shown you in this lesson and do a bunch more practice problems to get REALLY FAMILIAR with it.

It is a learnable skill.

If you put in the time and thought and diligence, you WILL be able to crank through paper LBOs like this in about 5 minutes, and then sit up and carry an insightful and thoughtful discussion about the company / deal for another 15.

That’s what it means to crush a paper LBO.

The post Paper LBO Model Example: How to rip through a paper LBO in 5 minutes appeared first on Private Equity Interviews: The Official Guide - PRIVATE EQUITY INTERVIEWS: THE OFFICIAL GUIDE.

Our new Private Equity Interview Guide teaches you step-by-step strategy, technique, and mindset of the distinctive private equity / venture capital job interview candidate. It provides a clear step up in comprehensiveness and quality over typical finance careers websites and buyside investing blogs because of its focus on:

• Recruiting at the hardest, most elite private equity firms in the world: Bain Capital, TPG, Blackstone, Carlyle, GS Capital Partners, KKR, Warburg Pincus, Apollo, Clayton Dubilier & Rice, Huntsman Gay, Golden Gate, Silver Lake
• Candidates with no previous buy-side experience, with or without investment banking experience, or no formal finance training at all
• Hard, complex investment scenarios / questions – not vanilla questions found in commercial corporate finance prep guides
• How to think flexibly on your feet in difficult interview situations
• Key insights about the mindsets and motivations of private equity interviewers
• In-depth breakdown of structure, format, and questions asked by brand-name, blue-chip LBO firms, and general advice for venture capital / growth equity interviews

This Private Equity Interview Guide is NOT focused on boutique firms, firms without industry-respected MDs, or firms with low AuM (e.g., family offices)

We’re so confident the guide is packed with actionable, insightful tips and techniques that if you don’t find the material insightful or useful after reading it, just e-mail us and we’ll refund your money back.

Read praise and testimonials for the e-book, preview the first chapter for free, and then buy and download the Private Equity Interview Guide today!

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The post Welcome to the Official Private Equity Interview Guide appeared first on Private Equity Interviews: The Official Guide - PRIVATE EQUITY INTERVIEWS: THE OFFICIAL GUIDE.

Let’s continue our conversation (from the last post) about the private equity LBO modeling test. The LBO modeling test is used by many, perhaps most, PE firms both large and small as part of the interview process to test 3 things:

• Finance knowledge
• Excel modeling skills
• Executive presentation / communication skills

This is a short series that covers the “who” and “what” of the LBO modeling test, the specific components of the LBO modeling slide presentation, delivering the oral presentation to your interview committee, how to practice for the LBO modeling test, and how the modeling test is evaluated in the context of other recruiting considerations.

This post is about how to deliver the oral presentation of your investment thesis to the interview committee, how to practice for the LBO modeling test, and how the modeling test is evaluated in the context of other recruiting considerations. You can see other posts in this series here:

• Who gets the private equity LBO modeling test and what is it?
• Key components of the LBO modeling test presentation

In the last post, I covered the specific components of the LBO modeling slide presentation. Next comes the oral presentation to the investment / recruiting committee.

Oral presentation 

When you deliver your oral presentation, your audience might be to just 1 investment professional or it might be all the partners of the firm. Whatever the size of the interview committee, the firm is not concerned with your actual recommendation as it is with your ability to reason and defend your conclusions thoughtfully.

In this regard, your communication skills are extremely important — more so than perfecting your model or understanding technical finance minutiae. You need to be able to state your recommendation clearly and unequivocally, as well as explain your supporting points simply, concisely, and compellingly.

So you should focus relentlessly on your investment recommendation, and only the most important supporting points (while addressing key risk factors). Do not get bogged down in details; do not say to your interviewers “if you look on page 132 of the investment memorandum….” No – you should be able to tick the key points off in your head for the various deal trade-offs without needing to reference anything more than your short slide deck.

To be sure, much of your presentation quality relates to your public speaking skills. Here are some tips that have always served me well.

• Speak twice as slowly as you normally would (this may feel unnatural to you, but it will NOT feel strange to your audience), make sure you pause at natural moments to allow your audience to absorb the points you just made, and make eye contact with your interviewers (if there are multiple audience members, be sure to make eye contact with each person every few seconds to keep them engaged)
• Write memory-jogging bullet points on your slides to remind you what your key points are, but do not write down your presentation verbatim
• Do a practice dry-run no matter what before you present, even if you only have 5 minutes to practice. Five minutes to collect your thoughts and rehearse your key points is infinitely better than inventing your presentation live and on-the-fly.

How to practice 

The LBO modeling test is certainly not for the faint of heart. There are a lot of moving pieces, and a lot of skills tested through the exercise: technical finance and accounting knowledge, Excel modeling skills, consulting-style macro / market analysis skills, slide presentation skills, and oral communication skills. Candidates who do well on the LBO modeling test tend to have practiced beforehand — plain and simple.

You should spend some time doing at least a couple practice iterations of the entire exercise end-to-end — yes, that means reading through an investment memorandum, actually going through the exercise of building a model, creating presentation slides, and then presenting orally (to friends and colleagues if possible, otherwise in front of the mirror).

Try to get a sample investment memorandum (ask a friend in banking if you don’t have direct access to one) and go through the exercise steps detailed above. (Alternatively, you could also just download the 10-K for a public company you don’t know well, and use that as the raw material for your practice test.)

Try to work through the key parts of the LBO model, referencing online resources or asking banking friends for help if you get stuck. See how fast you can get your modeling time down to, and try to systematically decrease the time it takes for you to build a model from scratch.

Do the same exercise with the market / industry analysis portion (which should be easier because little modeling is needed here), as well as rapidly creating your slides, formulating your investment thesis, and collecting your thoughts for your oral presentation.

Then practice delivering your oral presentation to get a feel for the pacing and flow, and where you need to be mindful about how much time you are spending getting through your points, etc.

How the LBO modeling test is evaluated 

The modeling test definitely counts for a lot in the evaluation of your candidacy, but you should always keep in mind that it is not the only thing determining whether you get an offer. PE firms tend to have many interview rounds, and since they are generally quite small and can afford to be selective, personal fit is as important (arguably even more important) than your modeling test performance.

To be sure, everyone needs to clear a certain bar for the modeling test, but between a good “tester” with great personal fit vs. an awesome “tester” with poor personal fit, I can’t tell you if one WILL ultimately get an offer, but I can tell you which one will NOT be getting an offer.

So keep in mind that PE interview prep must be balanced between your facility in going through the rigorous LBO modeling test and your personal fit / story for why you want to work in PE and why this firm feels like the next logical step for your career.

Be sure not to neglect the personal fit portions or nailing down the “why” behind your story. Most candidates have poorly thought-out stories for why they made certain career choices and where their careers are going, because they simply haven’t spent quality time thinking about what they actually want to do with their careers, and instead have been chasing the crowd into investment banking, management consulting, private equity and other jobs simply because those things sound prestigious and cool.

But the last thing PE firms need is yet another candidate trying to get into PE because it sounds prestigious and cool — those candidates tend to flame out once the novelty wears off and there is just hard work and long hours remaining, and they are consequently unlikely to perform well at a PE  firm.

So make sure you get your story down cold, you are personable in your interviews, and you perform reasonably well on your LBO modeling test. With those things in place, you will stand a good chance of getting an elite PE offer no matter how many other candidates you are competing against!

Found this series useful?

Check out our step-by-step PE modeling training videos for walk-through tutorials on how to build an LBO model, navigate Excel with ruthless efficiency, and rapidly create an LBO PowerPoint deck to present to your PE interviewers.

Also check out our PDF guide “How to Nail Your Private Equity Interview (whether you have finance training or not)” for much more in-depth tips and strategies on how to successfully interview for top private equity jobs!

The post Private Equity LBO Modeling Tests: The Interview Presentation, How to Practice, and How the Test is Evaluated appeared first on Private Equity Interviews: The Official Guide - PRIVATE EQUITY INTERVIEWS: THE OFFICIAL GUIDE.

Let’s continue our conversation (from the last post) about the private equity LBO modeling test. The LBO modeling test is used by many, perhaps most, PE firms both large and small as part of the interview process to test 3 things:

• Finance knowledge
• Excel modeling skills
• Executive presentation / communication skills

This is a short series that covers the “who” and “what” of the LBO modeling test, the specific components of the LBO modeling slide presentation, delivering the oral presentation to your interview committee, how to practice for the LBO modeling test, and how the modeling test is evaluated in the context of other recruiting considerations.

This post is about the key components of the LBO modeling test presentation. You can see other posts in this series here:

• Who gets the private equity LBO modeling test and what is it?
• The LBO modeling test oral interview presentation, how to practice for the LBO modeling test, and how the test is evaluated

In the last post, I covered what you are expected to show when you present your findings to the interview committee. But what should you cover in each of the specific components of the LBO modeling slide presentation?

Executive summary slide

Your goal here is to summarize 3 things clearly.

• Whether the firm should invest: You need to give a clear recommendation one way or the other — without equivocating, hedging, or conditioning your response on additional “TBD” factors. You would be surprised how many candidates fail to do this basic task, which may translate into an automatic rejection.
• Key Merits: You need to highlight the most important merits supporting your investment recommendation (try to limit yourself to no more than 3-4, otherwise it suggests lack of editorial judgment on your part)
• Key Risks: Similarly, you need to touch on the biggest concerns and risk factors (again, limiting yourself to no more than 3-4)

Just to illustrate, here are some sample bullets you might write for an executive summary:

+ The deal team recommends that we proceed with a bid to invest in TargetCo at a 6.5x EBITDA multiple ($850M purchase price)

• TargetCo presents a strong investment opportunity that could provide a 2.8x MoM over a 5-year holding period (~24% IRR) given base case assumptions (revenue growth in line with historical trend line, 2% EBITDA margin expansion through cost improvements by year 3)

+ Key Merits

• Strong company fundamentals, robust cash flow
• Comparables trade at 15% higher multiples on average, making TargetCo especially price-attractive
• Untapped international expansion presents key growth opportunity (not factored into base case)
• Distinctive senior management team

+ Key Risks

• Continuing sluggish economic recovery continues to make consumer spending rebound very uncertain (“new normal”)
• New technology emerging could threaten defensibility of one of TargetCo’s major product lines
• Regulatory issues that could impede international expansion

Market, industry, and operations slides

With the market and industry slides, you goal is to cover the most interesting, relevant, and insightful macro analyses possible given the information provided to you.

For example, you might show data or charts about the market as a whole, including how fast it is growing, what consensus out-year forecasts are, and what various trends are in terms of innovation, regulation, etc.

You might also show the industry’s or company’s historical growth, key near-term expansion opportunities the company could pursue, and any forecast expectations for whether the company is expected to grow faster or slower than the market as a whole (and why).

You could also show a competitive analysis — primary competitors, key advantages / weaknesses of the company and its peers, and strategies the company might consider including how the landscape might shake out over the next few years.

Focus on the core economic forces and market drivers that most greatly impact your investment decision, and let that guide the analyses you show in this section.

LBO model slides 

This cluster of slides is meant to show valuation and expected returns, along with key assumptions and drivers that lead to your conclusions.

You can get yourself into trouble (and increase the risk of mistakes) by making your model too detailed and ambitious with 10 different operating cases, a slew of EBITDA add-backs, multiple debt tranches, PIK vs. cash interest scenarios, and book vs. cash tax reconciliations.

Fight the urge to impress the firm by going into unnecessary detail and instead focus only on the key assumptions and drivers. Your interviewers will not nit-pick over your assumptions and projections as long as they are reasonable and thoughtful; they will not say “how come you didn’t think about using mezz debt?” or “why didn’t you consider the difference between book vs. cash taxes?”

Keep it simple and clear.

The core things you need to show in your model are:

• Sources and uses showing how much debt vs. equity you are financing the transaction with, how much is being used to re-finance existing debt,  pay fees, etc
• Entry / exit multiples and leverage ratios
• Income statement / EBITDA projections
• Free cash flow projections
• Working capital projections (balance sheet not necessary, unless they specifically ask for it or you are facing an unusual acquisition scenario)
• Returns scenarios and sensitivities at various multiples / prices, EBITDA projections, and leverage ratios

So you might structure your 3 slides as follows:

1. Sources and uses, entry / exit multiples, and leverage ratios
2. Income statement / EBITDA projections, Free cash flow projections, and working capital schedule (if needed)
3. Returns scenarios and sensitivity tables at various multiples / prices, EBITDA projections, and leverage ratios

Conclusion Slide

The conclusion slide is essentially a rehash of your executive summary slide (i.e., slide 1). Here you are simply summarizing your conclusions, perhaps with specific key points from your market and model slides, along with re-stating your go / no-go recommendation on whether to invest and how the PE firm should mitigate risk factors you identified in the presentation.

If your recommendation is NOT to invest, then you could perhaps mention under what terms the deal would be attractive — e.g., how much would the price have to decline or what would have to change about the company’s prospects in order for your recommendation to change?

The go / no-go recommendation is seldom clear-cut, and there can quite possibly be good arguments on both sides. Your job is to provide a well-reasoned argument for your particular recommendation, and your actual answer doesn’t matter so much as how you support your reasoning and defend your recommendation.

To make a go / no-go recommendation, keep in mind that the numbers in your model do matter, but they are best used to test key assumptions for whether the deal would work. If your model shows the IRR below 15% over a 5-year hold even under very aggressive assumptioms, for example, the deal isn’t going to work. By contrast, if it shows the IRR over 25% under even the most conservative assumptions, then the deal is likely quite attractive.

With your model as a sanity check against your biggest assumptions, your ultimate decision should likely rest on more macro factors about where the market is going, the growth prospects of the industry, and the company’s outlook given its strengths and weaknesses, etc. Use your LBO analyses (valuation, returns scenarios) to support your arguments around these macro factors, not to drive your entire investment decision.

Ideally, you want to say to your interview committee: “I recommend we invest in TargetCo because consumer spending in this sector is recovering quickly, and the industry as a whole has experienced double-digit tailwinds over the past 2 years, with no signs of slowing down. Moreover, TargetCo is already the leader in its category with 4 additional new products in the pipeline that will likely reinforce its market leadership over the next 18-24 months. Given base case assumptions, TargetCo can easily produce a 22% IRR if it simply maintains trend line growth, without even factoring in extra share capture expected to accrue from the release of these 4 new products.”

In the next post of this series, we’ll cover how to deliver the oral presentation of your investment thesis to the interview committee, how to practice for the LBO modeling test, and how the modeling test is evaluated in the context of other recruiting considerations.

Found this series useful?

Check out our step-by-step PE modeling training videos for walk-through tutorials on how to build an LBO model, navigate Excel with ruthless efficiency, and rapidly create an LBO PowerPoint deck to present to your PE interviewers.

Also check out our PDF guide “How to Nail Your Private Equity Interview (whether you have finance training or not)” for much more in-depth tips and strategies on how to successfully interview for top private equity jobs!

The post Private Equity LBO Modeling Tests: Key Components of the LBO Modeling Test Presentation appeared first on Private Equity Interviews: The Official Guide - PRIVATE EQUITY INTERVIEWS: THE OFFICIAL GUIDE.

Let’s talk a bit about the private equity LBO modeling test. The LBO modeling test is used by many, perhaps most, PE firms both large and small as part of the interview process to test 3 things:

• Finance knowledge
• Excel modeling skills
• Executive presentation / communication skills

This is a short series that covers the “who” and “what” of the LBO modeling test, the specific components of the LBO modeling slide presentation, delivering the oral presentation to your interview committee, how to practice for the LBO modeling test, and how the modeling test is evaluated in the context of other recruiting considerations.

This post is about the “who” and “what” of the LBO modeling test. You can see other posts in this series here:

• Key components of the LBO modeling test presentation
• The LBO modeling test oral interview presentation, how to practice for the LBO modeling test, and how the test is evaluated

Who gets the LBO modeling test? 

First thing to clarify is that everyone gets the same modeling test — whether you are coming from a banking, consulting, corporate, or other background.

In this regard, investment banking candidates do have an edge because they most likely already have expert Excel skills and, given the nature of their jobs, they probably have a decent understanding of accounting and finance as well (although you would be surprised how many banking analysts I have met in my day who lack critical reasoning skills when it comes to analyzing businesses).

Consultants do well when it comes to executive communication and synthesis skills, and most of them have pretty good Excel skills too (though not as crazy good as bankers), and many of them even have a decently strong understanding of finance (although this is where they are weakest compared to bankers).

People in corp dev or at Fortune 500s may be somewhere in between, or may lean more one way or the other, depending on their background.

Point is, everyone has to do the LBO modeling test, and there isn’t a shortcut around it, so you should prepare to carve out sufficient time to prep for it diligently if you want to have a shot at doing well.

What should you expect to see in the modeling test as an interview candidate? 

Your mission in any LBO modeling test is simply to answer the question: “Should the firm invest in the company you just analyzed?”

The way the modeling test is administered is typically in one of two ways.

The first way is: You may get a memorandum or “bank book” containing financial statements, operational data, market and industry information, and other research materials describing the company, its performance, the industry it sits in, its competitors, suppliers, customers, etc. You will then be given a couple days or a week to analyze the company’s performance, build an LBO model, and create a slide presentation arguing your investment thesis for the company, which you will be asked to present to an investment / hiring committee at the end of the assignment.

The second way is: You may be given similar data and materials and be asked to analyze the company, build an LBO model, and build a slide presentation deck as part of the interview, and then present to the committee immediately afterward before you wrap up your interview. This is particularly common at brand-name, blue chip PE funds and mega-cap PE funds. The amount of time they give you could be as little as 1 hour and as much as 8 hours — it can vary a lot between firms, and even between recruiting years.

Of course, different levels of “resolution” are expected depending on how much time you are given. If they only give you 1 hour, you are obviously not going to be able to develop nearly as sophisticated an analysis as an 8 hour timeframe would allow you, much less a 1-week timeframe.

In terms of research materials you will be given, your PE recruiter will typically give you a “bank book” or a (pseudo) “confidential information memorandum” which may already be highly summarized for you (e.g., less than 10 pages) or it might be unabridged, which could run a couple hundred pages long or more. If you are asked to evaluate a public company, the firm might just ask you to look at the company’s latest 10-K for the data and information you need to conduct your analysis.

Even though you may have a ton of questions for your recruiter about how to scope the assignment or build your model, they will almost never give you any guidance on this because the whole point is that they want to see how good you are at “figuring it out.”

What are you expected to show when you present your findings? 

Keep things simple — that’s my biggest piece of advice. Do NOT try to build an overly complex model to show how much you know. Do not try to analyze all the company’s various customer segments for a single product line in the Asia Pacific region. If you get too complex or too detailed, you are much more likely to not finish the assignment within the time provided or screw something up. Either of these is a much bigger sin than being too simplistic in your analysis.

Unless they give you specific guidance on how to structure your presentation, you should structure it with:

• 1 executive summary slide containing your go / no-go recommendation on whether to invest
• 2-3 slides showing key points about the market, industry, and most important operational metrics of the company
• 3 slides showing key outputs from your LBO model (which you will build but not show in its entirety — you will show sources and uses, the income statement, free cash flow / working capital projections, and returns scenarios at various entry and exit multiples / prices, EBITDA projections, and leverage ratios)
• 1 wrap-up slide summarizing your conclusions and reiterating your go / no-go recommendation on whether to invest

One last tip: do NOT cram a bunch of dense text onto your slides. Since you will be delivering an oral presentation as part of the assignment, just jot down bullets for your main points to jog your memory so you can speak to them and transition smoothly when you present orally to the committee.

In the next post of this series, we’ll parse each of the key components of the LBO modeling slide presentation.

Found this series useful?

Check out our step-by-step PE modeling training videos for walk-through tutorials on how to build an LBO model, navigate Excel with ruthless efficiency, and rapidly create an LBO PowerPoint deck to present to your PE interviewers.

Also check out our PDF guide “How to Nail Your Private Equity Interview (whether you have finance training or not)” for much more in-depth tips and strategies on how to successfully interview for top private equity jobs!

The post Private Equity LBO Modeling Tests: Who gets them? What are they? appeared first on Private Equity Interviews: The Official Guide - PRIVATE EQUITY INTERVIEWS: THE OFFICIAL GUIDE.

This post is part of a short series that covers the who / when / where / how of landing a private equity job. This post is about the “how” of PE recruiting. You can find all the posts in this series here.

How Does the Recruiting Process for Private Equity Jobs Work?

Headhunters

Most PE firms use headhunters to source candidates, for at least two reasons.

One reason is that PE firms are rich. They don’t want to be bothered with having to deal with HR internally, so they choose to outsource it instead; headhunters charge them a lot in finder’s fees for successfully placed candidates, but they do a good job at it and the amount is “nickels and dimes” to PE firms which can compensate even their lowest-ranking investment professionals 6-figures.

The second reason is simply a matter of scale — unlike investment banks, which have huge departments and need to fill incoming classes that can easily be 100 analysts / associates or more, each PE firm typically only needs to recruit a handful of associates each year, if even that many. They may recruit as little as 1 (or even none) or as many as 8, but either way it isn’t a lot. Even the biggest mega cap funds tend to recruit fewer than 10 new associates per year. So it doesn’t really make sense for the firm to keep an HR person on-staff full-time.

This means that as you begin preparing to interview for private equity jobs, you will need to build relationships with headhunters to get your foot in the door, assuming you don’t already know people who work at PE firms.

The best headhunters I know of and have worked with are SG Partners, CPI, Oxbridge Group, Pinnacle Group, Weatherly Group, and Phoenix Group International. They have the best relationships and track record with placing candidates at elite PE firms, they get the highest quality candidates, which means the best PE firms tend to work with them.

If you are working at a big investment bank or brand-name consulting firm, you may be contacted by headhunters first sometime in the latter half of your first year as an analyst.

If you are working at a smaller bank, consulting firm, or corporate development department and are not contacted by headhunters first, a good way to get on their radar screen is to get referred by someone who either knows them or has worked with before. You can also try cold e-mailing or cold-calling them, but that tends to be less productive (though not impossible).

Remember, headhunters are constantly evaluating whether it is worth spending time to represent you, and the way they decide that is by believing you have a high likelihood of getting a PE offer (and hence will generate a finder’s fee for them). If you keep this in mind and underscore your “hirability” — why you are a good bet because you have a strong chance at getting a PE offer — then you will be in good shape to catch the attention of headhunters.

Initial screen  

Your first “meeting” will likely be an in-person interview with a headhunter representing the PE firm. Their sole goal at this stage is to filter out candidates who don’t have the right qualifications (e.g., not enough finance knowledge, not enough Excel skills).

This can be demonstrated by discussing your deal experience, client cases and projects, and / or financial or other modeling exposure — and while headhunters are not themselves finance specialists, they know enough about finance to smell B.S. and to tell what’s exaggeration, etc. In fact, many of them used to be investment banking analysts, and these headhunters actually do have finance knowledge to really evaluate your candidacy.

Make sure you pick good deal / case examples and be able to clearly explain your role on them, where you personally made an impact or significant contribution, and highlight the specific modeling work you did as well.

When you meet with headhunters, it is very important to impress them with your drive, intelligence, thoughtfulness, and communication skills. They make an internal cut right there for the private equity firms and filter you out (or in) based on your knowledge and experience — and whether you can pass the “airport test.”

That’s right, technical skills are not enough. You have to also be likeable. Even in these early meetings, try to develop a rapport and relationship with your headhunters. Talk about hobbies, places you’ve traveled, interesting personal projects you’ve worked on — anything to strike a connection and show that you can pass the “airport test,” even if it has nothing to do with finance.

Remember, if your headhunter or interviewer doesn’t fundamentally feel you are personable, then it doesn’t matter how qualified you are because they are not going to recommend you to the next step of the interview process.

As with any interview, demonstrate you are thoughtful, articulate, intelligent, hard-working — and personable — and you will do well in passing their “smell test” screens.

It may sound obvious, but it’s worth repeating here given how often it can be forgotten: Do not underestimate — and especially do not mistreat — your headhunters by thinking they are some useless HR department like at a big company. They are literally the gatekeepers between you and elite private equity opportunities, and they are pretty good at doing their job and finding great candidates. So treat them with respect and professionalism and you’ll be off to a good start.

Following your initial screen, your recruiters will start to send your resume to specific PE firms they have relationships with.

On-site interviews

Interviews for private equity jobs can go in many different directions depending on your background, skills, and experiences — as well as the firms you are applying to. My own PE interviews had huge variance in topics covered, technical finance questions I was grilled on, personal fit questions asked, and sheer difficulty. There are some general guidelines to keep in mind, however.

First, interviews at mega-cap funds will often test extremely technical finance knowledge to see how well you understand different accounting, valuation, and tax concepts.

Smaller PE firms tend to place greater emphasis even from the early stages on personal fit, and they want to see how hungry and motivated you are to perform well as a PE associate.

Most PE firms will test your financial modeling skills through an on-site LBO modeling test, as well as your general business / strategic judgment through case interviews.

For LBO modeling tests, you should practice building simple, short-form LBO models quickly in your free time (in under an hour) — you can download public company financials from Bloomberg, CapIQ, or even E-trade (or wherever you might have a personal investment account).

For case interviews you may encounter, focus on key analyses surrounding revenue growth, cost streamlining, customer / supplier risk — that sort of thing. Don’t try to be too clever with complex analysis. Being simple, clear, and articulate is more impressive than being complex in your answer.

Know your own work history — deals, cases, projects — impressively well. If you are coming from a non-finance background, focus on your operational experience and tell a compelling story about how you can pick up the finance skills and be a successful fit for PE.

Offers

It is pretty rare to be in the position of having offers for multiple private equity jobs to evaluate, since many firms give offers that explode in a day or two, or even on the spot, and some firms even agree to extend offers only if you agree beforehand to accept it! For entry-level roles like associate and senior associate positions, your compensation package is generally non-negotiable, so there isn’t much point in trying to negotiate. Packages are pretty standardized and competitive anyway, and there isn’t a huge amount of variation among the high vs. low between firms.

If you are lucky enough to get a private equity job offer, the real question you should ask yourself is whether you truly want to go into PE at all — and whether you can envision being happy for the next few years at the firm that is trying to court you. If both those answers are yes, then make your decision and coast on “easy street” for a while. Otherwise, revisit the drawing board to figure out what would be a better fit — better to do that self-reflection upfront now than to be stuck later in a job or role you don’t enjoy!

Found this series useful?

Be sure to check out our PDF guide “How to Nail Your Private Equity Interview (whether you have finance training or not)” for in-depth tips and strategies on how to successfully interview for jobs at top private equity firms!

Also be sure to check out our step-by-step Private Equity LBO Modeling Training Videos for walk-through tutorials on how to build an LBO model, navigate Excel with ruthless efficiency, and rapidly create an LBO PowerPoint deck to present to your PE interviewers.

The post How Does the Recruiting Process for Private Equity Jobs Work? appeared first on Private Equity Interviews: The Official Guide - PRIVATE EQUITY INTERVIEWS: THE OFFICIAL GUIDE.

This post is part of a short series that covers the who / when / where / how of landing a private equity job. This post is about the “where” of PE recruiting. You can find all the posts in this series here.

Where to Get a Private Equity Job

While you can certainly move around geographically as you recruit for private equity jobs, there is generally more “local” activity than not in PE recruiting — meaning there is somewhat of a tendency to recruit locally in whatever geography you are already in. In other words, if you are in Los Angeles, LA recruiters and LA firms will be more likely to talk to you — for LA opportunities. Same for New York City. Or San Francisco. Or Chicago.

It’s not that you can’t move from east to west coast or vice versa if you wanted to. It’s just that there will be more of a tendency to look at local candidates first, since there is simply less logistics and coordinating needed to get interview candidates in front of hiring managers.

Think about it: New York private equity firms have direct geographic access to armies of New York analysts at New York investment banks. They can get them in for interviews quickly, efficiently, on a moment’s notice, and virtually cost-free. If you are the world’s greatest analyst based in San Francisco, it’s just harder to coordinate (time zones, flights, etc) to get you in for an interview, so they are more likely to look at local talent first before really branching out to other geographies.

Again, lots of exceptions to this, but generally it’s true.

Found this series useful?

Be sure to check out our PDF guide “How to Nail Your Private Equity Interview (whether you have finance training or not)” for in-depth tips and strategies on how to successfully interview for jobs at top private equity firms!

Also be sure to check out our step-by-step Private Equity LBO Modeling Training Videos for walk-through tutorials on how to build an LBO model, navigate Excel with ruthless efficiency, and rapidly create an LBO PowerPoint deck to present to your PE interviewers.

The post Where Do You Get a Private Equity Job? appeared first on Private Equity Interviews: The Official Guide - PRIVATE EQUITY INTERVIEWS: THE OFFICIAL GUIDE.

This post is part of a short series that covers the who / when / where / how of landing a private equity job. This post is about the “when” of PE recruiting. You can find all the posts in this series here.

When Should You Start Looking for a Private Equity Job?

Private equity recruiting generally unfolds 10-18 months prior to your prospective PE start date.

Big prestigious mega-cap funds will recruit analysts, consultants, and other candidates beginning in the winter and spring of the year prior to the incoming PE class start dates — that can be 10-18 full months (and possibly even more!) in advance of your actual start date.

The next bracket of PE firms (e.g., semi-large and middle-market firms) may also start their recruiting processes around the same time or a bit later, but they will continue on after the mega-cap funds have finished recruiting and may recruit into the fall of that year as well (until they have filled their classes to their satisfaction).

Smaller firms and specialty funds may recruit even beyond that — winter and spring of the next year (the same year as the prospective start date) — and may also recruit in a more ad hoc non-standardized way, since their hiring needs may shift throughout the year (unlike mega-caps which have pretty stable, predictable hiring needs).

Found this series useful?

Be sure to check out our PDF guide “How to Nail Your Private Equity Interview (whether you have finance training or not)” for in-depth tips and strategies on how to successfully interview for jobs at top private equity firms!

Also be sure to check out our step-by-step Private Equity LBO Modeling Training Videos for walk-through tutorials on how to build an LBO model, navigate Excel with ruthless efficiency, and rapidly create an LBO PowerPoint deck to present to your PE interviewers.

The post When Should You Start Looking for a Private Equity Job? appeared first on Private Equity Interviews: The Official Guide - PRIVATE EQUITY INTERVIEWS: THE OFFICIAL GUIDE.