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Private Equity Case Study: Example, Prompts, & Presentation

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Private equity case studies are an important part of the private equity recruiting process because they allow firms to evaluate a candidate’s analytical, investing, and presentation abilities. 

In this article, we’ll look at the various types of private equity case studies and offer advice on how to prepare for them. 

This guide will help you ace your next private equity case study, whether you’re a seasoned analyst or new to the field.

Types Of Private Equity Case Studies

Case studies are very common in private equity interviews, and they are a key part of the overall recruiting process.

While you’re extremely likely to encounter a case study of some kind during your recruiting process, there is considerable variety in the types of case studies you might face.

Below I cover the major types:

Take-home assignment

In-person lbo modeling assignment.

For this case study, you’ll get some company information (e.g. a 10-K or a CIM) and be asked to assess whether or not you’re likely to invest. 

Generally, you’ll get between 2-7 days to prepare a full presentation or investment memo with your recommendations that you’ll present to the interviewer.  To support your investment recommendation, you’ll be expected to complete a full LBO model .  The prompt may give certain details or assumptions to include in the model.

This type of test is most common during “off-cycle” hiring throughout the year, since firms have more time to allow you to complete the assignment. 

This is pretty similar to the take-home assignment. You’re given company materials, will build a financial model, and decide whether you would invest. 

The difference here is the time you’re given to complete the case. You’ll generally get between two to three hours, and you’ll typically complete the case study in the firm’s office, though some firms are becoming newly open to completing the assignment remotely. 

In this case, you’ll typically only complete an LBO model. There is usually no presentation or investment memo. Rather, you’ll do the model and then have a short discussion afterward. 

This is a shorter, more condensed version of an LBO model. You can complete a paper LBO with a piece of paper and a pen. Alternatively, you may be asked to discuss it verbally with the interviewer. 

Rather than using an Excel spreadsheet, you use an actual sheet of paper to show your calculations. You don’t go into all the detail but focus on the essence of the model instead. 

In this article, we’ll be focusing on the first two types of case studies because they are the most widely used. But if you’re interested, here is a deep dive on Paper LBOs . 

Private Equity Case Study Prompt

Regardless of the type of case study you’re asked to do, the prompt from the interviewer will ultimately ask you to answer: “would you invest in this company?”

To answer this question you’ll need to take on the provided materials about the company and complete a leveraged buyout model to determine whether there is a high enough return. Generally, this is 20% or higher. 

Usually, prompts also provide you with certain assumptions that you can use to build your LBO model. For example:

  • Pro forma capital structure
  • Financial assumptions
  • Acquisition and exit multiples

Some private equity firms provide you with the Excel template needed for an LBO model, while others prefer you to make one from scratch. So be ready to do that. 

Private Equity Case Study Presentation

As you’ve seen above, if you get a take-home assignment as a case study, there’s a good chance you’re going to have to present your investment memo in the interview. 

There will usually be one or two people from the firm present for your presentation. 

Each PE firm has a different interview process, some may expect you to present first and then ask questions, or the other way around. Either way, be prepared for questions. The questions are where you can stand out!

While private equity recruitment is there to assess your skills, it’s not all about your findings or what your model says. The interviewers are also looking at your communication skills and whether you have strong attention to detail. 

Remember, in the private equity interview process, no detail is too small. So, the more you provide, the better. 

How To Do A Private Equity Case Study

Let’s look at the step-by-step process of completing a case study for the private equity recruitment process:

  • Step 1: Read and digest the material you’ve been given. Read through the materials extensively and get an understanding of the company. 
  • Step 2: Build a basic LBO model. I recommend using the ASBICIR method (Assumptions, Sources & Uses, Balance Sheet, Income Statement, Cash Flow Statement, Interest Expense, and Returns). You can follow these steps to build any model. 
  • Step 3: Build advanced LBO model features, if the prompts call for it, you can jump to any advanced features. Of course, you want to get through the entire model, but your number 1 priority is to finish the core financial model. If you’re running out of time, I would skip or reduce time on advanced features.
  • Step 4: Take a step back and form your “investment view”. I would try to answer these questions:
  • What assumptions need to be present for this to be a good deal?
  • Under what circumstances would you do the deal? 
  • What is the biggest risk in the deal? (e.g. valuation, growth, and margins). 
  • What is the biggest driver of returns in the deal? (e.g. valuation, growth, and debt paydown).

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How To Succeed In A Private Equity Case Study

Here are a few of my tips for getting through the private equity fund case study successfully. 

Get the basics down first

It’s very easy to want to jump into the more complex things first. If you go in and they start asking you to complete complex LBO modeling features like PIK preferred equity, getting to that might be on the top of your list. 

But I recommend taking a step back and starting with the fundamentals. Get that out the way before moving on to the complicated stuff. 

The fundamentals ground you, getting you through the things you know you can do easily. It also gives you time to really think about those complex ideas. 

Show nuanced investment judgment; don’t be too black-and-white

When giving your investment recommendation for a private equity fund you shouldn’t be giving a simple yes or no. 

It’s boring and gives you no space to elaborate. Instead, go in with what price would make you interested in investing and why. Don’t be shy to dig in here. 

Know where there is a value-creation opportunity in the deal, and mention the key assumptions you need to believe to create that value.

Additionally, if you are recommending that the investment move forward then bring up things you would want to know before closing a deal. You can highlight the key risks of the investment, or key things you’d want to ask management if you could meet with them. 

At the end of the day, financial modeling is a commodity skill.  Every investor can do it.  What will really set you apart is how you think about the deals, and the nuance you bring to analyzing them. 

You win by talking about the model

Along those lines, you don’t win by building the best model. Modeling is just a check-the-box thing in the interview process to show you can do it. The interviewers need to know you can do the basics with no glaring errors. 

What matters is showing that you can discuss the investment intelligently. It’s about bringing a sensible recommendation to the table with the information to back it up. 

How Do I Prepare For A Private Equity Case Study?

There is no one-size-fits-all when it comes to preparing for a private equity case study. Everyone is different. 

However, the best thing you can do is PRACTICE, PRACTICE, and more PRACTICE!

I know of a recent client that successfully obtained an offer from multiple mega funds . She practiced until she was able to build 10 LBO models from scratch without any errors or help … yes, that’s 10 models! 

Now, whether it takes 5 or 20 practice case studies doesn’t matter. The whole point is to get to a stage where you feel confident enough to do an LBO model quickly while under pressure. 

There is no way around the pressure in a private equity interview. The heat will be on. So, you need to prepare yourself for that. You need to feel confident in yourself and your capabilities. 

You’d be surprised how pressure can leave you stumped for an answer to a question that you definitely know.

It’s also a good idea to think about the types of questions the private equity interviewer might ask you about your investment proposal. Prepare your answers as far as possible. It’s important that you stick to your guns too when the situation calls for it, because interviewers may push back on your answers to see how you react.. 

You need to have your answer to “would you invest in this company?” ready, and also how you got to that answer (and what new information might change your mind).   

Another thing that gets a lot of people is limited time.  If you’re running out of time, double down on the fundamentals or the core part of the model.  Make sure you nail those.  Also, you can make “reasonable” assumptions if there’s information you wish you had, but don’t have access to. Just make sure to flag it to your interviewer 

How important is modeling in a private equity case study? 

Modeling is part and parcel of private equity case studies. Your basics need to be correct and there should be no obvious mistakes. That’s why practicing is so important. You want to focus on the presentation, but your calculations need to be correct first. They do, after all, make up your final decision. 

How can I stand out from other candidates? 

Knowing your stuff covers the basics. To stand out, you need to be an expert in showing how you came to a decision, a stickler for details, and inquisitive. Anyone can do the calculations with practice, but someone who thinks clearly and brings nuance to their discussion of the investment will thrive in interviews. 

Private equity case studies are a difficult but necessary part of the private equity recruiting process . Candidates can demonstrate their analytical abilities and impress potential employers by understanding the various types of case studies and how to approach them. 

Success in private equity case studies necessitates both technical and soft skills, from analyzing financial statements to discussing the investment case with your interviewer. 

Anyone can ace their next private equity case study and land their dream job in the private equity industry with the right preparation and mindset. If you’re looking to learn more about private equity, you can read my recommended Private Equity Books.

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How to prepare for the case study in a private equity interview

How to prepare for the case study in a private equity interview

If you're  interviewing for a job in a private equity firm , then you will almost certainly come across a case study. Be warned: recruiters say this is the hardest part of the private equity interview process and how you handle it will decide whether you land the job.

“The case study is the most decisive part of the interview process because it’s the closest you get to doing the job,"  says Gail McManus of Private Equity Recruitment. It's purpose is to make you answer one question: 'Would you invest in this company?'

In most cases, you'll be given a  'Confidential Information Memorandum'  (CIM) relating to a company the private equity fund could invest in. You'll be expected to a) value the company, and b) put together an investment proposal - or not. Often, you'll be allowed to take the CIM away to prepare your proposal at home.

 “The case study is still the most decisive element of the recruitment process because it’s the closest you get to actually doing the job.  Candidates can win or lose based on how they perform on case study. People who are OK in the interview can land the job by showing the quality of their thinking, ” says McManus. “You need to show that you can think, and think like an investor.”

"The end decision [on whether to invest] is not important," says one private equity professional who's been through the process. "The important thing is to show your thinking/logic behind answer."

Preparing for a PE case study has distinctive challenges for consultants and bankers. If you're a consultant, you need to, "make a big effort to mix your strategic toolkit with financial analysis. You need to prove that you can go from a strategic conclusion to a finance conclusion," says one PE professional. Make sure you're totally familiar with the way an  LBO model  works.

If you're a banker, you need to, "make a big effort to develop your strategic thinking," says the same PE associate. The fund you're interviewing with will want to see that you can think like an investor, not just a financier. "Reaching financial conclusions is not enough. You need to argue why certain industry is good, and why you have a competitive advantage or not. Things can look good on paper, but things can change from a day to another. As a PE investor, hence as a case solver, you need to highlight and discuss risks, and whether you are ready or not to underwrite them."

Kadeem Houson, partner at KEA consultants, which specialises in hiring junior to mid-level PE professionals, says: “If you’re a banker you’re expected to have great technical skills so you need to demonstrate you can think commercially about the numbers you plugged in.    Conversely, a consultant who is good at blue sky thinking might be pressed more on their understanding of the model. Neither is better or worse – just be conscious of your blank spots.”

A good business versus a good investment

For McManus, one of the most important things to consider when looking at the case study is to understand the difference between a good business and a good investment. The difference between a good business and a good investment is the price. So you might have a great business but if you have to pay hugely for it it might not be a great business. Conversely you can have a so-so business but if you get it a good price it might make a great investment. “

McManus says as well as understanding the difference between a good business and a good investment, it’s important to focus on where the added value lies.  This has become a critical element for private equity firms to consider  as competition for assets has become even more fierce, given the amount of dry powder that funds now have at their disposal through a wide array of funds.   “Because of the competition for transactions generally you have to overpay to win a deal. So in the case study it’s really important you think about where the value creation opportunity lies in this business and what the exit would be,” says McManus.

She advises candidates to be brave and state a specific price, provided you can demonstrate how you’ve arrived at your answer.

Another private equity professional says you shouldn't go out on a limb, though, and you should appear cautious: "Keep all assumptions conservative at all times so as not to raise difficult questions. Always highlight risks, downsides as well as upsides."

Research the fund – find the angle

One private equity professional says that understanding why an investment might suit a particular firm could prove to be a plus. Prior to the case study, check whether the fund favours a particular industry sector, so that when it comes to the case study, you can add that to the investment thesis. “This enables you to showcase you have read up on the firm’s strategy/unique characteristics Something that would make it more likely for the fund you’re interviewing with winning the deal in what’s a very competitive market, said the PE source, who said this knowledge made him stand out.

However, the  primary purpose of the case study  is to test  the quality of your  thinking - it is not to  test you on your knowledge of the fund. “Knowing about the fund will tick an extra box, but the case study is about focusing on the three most critical things that will drive the investment decision,” says McManus. 

You need to think through these questions and issues:

We spoke to another private equity professional who's helpfully prepared a checklist of points to think about when you're faced with the case study. "It's a cheat sheet for some of my friends," he says.

When you're faced with a case study, he says you need to think in terms of: the industry, the company, the revenues, the costs, the competition, growth prospects, due dliligence, and the transaction itself.

The questions from his checklist are below. There's some overlap, but they're about as thorough as you can get.

When you're considering the  industry, you need to think about:

- What the company does. What are its key products and markets? What's the main source of demand for its products?

- What are the key drivers in that industry?

- Who are the market participants? How intense is the competition?

- Is the industry cyclical? Where are we in the cycle?

- Which outside factors might influence the industry (eg. government, climate, terrorism)?

When you're considering the company, you need to think about:  

- Its position in the industry

- Its growth profile

- Its operational leverage (cost structure)

- Its margins (are they sustainable/improvable)?

- Its fixed costs from capex and R&D

- Its working capital requirements

- Its management

- The minimum amount of cash needed to run the business

When you're considering the revenues, you need to think about:

- What's driving them

- Where the growth is coming from

- How diverse the revenues are

- How stable the revenues are (are they cyclical?)

- How much of the revenues are coming from associates and joint ventures

- What's the working capital requirement? - How long before revenues are booked and received?

When you're considering the costs, you need to think about:

- The diversity of suppliers

- The operational gearing (What's the fixed cost vs. the variable cost?)

- The exposure to commodity prices

- The capex/R&D requirements

- The pension funding

- The labour force (is it unionized?)

- The ability of the company to pass on price increases to customers

- The selling, general and administrative expenses (SG&A). - Can they be reduced?

When you're considering the competition, you need to think about:

- Industry concentration

- Buyer power

- Supplier power

- Brand power

- Economies of scale/network economies/minimum efficient scale

- Substitutes

- Input access

When you're considering the growth prospects, you need to think about:

- Scalability

- Change of asset usage (Leasehold vs. freehold, could manufacturing take place in China?)

- Disposals

- How to achieve efficiencies

- Limitations of current management

When you're considering the due diligence, you need to think about: 

- Change of control clauses

- Environmental and legal liabilities

- The power of pension schemes and unions

- The effectiveness of IT and operations systems

When you're considering the transaction, you need to think about:

- Your LBO model

- The basis for your valuation (have you used a Sum of The Parts (SOTP) valuation or another method - why?)

- The company's ability to raise debt

- The exit opportunities from the investment

- The synergies with other companies in the PE fund's portfolio

- The best timing for the transaction

BUT: keep things simple.

While this checklist is important as an input and a way to approach the task, w hen it comes to presenting the information, quality beats quantity.  McManus says: “The main reason why people aren’t successful in case studies is that they say too much.  What you’ve got to focus on is what’s critical, what makes a difference. It’s not about quantity, it’s about quality of thinking. If you do 30 strengths and weaknesses it might only be three that matter. It’s not the analysis that matters, but what’s important from that analysis. What’s critical to the investment thesis. Most firms tend to use the same case study so they can start to see what a good answer looks like.”

Houson agrees that picking out the most important elements in the case study are more important than spending too much time on an elaborate model.   “You don’t necessarily need to demonstrate such technical prowess when it comes to building the model. But you need to be comfortable about being challenged around the business case. Frankly it’s better to go for a simple answer which sparks a really interesting conversation rather than something that is purely judged from a technical standpoint.  The model is meant to inform the discussion, not be the discussion itself.”

Softer factors such as interpersonal skills are also important because if the case study is the closest thing you’ll get to doing the job, then it’s also a measure of how you might behave in a live situation.  McManus says: “This is what it will be like having a conversation at 11am  with your boss having been given the information memorandum the day before.  Not only are the interviewers looking at how you approach the case study, but they’re also looking at whether they want to have this conversation with you every Tuesday morning at 11am.”

The exercise usually takes around four hours if you include the modelling aspect, so there is time pressure. “Top tips are to practice how to think in a way that is simple, but fit for purpose. Think about how to work quickly. The ability to work under pressure is still important,” says Houson.

But some firms will allow you do complete the CIM over the weekend. In that case on one private equity professional says you should get someone who already works in PE to check it over for you. He also advises getting friends who've been through case study interviews before to put you through some mock questions on your presentation.

But McManus says this can lead to spending too much time and favours the shorter method. “It’s fairer and you can illustrate the quality of your thinking over a short space of time.”

The case study is conducted online, and because of Covid, so too are many of the follow-up discussions, so it’s worth thinking about how to present yourself on zoom or Teams. “Although a lot of these case studies over the last couple of years have been done remotely, in many ways that’s even more reason to try to bring out a bit of engagement and personality with the people you’re talking to." 

“ There’s never a right or wrong answer. Rather it’s showing your thinking and they like to have that discussion with you. It’s the nearest you get to doing the job. And that cuts both ways – if you don’t like the case study, you won't like doing the job. “

Contact:  [email protected]  in the first instance. Whatsapp/Signal/Telegram also available (Telegram: @SarahButcher)

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The Importance of Case Studies in Private Equity Interviews

The private equity case study is in the recruitment process for a reason – to see if you can think for yourself, says Gail McManus of Private Equity Recruitment. Its purpose is to make you answer one question: ‘Would you invest in this company?’ [1]

To effect the study, the candidate will be given a ‘Confidential Information Memorandum’ (CIM) relating to a company the private equity fund could invest in. They will be expected to a) value the company, and b) put together an investment proposal – or not.

Sound easy? It isn’t.

“For many candidates, this can be one of the most challenging elements of the interview process,” says McManus.

The candidate needs to demonstrate that they can evidence the critical thinking required to succeed in the role.  The private equity case study should introduce variables internal to the company as well as elements related to the industry, the competition, external pressures, growth prospects, change of control, leverage and more.  The more sophisticated the PE case study, the more likely it will offer elements of differentiation between candidates.

For an experienced PE professional, these points are obvious as are all the subpoints they imply. A recent MBA can probably chat knowledgeably about all these concepts but may not have the knowledge or experience to assess them, particularly under the pressures of an interview. The use of the case study can be a powerful tool to separate out those who can think like investors from the theoreticians. The end decision [on whether to invest] is not important. The important thing is for the private equity candidate to show their thinking/logic behind each interview answer.

A way to add pressure to the case study process is to use a company that the firm is already invested in. This faces the candidate with the added issue of standing by their analysis vs. acquiescing to what the firm has already done, with no assurance that the numbers in the study are what the numbers were when the firm invested in or acquired the company. This adds an element of character or personality assessment to the technical aspects of the case study method.

Finally, let’s ponder an important question: why should Private Equity firms focus on Case Studies as part of the interview process?  After all, the firm already knows the candidate’s work experience, GPA and all their accomplishments. Why run the risk of scaring off so much good potential talent, or threatening their candidacy for the job with such a (seemingly) daunting interview component?

The key reason is that case studies are highly reflective of the daily work of a member of a PE firm. Thinking on their feet, being structured and articulate in communication, synthesizing information, and demonstrating their ability to respond well under pressure are all central to being effective in the industry. Case studies offer a method to evaluate who the firm believes will be the best among many qualified and talented candidates. In other words: it doesn’t matter how much “raw talent” the candidate may have—if they cannot succeed in the Case Studies portion of interviews, there is a good chance that PE may not be the right field for them.

[1] https://www.efinancialcareers.com/news/finance/how-to-handle-the-cunning-case-study-part-of-the-private-equity-interview

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></center></p><h2>The Importance of a Confidential Information Memorandums for Private Equity</h2><ul><li>December 28, 2021</li><li>Getting Funded</li><li>Dawn Allcot</li></ul><p><center><img style=

A confidential information memorandum (CIM), sometimes called a confidential offering memorandum (COM), or even private placement memorandum (PPM) , is used in sell-side research to offer prospective buyers insights into a company’s operations and finances. In private equity research, the CIM may be presented as a disclosure document for prospective buyers during an auction.  

Unlike many other documents and files created and shared during the mergers and acquisitions process, a CIM does not have to follow a specific format. It can range from 50 to 150 pages (more or less) and may or may not include elements such as: 

  • Spreadsheets.

Understandably, with so many different elements to share, all under confidentiality agreements, having a secure way to create, store and share the files and information is crucial. 

Table of Contents

Who Researches and Compiles the CIM? 

If you’re on the sell side of a private equity deal , you’ll hire a firm to prepare the CIM for prospective buyers to review. Company executives or employees rarely create the CIM on their own, but rather turn to an investment banking team to compile the necessary financial information and to paint the company in the best light to buyers.

At its heart, the CIM is a marketing document , but it must also be completely factual. By enlisting an outside firm to create the document, you can be sure the document touches on key considerations potential buyers will want to know. You also want to make sure the document reaches your target market of buyers and does not reveal information you would not want to be shared with firms that, ultimately, may choose not to go through with the M&A deal.  

Basics of a Confidential Information Memorandum for Equity Research

A CIM for private equity deals or the sale of a company includes a number of elements ranging from executive biographies to financial projections and other key data needed to complete financial due diligence . How those who are compiling the sell-side research choose to structure the information depends on what factors they want to highlight and what elements they might want to downplay.  

In general, a CIM may include :  

  • Company overview and history.
  • Products and services.
  • Market and industry overview.
  • Organizational structure.
  • Sales, marketing and management bios.
  • Financial results and projections.
  • Principal assets.
  • Suppliers and vendors.
  • Technology, intellectual property and other assets.

The CIM should include relevant details, facts and figures that would entice a buyer to complete the merger or acquisition and show the buying company how to get the most value from their investment. 

Securely manage confidential information, M&A activity, and more with CapLinked.

What Is Not Included in a CIM? 

A CIM is not a legal contract. It also does not include a company’s valuation. It may hold back information that prospective buyers could use against the company — either to kill the M&A deal or to compete with the company in the future if the deal doesn’t go through. 

For instance, the CIM may include financials that are already available for a publicly-traded company, but it may or may not include specific, detailed information about the company’s IP, technology and human resource capital (beyond short summaries of the sales, marketing and the executive management team ). 

How Is a Teaser Different From a CIM?

Before a prospective buyer signs a non-disclosure agreement (NDA) and gains access to a CIM, they will likely review a teaser. This document is a whitewashed, quick summary of the CIM. It does not include the company’s name but may include: 

  • Financial information .
  • An analysis of growth opportunities .
  • Future projections.
  • Summary of the target market and industry.

This information can help those on the buyer side of equity research narrow down their prospects for M&A deals. 

How Your CIM Affects the M&A Process

The CIM is the first step in the due diligence process for M&A deals . The company on the buy side has approved the teaser and has interest in acquiring the company in question, and now digs deeper to explore the full market potential and financial projections.  

If your CIM for private equity doesn’t entice them to move forward to explore the rest of your documentation, the deal could fall flat immediately. And if it’s difficult to access, understand or follow, it could paint the company in a poor light. With this in mind, you want to give any prospective buyer just enough details to want to move forward, without revealing anything competitors could use to gain the upper hand.

Why You Need a Virtual Data Room for Your CIM Documentation 

With so many moving parts and people involved in the process of creating a CIM for private equity , confidentiality and security are important at every step. Not only will company leaders and your investment firm require seamless access to read and revise documents, but — ultimately — third parties require secure access. 

CapLinked offers virtual data room services for every step of the M&A process . With the capabilities to grant and revoke access at any time, track file changes and ensure the security of documents , creating and sharing CIMs can be easier with CapLinked virtual data rooms.                                                        

Dawn Allcot is a full-time freelance writer and content marketing expert specializing in technology, business and finance. 

References:

MelCap Partners, LLC – What Is a Sell-Side Confidential Information Memorandum and Why Is It an Important Document?  

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Private Equity Sache Study: Example, Prompts, & Presentation

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Private equity case student are an important separate of the private equity recruiting process because they allow firm to evaluate a candidate’s analytical, investing, and presentation abilities. 

In this article, we’ll look the the various types is private equity case studies and offer advice on how to prepare used them. 

This guide will online you ace our following private equity case study, whether you’re an seasoned analyst or new on this field.

Genres Of Secret Equity Case Learn

Case studies are very common in private equity interviews, and it can a key part of that overall recruiting process.

When you’re extremely possibly in encounter ampere lawsuit study of some kind during your recruiting process, there is appreciable variety in which types of case studies you might face. Private Equity Workshop Materials

At I cover of major types:

Take-home assignment

In-person lbo modeling assignment.

For this rechtssache study, you’ll get some company information (e.g. a 10-K or a CIM) and be asked go assess whether oder not you’re likely at invest. 

Generally, you’ll get between 2-7 days to prepare a comprehensive presentation or investiture reminder over your recommendations that you’ll present to the interviewer.  To support your investment recommendation, you’ll be expected to complete a full LBO prototype .  The prompt may give constant details or assumptions to inclusion in aforementioned model.

This artist of test is most common during “off-cycle” hiring over the year, since firms have more time to allow you to complete the assignment. 

This will pretty similar to that take-home assignment. You’re given company select, will build a financial model, and decide whether you would invest.  Private Equity Presentations: Are Of Tall Tales?

The difference here a the period you’re given up complete the case. You’ll generally get between two to three hours, press you’ll typically complete the case study in the firm’s office, though einige firms are becoming newly open to completing the assignment remotely.  Showcase Objective. • This presentation is planned to deploy a high level review of the economic structure of Private Equity (“PE”) fund investments.

In save case, you’ll typically with complete einen LBO model. There is usually no presentation instead investment notation. Rather, you’ll do the model and then have a short discussion afterward. 

This is a brief, more dense version of an LBO model. You can complete a paper LBO with a piece of hard and a pen. Alternatively, thou may exist asked to discuss it verbally with the interviewer. 

Rather than through an Excel spreadsheet, you use can actual sheet are paper to show autochthonous calculations. You don’t go into all the detail but focus on the essence about the model instead.  NB Privately Equity Partners: Company Presentation

In this article, we’ll be focusing the the first-time second types of case studies because group are the most widely used. And if you’re interested, here is ampere deep fall on Paper LBOs . 

Private Equity Case Examine Prompt

Regardless of who type of case study you’re asked up do, the prompt from the interviewer will ultimately ask you till rejoin: “would you invest within this company?” Private Equity Workshop Presentation ... Examples of Waterfall Finance ... A recently example: consistently strong execution management.

To answer this question you’ll need toward make on the provided materials about to company and complete a leveraged buyout model to determine whether there is a high enough return. Generally, this is 20% button higher. 

Usually, prompts also provide you with certain assumptions that you bucket use to build your LBO model. For examples:

  • Pro forma capital built
  • Financial assumptions
  • Acquisition and exit multiples

Some individual net firms provide you in the Excels template needed for an LBO model, when additional prefer you for make one from scratch. To be complete to achieve that. 

Private Equity Case Study Presentation

As you’ve seen above, if you get a take-home assignment as a case study, there’s a fine chance you’re left to have to present your investment comment in the interview. 

There will usually be one or twin people from the resolute present for your presentation. 

Each PE resolute has a different ask proceed, some could expectations you to introduce first additionally when ask questions, instead the other type about. Either method, be prepared by questions. The questions are where you ca stand out!

While private equity employee a there the assess your skills, it’s did all about my findings or what your model said. The interviewers are also looking at your communication competencies and whether you have strong caution to detail.  Private equity investiture deck powerpoint presentation slides

Remember, are the home company interview process, no detail is too small. So, the more you provide, aforementioned better. 

How To Do A Private Equity Case Study

Let’s look along the step-by-step process to completing a box study for the home equity personnel process:

  • Step 1: Read and digest this material you’ve been given. Read through of materials extensively also get an understanding of which company. 
  • Step 2: Build adenine bases LBO models. I recommend using that ASBICIR method (Assumptions, Sources & Uses, Balance Leaves, Total Statement, Cash Flow Statement, Support Expense, and Returns). You can followed these steps to construct any model. 
  • Step 3: Build advance LBO model features, if the prompts call for it, you can jump to any advanced features. Of course, you want to get through the entire scale, but your number 1 priority is to finish the core financial print. If you’re running out of time, I would skip with reduced time on advanced functionality.
  • Step 4: Take a step endorse and form your “investment view”. I would tries to answer above-mentioned questions:
  • What assumptions need to be present for this to being a good deal?
  • Under what circumstances would you do one deal? 
  • Something is the biggest risk in the dealer? (e.g. valuation, growth, and margins). 
  • Get is the biggest truck concerning returns in the deal? (e.g. valuation, growth, and debt paydown).

How To Succeed In A Confidential Equity Case Study

On are a few of my tips for getting through that private common fund case study successfully. 

Get the basics down first

It’s high easy to want to jump under an more complex thingies initially. If you go in and they start asking you to complete complex LBO modeling features like PIK preferred equity, getting to that might be turn the top of your list. 

But I recommend taking a step back the starting with the fundamentals. Received that out one pathway before moving on until one complicated stuff. 

The fundamentals earth you, getting you through the things you know you can do easily. It also gives her time to indeed think about those sophisticated ideas. 

How nuanced investment judgment; don’t be too black-and-white

When giving your investment recommendation by a private shareholders fund them shouldn’t be giving a simple yes or no. 

It’s boring and presents you cannot space to elaborate. Instead, go in with what pricing would make you interested in investing and why. Don’t being shy to grave in here.  NB Individual Equity Mates Update

Know where there is a value-creation opportunity in the deal, and mentioned the key assumptions thou need to believed to create that value.

Additionally, if you is recommended that the participation move forward when carry up things you would require to know before closures a deal. You may highlight the press risks of the investments, or key things you’d want to ask management if you may meet with them.  of disclosures and fairness of show; and (c) are being provided ... [See Investment included Private Operating Companies used example.

At the end von the day, financial mold your a commodity skill.  Every capitalist can does it.  Whatever will really fixed you apart is select you think about the deals, and the nuance you taking to analyzing them.  Illustrative financial statements: Home Shareholder

Your winning per talking about the model

Along these cable, yours don’t triumph by building this best model. Modeling is just a check-the-box thing int the interview process to shows you can accomplish it. The poll need on know you can do the basics with no glaring errors. 

Whats matters lives showing that you can discuss the investment intelligently. It’s about bringing a sensible recommendation to the tab at the information up back it up. 

As Do I Prepare For A Private Equity Case Study?

There a no one-size-fits-all when it comes to preparing for a individual equity case study. Everyone remains different. 

However, the best thing you can go is PRACTICE, PRACTICE, and other TRAINING!

I know of a recent patron that successfully obtained an offer from multiple mega resources . She practice until she was competent to built 10 LBO models from scratch without either errors conversely help … yes, that’s 10 models! 

Now, about it takes 5 alternatively 20 practice kasten studies doesn’t matter. The whole point is to get to a set location you feel confident enough to do an LBO model quickly while under pressure.  Learn about different types by private equity case studies and how to excel included them. Aforementioned guide coverage prompts, presentations, and homework tips

There is no way around that pressure in a private company interview. The heat will be on. So, yourself need to prepare yourself on that. You need to felt confident to yourself and your capabilities.  Private Shareholders Casing Study: Example, Prompts, & Presentation

You’d be surprising how pressure can leaves you stumped for an answer to a question that you definitely know.

It’s also an great idea to how about the types of questions the private equities interviewer might beg you about your investment make. Prepare your answers as way as available. It’s important that you stick to autochthonous rifles also when aforementioned situation calls for it, because interviewers allow push back on your returns to see how you react.. 

Yourself need to have your answer to “would it invest in dieser company?” ready, and also how you got to that answer (and what new information might change your mind).   

Another thing that gets a lot von people is restricted time.  If you’re running out of date, double down on the rudiments or the main part about the model.  Make sure you nail those.  Also, you can make “reasonable” premises if there’s information you want you had, but don’t have access into. Just make sure to flag it to your interviewer  Apex 10 VC Pitch Decks, Examples and Templates

Instructions major is modeling to a private equity case study? 

Sculpt is part and parcel of private shareholder case surveys. Your basics what to be correct furthermore there should may no obvious bug. That’s why practicing is to major. You want to focus up the presentation, but your calculations need to be correct first. They do, after select, make up their final decision. 

How can I stand out off other candidates? 

Knowing insert stuff covers the basic. To stand out, you need to be an subject in showing how you came to a decision, a adherent for details, press inquisitive. Anyone can do the calculations with habit, but individual who thinks clearly furthermore brings nuance to their diskussion of the financial will thrive in interviews. 

Intimate equity case studies are adenine difficult but necessarily part of the private equity recruiting process . Candidates can demonstrate their analytic abilities and impress potential employers by understanding to various types the sache studies and how to approach them. 

Success in private equity suitcase studies necessitates twain technical and soft skills, from evaluate economic statements to talk the participation case with your interviewer. 

Anyone can ace ihr continue private equity case study and land their dream job are the private equity industry with aforementioned right preparation additionally spirit. If you’re looking to learn more nearly private impartiality, you can read my recommended Private Capital Sell.

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Private Equity in Action: Case Studies from Developed and Emerging Markets

Private Equity in Action takes you on a tour of the private equity investment world through a series of case studies written by INSEAD faculty and taught at the world's leading business schools. The book is an ideal complement to Mastering Private Equity and allows readers to apply core concepts to investment targets and portfolio companies in real-life settings. The 19 cases illustrate the managerial challenges and risk-reward dynamics common to private equity investment.

The case studies in this book cover the full spectrum of private equity strategies, including:

Carve-outs in the US semiconductor industry (LBO) Venture investing in the Indian wine industry (VC) Investing in SMEs in the Middle East Turnaround situations in both emerging and developed markets. Written with leading private equity firms and their advisors and rigorously tested in INSEAD's MBA, EMBA and executive education programmes, each case makes for a compelling read.

As one of the world's leading graduate business schools, INSEAD offers a global educational experience. The cases in this volume leverage its international reach, network and connections, particularly in emerging markets.

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Basic LBO Modeling Test

Step-by-Step Guide to Understanding the Basic LBO Model Test (1-Hour)

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What is an LBO Model Test?

The LBO Model Test refers to a common interview exercise given to prospective candidates during the private equity recruiting process.

Usually, the interviewee will receive a “prompt,” which contains a description containing a situational overview and certain financial data for a hypothetical company contemplating a leveraged buyout.

Upon receipt of the prompt, the candidate will build an LBO model using the assumptions provided to calculate the return metrics, i.e. the internal rate of return (IRR) and the multiple on invested capital (“MOIC”).

Basic LBO Modeling Test

Basic LBO Model Test: Practice Tutorial Guide

The following LBO model test is an appropriate place to start to ensure you understand the modeling mechanics, particularly for those starting to prepare for private equity interviews.

But for investment banking analysts interviewing for PE, expect more challenging LBO modeling tests like our standard LBO modeling test or even an advanced LBO modeling test .

The format for the basic LBO model is as follows.

  • Excel Usage: Unlike the paper LBO , which is a pen-and-paper exercise given in earlier stages of the PE recruiting process, in an LBO Modeling Test, candidates are given access to Excel and expected to construct an operating and cash flow forecast, financing sources & uses and ultimately determine the implied investment returns and other key metrics based on the information provided in the prompt.
  • Time Limit: The various LBO Excel modeling tests you encounter throughout the recruitment process will most commonly be either 30 minutes, 1 hour or 3 hours, depending on the firm and how near you are to the final stage before offers are made. The one covered in this post should take approximately one hour at most, assuming that you’re starting from a blank spreadsheet.
  • Prompt Format: In some cases, you will be provided a brief prompt consisting of a few paragraphs on a fictitious scenario and be asked to build a quick model from scratch – whereas, in others, you may be given the confidential information memorandum (“CIM”) of a real acquisition opportunity to put together an investment memo alongside an LBO model to support your thesis. For the latter, the prompt is usually left vague intentionally, and it will be asked in the form of a “share your thoughts” open-ended context.

LBO Modeling Test Interview Grading Criteria

Every firm has a slightly different grading rubric for the LBO modeling test, yet at its core, most boil down to two criteria:

  • Accuracy: How well do you understand the underlying mechanics of an LBO model?
  • Speed: How quickly can you complete the task without a loss in accuracy?

For more complex case studies, where you will be given more than three hours, your ability to interpret the output of the model and make an informed investment recommendation will be just as important as your model flowing correctly with the right linkages.

LBO Model Test Types

In-Person LBO Modeling Test Spectrum

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LBO Model Test Example: Illustrative Prompt

Let’s get started! An illustrative prompt on a hypothetical leveraged buyout (LBO) can be found below.

LBO Model Test Instructions A private equity firm is considering the leveraged buyout of JoeCo, a privately-owned coffee company. In the last twelve months (“LTM”), JoeCo generated $1bn in revenue and $100mm in EBITDA. If acquired, the PE firm believes JoeCo’s revenue can continue to grow 10% YoY while its EBITDA margin remains constant. To fund this transaction, the PE firm was able to obtain 4.0x EBITDA in Term Loan B (“TLB”) financing – which will come with a seven-year maturity, 5% mandatory amortization, and priced at LIBOR + 400 with a 2% floor. Packaged alongside the TLB is a $50mm revolving credit facility (“revolver”) priced at LIBOR + 400 with an unused commitment fee of 0.25%. For the last debt instrument used, the PE firm raised 2.0x in Senior Notes that carries a seven-year maturity and an 8.5% coupon rate. The financing fees were 2% for each tranche while the total transaction fees incurred were $10mm. On JoeCo’s balance sheet, there is $200mm of existing debt and $25mm in cash, of which $20mm is considered excess cash. The business will be delivered to the buyer on a “cash-free, debt-free basis”, which means the seller is responsible for extinguishing the debt and keeps all the excess cash. The remaining $5mm in cash will come over in the sale, as this is cash that the parties determined is required to keep the business operating smoothly. Assume for each year that JoeCo’s depreciation & amortization expense (“D&A”) will be 2% of revenue, capital expenditures (“Capex”) requirement will be 2% of revenue, the change in net working capital (“NWC”) will be 1% of revenue, and the tax rate will be 35%. If the PE firm were to purchase JoeCo at 10.0x LTM EV/EBITDA on 12/31/2020 and then exit at the same LTM multiple after a five-year time horizon, what would the implied IRR and cash-on-cash return of the investment be?

LBO Model Test – Excel Template

Use the form below to download the Excel file used to complete the modeling test.

However, while most firms will provide the financials in an Excel format that you could use as a “guiding” template, you should still be comfortable with creating a model starting from scratch.

Get the Excel Template!

Step 1. model assumptions, entry valuation.

The first step of the LBO modeling test is to determine the entry valuation of JoeCo on the date of the initial purchase.

LBO Model Assumptions Blank

By multiplying JoeCo’s $100mm LTM EBITDA by the entry multiple of 10.0x, we know the enterprise value at purchase was $1bn.

“Cash-Free Debt-Free” Transaction

Since this deal is structured as a “cash-free debt-free” transaction (CFDF) , the sponsor is not assuming any JoeCo debt or getting any of JoeCo’s excess cash.

From the sponsor’s perspective, there is no net debt, and thus the equity purchase price equals the enterprise value.

The private equity firm is essentially saying: “JoeCo can have the excess cash sitting on its balance sheet, but on the basis that JoeCo will pay off its outstanding debt in return.”

Most PE deals are structured as cash-free, debt-free (CFDF). The notable exceptions are go-private transactions where the sponsor acquires each share for a defined offer price per share and thus acquires all assets and assumes all liabilities.

Transaction Assumptions

Next, we will list out the transaction assumptions provided.

  • Transaction Fees : The transaction fees were $10mm – this is the amount paid to investment banks for their M&A advisory work, as well as to lawyers, accountants, and consultants who helped on the deal. These advisory fees are treated as a one-time expense, as opposed to being capitalized.
  • Financing Fees : The 2% deferred financing fee refers to the costs incurred while raising debt capital to fund this transaction. This financing fee will be based on the total magnitude of debt used and will be amortized over the tenor (term) of the debt – which is seven years in this scenario.
  • Cash to B/S : The minimum cash balance required post-closing of the transaction (i.e. “Cash to B/S”) was stated as $5mm, which means JoeCo needs $5mm in cash-on-hand to continue operating and meet its short-term working capital obligations.

Debt Assumptions

With the entry valuation and transaction assumptions filled out, we can now list out the debt assumptions related to each debt tranche, such as the turns of EBITDA (“x EBITDA”), pricing terms, and amortization requirements .

The amount of debt that a lender has provided is expressed as a multiple of EBITDA (also called a “turn”). For instance, we can see that $400mm was raised in Term Loan B as the amount was 4.0x EBITDA.

In total, the initial leverage multiple used in this transaction was 6.0x – since 4.0x was raised from TLB and 2.0x in Senior Notes.

Moving onto the columns on the right, the “Rate” and “Floor” are used to calculate the interest rate of each debt tranche.

The two senior secured debt tranches, the Revolver and Term Loan B, are priced off LIBOR + a spread (i.e. priced at a “ floating rate “), meaning that the interest rate paid on these debt instruments fluctuates based on LIBOR (“London Interbank Offered Rate”), the global standard benchmark used to set lending rates.

The general convention is to state the pricing of debt in terms of basis points (“bps”) rather than by “%”. The “+ 400” just means 400 basis points, or 4%. Therefore, the interest rate pricing on the Revolver and TLB will be LIBOR + 4%.

The Term Loan B tranche has a 2% “Floor”, which reflects the minimum amount required to be added to the spread. LIBOR will often fall below the floor rate during periods of low-interest rates, so this feature is meant to ensure that a minimum yield is received by the lender.

For example, if LIBOR was at 1.5% and the floor was 2.0%, the interest rate on this Term Loan B would be 2.0% + 4.0% = 6.0%. But if LIBOR was at 2.5%, the interest rate on the TLB would be 2.5% + 4% = 6.5%. As you can see, the interest rate cannot fall below 6% because of the floor.

The third tranche of debt used, the Senior Notes, is priced at 8.5% (i.e. priced at a “fixed rate”). This type of pricing is simpler because regardless of whether LIBOR goes up or down, the interest rate will remain unchanged at 8.5%.

In the final column, we can calculate the financing fees based on the amount of debt raised. Since $400mm was raised in Term Loan B and $200mm was raised in Senior Notes, we can multiply each by the 2% financing fee assumption and sum them up to arrive at $12mm in financing fees.

Step 1: Formulas Used Purchase Enterprise Value = LTM EBITDA × Entry Multiple Debt Amount (“$ Amount”) = Debt EBITDA Turns × LTM EBITDA Financing Fees (“$ Fee”) = Debt Amount × % Fee

private equity cim case study

Step 2. Sources & Uses Table

In the next step, we will build out the Sources & Uses schedule, which lays out how much it will cost in total to acquire JoeCo and where the required funding will come from.

Sources & Uses Table Blank

It is recommended to start on the “Uses” side and then complete the “Sources” side afterward since you need to figure out how much something costs before thinking about how you will come up with the funds to pay for it.

  • Purchase Enterprise Value : To start, we have already calculated the “Purchase Enterprise Value” in the previous step and can directly link to it. The $1bn is the total amount being offered by the private equity firm to acquire the equity of JoeCo.
  • Cash to B/S : We must recall that JoeCo’s cash balance cannot dip below $5mm post-transaction. As a result, the “Cash to B/S” in effect will increase the total funding required – hence, it will be on the “Uses” side of the table.
  • Transaction Fees and Financing Fees : To finish the Uses section, the $10mm in transaction fees and $12mm in financing fees were already calculated earlier and can be linked to the relevant cells.

Therefore, $1,027mm in total capital will be required to complete this proposed acquisition of JoeCo, and the “Sources” side will now illustrate how the PE firm intends to finance the acquisition.

Sources Side

We will now outline how the PE firm came up with the necessary funds to meet the cost of purchasing JoeCo.

  • Revolver : Since there was no mention of the revolving credit line being drawn, we can assume that none was used to help fund the purchase. The revolver is generally undrawn at close but could be drawn from if needed. Think of the revolver as a “corporate credit card” meant for use during emergencies – this line of credit is extended to borrowers by lenders to make their financing packages more attractive (i.e. for the Term Loan B in this scenario) and to provide JoeCo a “cushion” for unexpected liquidity shortages.
  • Term Loan B (“TLB”) : Next, a term loan B is provided by an institutional lender and is generally a senior, 1st lien loan with a 5 to 7 year maturity and low amortization requirements. The amount of TLB raised was calculated earlier by multiplying the 4.0x TLB leverage multiple by the LTM EBITDA of $100mm – thus, $400mm in TLB was raised to fund this purchase.
  • Senior Notes : The third debt tranche raised was Senior Notes at a leverage multiple of 2.0x EBITDA, so $200mm was raised. Senior Notes are junior to secured bank debt (e.g. Revolver, Term Loans), and provide a higher yield to compensate the lender for undertaking the additional risk of holding a debt instrument lower in the capital structure.

Now that we have determined how much the firm needs to pay and the amount of debt funding, the “Sponsor Equity” is the plug for the remaining funds needed.

If we add up all the funding sources (i.e. the $600mm raised in debt) and then deduct it from the $1,027mm in “Total Uses”, we see $427mm was the initial equity contribution by the sponsor.

Step 2: Formulas Used Sponsor Equity = Total Uses – (Revolver + Term Loan B + Senior Notes Amounts) Total Sources = Revolver + Term Loan B + Senior Notes + Sponsor Equity

Sources & Uses Table Complete

Step 3. Free Cash Flow Projection

Revenue and ebitda.

Thus far, the Sources & Uses table has been completed and the transaction structure has been determined, meaning that the free cash flows (“FCFs”) of JoeCo can be projected.

Free Cash Flow (FCF) Blank

To start the forecast, we begin with Revenue and EBITDA since most of the operating assumptions provided are driven by a certain percentage of revenue.

As a general modeling best practice, it is recommended to place all the drivers (i.e. operating assumptions”) grouped together in the same section near the bottom.

The prompt stated the year-over-year (“YoY”) revenue growth will be 10% throughout the holding period with the EBITDA margins held constant from the LTM performance.

While the EBITDA margin was not explicitly stated in the prompt, we can divide the LTM EBITDA of $100mm by the $1bn in LTM revenue to get a 10% EBITDA margin.

Once you have inputted the revenue growth rate and EBITDA margin assumptions, we can project the amounts for the forecast period based on the formulas below.

Operating Assumptions

As stated in the prompt, D&A will be 2% of revenue, Capex requirements are 2% of revenue, the change in NWC will be 1% of revenue, and the tax rate will be 35%.

All these assumptions will remain unchanged throughout the forecast period; therefore, we can “straight-line” them, i.e. reference the current cell to the one on the left.

The formula for free cash flow before any revolver drawdown / (paydown) begins with net income.

Therefore, we need to work our way down from EBITDA to net income (“the bottom line”), meaning the subsequent step is to subtract D&A from EBITDA to calculate EBIT.

We are now at Operating Income (EBIT) and will subtract “Interest” and the “Amortization of Financing Fees”.

The interest expense line item will remain blank for now as the debt schedule has not yet been completed – we will return to this later.

For the financing fees amortization , we can compute this by dividing the total financing fee ($12mm) by the tenor of the debt, 7 years – doing so will leave us with ~$2mm each year.

The only expenses remaining from Pre-Tax Income (EBT) are the taxes paid to the government. This tax expense will be based on JoeCo’s taxable income. Therefore, we will multiply the 35% tax rate by EBT.

Once we have the amount in taxes due each year, we will subtract that amount from EBT to arrive at net income.

Free Cash Flow (Pre-Revolver)

The FCFs generated are central to an LBO as they determine the amount of cash available for debt amortization and the servicing of the due interest expense payments each year.

To calculate the FCF, we will first add back D&A and the Amortization of Financing Fees to Net Income since they are both non-cash expenses.

We calculated them both earlier and can just link to them but with the signs flipped since we are adding them back (i.e. more cash than net income showed).

Next, we subtract out Capex and the change in NWC. An increase in Capex and NWC are both outflows of cash and decrease the FCF of JoeCo, thus make sure to insert a negative sign at the front of the formula to reflect this.

In the final step before arriving at FCF, we will deduct the mandatory debt amortization associated with the Term Loan B.

For the time being, we’ll keep this part blank and return it once the debt schedule has been finalized.

Step 3: Formulas Used Total Uses = Purchase Enterprise Value + Cash to B/S + Transaction Fees + Financing Fees Revenue = Prior Revenue × (1 + Revenue Growth %) EBITDA = Revenue × EBITDA Margin % Free Cash Flow (Pre-Revolver) = Net Income + Depreciation & Amortization + Mandatory Amortization Financing Fees – Capex – Change in Net Working Capital – Mandatory Amortization D&A = D&A % of Revenue × Revenue EBIT = EBITDA – D&A Amortization of Financing Fees = Financing Fees Amount ÷ Financing Fees Amortization Period EBT (aka Pre-Tax Income) = EBIT – Interest – Amortization of Financing Fees Taxes = Tax Rate % × EBT Net Income = EBT – Taxes Capex = Capex % of Revenue × Revenue Δ in NWC = (Δ in NWC % of Revenue) × Revenue Free Cash Flow (Pre-Revolver) = Net Income + D&A + Amortization of Financing Fees – Capex – Δ in NWC –  Mandatory Debt Amortization

If a line item has “Less” at the front, confirm it is reflected as a negative outflow of cash, and vice versa if it has “Plus” in front. Assuming you followed the sign conventions as recommended, you can just sum up net income with the five other line items to arrive at the pre-revolver FCF.

Free Cash Flow (FCF) Projection

Step 4. Debt Schedule

The debt schedule is arguably the trickiest part of the LBO Modeling Test.

In the previous step, we calculated the free cash flow available before any revolver drawdown / (paydown).

The missing line items that we had skipped over earlier will be derived from the debt schedule to complete those FCF projections.

Blank Debt Schedule

To take a step back, the purpose of creating this debt schedule is to keep track of JoeCo’s mandatory payments to its lenders and assess its revolver needs, as well as calculate the interest due from each debt tranche.

The borrower, JoeCo, is legally required to pay down debt tranches in a specific order (i.e. waterfall logic) and must abide by this lender agreement. Based on this contractual obligation, the revolver will be paid off first, followed by the Term Loan B, and then the Senior Notes.

The Revolver and TLBs are the highest in the capital structure and have the highest priority in the case of bankruptcy , hence carry a lower interest rate and represent “cheaper” sources of financing.

For each debt tranche, we will utilize roll-forward calculations , which refer to a forecasting approach that connects the current period forecast to the prior period after accounting for the line items that increase or decrease the ending balance.

Roll-Forward Approach (“BASE” or “Cork-Screw”)

Roll-forwards refers to a forecasting approach that connects the current period forecast to the prior period:

private equity cim case study

This approach is very useful in adding transparency to how schedules are constructed. Maintaining strict adherence to the roll-forward approach improves a user’s ability to audit the model and reduces the likelihood of linking errors.

Revolving Credit Facility (“Revolver”)

As mentioned in the beginning, the revolver functions similarly to a corporate credit card and JoeCo will draw down from it when it is short on cash and will pay off the balance once it has cash in excess.

If there is a shortage of cash, the revolver balance will rise – this balance will be paid down once there is a surplus of cash

The revolver sits at the very top of the debt waterfall and has the highest claim on JoeCo’s assets if the company were to be liquidated.

To start, we will create three line items:

  • Total Revolver Capacity The “Total Revolver Capacity” refers to the maximum amount that can be drawn from the revolver, and it comes out to $50mm in this scenario.
  • Beginning Available Revolver Capacity The “Beginning Available Revolver Capacity” is the amount that can be borrowed in the current period after deducting the amount already drawn in previous periods. This line item is calculated as the total revolver capacity minus the beginning of period balance.
  • Ending Available Revolver Capacity The “Ending Available Revolver Capacity” is the amount of the beginning available revolver capacity minus the amount drawn from in the current period.

For example, if JoeCo has drawn $10mm to date, the beginning available revolver capacity for the current period is $40mm.

To continue building out this revolver roll-forward, we link the beginning of period balance in 2021 to the amount of revolver used to fund the transaction in the Sources & Uses table. In this case, the revolver was left undrawn, and the beginning balance is thereby zero.

Then, the line that comes after will be “Revolver Drawdown / (Paydown)”.

The formula for the “Revolver Drawdown / (Paydown)” in Excel is shown below:

private equity cim case study

The “Revolver Drawdown” comes into play when the FCF of JoeCo has turned negative and the revolver will be drawn from.

Again, JoeCo can borrow at most up to the Available Revolver Capacity. This is the purpose of the 1st “MIN” function, it ensures no more than $50mm could be borrowed. It is entered as a positive because when JoeCo draws from the revolver, it is an inflow of cash.

The 2nd “MIN” function will return the lesser value between the “Beginning Balance” and the “Free Cash Flow (Pre-Revolver)”.

Take notice of the negative sign in front – in the case that the “Beginning Balance” is the smaller value of the two, the output will be negative and the existing revolver balance will be paid down.

The “Beginning Balance” figure cannot turn negative as that would imply that JoeCo paid down more of the revolver balance than it had borrowed (i.e. the lowest it can be is zero).

On the other hand, if the “Free Cash Flow (Pre-Revolver)” is the lesser value of the two, the revolver will be drawn from (as the two negatives will make a positive).

For instance, let’s say that JoeCo’s FCF has turned negative $5mm in 2021, the 2nd “MIN” function will output the negative free cash flow amount, and the negative sign placed in front will make the amount positive – which makes sense since this is a drawdown.

This is how the revolver balance would change if JoeCo’s pre-revolver FCF had turned negative by $5mm in 2021:

private equity cim case study

As you can see, the drawdown in 2021 would be $5mm. The ending balance of the revolver has increased to $5mm. In the next period, since JoeCo has sufficient pre-revolver FCF, it will pay down the outstanding revolver balance. The ending balance in the 2nd period has thus returned to zero.

To calculate the interest expense associated with the revolver, we first need to get the interest rate. The interest rate is calculated as LIBOR plus the spread, “+ 400”. Since it was stated in terms of basis points, we divide 400 by 10,000 to get .04, or 4%.

Although the Revolver has no floor, it is a good habit to put the LIBOR rate in a “MAX” function with the floor, which is 0.0% in this case. The “MAX” function will output the larger value of the two, which is LIBOR in all the forecasted years. For example, the interest rate in 2021 is 1.5% + 4% = 5.5%.

private equity cim case study

Note that if LIBOR were stated in basis points, the top line would look like “150, 170, 190, 210, and 230”. The formula would change in that LIBOR (Cell “F$73” in this case) will be divided by 10,000.

Now that we have calculated the interest rate, we can multiply it by the average of the beginning and ending revolver balance. If the revolver remains undrawn throughout the entire duration of the holding period, the interest paid will be zero.

private equity cim case study

Once we link the interest expense back into the FCF forecast, a  Circularity will be introduced into our model. Therefore, we have added a circularity toggle in case the model breaks.

Basically, what the formula above is saying is:

  • If the toggle is switched to “1”, then the average of the beginning and ending balance will be taken
  • If the toggle is switched to “0”, then a zero will be output, which removes all the cells populated with “#VALUE” (and can be toggled back to use the average)

Finally, the revolver comes with an unused commitment fee, which is 0.25% in this scenario. To calculate this annual commitment fee, we multiply this 0.25% fee by the average of the beginning and ending available revolver capacity, since this represents the revolver amount not being used.

private equity cim case study

Term Loan B (“TLB”)

Moving onto the next tranche in the waterfall, the Term Loan B will be forecasted in a similar roll-forward but this schedule will be simpler given our model assumptions.

The only factor that impacts the ending TLB balance is the scheduled principal amortization of 5%. For each year, this will be calculated as the total amount raised (i.e. the principal) multiplied by the 5% mandatory amortization.

private equity cim case study

While it is less relevant to this scenario, we have wrapped a “-MIN” function to output the lesser number between the (Principal * Mandatory Amortization %) and the Beginning TLB Balance. This prevents the principal amount paid down from exceeding the balance remaining.

For example, if the required amortization was 20% per year and the holding period was 6 years, without this function in place – JoeCo would still be paying the mandatory amortization in year 6 despite the principal being fully paid off (i.e. the beginning balance in Year 6 would be zero, so the function will output the zero rather than the mandatory amortization amount)

The amortization amount is based on the original debt principal regardless of how much of the debt has been paid down to date.

In other words, the mandatory amortization of this TLB will be $20mm each year until the remaining principal will be due in one final payment at the end of its maturity.

The interest rate calculation for TLB is shown below:

private equity cim case study

The formula is the same as the revolver, but this time there is a LIBOR floor of 2%. Since LIBOR is 1.5% in 2021, the “MAX” function will output the larger number between the floor and LIBOR – which is the 2% floor for 2021.

The 2nd part is the spread of 400 basis points divided by 10,000 to arrive at 0.04, or 4.0%.

Given how LIBOR is 1.5% in 2021, the TLB interest rate will be calculated as 2.0% + 4.0% = 6.0%.

Then, to calculate the interest expense – we take the TLB interest rate and multiply it by the average of the beginning and ending TLB balance.

private equity cim case study

Notice how as the principal is paid down, the interest expense decreases. Contrast this to mandatory amortization, in which the amount paid remains constant regardless of the principal paydown.

The approximate interest expense is ~$23mm in 2021 and falls to ~$20mm by 2025.

However, this dynamic is less apparent in our model given the mandatory amortization is only 5.0% and we are assuming no cash sweeps (i.e. prepayment using excess FCF is not allowed).

Senior Notes

Relative to equity and other riskier notes/bonds that the PE firm could have potentially used as funding sources, Senior Notes are higher up in the capital structure and considered to be a “safe” investment from the perspective of most lenders. However, Senior Notes are still below bank debt (e.g. Revolver, TLs) and usually unsecured despite the name.

One characteristic of these Senior Notes is that there will be no required principal amortization, meaning the principal will not be paid until maturity.

We saw how with the TLB, the interest expense (i.e. the proceeds to the lender) decreases as the principal is gradually paid down. So, the lender of the Senior Notes chose to neither require any mandatory amortization nor allow prepayment.

As you can see below, the interest expense is $17mm each year, and the lender receives an 8.5% yield on the $200mm outstanding balance for the entire tenor.

private equity cim case study

Forecast Completion

The debt schedule is now done, so we can return to the parts of the FCF forecast that we skipped over and left blank.

  • Interest Expense : The interest expense line item will be calculated as the sum of all of the interest payments from each debt tranche, as well as the unused commitment fee on the revolver.
  • Mandatory Amortization : In order to complete the forecast, we will link the mandatory amortization amount due from the TLB directly to the “Less: Mandatory Amortization” line item on the forecast, right above the “Free Cash Flow (Pre-Revolver)”.

For more complex (and realistic) transactions where various debt tranches require amortization, you would take the sum of all of the amortization payments due that year and then link it back to the forecast.

Our free cash flow projection model is now complete with those two final linkages made.

Step 4: Formulas Used Available Revolver Capacity = Total Revolver Capacity – Beginning Balance Revolver Drawdown / (Paydown): “=MIN (Available Revolver Capacity, –MIN (Beginning Revolver Balance, Free Cash Flow Pre-Revolver)” Revolver Interest Rate: “= MAX (LIBOR, Floor) + Spread” Revolver Interest Expense: “IF (Circularity Toggle = 1, AVERAGE (Beginning, Ending Revolver Balance), 0) × Revolver Interest Rate Revolver Unused Commitment Fee: “IF (Circularity Toggle = 1, AVERAGE (Beginning, Ending Available Revolver Capacity), 0) × Unused Commitment Fee % Term Loan B Mandatory Amortization = TLB Raised × TLB Mandatory Amortization % Term Loan B Interest Rate: “= MAX (LIBOR, Floor) + Spread” Term Loan B Interest Expense: “IF (Circularity Toggle = 1, AVERAGE (Beginning, Ending TLB Balance), 0) × TLB Interest Rate Senior Notes Interest Expense = “IF (Circularity Toggle = 1, AVERAGE (Beginning, Ending Senior Notes), 0) × Senior Notes Interest Rate Interest = Revolver Interest Expense + Revolver Unused Commitment Fee + TLB Interest Expense + Senior Notes Interest Expense

As a side note, one common feature in LBO models is a “cash sweep” (i.e. optional repayments using excess FCFs), but this was excluded in our basic model. For this reason, the “Free Cash Flow (Post-Revolver)” will be equal to the “Net Change in Cash Flow” since there are no more uses of cash.

Debt Schedule Complete

Step 5. Returns Calculation

Exit valuation.

Now that we have projected the financials of JoeCo and the net debt balance for the five-year holding period, we have the necessary inputs to calculate the implied exit value for each year.

  • Exit Multiple Assumption : The first input will be the “Exit Multiple Assumption”, which was stated as being the same as the entry multiple, 10.0x.
  • Exit EBITDA : In the next step, we’ll create a new line item for “Exit EBITDA” which simply links to the EBITDA of the given year. We will grab this figure from the FCF forecast.
  • Exit Enterprise Value : We can now calculate the “Exit Enterprise Value” by multiplying the Exit EBITDA by the Exit Multiple Assumption.
  • Exit Equity Value : Similar to how we did in the first step for the entry valuation, we will then deduct the net debt from the enterprise value to arrive at the “Exit Equity Value”. The total debt amount is the sum of all of the ending balances in the debt schedule, while the cash balance will be pulled from the cash roll forward in the FCF forecast (and Net Debt = Total Debt – Cash)

Blank LBO Returns

  • Internal Rate of Return (IRR)

In the final step, we will calculate the two return metrics we were instructed to by the prompt:

  • Cash-on-Cash Return (aka MOIC)

Starting with the internal rate of return ( IRR ), to determine the IRR of this investment in JoeCo, you first need to gather the magnitude of the cash (outflows) / inflows and the coinciding dates of each.

The initial equity contribution by the financial sponsor needs to be inputted as a negative since the investment is an outflow of cash. In contrast, all cash inflows are inputted as positives. But in this case, the only inflow will be the proceeds received from the exit of JoeCo.

Once the “Cash (Outflows) / Inflows” section has been completed, enter “=XIRR” and drag the selection box across the entire range of cash (outflows) / inflows in the relevant year, insert a comma, and then do the same across the row of dates. The dates must be formatted correctly for this to work properly (e.g. “12/31/2025” rather than “2025”).

Multiple on Invested Capital (MOIC)

The multiple-on-invested-capital (MOIC) , or “cash-on-cash return”, is calculated as the total inflows divided by the total outflows from the perspective of the PE firm.

Since our model is less complex with no other proceeds (e.g. dividend recaps, consulting fees), the MOIC is the exit proceed divided by the $427 initial equity investment.

To perform this in Excel, use the “SUM” function to add up all the inflows received during the holding period (green font), and then divide by the initial cash outflow in Year 0 (red font) with a negative sign in front.

Step 5: Formulas Used Exit Enterprise Value = Exit Multiple × LTM EBITDA Debt = Revolver Ending Balance + Term Loan B Ending Balance + Senior Notes Ending Balance IRR: “= XIRR (Range of Cash Flows, Range of Timing)” MOIC: “=SUM (Range of Inflows) / – Initial Outflow”

LBO Model Returns Analysis (IRR / MOIC)

Conclusion of LBO Modeling Test

If we assume an exit in Year 5, the private equity firm was able to fetch a 2.8x MOIC on its initial equity investment in JoeCo and achieve an IRR of 22.4% throughout the holding period.

  • Internal Rate of Return (IRR) = 22.4%
  • Multiple on Invested Capital (MOIC) = 2.8x
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Thanks for this post – it is very useful! A question on the calculation of IRR and MOIC, what did you do to make the functions applied to all the cells on the right and give out correct answer? i tried to use apply the formulas to the right use …  Read more »

Hi, Rohit, Good question. This is hard to do because each exit year calculation is in a different row, so you cannot simply copy to the right. You could put the calculation of IRR and MOIC off to the right, and copy the formula down, and then you could copy …  Read more »

why is the amount under the revolver a dash (-) and not 50million?

Hi Danielle – the revolver is assumed to be left undrawn on the initial date of purchase, and the formatting is set to display zero as a dash.

In Step 3. could you please explain why amortization of financing fees is included as part of net income but mandatory amortization of term loan isn’t? Shouldn’t net income include all debt related repayments? Thanks.

Hi, Krishna, Amortization of financing fees is an accrual expense that reduces net income but is added back on the cash flow statement. It is treated like non-cash interest expense, part of the cost of the loan. Amortization of loan principle is not a cost of the loan, it is …  Read more »

How long should it take to build this model from scratch (blank excel) and complete the exercise? thanks

If starting from scratch, the basic modeling test should take approximately 45 minutes to complete (and an hour at most).

Yes, thank you, Justin!

Hi Brad, Thank you for this post. In the exercice can you explain how LABOR (%) grows by +0,2 PP each year? E.g. from 1,5% in Y1 to 1,7% in Y2. How are we supposed to know LABOR basis point in the exercise? I think I missed smt there 🙂

Hi, Dalongeville,

The LIBOR is a projection of what the rates are expected to be in the futures market. LIBOR is now discontinued, so you would want the SOFR rate, and you can find a projection of that here: https://www.chathamfinancial.com/technology/us-forward-curves

Hi WSP team, I have an odd question – if the sponsor is to buy the target company on a CFDF basis, then shouldn’t the use of fund side begin with purchased equity value rather than the purchased enterprise value? If it is due to the use of entry EV/EBITDA …  Read more »

Hi, Aries, No, the use of funds in a CFDF transaction is enterprise value plus fees (possibly plus cash to the B/S). EV is cash free debt free, that is the point; it is the value of the core operations of the business, independently of how it is financed and …  Read more »

Why is the cash flow not used to pay off the TLB and senior notes? (i.e. why do we not use the min(max) formula instead of assuming only the mandatory amortization amount to be paid off every year?)

Good question. Our standard LBO test does use excess cash flows to pay down the TLB. Unlikely we will pay the senior notes early, as bonds usually have call protection to prevent early repayment.

The model is really very helpful …I have learned from basic to advanced about LBO modelling just from these few pages of wall street prep.

Glad to hear, Sushant!

Nvm, saw an earlier screenshot.

Thanks for the article – I have a question about transactions that occur on a cash free debt free basis. in a CFDF basis, does the seller take ALL of the cash (including cash needed for daily operations)? OR does the seller just take the excess cash (and you assume …  Read more »

Hi, Andrew, Yes, typically the seller takes all the cash, which is why the buyer needs to inject some cash as a use of funds. And yes, technically the value of core operations should include some minimum cash, and in that sense, enterprise value is not exactly the same as …  Read more »

For the equity value calculation at the end, shouldn’t we exclude the 5m in cash if it is not excess cash and necessary to run the business

Hi, Cynthia, Here is the answer I just gave Andrew above about the cash that is needed to run the business, which should answer your question a well. The exit enterprise value should not include the value of the cash to run the business, we just assume it is done …  Read more »

Hi. If in a CFDF txn, the minimum cash stays on the balance sheet and is not taken by the seller, why do we need to show it in the Uses ? Doesnt showing the min cash in the uses imply that the buyer will fund the min cash using …  Read more »

If the minimum cash is kept in the company as it is turned over to the buyer, then you are correct, there is no need to show cash to B/S as a use of funds. But that also means it is not strictly a CFDF transaction.

Hello, just two questions regarding the IRR. 1) What do we calculate FCF (post revolver) if at the end we use a multiple of EBITDA and exit value for the calculation of IRR? 2) In the table above IRR increases as the exit years get delayed. I’ve seen some models …  Read more »

Hi, Leo, EBITDA is just a way to estimate the enterprise value that we will sell the business for, whereas FCF post revolver helps us to measure how much excess cash we have to pay down debt, and that will increase what is left over for equity value at the …  Read more »

Hi, For the revolver, in this scenario it seems that it is set to draw only if pre-revolver fcf is negative but shouldn’t we need to adjust it to reflect the 5mn in minimum cash each year? I realize that because the CFs are all positive that this doesn’t impact …  Read more »

Hi, Avery, Great question, and yes, it should account for the $5mm minimum cash. But that is why we base the revolver draw not only on the pre-revolver FCF from that year, but on the cash available which takes into account the beginning cash balance, the minimum cash balance, and …  Read more »

Hi, I was wondering if the formula of the UFCF is missing something.

If we start with NI, isn’t it UFCF = NI + D&A + I (1-t) – CAPEX – Change in NWK?

I don’t see I (1-t) being added back.

Can we also start with NOPAT?

Hi, Anthony, That would be the correct formula for Unlevered FCF, and yes, for UFCF, we would preferably start with NOPAT (which is EBIT * (1-tr). However, in this LBO model, what we mean by FCF is not UFCF, but the FCF available to pay down the revolver, and after …  Read more »

Hi, For the calculation of unlevered FCF, aren’t we supposed to add back interest expense x (1-t) ?

Unlevered FCF = Net income + depreciation and amortization + interest expense (1-t) – capital expenditures – change in net working capital

Hi, Leo, That would be the correct formula for Unlevered FCF. However, in this LBO model, what we mean by FCF is not UFCF, but the FCF available to pay down the revolver, and after the revolver is paid, the increase in the cash balance. So, it needs to incorporate …  Read more »

Great thanks !

You’re welcome!

Why didn’t we add the $50mm under “$ amount” for revolver in “Debt Assumptions”? Why are we just including it in the debt schedule?

Hi Lily – the revolving credit facility is assumed to be undrawn on the date of initial purchase. The $50 million is the revolver’s predefined capacity, i.e. the maximum amount that can be drawn if the borrower experienced a cash shortfall. If left undrawn, the revolver is a source of …  Read more »

Hi, how would you account for the transaction fee in the final returns calculation? Thanks a lot for your help and great tutorial!

Hi, Lisa, As long as the transaction and financing fees are included in uses of funds, then the amount of equity that the sponsor has to inject in order to come up with the total sources of funds will be impacted by those fees, and therefore the final return calculation …  Read more »

Got it, thanks a lot Brad, great tutorials!

You’re welcome, Lisa!

Hi, in case I have a lot of unused cash and no debt to pay off before the purchase, can I use it as a source of funding? If so, how can I add this step to the model? Thanks a lot! D.

Yes, if a company has excess cash and no debt to pay off, that cash is netted against the purchase price as a ‘source of funds’ in the LBO model.

Hi, in the FCF pre revolver, why do we subtract “mandatory amortization? Is it a real cash out flow?

Hi, Alexandre,

Yes, they are real cash outflows. Mandatory amortization (or principal payments) must be made before any revolver payments are made, so we need to include them in pre-revolver FCF.

So that means we can possibly use the revolver to pay the mandatory amortization of other debts?

Yes, we could use the revolver to make a mandatory amortization payment if we had no other source of funds.

Why are we adding back the amortization of financing fees? I understand that it’s a form of amortization, but it seems to me that it’s a cash expense?

It is a non-cash expense. The fees are paid up front in cash out of the proceeds from the debt issuance, like a prepaid expense. But they are expensed over the life of the debt as a non-cash expense.

This makes sense. Thank you for the clarification!

In step 3 there is already interest expense, how is that possible? because it is stated that for a while we leave it as a blank

That’s only because we are using screenshots from the completed model.

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What Boards of Public Companies Can Learn from Private Equity

  • Jeffrey M. Cohn

private equity cim case study

Given the pace of change, it can pay off to have directors collaborate closely with management.

Public company boards are typically focused on oversight, supporting the management team while keeping a respectful distance from day-to-day operations. In contrast, boards of companies owned by private equity tend to be much more hands-on. Often populated by former CEOs, these boards are more likely to get involved in shaping strategy and culture, providing information to the company, and actively engaging with future CEO candidates further in advance of succession.

Public company boards have made quite a few upgrades over the past decade. They have become far more diverse, more focused on risk management, and more attentive to the environmental impacts of the companies they oversee.

  • Jeffrey M. Cohn is a CEO succession expert and author of Why Are We Bad at Picking Good Leaders: A Better Way to Evaluate Leadership Potential . Contact him at [email protected].

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The Timed LBO Modeling Test: Full Tutorial for a 60-Minute Case Study

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LBO Modeling Test

But it’s a bit misleading to call it a “modeling test.”

Given the time constraints – often between 1 and 3 hours – it’s more of an Excel speed test .

If you know the shortcuts and formulas like the back of your hand, and you can enter data quickly, you should do quite well.

And if not, you better start learning and practicing ASAP.

We’ll go through a full practice run in this tutorial for a 60-minute test starting from a blank sheet:

Types of LBO Modeling Tests

As discussed in the PE case study article , there are different types of “modeling tests” and “case studies”: simple paper LBOs, 1-3-hour timed tests, and open-ended take-home case studies.

The 1-3-hour timed tests are most common in the on-cycle recruiting process at large firms in the U.S.

However, they could come up in any recruiting process; for example, some firms in London start with a simple, timed test to screen candidates before advancing them to the next rounds.

The good news is that these timed tests require far less critical thinking, creativity, and research than the open-ended case studies.

The bad news is that if you want to get good at them, you’ll need to “put in the reps” by completing many practice exercises.

What to Expect in a Timed LBO Modeling Test

The two main categories are tests that give you an Excel template and tests in which you start from a blank sheet .

The ones with templates tend to have more complex formulas, and the ones where you start from scratch have simpler formulas but are more challenging to finish under time pressure.

Here’s a summary of the likely differences based on the type and allotted time:

LBO Modeling Test Types

The 60-Minute LBO Modeling Test from a Blank Sheet

You can find examples of tests with provided templates fairly easily, so I thought it would be more interesting to look at an example without a template here.

You can get the case study prompt, the answers, and the completed Excel file below:

  • 60-Minute LBO Modeling Test – Case Study Prompt (PDF)
  • 60-Minute LBO Modeling Test – Completed Excel File (XL)
  • Answers to Case Study Questions (PDF)
  • Overview of Main Points in 60-Minute LBO Modeling Test – Slides (PDF)

There is no “blank” or “beginning” file because we create a new sheet in Excel and enter everything from scratch in this tutorial.

You can get the video version of this entire tutorial below:

Table of Contents:

  • 2:24: Part 1: Likely Requirements in Modeling Tests
  • 7:43: Part 2: Transaction Assumptions and Sources & Uses
  • 17:24: Part 3: Model Drivers and Income Statement
  • 32:14: Part 4: Free Cash Flow and Debt Schedule
  • 46:04: Part 5: Returns and Sensitivities
  • 56:22: Part 6: Answers to the Case Study Questions
  • 1:03:12: Recap and Summary

This example is not taken from our courses – it’s new for this article – but it is similar to one of the many case studies in our Core Financial Modeling course :

course-1

Core Financial Modeling

Learn accounting, 3-statement modeling, valuation/DCF analysis, M&A and merger models, and LBOs and leveraged buyout models with 10+ global case studies.

The full course has a different 60-minute example and a 90-minute test as well. And if you want more complex LBO models and a “take-home” example, check out the Advanced Financial Modeling course :

course-1

Advanced Financial Modeling

Learn more complex "on the job" investment banking models and complete private equity, hedge fund, and credit case studies to win buy-side job offers.

Part 1: Likely Requirements in an LBO Modeling Test

The chart above sums up the likely requirements for tests of different lengths. To be more specific, you can expect the following in a 60-minute test starting from a blank sheet:

  • Assumptions: Purchase Enterprise Value or Equity Value and a simple Sources & Uses schedule . There may be a working capital adjustment as well, but it’s fairly simple and makes a low impact on the model.
  • Debt Schedule : Perhaps 2-3 tranches of Debt with slightly different interest rates and repayment terms (e.g., fixed vs. floating interest, cash vs. PIK, and mandatory and optional repayments for one tranche). A Revolver is possible but unlikely.
  • Revenue, Expenses, and Cash Flow: These will often be simple percentage assumptions, but they could be a bit more complicated, such as Units Sold * Average Unit Price or Market Share * Market Size.
  • Financial Statements: A simple Income Statement and partial Cash Flow Statement; you just need enough to calculate Free Cash Flow and Cash Flow Available for Debt Repayment.
  • Returns Calculations: These will be fairly simple, but there could be a small twist, such as an earn-out, options pool, or management rollover.
  • Sensitivity Analysis : You might create 1-2 tables if the returns calculations were simple, but you might skip these if they were more complex. The case study questions determine whether or not you “need” these tables.
  • Total # of Rows: Probably ~100 or less (including blank rows), but you could go up to ~130 if there are sensitivities.

Unless they specifically ask you to do so, you should NOT build a full 3-statement model .

It’s a waste of time when you have only 60 minutes and adds nothing over the cash flow projections.

You should also skip other bells and whistles such as purchase price allocation , scenarios, complex Debt schedules, etc.

And do not include anything beyond bare-bones formatting, or you’ll never finish on time – number formats are OK, but forget about colors and borders for headers, input boxes, etc.

Part 2: Transaction Assumptions and Sources & Uses

The first part of this exercise is simple: we enter the assumptions provided in the case study document, focusing on ones that stay the same each year :

LBO Modeling Test Assumptions

Since this is a cash-free, debt-free deal , we use Purchase Enterprise Value on the Uses side of the Sources & Uses schedule.

One slightly tricky part is the $25 million “Cash Injection” when the deal closes; the case document strongly hints that we need to include this:

Sources and Uses - Cash Injection

“Cash-free, debt-free” means the company has 0 Cash and 0 Debt immediately after the deal closes – but that changes a second later due to the new Debt used to fund the deal.

There isn’t always a “Cash injection” right after the deal closes, but in this case, there is.

The rest is straightforward, and the Investor Equity is a standard “plug,” as shown above (Total Uses – Sources So Far).

Part 3: Model Drivers and Income Statement

It helps to start by setting up a sketch of the Income Statement, so we know what we’re building up to:

LBO Model Income Statement

Then, we can go back and fill in some of the drivers, starting with widget unit sales and the average price per widget:

Widget Unit Sales and Pricing

The document gives us information about the factories, including Maintenance CapEx and Growth CapEx, but it’s vague about the Depreciation.

You might be tempted to do something complicated, such as a detailed Depreciation schedule based on annual CapEx spending.

Or you might want to use functions like ROUNDUP to ensure that the factory count can only be in whole units rather than decimals (“8.5 factories” doesn’t make logical sense).

I recommend avoiding all of this and keeping the drivers as simple as possible because these details do not matter in a time-pressured test.

We drive the # of factories with the Widget Unit Sales and the Widgets per Factory, which is 500,000 based on the initial year (4 million widgets / 8 factories).

Depreciation is a simple % of sales, set to percentages slightly below the CapEx ones:

The COGS and Operating Expenses ( “Fixed Expenses” here) are simple; COGS is based on the Gross Margin % , and Fixed Expenses = (Sales – EBITDA) – COGS.

They grow at the same rate as average widget pricing:

We can then put together all the pieces to build the Income Statement down to Net Income, skipping the Interest deduction for now:

Part 4: Free Cash Flow and Debt Schedule

Free Cash Flow , at least under U.S. GAAP, is defined as Cash Flow from Operations minus CapEx (roughly).

“Cash Flow from Operations” is simple because this company is simple: start with Net Income, add Depreciation and Non-Cash Interest, and add/subtract the Change in Working Capital .

And then subtract Total CapEx from the model drivers to calculate FCF:

To complete the blank lines here, we need the Interest numbers – but to get the Interest expense, we need the Debt balances first.

But before we can project the Debt balances, we need to think about optional repayments , otherwise known as “cash flow sweeps.”

In other words, if the company generates positive cash flow available for Debt repayment in one year, how much of that cash flow could it use to repay the Term Loans optionally?

The case document explicitly tells us the answer is “50%”:

However, it’s NOT as simple as using 50% of the “Free Cash Flow” to repay these Term Loans.

“Cash Flow Available for Debt Repayment” is different from “Free Cash Flow” because more line items factor into it:

  • FCF Generated in the Year: This increases the cash the company could potentially use to repay the Term Loans.
  • Beginning Cash: The higher the company’s initial Cash balance, the more it can potentially use to repay Debt.
  • Mandatory Repayments: If the company must repay 5%, 10%, or 15% of the Term Loans, these payments reduce how much it can pay optionally.
  • Minimum Cash: Finally, Widget Co. must maintain 5% of its previous year’s sales as a minimum Cash balance at all times, which reduces the amount it can use to repay Debt.

Putting these pieces together, we get this sketch:

At this stage, we should move to the Debt balances below and link the Term Loans to the mandatory and optional repayments and the Senior and Subordinated Notes to PIK Interest :

And then, we can go back and calculate the Cash Flow Used for Debt Repayment and the Ending Cash each year:

NOTE: In the video, the Ending Cash calculation is incorrect at first. We go back and fix it a few minutes later. The screenshot above reflects the correct numbers at this stage of the model.

The Cash Flow Used for Debt Repayment is the minimum between the Cash Flow Available * Sweep % and the remaining Term Loan balance after the mandatory repayment.

This formula ensures that if, for example, $50 of the Term Loan remains, but we have $200 * 50% = $100 in available cash flow, only the remaining $50 is repaid.

The Ending Cash is based on the Beginning Cash minus Mandatory Debt Repayments plus Free Cash Flow minus Optional Repayments (“CF Used for Debt Repayment”).

The final step is to calculate the interest for each tranche of Debt, which we split into Cash and PIK to make it easier to link the statements later:

We then go back and link the total Interest Expense into the Income Statement and add back the Paid-in-Kind portions to calculate Free Cash Flow:

As a result of these Interest links, the company’s Cash balance grows to a lower level, and it repays the Term Loans more slowly.

To avoid circular references, we can use the beginning Debt balance as well (for more, see our tutorial on how to remove circular references in Excel ).

Part 5: Returns and Sensitivities

The basic returns calculations here are simple: we apply an Exit Multiple to the EBITDA in Year 4 or 5 to calculate the Exit Enterprise Value, subtract the remaining Debt, and add the remaining Cash:

The 5% management options pool makes things trickier, as we need to factor in the Cash the management team pays to exercise their options and the Equity they receive.

By paying to exercise their options, the management team increases the total Equity, which means they no longer own exactly 5% of the total Equity .

Management owns 5% / (1 + 5%) = ~4.8% of this expanded pool, so the Equity to Management Option Holders is based on that percentage times the expanded total Equity:

If you get this slightly wrong, it’s not the end of the world; this point barely affects the returns.

You just need to show some small outflow of proceeds, assuming the Exit Equity Value is higher than the initial Investor Equity (meaning the options are exercisable).

We can then calculate the IRR and multiple of invested capital and create a few simple sensitivity tables:

If you’re wondering about the exit multiple range of 9-13x, the purchase multiple was 12x, and the company is growing more slowly by the end of the holding period (~9% vs. ~16%), so we assumed modestly lower multiples.

Ideally, we’d look at the ROIC and comparable companies to estimate the exit multiple, but we do not have the time or information for those.

With that, we’re done with the Excel portion of this modeling test.

Part 6: Answers to the Case Study Questions

You can read the answers yourself , but in short, we recommend doing this deal because the likely IRRs are between 20% and 30%, with MOICs between 2x and 3x.

The company’s financial projections may be slightly aggressive in terms of margin expansion (with EBITDA margins increasing from 20% to 25%), but growth is also slowing, so they’re not crazy.

If the PE firm wants to boost its returns, the easiest solution is to use more Debt .

The company can support more than 5x Debt / EBITDA because it pays off the Term Loans by Year 5, with Total Debt falling by over $200 million in that period.

So, the PE firm could increase the initial Debt to 6x or do a Dividend Recap midway through the holding period (or even a simple cash dividend).

How to Master the LBO Modeling Test

Overall, this is a fairly challenging LBO modeling test .

I intentionally inserted multiple ways to make mistakes and waste time on marginally useful tasks.

That said, you do not need to score 100% to “pass” – the median score on these tests is often below 50%.

So, if you can finish the model and get most of it correct, you should be in good shape, even with some mistakes here and there.

But the key part of that sentence is “finish the model.”

If you don’t know Excel quite well, you will struggle to finish in 60 minutes.

If it takes you 2-3 hours to finish, that’s a fine result for your first try.

At that level, you could reduce your time to the 60-minute range with repeated practice.

Similar to standardized tests like the SAT and GMAT, there are only so many features they could throw at you in an LBO modeling test.

Once you’ve done 5-10 practice tests, you’ll be ready for ~90% of future tests.

And if the average person suddenly learned the truth about what it takes to get into private equity , they might start wondering what explains those sky-high salaries …

private equity cim case study

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

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Spillover effects from private equity acquisitions in the health care sector

Brown researcher awarded grant to assess the spillover impact of private equity practice acquisition on health care spending, quality and access outcomes

Professor Yashaswini Singh served as an expert panelist at the October 2023 event “Private Equity and the Future of U.S. Health Care.” Credit: Kenneth C. Zirkel

The health care sector is witnessing a significant transformation as private equity (PE) firms step up their acquisition of physician practices. This trend reflects a broader shift within the health care industry of corporate investors acquiring health care providers, driven by the allure of short-term profitability and efficiency gains. It also raises questions about the implications for health care quality, accessibility and the overall impact on the U.S. health care system.

A new study led by Yashaswini Singh , assistant professor of health services, policy, and practice and a member of Brown’s Center for Advancing Health Policy Through Research , will explore this phenomenon and the effects of PE acquisitions on health care accessibility. Funded by the National Institute for Health Care Management Foundation , the study, “Spillover Effects of Private Equity Acquisitions of Physician Practices on Local Market Competitors: Implications for Access to Care,” represents a pioneering investigation into a critically under-examined area. 

Singh’s prior research shows that PE acquisitions of physician practices often lead to increased health care spending and utilization, changes in workforce composition and a reshaping of services based on profitability. Yet the extended impact of these changes, especially the “spillover effects” on competing practices within the same locale, remains largely unexplored. 

Singh’s new study will consider a core concern: the propensity of PE firms to prioritize short-term financial gains, potentially at the expense of offering comprehensive care. This strategy may lead to the curtailment or discontinuation of less lucrative services, disproportionately burdening independent medical practices, as they may have to accommodate an increased demand from patients turned away from PE-owned offices.

Singh and her study co-author, Durgar Borkar , assistant professor of ophthalmology at Duke University, are focusing on the field of ophthalmology, merging hand-collected data on PE ownership with longitudinal medical claims data. Their work is set to make a significant contribution to the field, providing the first policy-relevant empirical evidence on the market-wide effects of PE acquisitions. 

We spoke to Professor Singh about her upcoming study.  

What are the general developments surrounding PE firms and physician practices in the U.S.?

Over the last decade, there’s been a rapid increase in institutional investors, such as private equity funds, acquiring physician practices, primarily through consolidation. Private equity aims to generate approximately 20% annual returns over short investment periods of three to seven years. This raises concerns about whether private equity’s financial incentives can coexist with physician incentives to deliver affordable, accessible, high-value care for patients.

In the past five years, acquisitions have occurred in several specialties, including dermatology and ophthalmology, and more recently, primary care. A growing body of literature is examining the impact of these acquisitions on health care spending, quality and access outcomes, which is the focus of my research and this grant.

According to one report , PE ownership of physician practices quadrupled between 2010 and 2020. Nonetheless, it’s difficult to get an accurate count. Why is this the case? 

That’s in the ballpark, indicating a rapid trend in corporate consolidation in the last five to ten years. However, specific numbers are hard to confirm due to the private nature of these transactions. Private equity companies are exempt from Securities and Exchange Commission disclosure requirements, and most physician practice acquisitions go unreported to antitrust authorities like the Federal Trade Commission.This lack of transparency is a key policy issue, making it hard for researchers, policymakers, physicians and patients to understand the real magnitude of these trends.

In ophthalmology, many services are financed by Medicare, a government payer. If private equity changes practice patterns in ways that affect Medicare patients, it raises concerns for patient care and taxpayer dollars.

Woman smiling

What inspired you to focus on the spillover effects of private equity acquisitions, particularly in ophthalmology?

The rapid acceleration of private equity in the last five years and the concentration of PE penetration in specific geographies motivated my focus. In ophthalmology, many services are financed by Medicare, a government payer. If private equity changes practice patterns in ways that affect Medicare patients, it raises concerns for patient care and taxpayer dollars.

I’m also interested in how entities in the same markets as those receiving private equity investments respond. Do they seek PE financing, merge with others or exit the market? These responses have significant implications for patient access to care.  

How do you plan to ensure that your findings reach and influence policymakers?

It’s a very important question. These issues are personal in that they affect our day-to-day lives and health in ways we might not be paying attention to. Private equity in health care has received a lot of policy attention at both the federal and state levels. I am affiliated with the Center for Advancing Health Policy Through Research (CAHPR) here at Brown’s School of Public Health. Working closely with collaborators within CAHPR, we have a targeted dissemination strategy that aims to translate research findings to a broader policy audience. 

We have developed relationships with leading health care reporters and will share findings with policymakers, including, state and federal legislative staff, federal agency staff, the Federal Trade Commission, and in the media. There are journalists covering the effect of private equity in health care, and we plan deliberate outreach to ensure our research reaches beyond academic journals. We will also target high-impact journals in health policy, health economics, and health services research, but our ultimate goal is to reach policy audiences as well.

“ Private equity investments in health care don’t happen in a vacuum. Understanding the aggregate effects at a market level will help us comprehend how private equity operates across settings. ”

Beyond this study, what are the other areas in health care where you believe the spillover effects of private equity acquisitions need investigation?

Every segment requires investigation. Private equity investments in health care don’t happen in a vacuum. What we see is a practice that was acquired, but we don’t see the practices that were courted by private equity, some of which said yes and others, no. Understanding the aggregate effects at a market level will help us comprehend how private equity operates across settings. 

Spillovers in primary care, for example, where there’s been a rapid increase in consolidation by private equity investors in the last three to four years, are crucial. This is another area of work I’m developing at Brown. 

The effects in primary care can have serious implications for quality and access, especially given the existing shortage of primary care practitioners. It’s to be seen if private equity exacerbates underlying disparities in health care by affecting practice patterns of entities courted by private equity in the past but decided not to sell to those investors. There is also potential for positive spillovers: if PE investors make technological investments that improve the quality of care (e.g. by reducing wait times), this can incentivize local competitors to compete on quality or risk losing patients to higher-quality competitors.

Related News

School of public health welcomes renowned scholars to faculty, brown study reveals substantial health care spending following covid-19 infection, humans in public health: crisis & humanitarian response.

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PE Interview Case Studies

energyib's picture

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PE recruiting is slowly starting ... some of us are in the beginning of interview processes .. one thing that differentiates the interview process at PE / IB is the case study interview...

For those who work at PE shops, or have gone through the process, think it might be useful if you guys could post a few case studies you were asked and some details like timing/how many interviewers/do you present at the end of the case study your conclusions/etc.

is it a McKinsey type of case study where you are given a how many ping pong balls can fit in a 747 to test analysis or more like an investment opportunity idea and you need to calculate back of envelope valuation, and put together a few powerpoint slides with sensitivities etc?

if you guys could post specific examples from interviews you had or took - that would be awesome for us !

please PM me if you do not want to post publicly - interview with mega fund coming up next week - help requested please!!!

---Message from WSO Below---

Free LBO Modeling Test (Email Form Below Video)

See if you're ready for the real deal. video solution + modeling file included so you can get realistic practice. just enter your email in the field below..

HerSerendipity - Certified Professional

When I was interviewing, case studies were not like the ones given in consulting interviews . Luckily, I never had to do any 'on the spot' tests; i will let someone else speak to that. All my case studies gave me 3 or 4 days to complete.

Generally, they give you an overview: ABC Company has approached [Potential Firm] with the opportunity to invest in Business. They'll give you any basic operating assumptions and other tidbits. I was asked to build a model and write an investment memo that outlines the opportunity, returns, pros/cons of the deal, and investment decision. I did not have to present. I was allowed to use any and all resources available to me (market research, any rate spreads, comps , etc.) Obviously there is an honor code in place which should govern morally whether or not you get help from coworkers, etc.

dosk17 - Certified Professional

I never had any "How many golf balls fit into a 747" type questions - it was always more like: "Should we invest in this company or not? And why?"

Typically they will give you:

-CIM/OM, or maybe an abbreviated version such as a short Executive Summary that's around 5-10 pages, describing the company, high-level financials, employees, products, market, etc.

-Sometimes they will give you filings or a more detailed operating model, but this is less common than just receiving a short document as described above.

-Usually they will just ask you to make a short 5-10 slide presentation on whether or not they should invest in the company.

-At mega-funds, it's more common to get "do this on the spot" type tests where you get a few hours to work on your own model and then show them something at the end. Smaller places tend to be more like, "Take a few days to a week to do this, and then present it to us."

Typically you want your presentation to consist of:

-Summary slide - do you invest, or not, and key reasons for/against

-Spend maybe 3-4 slides on valuation of the company, showing output from comps , DCF , and simple LBO model.

-Spend 2-3 slides justifying qualitative factors impacting the company / investment (market, competitors, management team, etc.)

-Conclusion slide re-stating what you did, saying whether or not you'd invest and at what valuation, and giving approximate 3-5 year IRR .

-Lots of people make this way too complicated, which is a waste of time. Focus on the fundamentals and keep all models/valuations simple and get to the point rather than going on for pages about nothing.

-Always make sure you actually MAKE a decision. Don't do a, "Well, we would invest in this company but only if they hit projections..." type thing, just say, "Yes, invest at this price range" and just say you'd need to perform confirmatory DD as is standard with any deal.

-Don't over-crowd slides - have a max of 3 major points and/or diagrams/tables on each one, and use 80/20 if you're in doubt about what's important.

-Above all, make sure you clearly articulate your arguments - simplicity is key. Case studies are just as much about your communication skills as they are about your technical skills.

I would share examples but I don't have any of the PDFs with me at the moment as I'm traveling overseas.

energyib's picture

thanks a lot dosk and herserendipity.. much appreciated!

Marcus_Halberstram - Certified Professional

Anyone else? I know others on here are in PE . Mind sharing your experiences?

wallstreet09's picture

How many pages of investment memorandum do people generally aim for a 4 hour test? Is there any outline that we should stick to?

also, has anyone done any credit investment case study test?

ap0258 - Certified Professional

I had a case study interviewing for the debt fund I work at. We do mezz and mid-market lending (so similar analysis to being the sponsor in an LBO with somewhat different focus points.

My work product was only about 2 pages of memo (bullet points as well eating up space), the model was a much bigger focus. I was also grilled on how I would have structured the deal, how I viewed the covenant package, which tranche I felt had the best relative value, how I built my downside cases, etc.

I was asked a few brain-teasers earlier in the interview process as well.

dreamer1992's picture

PE interview case studies? ( Originally Posted: 08/19/2013 )

Where can I get them? Can anyone please send me one? Would really appreciate it!

charlemagnereborn's picture

Would anyone mind sending them to me as well? Much appreciated. Thanks!

Beny23's picture

Also interested.

another question - can someone please name general resources for PE interview prep? I don't think M&I or WSO have a specific PE guide. Any other ones?

worldofecofin's picture

Vault has one...but that's light. there's another by Vault which focuses on PE andhedge fund together. That has good techinical questions (better than the private equity guide) at least.

Matrick - Certified Professional

PE case studies are usually always the same: It's usually a Paper LBO , that you then have to compute on the spot and come up with a yes or no investment decision based on the IRR you calculated.

abcdefghij's picture

Matrick: PE case studies are usually always the same: It's usually a Paper LBO , that you then have to compute on the spot and come up with a yes or no investment decision based on the IRR you calculated.

That sounds nothing like any PE case study I've seen.

Alpine - Certified Professional

There are generally two types of case studies (at least what I have come across and what we do):

Short-form: This is where you have a few hours to read and prepare your analysis for a short case study where you will get a bit of information on the company, industry and financials (i.e. 1-2 pager) - you build a quick high-level LBO model and then present your analysis (most of the time, you will have access to Excel but have also seen where you can only use pen & paper) + Q&A in a presentation to interviewers - this takes 1/2 day max in my experience

Long-form: This is where you're given a company name and have a weekend to pull together a short (e.g. 10-page) presentation + LBO model on the opportunity - it generally is a public company so you can pull all the info yourself - deadline end of Sunday with a 1-hour presentation the following week

You can practice for either one by just picking a few companies you have read about in the news as potential buyout candidates or you are interested in and practice building a quick LBO model and do some brainstorming what your investment thesis would consist of and which risk factors / mitigants you can identify. You can also practice high-level industry analysis yourself by picking out a company and think about what you would say about the industry (e.g. overall market size, growth expectations, drivers, competition, positioning, etc.).

You saw these types of case studies for PE interviews for people straight out of undergrad?

No, for Analysts who would have 1-2yrs at a bank or Associates. Sorry but cannot comment on PE case studies for people straight out of undergrad.

I think OP is asking for the latter, judging from another post he made in the IB forum.

CompBanker - Certified Professional

I can comment on US MM PE both pre-MBA and post-MBA (but not directly out of undergrad). I've seen or administered the following modeling tests:

1) Paper LBO . Flip over the resume, make up the assumptions on your own, calculate an IRR and ROIC. Very high level. 2) 30 minute "fill in the blanks" LBO . Make high level assumptions and complete the template on site during the interview process. 3) Take home LBO . I was given a CIM and told to prepare an LBO model and email it back. Completely up to me on how to construct and prepare it. 4) Merger model. One hour to merge two companies' financials to create pro forma financial statements and answer questions about the combined entity.

However, this is usually just one component of the interview. General the case study portion of the interview involves reading an offering memorandum and answering questions on the spot. Opportunities / Risks, would I invest, what questions to ask management, etc. Usually PE firms choose either a recent deal or an existing portfolio company to administer these case studies.

CompBanker: 4) Merger model. One hour to merge two companies' financials to create pro forma financial statements and answer questions about the combined entity.

I have to correct myself: I also encountered this for a PE position straight out of undergrad. It was very high level though, and they mostly cared about Goodwill creation.

Also agree on the part in regards to using a recent deal the firm did or a portfolio company. Was the same for me everytime.

chuck123's picture

Thanks for your help CompBanker. I'm just starting off and have a few PE interviews lined up. Do you have any examples of how to do #1? I'm going through an in-depth LBO tutorial to prep for #2 and #3.

thegreen - Certified Professional

PE Case Interview Expectations ( Originally Posted: 02/18/2018 )

Hey monkeys -

TL;DR - Hour long case interview and looking for guidance on the best way to prepare.

Background I am currently a consultant and have been trying to break into PE . I have an interview later this week that the associate defined as a 'case' interview. My interviewer indicated that we would have a hour for the interview so with that information I am looking for guidance on the best way I can allocate my studying time.

I really like the company and it is my top choice of firms right now but due to my current client obligations I have not been able to focus as much as my time as I would have preferred to. This is not meant to be an excuse as I should have foreseen this but it is what it is at this point and I want to use my limited free time as best as possible.

Question Knowing that this is an hour interview, do any of you have insights on the type of technical questions or 'cases' that may be presented? I am working on full scale LBOs hoping that if I nail that down then I would be able to answer anything higher level but I am aware this may not be fool proof.

Any advice is appreciated.

Best, CoffeeDrivenConsultant

PrimeP's picture

"full scale LBOs" usually take 2-3 hours yours will most likely be a paper lbo or a more general discussion around a hypothetical case / previous investment the fund did

Do you have any perspectives / examples of what the discussion would be like?

it depends. they might give you a case and ask for a quick write up with some quick calculations (not a full lbo model). or it can be part of a discussion during the interview, e.g. we are looking to invest in x - what do you think?

Ditchard86's picture

Thanks and.... PE Case Interview Help? ( Originally Posted: 01/15/2014 )

Hi there, longtime lurker, first time poster (yes, this is a new username - my existing handle was just a little too identifying). First off, just want to thank everyone on here for generally amusing and often helpful posts, examples, experiences and tips. Historically I had just visited for pure amusement, but recently have begun using the forum as an information source, and it's been truly indispensable.

So short story - spent a few years doing strategy consulting/ M&A advisory for a boutique, sector-focused firm. Spent most of my time working with private equity firms providing commercial due diligence similar in scope to what Bain might provide (lots of excel, but no heavy financial modeling) Girlfriend graduates from grad school, takes job in new city, and presto! I have a new home.

I took a look at the sponsors in the area, but they are few and far between where I am and had no open associate spots when I was looking. I ended up landing a corporate development style role with a mid-sized industrial firm where I am today. Anyways, along comes a headhunter, asking me if I'd still be interested in an associate spot and here I am.

Got through an interview with a partner (mostly fit/background, a few technicals) and am now on the LBO case! They just gave me a CIM and asked me to do a model and a write up over about 3 days (no other instructions or assumptions). I've sort of wrapped up the model and am looking for some advice, as I am somewhat new to the LBO modeling portion. So if there's anyone out there willing to take a quick look and critique anything and everything, I'd appreciate it.

Specific questions I have: - The partner I interviewed with said I should create an "intermediate level" lbo model - does this seem to fit the bill? I don't have too many bells and whistles on there, fairly simple debt structure (revolver, TLA and TLB), and I cut out the full BS , just took the given depreciation and capex, calced WC as % of revenue, etc. I'd like to add operating cases and some more returns analysis - anything else? - Do my debt characteristics and amounts look about right? I'm not really plugged into the LevFin world so I don't know what the going rates/structures are. - Currently my debt amounts calc off of a multiple of EBITDA , with the sponsor equity as the plug - when you sensitize around entry multiple it just shrinks or grows the amount of equity - is that the right way to do it? Or should I be using more of a target cap structure (e.g.,60% debt, 40% equity) off of the EV? - On the credit statistics, does interest coverage include mandatory amorts? Or is it just pure interest? - Currently I'm kind of lukewarm on the business as an LBO target. The management projections are in there (I'll add operating cases later), which are obviously on the rosy end of the spectrum. It's an industrial distribution business, almost sort of retail, so growth takes a fair bit of capex and working capital to scale up. When it's already a low margin business, it just doesn't have a whole lot debt capacity (in my estimation).

Anyways, any thoughts would be greatly appreciated! Thanks again to the whole community!

Haven't looked that closely at your model, but if they gave you a CIM and 3 days to do it, why not include a balance sheet? I remember doing a balance sheet on 1-hour timed LBO tests

Fair point I suppose. I left it out at the outset because it was somewhat complicated/lengthy, and given the amount of info I have, I would have just ended up doing AR / AP Days, Inventory as % of COGS, etc., which leads you to pretty much the same place as what I did - NWC as a percent of revenue.

Boats and LBHoes - Certified Professional

Agree with above - do a full three statement model if you have 3 days and aren't in IB . I'm sure you can find the time.

Quickly looking at it, your income statement needs to be driven off assumptions (preferably with multiple scenarios) instead of hardcoded. Some formatting issues. Some of your formulas are overly complicated. For example, your paydown formulas should be a simple -min function instead of the convoluted if statements you have running. Doesn't look like you're discounting your cash flows in your IRR analysis. Haven't really looked at it in-depth though. Look at Macabacus for an example.

stvr - while I appreciate your "I'm sure you can find the time" snark, I'd appreciate EVEN MORE some real insight here. Your offer of vague pointers about "formatting issues" and advice when you "haven't looked at it in-depth" isn't terribly helpful. If you've don't like the formatting or something, please specify so it's, you know, helpful.

As you'll note above, I mentioned that I was planning on putting in operating scenarios, so I'm well aware of that shortcoming. As far as the debt pay down formulas go, take a look at M&I, they have a pretty helpful explanation - just using a Min function is too simple and doesn't work in all cases ( http://bit.ly/K4w81T ).

As far as discounting cash flows in the IRR , I'm not entirely sure I follow. This isn't a DCF . It takes the cash on cash return, then calcs the geometric growth rate needed to achieve that cash on cash return (which is IRR in effect). I'm willing to be told that I'm wrong, but I think that works exactly the way it's supposed to (presuming you' don't have any dividends or anything like that).

johndoe89 - Certified Professional

I've PM'd you

Anihilist - Certified Professional

Agree with above user. I think your projected I/S lines should be driven off growth assumptions, you seem to have it the other way around (i.e. conforming growth numbers to line items growth).

Thanks. Yeah those were just placeholders.

This is probably a stupid question, but I'm just venting now - how big of a sin is it if your B/S doesn't quite tie. I can't seem to figure out why mine isn't. I think part of my problem is that the data in the CIM wasn't quite complete.

So at this point, I'm faced with two unappetizing options: submit a model without a B/S (all the other things correctly accounted for - WC, CapEx, debt schedules, etc.) or send in a model with a fully integrate B/S that doesn't quite tie (think like .1% of assets off)

bschoolhopeful's picture

Wow. I'm just realizing how much I learned over the summer. Before the internship I wouldn't have understood a word of what you said in this post but at this point I almost feel confident enough to give you tips on your model. But I'll leave it up to the Certified Users to help you out.

sent you a revised model

Billy Ray Valentine - Certified Professional

PE Analyst Case Interview ( Originally Posted: 11/04/2008 )

I just got called in for a first round interview with Audax Private Equity. Has anyone been through their interviews and does anyone have any advice? I assume it will be partially case based. Does anyone have any suggestions about case questions in general? I have the vault guide but it is about 400 pages and I have 2 days... Help!

xqtrack - Certified Professional

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  1. PE Case Study

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