List of London Private Equity Firms

Below is a list of Private Equity funds that have offices in London and have a significant European presence. We broke down the list in "generalist" funds that cover all sectors across difference geographies, "sector specialists", "specific region-focused" funds and finally Private Equity funds within investment banks. Note that the list below covers only the major funds and doesn't include venture capital funds and other Private Equity funds that have less than £500 million of assets under management.

Generalist Funds with London-based operations

The Carlyle Group (www.carlyle.com)

KKR (www.kkr.com)

The Blackstone Group (www.blackstone.com)

TPG Capital (www.tpg.com)

Permira (www.permira.com)

Apax Partners (www.Apax.com)

Bain Capital (www.baincapital.com)

CVC Capital Partners (www.cvc.com)

Cinven (www.cinven.com)

Apollo Management (www.agm.com)

3i (www.3i.com)

Warburg Pincus (www.warburgpincus.com)

Terra Firma (www.terrafirma.com)

Hellman & Friedman (www.hf.com)

General Atlantic (www.generalatlantic.com)

Charterhouse Capital Partners (www.charterhouse.co.uk)

Sun Capital Partners (www.SunCapPart.com)

BC Partners (www.bcpartners.com)

Bridgepoint Capital (www.bridgepoint.eu)

Doughty Hanson & Co (www.doughtyhanson.com)

TA Associates (www.ta.com)

Advent International (www.adventinternational.com)

Clayton, Dubillier & Rice (www.cdr-inc.com)

Barclays Private Equity (www.bpe.com)

Duke Street Capital (www.dukestreet.com)

Eurazeo (www.eurazeo.com)

GI Partners (www.gipartners.com)

HIG Capital Europe (www.higeurope.com)

IK Investment Partners (www.ikinvest.com)

Phoenix Equity Partners (www.phoenix-equity.com)

Rhone Group (www.rhonegroup.com)

Silverfleet Capital Partners (www.silverfleetcapital.com)

Hg Capital (www.hgcapital.com)

PAI Partners (www.paipartners.com)

Cerberus Capital (www.cerberuscapital.com)

Star Capital (www.star-capital.com)

Montagu Private Equity (www.montagu.com)

Omers Private Equity (www.omerspe.com)

Arle Capital (www.arle.com)

Vista Equity Partners (www.vistaequitypartners.com)

Capvest (www.capvest.co.uk)

Pamplona Capital Partners (www.pamplonafunds.com)

Elecktra Partners (www.electrapartners.com)

Inflexion Private Equity (www.inflexion.com)

Sector Specialists

TMT, Growth Equity

Providence Equity Partners (www.provequity.com)

Silver Lake Partners (www.silverlake.com)

Summit Partners (www.summitpartners.com)

GMT Communications (www.gmtpartners.com)

The Gores Group (www.gores.com)

Quadrangle (www.quadranglegroup.com) - Media

Veronis Suhler Stevenson (www.vss.com) - Media

Consumer Goods

Lion Capital (www.lioncapital.com)

Neo Capital (www.neo-cap.com)

Financial Services

J.C. Flowers (www.jcfco.com)

Corsair Capital (www.corsair-capital.com)

JRJ Group (www.jrjgroup.com)

Anacap (www.anacapfp.com)

Infrastructure

Borealis (www.borealis.ca)

Global Infrastructure Partners (www.global-infra.com)

Clean Technologies / Environment

Climate Change Capital (www.climatechangecapital.com)

Specific Geographic focus

EQT Partners (www.eqt.se) - Nordic, Germanic region

Vitruvian Partners (www.vitruvianpartners.com): Northern Europe including UK

Nordic Capital (www.nordiccapital.com) - Nordic region

Mid Europa Partners (www.mideuropa.com) - Central and Eastern Europe

Actis (www.act.is) - Emerging markets: Africa, China, India, Latin America

Aureos Capital (www.aureos.com/) - Emerging Markets: Africa, Asia, Latin America

Investment Banks Funds

Goldman PIA (www.goldmansachs.com/services/investing/private-equity/private-equity-gr...)

Morgan Stanley Private Equity (www.morganstanley.com/privateequity)

Lloyds Development Capital (www.ldc.co.uk

Private Equity Interview Preparation

Below is some good advice from specialist recruiting firm KEA Consultants about the Private Equity Recruiting Process.

The private equity interview process is challenging from start to finish. Most firms will interview a candidate over three to four rounds, but there are cases where it can be as many as ten rounds. It all depends on the firm, the number of people they want you to meet and the testing involved. In some instances, you may come across SHL type tests testing your verbal, numerical or logic skills.

However, all candidates should be prepared for general CV overview interviews, as well as the case study and LBO modeling round. The majority of mid-market and large cap buyout funds will test candidates on their modeling skills. Smaller cap or growth equity funds are less likely to test these skills, but may have a business case study where you present on a private investment. All firms will want to test your commerciality and business sense. Ultimately, as an entry-level candidate you need to prove that you can make the transition from the sell-side to the buy-side and think like an investor.

The key to doing well in any interview is preparation. Do your homework on the firm, the professionals and the portfolio. At a minimum you should know the fund’s size, how long they have been around, the stage at which they invest, which sectors they invest in and their investor base. It would be worth thinking through a couple of the investments the firm has made in the past and assessing why they were good investments (or even why not) and how they developed the firm’s investment strategy. Without fail, prepare some questions that you can ask the investment professionals at the firm where you’re interviewing, as they are likely to give you the opportunity during your interview. These can range from asking about the amount of capital available to invest, to the number of deals the firm screens at any one time, to asking more specifically about a recent investment the firm made.

There are some extremely practical things you can do throughout the interview process to guarantee that you present yourself to best effect. The most basic and important are:

Always be on time, if not 5-10 minutes early for each interview

  • Stick to a scheduled interview time to the best of your ability
  • Prepare questions for your interviewer
  • Give a firm handshake on introduction and departure
  • Always make eye contact with your interviewer
  • Think carefully about your answers; it’s better to take an extra minute structuring your thoughts than rambling on for too long and without focus
  • Speak clearly and with confidence, at the same time try to be humble and not too aggressive
  • Remember you are selling yourself to them, not vice versa

During the CV interview rounds there are certain points and questions that you should specifically prepare for. We have listed examples below for you to think about. This is not an exhaustive list, but it should give you a sense of what to expect:

Know your CV: you must be able to answer questions on anything on your CV. If you’ve listed several transactions then make sure you really know what happened and know the relevant numbers: IRR, debt equity ratio, price, earnings multiple etc. Practice walking through your CV from university onwards in a structured 2-3 minute overview.

Tell me about a deal on your CV: If you are from investment banking you should definitely expect this question. Pick a deal that would be most relevant for a private equity investor (either in industry or type of transaction).

Why do you want a career in Private Equity? Tailor your answer to your experience, skills and relevant interests, as demonstrated on your CV.

Why are you interested in our firm? If you’ve done your homework on the firm, then you should be able to easily answer this question.

From the companies you’ve worked with, which would make a good private equity investment and why? Tailor your answer to the firm you are interviewing with and be prepared to go into financial detail on why you would invest in that company.

Explain the mechanics of an LBO model? You need to be able to either talk an investment professional through this, or calculate a simple one on an A4 sheet of paper. (see our modellings tests page if you require practice )

Why are EBITDA and FCF important to private equity investors? You need to know the difference and explain how they are used in relation to the new debt borrowed for an LBO.

What determines how much debt you can put on a company? Talk about the cash profile of the business and the state of the debt market.

How would you source potential investments? Indicate how you would research and identify attractive targets in a sector. Think about where recent private equity deals have been done. Mention networking in an industry, through cold-calling, conferences, reading trade publications. Keep it relevant to the firm you’re interviewing with.

How important is management in a private equity deal? They are extremely important, good business need good managers.

Tell me about an interesting deal in the news recently? Make sure you have a clear opinion on the deal that you chose in order to demonstrate your business judgement.

What are your thoughts on the private equity industry and/or a specific industry the firm looks at? Again, have an opinion.

Where do you see yourself in five years? Demonstrate your ambition and commitment to private equity.

A few other general questions...

What motivates you? Tell me about a time you’ve failed? What are your three main strengths? What do you do in your spare time? Finally, personal fit is important. As teams are smaller in private equity firms than in other corporates, personality fit is a key part of a firm’s overall evaluation process. Remember to "be yourself" during your interviews. A private equity firm will only want to hire candidates that they feel fit well with the firm’s culture and ethos. If hired, you will be working with the people who interviewed you on an intensive basis and having strong professional relationships will determine how much you enjoy your new job and ultimately how successful you are.

Why Private Equity? Why Our Firm?

Invariably, this question will be asked during any private equity interview, and is one of the most critical. Most bankers who prepare well and have a good deal of experience are able to pass all the technical interview questions, but a lot of them fail on providing a compelling answer to "why PE, why our firm".

What are the private equity firms looking for when they ask "why PE, why our firm"?

Obviously, the interviewer will want to know your motivations behind doing this job, and also behind joining their firm.

However, the question is actually much more complex than you might think. Private equity firms already know why people apply to their firms: prestige, better long-term money, fewer hours, and the entrepreneurial aspect. But they are really looking for the answers to these questions:

1. What's driving you professionally and personally?

2. Have you done some research about the firm?

3. What special skills do you have, and how can they be of use to the firm?

4. Are you going to stay long-term?

Structures to best answer the question

Make sure that you address the four points described above, directly or indirectly. Notice that the question is actually twofold: 1) why PE and 2) Why our firm. However, in most cases it is best to address the two questions at the same time, even if they are asked separately. For example, if you are just asked "Why PE", I would still answer the "Why our firm" at the same time.

When answering, we suggest that you use the following structure:

1. Answer why you like PE first (addresses points no.1 and 4)? For this question, there needs to be a solid personal motivation as well as a professional motivation.

> Personal motivations: Those usually revolve around an "entrepreneurial spirit" and desire to do investments and act as a principal. Great stories include coming from an entrepreneurial family, some evidence of entrepreneurial activities, risk-taking or outstanding initiatives, in or outside your job.

> Professional motivations: This usually revolves around the aspects of your work that are similar or related to private equity. Bankers and consultants can mention work they did with Private Equity and how they enjoyed it. You just need to show that you know the work that PE involves. Points not to mention: money, prestige, fewer hours, or plainly saying "I like to do investments". Another danger zone is to mention personal stock trading - be aware that stock trading is short-term and more suited to hedge funds, not PE, so if you mention it talk about a long-term "hold" strategy.

2. Show off your knowledge about their firm (addresses point no. 2) 

Mention positives and success factors of the firm that are attractive to you:

> Strategy: unique positioning of the firm, sector focus, geographic focus

> Recent fundraising or expansion: big new fund, new offices, new partners

> Great investments or exits they have done: mention any known details to show knowledge

> Strength of some partners (i.e. the more prominent figures): mention names

3. Tie in the firm positives with your skills (addresses points 3 and 4)

This is the hardest part - you need to tie the firm's strategy to your skills. This part will vary with each individual, but these are the most common rationales:

> Language skills that tie in with the fund regional expansion strategy. For example, "You have made several investments in France, and as a French speaker, I would really love to work on some of those portfolio companies." Or "I speak three European languages, so I like your pan-European focus," etc.

> Sector experience that ties in with sector focus. For example: "I worked on three media transactions and really enjoyed the work, so I think I would really love working in a TMT-focused private equity firms such as yours."

> Showing relevant business experience. For example: "I have worked for three years in investment banking and with several private equity clients, so I am well aware of the strong reputation of your firm."

> "Business acumen" or "belief". Basically, this would be something saying that you believe that the PE firm is well positioned, and that is why you want to join them. Again, you can mention their strong track record, nice positioning, great management, and all those success factors that make you want to join them.

You will get bonus points if:

- You reached out to the PE firm directly without going through headhunters (shows initiatives, credibility)

- You get "championed" by somebody working at the firm (alumni, friend). If you got recommended, do mention this fact.

- You worked on a deal with the firm (as a banker or consultant, provided you did well!)

- You dealt with companies they thought about buying (bankers and consultants: check the all bidders for the deals on your CV!)

Private Equity Interview Questions

Private Equity interviews are notoriously difficult and will contain a mix of fit questions, technical questions, mini cases and investment pitches and brainteasers. Below are some of the questions that you would typically get in a Private Equity Interview

 

Qualifications, Motivations and Background

- Why are you interested in Private Equity, why our firm?

- Why not work for a Hedge Fund / Startup / Portfolio company?

Business Acumen / Ability to think like an investor

- What industry trends are key when you are looking at a potential investment?

- How do you source potential investment?

- If I wanted to protect my downside, how would I structure an investment?

- Have you looked at our website? Which investment do you like most/least? Why?

- If you could only have one financial statement, which one would you choose? Why? What if you could have 2? Why?

- An investment banker gives you a deal book - how do you verify the information in it?

- What should we buy next? What kind of IRR would we make? (provide high level financials/LBO model workings)

Technical Questions

- You buy a business at an 8.0x EBITDA multiple and you believe you can sell it in 5 years time at the same 8.0x EBITDA multiple. Your required return rate is 20%/year. Assume that banks are willing to lend up to 4x debt/EBITDA, and that half of the debt would get repaid after 5 years. How much do you need to grow EBITDA by within this timeframe?

- You buy a company for 10x EBITDA. It has EBITDA of £100 in yr 1, and £150 in yr 5: what kind of multiple should we exit at to get at least 25% IRR

- What different levers can be used to improve IRRs?

- What is the advantage of a vendor loan?

Mini cases

- Would you invest in an airline? Why and why not?

You will find detailed answers to the above questions in our Private Equity Interview Guide, as well as more practice questions.

Private Equity LBO Modelling Test

Most Private Equity firms will give you modelling tests to complete realtime at their offices from scratch. Without practice, this can be challenging, even for seasoned investment bankers. Here are a few tips and an example of a test you will likely get:

LBO Modelling Tips

Tip#1: Spend enough time to understand all the requirements properly

Read in detail the information provided, as well as what is asked. Often, candidates fail to answer the question asked by trying to do too much or waste time as they add complexities that are not required.

Tip#2: Always keep models simple

Do not try to "show off" by building complex models and advanced functions. Build a practical model that answers the question; only if you have enough time, then add a few more advanced functions or clean up the formatting, but this is not necessary.

Tip#3: Watch your time, and if you are running out of time, simplify

If you get stuck on a point, just simplify it; at minimum, provide an IRR output. If you build only half of the model, then your ability to build a full LBO cannot be judged. But if you take a shortcut on some parts but still build the full LBO and IRR calculations, you might be able to get away with it.

Tip#4: Have a well-practiced template in mind

Make sure you have a very well-rehearsed basic template in mind with the following items:

- Simple Source and Uses table (one or two branches of debt). Input your entry/exit multiple assumptions here

- Basic income statement (Revenue, EBITDA, D&A, EBIT, Taxes, Interest, Net profit - that's it). Leave Interest blank and link it later on from your debt schedule.

- Cash Flow Statement (EBITDA, Capex, Working Capital, Tax, Debt Repayments and Interest Paid). You could model Working Capital and Capex separately in a mini-balance sheet for added details. Leave Debt Repayments and Interest Paid blank for now and link from Debt Schedule later.

- Debt Schedule: Here you need to detail the Debt Repayments and Interest Paid. You can then link those to the Cash Flow and P&L.

- IRR Calculation. The cash flows should come from your cash flow statement and you only need to insert the IRR Calculation here. You should also insert some sensitivity tables for different exit years and different entry/exit multiples.

LBO Model Test Example (2 hours)

For practice, try to solve this case:

LBO Model Assumptions

1. A Private Equity Firm wants to acquires a German business for €280m + any Advisory Fees equivalent to 2% of the transaction value. Assume a transaction date of 30 June 2012 and no cash.

- Senior debt of 3.0x EBITDA at transaction date has been obtained from a regional bank.

- The seller has also agreed to provide an additional €35m in the form of a vendor loan.

- The private equity firm will invest the balance in the form of a shareholder note.

3. The Senior Bank Debt pays 7% per annum (cash pay), with this repayment plan in place: 5% repaid in year one, 15% in year two, 20% in year three, 30% in year four, and 30% in year five.

4. The Vendor Loan pays 8% (non-cash) which accrues annually. This vendor loan is subordinated to the bank debt.

5. The Private Equity Firm shareholder loan pays a 15% non-cash pay coupon, which accrues annually. This loan is subordinated to the senior bank debt and to the vendor loan.

6. The Company needs to maintain a minimum of €1m operating cash at all times. Assume a full cash sweep for any amounts above €1m.

7. The Private Equity firm wants to maintain control of the company and at the time of the acquisition will have 85% shareholding in the company, while the management will retain 15%.

8. Sales at closing were €100m; assume this will grow by 5% in year one, and 7% p.a. thereafter

9. EBITDA margins will increase from 35%, and increase by two percentage points per year until 2017.

10. It is thought that Capex over this period will be €15m per annum (equal to depreciation).

11. The Company has 10 days (of sales) funding gap in working capital.

12. Tax will be charged at 30%.

Questions

'A. What is the Private Equity firm IRR, and cash on cash returns at 7.0x, 8.0x and 9.0x EBITDA exit multiples in years four and five?

'B. What are the returns if you assume senior debt of 2.5x and 3.5x EBITDA? What are the issues that we need to consider in deciding the necessary level of bank debt?

'C. What is your recommended level of bank debt?

'D. Which EV exit is realistic given the data provided, and what return would you expect?

'E. What kind of return should you be looking for with this kind of business?

'F. What is the benefit of a vendor loan?

'G. What would be a sensible strategy you would adopt with regards to the vendor loan in two or three years?

H. How much of the exit proceeds will go to shareholders and how much will go to management

For a fully worked out answer, please refer to the LBO Model.

Ideal Backgrounds for Private Equity

There is no standard way of entering the Private Equity industry, but this article aims at illuminate the typical characteristics that private equity firms are looking for in a candidate.

What age or level of experience do private equity firms want?

- The large majority of people joining private equity firms do so after two to five years’ work experience in a relevant field such as investment banking, strategy consulting, corporate development, or restructuring.

- It is very unusual for people to join a private equity firm right after graduation from university with an undergraduate degree. The main reason is that most private equity firms are small and do not have the ability to train people within the firm. Notable exceptions include the very big private equity firms such as Blackstone, who sometime hire from straight from undergraduate degrees - but note that the students being considered have typically worked through several internships in banking, strategy consulting, restructuring, or at other private equity firms.

- A common route to enter private equity is right after an MBA (more common in the US). Similarly, this implies two to five years’ prior experience in relevant fields.

- Age is always a sensitive topic, but most private equity firms like to hire people below 30 for an entry position.

What are the typical educational backgrounds?

- Private equity is notoriously picky about educational backgrounds, are will usually target graduates from top universities. In Europe, there is a strong representation from schools such as Oxford/Cambridge in the UK, HEC/Essec in France, etc. The reasons are that they have a large choice of applicants so the school is an easy first screening ground, and also because the networking aspect of private equity is quite important (who you know matters). Note that the name of a good school is not enough and is often just a pre-requisite. If you are not from one of those top schools, however, it is still possible to break in if you have outstanding work experience, skills, or achievements.

- For MBA degree earners, Private Equity is also very picky, even more than for undergraduate degrees. The very large majority of MBAs in private equity in Europe come from three schools: Harvard, Wharton, and Insead (also Stanford in the U.S.).

- While you don't need to be a finance major, your degree should demonstrate strong analytical ability. Science and finance degrees tend to be popular.

What are the typical professional backgrounds?

On top of a great education (ideally with top grades and lots of extracurricular activities), Private Equity firms like to see prestigious company names and impressive transactions in your background. The most common backgrounds are these:

- Investment bankers: usually from second-year analyst to first-year associate levels. Why? Because of the excellent modelling training, transaction management skills, ability to work extremely hard, and sometimes sector knowledge. The rule of thumb is that the larger the Private Equity firm is, the more demanding they will be in terms of investment bank "prestige". The large majority of ex-bankers in private equity come from Goldman Sachs, Morgan Stanley, ex-Lehman Brothers, ex-Merrill Lynch, Rothschild and Lazard. Some private equity firms will ask for your analyst or Associate ranking; the more deals you have done, the better. You can still break in from smaller banks but you will need some really impressive transactions or other specific skills.

- Junior Strategy consultants. Why? For the strategic thinking ability, ability to work very hard, and sector knowledge. Consultants are a bit less prevalent than bankers in private equity because they usually lack a bit in modelling skills, but people working at firms such as McKinsey, Bain & Co and BCG will have a good shot at private equity jobs, especially if they have worked on private equity due diligence assignments. Some PE firms (like Bain Capital) focus on hiring strategy consultants as opposed to bankers.

- "Others": depending on the firm, private equity companies may hire qualified accountants from the Big 4 (if they worked on private equity deals with a very UK-specific background), talent from restructuring, and sometimes people with a bit more unconventional backgrounds (i.e. equity research, ECM, corporate strategy).

What other characteristics are private equity firms looking for?

On top of a great education and a great work experience at a top firm, private equity firms would really like to see these characteristics:

- Languages: The more you speak fluently, the better. You can significantly increase your chances if you speak two or three European languages fluently, and in most cases English + another European language is required. ‘Hot’ languages include Nordic and Eastern European languages. German, French, Italian, Spanish and Dutch are also very useful.

- Extracurriculars: To make you stand out from the rest, extracurriculars (such as athletics or art) are very useful, especially if they are impressive. Anything that shows that you are a well-rounded person is often required!

- Entrepreneurial drive and leadership: Anything that shows that you are a driven person who likes to show initiative can apply, such as the position of a club president, organising charities, etc.

Private Equity Psychometric Tests

After applying for a job at a Private equity firm, sometimes you will be sent several online psychometric tests. These tests help companies to weed out candidates before starting the actual face-to-face interview process and are becoming more and more common with large private equity companies. On average, more than half of potential candidates do not pass this stage, usually as a result of lack of preparation. In order to get a good score on these psychometric tests it is essential to remember that preparation is key.

The good news is that companies will always let you know that there will be a test, and it will almost always be an SHL test.

What is SHL?

SHL is one of the most popular and well-known assessment companies in the world. Major Private Equity companies rely on companies like SHL to provide psychometric tests for job candidates.

You can practice SHL aptitude tests just like the ones used for actual job assessments here.

The Tests Explained

1. A Verbal Reasoning Test:

Verbal Reasoning Tests are designed to measure your ability to understand written information and to evaluate arguments pertaining to this information. You’ll be presented with a paragraph of text or excerpt and will need to use logical and comprehension skills to answer specific questions. You can get Verbal Reasoning Practice Tests here.

2. A Numerical Reasoning Test:

Numerical Tests are designed to assess your understanding of statistical and numerical data as well as your ability to make logical deductions. You’ll be presented with a table or graph depicting specific numerical information and will need to answer questions about the data. The questions are often based on mathematical calculations involving percentages and ratios. You can get Numerical Reasoning Practice Tests here.

3. An Inductive Reasoning Test:

Inductive Reasoning Tests are designed to test conceptual and analytical thought based on pattern and consistency identification. You’ll be presented with a group of images and shapes that follow a particular chronological pattern and be asked which image is the next in the pattern.

4. A Personality Questionnaire (sometimes)

The purpose of Personality Questionnaires is to assess specific character traits of applicants to build a “personality profile”. Companies then compare this profile to the requirements of the company and the requirements of the particular position. Personality Questionnaires will often claim that there are no right and wrong answers but that is obviously not true, as there are specific answers that point to either positive or negative characteristics that have a big effect on whether or not you’ll get the job.

How to find out more and get some practice?

The only way to practice is to do mock tests online. You can find some free samples or purchase more practice, if needed, via the following link:

Take a Mock Test Online

Walk me through an LBO model

An common question you get during private equity interviews is "can you please walk me through an LBO? feel free to make your own assumptions". While this may sound a bit daunting at first, the trick here is to keep things simple. The theory behind an LBO is actually fairly simple.

In what level of detail should you go? What the interviewer is trying to test is only that you have a good understanding of the mechanics of an LBO, so there is no need for you to go into a lot of details. Details will come during the LBO modelling test! Here is what you should be able to understand and the steps you should take.

If possible, lay out some assumptions on a piece of paper. 

Step one: Lay out the Sources and Uses assumptions assumptions and some example company.

"Lets assume we have an consumer retail company. My first step would be to lay out some assumptions with regards to source an uses.

- I need to know how much I will pay for the company. This can be expressed as a multiple of EBITDA. Let's assume 8 times of current EBITDA, which I think is a reasonable multiple.If current sales are 500 and EBITDA margin is 20%, then EBITDA is 100, that means 8*100 = 800 is what I need to pay.

- I need to know how much of that purchase price will be paid in equity and how much through debt. Lets assume that I will use 50% of debt and 50 % of equity. So that means I used 400 of equity and 400 of debt.

- Also, lets now assume that we will sell this company in 5 years, at a same 8 times EBITDA multiple.

Step 2. Make some basic cash flow assumptions

"Now I need to know about the financial forecast to see what the cashflow looks like and see how much of debt I can repay over the period.  My cashflow before debt repayment is calculated as: EBITDA - Capex - Changes in Working capital - Interest paid on the debt - Taxes.

[Here you may be asked to go into detail of how you come up with each number, or you may jump some steps - interviewer will guide you].

I assume EBITDA can grow from 100 to 150 over five years. Then lets say that based on those forecasts, I am able to repay 20 of debt per year [you may be asked to derive the amount you can repay based on the details you calculated above], that is 100 over the next five years."

Step 3. Calculate your IRR

-I have spent 400 of equity and taken 400 of debt

-After 5 years, EBITDA is 150, and assuming I can sell at a 8 times multiple, I will get 150 * 8 = 1,200. From that 1,200, I need to repay the 400 of debt but I already repaid 100 over the last 5 years, therefore I only have 300 left to repay. That leaves me with 1200 - 300 = 900 of equity.

-My overall return is therefore 900 / 400 = 2.25x return over 5 years, which is roughly an 18% IRR [to be able to estimate IRRs, you need to memorise IRR conversion tables]

 

For more advanced private equity LBO modelling practice, you can also refer to our tips and LBO practice example 

The Value of MBAs For Private Equity

An MBA is typically regarded as a prerequisite to reach the higher echelons of private equity, especially at the larger firms. But is that really

true? What does the data tell us? 

MBAs are in almost every PE firm

I checked the percentage of MBAs in each one of a few firms. Out of 315 executives, 166 had MBAs (about 52%). Views are mixed; in some firms an MBA is a prerequisite. A partner at a global firm recently stated, "We view senior associate positions as post-MBA positions, and would therefore require that qualification unless there are exceptional circumstances". However, the communications director at 3i Group also said last year, " the MBA is not a pre-requisite but it can be of tremendous help for some people, people with non-financial backgrounds for example".

The larger the firm, the more MBAs you will find

The largest PE funds such as KKR, Blackstone, and Apax had the most MBAs. I've gathered some data here:

1. PE FIRM, (% MBAs)

2. Apax (77%)

3. Blackstone (63%)

4. KKR (61%)

5. Candover (59%)

6. Permira (58%)

7. 3i (48%)

8. CVC (46%)

9. Bridgepoint (38%)

10. EQT (22%)

11. PAI (21%)

The number of executives with MBAs is increasing

By looking at the younger executives in the firm, there is also clear evidence that the MBA is becoming increasingly popular amongst the new generation of buyout executives.

Among MBAs, five schools provide the vast majority of PE professional graduates

Five schools provide more than 80% of all the MBA graduates who work in private equity; Wharton, Harvard, and Stanford are provided from the U.S., and in Europe, Insead and LBS. PE firms tend to hire their own kind, so the PE MBA community is a very closed circle. If you are interested in our MBA essay review service by alumni from top business schools, please get in touch at thomas@askivy.net.

Headhunters for Private Equity

While PE firms tend to recruit people through their network first (e.g. alumni, bankers they worked with, friends and ex-colleagues) before going to headhunting firms, here is a list of the well known headhunters in London that have a specialised private equity practice:

Argyll Scott International (www.argyllscott.com)

Specialist Recruitment Consultancy managing permanent mid to senior level appointments within Corporate Finance. Clients range from top tier Investment Banks and Boutiques to Private equity houses in London. 

Contact Name: Jade Sweeney

email: jsweeney@argyllscott.com

contact phone: +44 (0) 207 936 1125

Arkesden Partners (www.arkesden.com)

Dedicated stand alone Private Equity team with a track record and experience of the sector for over a decade. Principal, Senior Associate, Associate and Executive level mandates taking a pure search methodology for every mandate. Mandates are UK, CEEMEA and MENA focused. Nearly half of placements in 2012 were outside of the UK. Source candidates from Investment Banking (M&A, Leveraged Finance and Financial Sponsors), lateral Private Equity professionals and Management Consultants.

Contact name: Adam Cairns

email: awc@arkesden.com

contact phone: +44 (0) 203 762 2023

Blackwood (www.blackwoodgroup.com)

Blackwoods is a London-based search firm that recruits for a large variety of finance and non-finance roles, but they also have a good recognition in the London private equity recruiting space.

EH Partners (www.ehpartners.co.uk)

EH Partners is a London boutique executive search firm focussed on the alternative assets space and investment banking.

Contact Name: Simon Hegarty

email: simon.hegarty@ehpartners.co.uk

contact phone: +44 (0) 203 432 2552

KEA consultants (www.keaconsultants.com)

Kea Consultants is an executive search firm that specialises in moving young professionals from top tier investment banks and consultancies into the buy-side. They work on an exclusive basis with firms such as Blackstone, TPG, Advent & Och Ziff and have strong relationships with a number of other funds ranging in size

email: info@keaconsultants.com

contact phone: +44 (0) 203 397 0840

One Search (www.one-search.co.uk)

Pure finance-focused firm with a good presence in private equity and hedge funds.

Contact name: Chris White

email:chris.white@one-search.co.uk

contact phone: +44 (0) 207 887 7500

PER (www.perecruit.com)

Private Equity Recruitment (PER) focuses exclusively on investment-related functions such as Private Equity, Venture Capital, Mezzanine Capital, Fund of Funds and Secondaries. They mainly cover Europe and Middle East.

Principal Search (www.principalsearch.com)

Specialist financial services search firm providing global hiring solutions to clients across a wide range of product areas within the investment banking and financial services sectors.

Contact Name: William McCaw

email: william.mccaw@principalsearch.com

contact phone: +44 (0) 207 090 7575

The Rose Partnership (www.rosepartnership.com)

Large recruitment firm based in UK. They cover mainly Europe out of London but also have some presence in Asia-Pacific through their Hong Kong office. They recruit for Banking and Private Equity.

Walker Hamill (www.walkerhamill.com)

Walker Hamill is widely recognised as one of Europe’s leading recruiters in private equity, venture capital, real estate, secondaries, fund of funds, mezzanine and hedge funds. It recruits for investment positions from Associate to Partner level and infrastructure roles including finance & accounting, fund raising, investor relations,compliance and portfolio management.

Contact : James Stephens jstephens@walkerhamill.com

Would you like to add your firm, contact name or other details to this list? Contact us here.

PE Interview: How to Differentiate Yourself

It is not unusual for Private Equity firms to receive thousands of CVs per year, and even more for the major funds. Similarly, investment professionals tend to get bombarded by emails and calls requesting information and help to secure an interview. So, how can you differentiate yourself amongst all those CVs?

1. A mere Oxbridge/Ivy League degree + work experience at top firms doesn't cut it

In Europe, Private Equity firms may only hire 100 or so new associates every year in total. The top firms may only hire for one dozen positions per year, maybe less. To illustrate what you are up against, the Private Equity clubs from Harvard and Wharton have more than 800 members each. If you add to that number the analyst and junior associates classes of Goldman Sachs, Morgan Stanley, McKinsey, Bain & Co, etc., you will be very quickly in the several thousands of well-educated, well-trained candidates who will compete against you for a handful of jobs.

2. Find a "marketing angle" that makes you unique

Your marketing angle will come from different dimensions:

- Geography: Obviously, language is a big differentiator in Europe. But only talk about the languages you speak fluently or the regions you actually worked/lived in. Then reach out to people from those regions when sending your CV, and mention this clearly to the headhunters. Note that if you speak a language but never worked in the country, that may be a handicap, so you need to mention that you spent a number of years in said country.

- Sector expertise: Very useful for sector-focused funds or funds organised in verticals.

- Specific deal exposure: Mentioning transactions where you either worked with the private equity fund or where it was an under-bidder is a good angle to start a discussion with a PE fund, as they will be able to test your understanding and abilities very quickly. This may backfire though - make sure you know the deal inside and out.

- Transaction types: If you work for a boutiques or mid market of focused banks or consulting firms, this will be well received by small cap and mid-market funds.

- Educational background: Use your alumni base as much as you can, but don't limit yourself to your own school. For example, a top MBA is likely to be well received by somebody from another top school.

- Company alumni: Similarly, reach out to people who worked at the same firm than you. Again, you don't need to limit yourself to the same firms. For instance if you worked at McKinsey and you are reaching out to somebody who worked at a rival firm, it is still more likely to work than reaching out to an ex-banker.

- Other connections: Ex-military, specific background (i.e. if you studied medecine, law, etc.), same associations, etc.

If you build your profile along those verticals, you will now see that you can differentiate yourself effectively and make yourself much more memorable to the firms.

3. Tailor your CV and angle to different firms

I would advise against sending generic CVs to every firm or headhunter, hoping that something will fit your profile. You need to target funds, and then tailor your message accordingly. For example, if you are in a specific sector team, try to diversify your CV if you apply to a generalist fund (i.e. less detail about the sector/deals, highlight some other experiences, etc). If you apply to an all-British fund, there is no need to mention your international experience or language abilities at length, etc.

4. Personality is the ultimate differentiator

All the above advice will help you get to the interview stage. However, in the end, the "fit" is what really differentiates one candidate from another, all else being equal (i.e. same performance in the technical tests, modelling tests, etc, which is under your control if you practise). At all times during the process, do not forget to maintain a well-mannered and humble attitude, which, surprisingly, is an area where many candidates fall short. If you have the right profile and manage to differentiate yourself, build a story, maintain the right attitude and prepare, getting a job in private equity will just be a matter of time!

How to Cold Email PE Professionals

The best strategy to find a job in Private Equity is often to reach to those firms directly, especially if you feel that there would be a good fit between your background and the firm. In addition, headhunters are very selective when sharing job opportunities in PE so you might miss out on a potential interview. Sending "cold emails" is widely accepted in the PE industry, and if the email is properly crafted, you should be getting an answer in most cases. So find below a few strategy tips for cold emails to Private Equity professionals.

Make a list of your priority target firms that make most sense

> Create a big spreadsheet with the list of all PE firms that might be relevant and that come to your mind, or that you've come across.

> Narrow down to a set of priority firms (7 to 10 firms maximum) that you think would be the best fit and most relevant to your background. Sending proper cold emails is actually quite time-consuming, which is why we recommend to focus as much as possible initially.

Identify the best contact person(s)

> Seniority: We would recommend that you avoid reaching out to a very junior person, or one at your same level, for a number of reasons (they are the busiest, there might be a fear of competitors, a lack of incentive to help), or to those too senior (most won't care or have time). The ideal people are at the "principal", "director" or "vice-president" levels, because they are senior enough to have a say in the recruiting process but still junior enough to take time to answer candidate emails.

> Common background: check out the websites of the firms and review the biographies of the people working there to get an idea of their backgrounds. From the background descriptions, try to find the persons who are most similar to you: people who worked at the same firms, same country of origin, same school, same kind of work experience or educational background, etc.

> LinkedIn: LinkedIn is very powerful tool for identifying potential contacts, and researching people's backgrounds and potentially common friends. Always do a search on LinkedIn for your target firm as you might also find people who are not listed on the website.

> HR: Some PE firms have HR departments. However, I would actually advise against sending your CV directly to HR if you find some other suitable contact in the firm, as HR's candidate criteria are usually narrower compared to investment professionals, which means less of a chance to get an interview.

Structuring the email

Never write a cold email that is more than one or two paragraphs long. Most people won't take the time to read longer emails, and it also shows that you are not able to write concisely. Get straight to the point and attach a CV.

We recommend the following structure:

> First sentence: Your background (basic key relevant points) + optionally how you got their details, if it was an introduction from a friend.

Example: "Hello Mark, I am a second-year analyst working at Morgan Stanley in the Consumer team here in London, and I'm from Germany (I also speak Spanish)."

> Second sentence: Purpose of the email + asking to discuss + CV

Example: "I'm very interested in Private Equity and your firm in particular, and I was wondering if your firm had any expansion plans in the short or medium term? I would be happy to have a quick chat at your convenience. I'm attaching my CV for reference. Best/regards, ". 

Other reasons: "I read that your firm just raised a fund / just opened an office in Munich", etc.

What happens next?

Usually the person will open the CV and take a five-second look to see if your profile would fit. If it doesn't fit, they might say that they are not hiring, or simply say that you don’t have the required profile. You might also get a standard "reject" email. If it fits, they might reply that they are not hiring if they are indeed not hiring, and keep your CV on file. They might also accept a quick phone chat to do some informal pre-screening process, or they might even ask you to come in for an interview!

What if I get ignored?

There might be a good number of reasons why you get ignored, not always negative - people travel, miss emails, forget to reply, etc. If you don’t get a reply within a week, it’s perfectly find to send a reminder email: "Hi Mark, I wanted to follow up on my previous email, happy to have a chat whenever convenient. Thanks". One reminder email is enough and we would not advise to go beyond that. If you still don't hear back, try another person or two in the firm! You have nothing to lose by trying, but we would advise against trying more than three people in the firm.

Track your progress, persevere, and be consistent!

Do maintain your spreadsheet and make a note of each rejection, each email sent, and person contacted so that you always know the status of your attempts. Private Equity recruiting is a long-term game:

> If they said no - don't waste your time and move on to other firms in your list

> If they said that they are not hiring now, try again in six months’ time, or whenever they do a fundraising (fundraising usually means expanding the team!)

> If you need to contact the firm again, contact the same person

> Once you have been through a few firms within your priority list, start investigating firms outside your top priority

> As you read the press, work on deals, talk to friends, etc. Don’t forget to add to your list any interesting PE firm name that you come across.

Private Equity Case Studies

If you get invited to Private Equity interviews, you will almost always encounter Private Equity case studies. PE case studies can be notoriously difficult, and require a great deal of preparation. While every firm will have different types of case studies, this article aims to give you an overview of what you should be expecting.

What is a case study?

Case studies are investment problems that you will be asked to analyse. Based upon your analysis you need to propose a final recommendation: should they invest in this company or sector? At what price?

Why do private equity firms use case studies?

Case studies are great because they enable the interviewer to assess several aspects of a candidate:

The ability to absorb a large quantity of information and focus on what is relevant

The ability to structure your thoughts and analysis

General business acumen

Pure "problem-solving" skills (i.e. intelligence)

Analytical skills (calculations are always involved)

Presentation and communication skills (you will be asked to present a solution)

Excel modelling / PowerPoint

Time management skills

At what stage of the interview process do I get case studies?

Usually after the first round of interviews, but sometimes in the very first round.

How are they given? How much time do I have to work on case studies?

Case studies can take on several forms, but these are the most common:

1. Take-home case studies: The firm will send you a case via email and give you a few days to complete it, then send it back in a Word document with your Excel model.

2. Mini-cases: at the firm, in person, as a live discussion. In this case, there is no Excel model (or you may be asked to do a "back of the envelope" model on paper) and the discussion generally lasts between 45 minutes to an hour.

3. Full-blown cases: At the firm. You are seated in a room with a computer, given the case study, and allowed between one hour to four hours to complete your analysis and Excel model.

Can you give me an example of a Private Equity case study?

The ingredients of a case study are always the same, irrespective of the format:

1. Description of a company and sector. This can be a few summary lines or slides, or in full-blown case studies, they could either give you a company annual report or an Information Memorandum ("IM")

2. Financials. These can be a few key items (i.e. revenue, EBITDA, Capex) or you can get a full annual report or IM.

Based on this information, you should be able to analyse the company, build an LBO model, and answer the following questions:

  • Is the company an attractive investment or not?
  • How much should we pay for it?

For case study practice please refer to our private equity case study here.

Preparing your CV for Private Equity

If your ambition is to work for a private equity fund, not only must your resume go past the headhunters, which are notoriously picky about who they send for PE interviews, but it needs to get you a foot in the door of PE funds. Tailoiring your CV is a critical part of the application process, because it will be used in the numerous steps that will follow if you are invited for a first round interview. In the UK, Private Equity funds will typically look for the following qualities in your CV :

>> Business Judgement
>> Strategic perspective and understanding
>> Interest for investing
>> Raw intelligence
>> Analytical skills
>> Knowledge of finance, accounting and modelling
>> Strong communication and social skills
>> Existence of network or potential network, and "pedigree"
>> Leadership and maturity

Therefore, to be invited for a first round interview, you need to bring out each of those qualities on your resume. Of course, funds differ in size, investment strategy and culture, so some funds will look for some specific qualities in more details compared to others.

Guidelines by fund type

- The large private equity funds (with $1bn or more in asset under management) such as Goldman Sachs PIA, Morgan Stanley Private Equity, Blackstone, Carlyle, etc. will tend to focus on your LBO modelling skills. This is particularly true for private equity funds with teams composed of ex-bankers so check their websites and you'll know what to expect.

- "Consulting-type" funds that staffed mainly from ex-strategy consultants from McKinsey, Bain&Co or BCG such as Bain Capital will look at your strategic thinking abilities and your business sense. Therefore, showing a good understanding of the rationale of a transaction is extremely important to them. Expect consulting-style case studies at the interview.

- Small and mid-market funds will be more focused on your personality and cultural fit with the firm. This is because for smaller firms, relationships are key and you will be working very close with management teams of potential target and portfolio companies.

What to write in my Education section?

- List any outstanding scores and significant scholarships (mention the amount)
- Mention any meaningful Club affiliation that are relevant to investments such as Investment Club memberships, Private Equity or Asset Management Club, etc. Be careful however, trading and picking stock is not what private equity companies do, they are looking at the long term, so do not mention that you are a member of a Sales and Trading Club.
- Any leadership positions you've had is a strong positive as it shows leadership, maturity, good social skills and ambition.
- Finally, do not mention anything that is irrelevant (i.e. member of the Cooking Club) or indicates a lack of focus (ie. Marketing Club, Consulting Club)

Its generally a negative not to be from Oxbridge/Ivy League, but the way to compensate for this is to have very high grades, a very good work experience at top firm (i.e. bulge bracket, top consulting firm), or a unique "angle" such as rare languages (Nordic, Turkish, Eastern European, etc.), deep sector knowledge or special achievements.

What to write in my Professional Experience section?

Applicants with banking experience need to bring out deal experience on the CV. The best deal experience from PE funds' perspective is having advised a fund on a successful acquisition, and any experience in financing and leverage-finance work. Beware! they will grill you on those transactions! Also highlight sell side, buy side, IPOs, etc that you have done, but give less details than for your Private Equity-related deals.

Applicants with management consulting experience need to bring out operational expertise. You will score a lot of points if you worked on due dilligence assignments with PE firms. Also highlight any financial modeling you may have done, as the main drawback of consultants is their lack of experience at building LBO models.

For all applicants, depending on the fund you are targeting, highlightings sector knowledge may be a good or bad things. Some funds prefer generalists, while some funds will want to hire you for a specific sector team (i.e. FIG, TMT). Just make your due diligence on the fund you want to apply to, and tailor your CV accordingly.

PE funds clearly favour top-tier firms, and especially US banks and McKinsey, BCG and Bain&Co, and they like to hire people who they worked with on transactions. Applying from a second-tier bank will definitely be a challenge (and a from a third-tier and
small firm an major struggle), but it can be overcome if you have solid deal experience or can excel in other areas, especially in terms of education, languages, and fit with the firm's culture.

What to write in the "other interests" section?

Many applications to PE funds have very similar CVs: prestigious firm, very good schools, and couple of interesting transactions. In the end, you need to have a "special flavour" that will make a difference. Here is a checklist of good things to bring out:

- Activities pursue at a high level: for example, sports are always a good things to bring out if you've played at a professional and semi-pro level. It is not uncommon to see PE professionals who climbed the Everest, won a medal at the Olympics games, or regularly run marathons.

- If you have any burning passions, mention them, but only if you are a genuine expert and received tangible and impressive recognition for it (i.e. prizes, mentions in the press)

- Language skills and citizenship are always valuable for big pan-European or global funds. For pure UK funds, be careful as this may well be a handicap, unless they have explicitly require somebody with a specific language.

- Community service is often a plus, but not required (more of a tradition in the US).

Other General Tips

- Get your CV reviews by pople that have PE experience, if you can. Only work with a few people you trust as getting too many reviews can be confusing.

- Say the truth. PE interviews are typically very detailed and "in-depth", so there is no room to make up anything. Also remember that the PE community is a very small world, and "stretching the facts" will easily spread to the other funds and other potential employers.

- Prioritise your experiences. Take out anything that is not relevant out of your CV, and focus on the most relevant experiences, and go into details. Omit anything that was too short or that you would not be comfortable talking about.

- Use action phrases and not passive ones. "I was part of a team" is not good - tell them what YOU were doing.

- Always make your due diligence on funds by checking the press, recent deals, checking bios and googling the people you are going to meet.

- You can always anticipate at least 50% of the questions that will be asked about yourself and your CV. PE equity interviews are hard to get, so spend meaningful time preparing to make the best of it!

Private Equity Interview Process Explained

Private Equity recruiting tends to be much more informal than banking or consulting, however there are some very common steps that most Private Equity firms take for interviews. A typical process in the UK (or Europe in general) is described below. For more detail on each step, please check our detailed posts on technical questions, case studies, and psychometric tests.

The early rounds (first one or two interviews): psychometric tests, fit questions, mini-case studies and random technical questions.

- Psychometric tests

These are numerical and verbal tests (most often SHL tests, examples here) designed to complete a first cut in the applicant pool. Anything between 30% and 50% of the applicants can be rejected at this stage, sometimes more, depending on the "pass" threshold. Sometimes, you will also be given a personality test. Make sure to ask if you will need to take these tests, as you will need some preparation.

- Fit and CV questions

These questions involve having to first introduce your background, walking the interviewer through your CV, and acing questions like, "Why private Equity?" and "Why our firm?" Needless to say, you must have rehearsed this extremely well, as this is probably the most important question you will be asked in the interview.

- Mini-case studies and investment cases

Usually, private equity firms like to give small case studies to judge your business sense, gauge your understanding of the way companies operate, and to test your understanding of what drives return in an investment. This may consist of a SWOT analysis on a particular firm (very often one of their portfolio company), an investment rationale analysis, or asking your opinion on specific industries or firms. This could be a simple question, such as "Do you think an airline would be a good investment?" or more detailed questions with supporting data and charts that you will have to analyse. Very often, if you are a banker and have worked on a deal, they will ask you your views on the deal and whether you think it made sense.

- Technical questions

These accounting or LBO questions are nothing too difficult for a seasoned investment banking analyst, but be ready to discuss how you build an LBO, estimations of IRRs, and various types of debt instruments without hesitation.

Later Rounds (if you passed the early rounds): full-blown LBO Modelling Test or Case Study test

This often involves a full-blown LBO modelling exercise and investment case analysis based on an Information Memorandum or a case study provided by the private equity firm. You will be given a laptop or be in a room with a desktop for a couple of hours (one to four hours depending on the firm) to prepare a model and some slides based on the information provided. You will then need to present your results to senior members of the firm. Again, if you are an experienced analyst and if you get some LBO modelling practice this should not be too difficult.

Before the interview, make sure you practice creating simple LBO models from scratch. You should be able to pull together a simple LBO model in less than one hour, starting from a blank page, by making reasonable assumptions.

Final Round: the likeability test

Most firms will do a dinner or drinks with the most senior partners in the firm in the final stages (with the CEO himself or the company head), so that you can get a final stamp of approval. Anything can be asked; some firms may try to drill down on your perceived weaknesses and ask more fit questions, you may just have a pleasant and simple chat (but don't be fooled, every answer will be scrutinised), or you may be asked a lot of very personal questions. At this point, everything will come down to your personality, your career goals, and how likeable you are as a person.

As a rule of thumb, smaller firms tend to be less technical and the interviews largely based on fit and personality, while larger firms (Blackstone, Apax, etc.) tend to spend much more time testing your technical skills. However, most firms will require you to meet everybody or at least 90% of the people in the fund, so be prepared for a very lengthy process that may last several months -and expect at least three months from start to finish.

Private Equity Career Track

Getting a job in private equity is often seen as the holy grail of finance. However, once you have made your way into a private equity fund, how will your career evolve, and how do you make it to partner? The traditional career progression in private equity is detailed below.

Analyst or Pre-MBA Associate

-These are typically pre-MBA candidates hired from the investment banks, strategy consulting firms or accounting firms. They usually have two to four years’ experience maximum.

- The job involves mainly prospecting (cold calling, screening sectors for interesting companies, etc.) as well as investment analysis. This involves reading Confidential Information Memoradum (CIM) and other company data, working on financial models and writing investment memos for the investment committee.

- After two years, sometimes there is a promotion to the senior associate level, but often the analyst/pre-MBA associate will leave to either pursue an MBA at a top school or change career path (i.e. entrepreneurship, hedge funds, corporate development, or another PE fund).

- Compensation mostly consists of base pay + bonus.

Post MBA Senior Associate

- These are often hired right out of business school or one to two years after graduation from business school. These professionals have three to six years’ work experience in investment banking, consulting and private equity.

- Senior Associates can expect to reach Managing Director/Partner level within six to eight years.

- The work includes taking full responsibility for deal screening and modelling during the execution of a deal. Most of their time is spent managing advisors such as investment banks, lawyers, and accountants.

- Compensation mostly consists of base pay + bonus, sometimes with a small share of investment profits.

Vice President / Principal

- Position usually reached after two to three years in the private equity fund.

- They are expected to be able to lead the execution of transactions, source their own investments, and create ideas within their area of expertise.

- They also spend a lot of time managing the portfolio companies.

- They get promoted to partner if they demonstrate a good ability to generate money for the firm.

- A share of profits of the investments is an increasingly large portion of the compensation.Managing Director / Partner

- In charge of leading the firm's investment focus and strategy, as well as managing relationships with investors and raising new funds.

- Participate in investment decisions, sit in the investment committee, and sit on the portfolio companies’ board.

- Compensation is largely driven by profits of the firms. Partners are also expected to invest a significant proportion of their personal wealth in the fund.

Must-Reads for Private Equity

Private Equity as an Asset Class*

An introduction to private equity in five sections: (1) Definition and structure of the industry (2) Buyout funds (3) Venture funds (4) Development/Growth funds (5) Due Diligence and other topics. The good point about this book is that it doesn't get overly technical from the start, but takes some time explaining the business model of private equity firms in general. Nevertheless, bear in mind that this book is written from an investor perspective (the people investing in the fund) as opposed to the private equity fund manager’s perspective.

The Predator's Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders*

This book is largely about the emergence of junk bonds, which are the type of debt used to finance Leveraged Buyouts (LBOs), without which the private equity market would not really exist. The books focuses on the rise and fall of legendary investment bank Drexel Burnham Lambert, the bank that ruled the junk-bond world in the ‘80s.

Barbarians at the Gates*

A very long book by Bryan Burrough and John Helyar, but also a mandatory read for future leverage buyout moguls. This book relates the true story of a bidding war for RJR Nabisco (one of the largest consumer goods company in the U.S. at the time), who was ultimately acquired by KKR. We recommend this book because it is well-written and relates to a true, very important event of financial history; also, it will give you a good idea of the political fights that occur during large leverage buyouts. You will get a good overall understanding of how private equity companies think and work.

The New Financial Capitalists: Kohlberg Kravis Roberts and the Creation of Corporate Value*

This is a study of private equity pioneer and powerhouse KKR. This is a great read for many reasons; it not only gives you an unbiased story of KKR’s rise to prominence, but it also details other aspects of private equity such as deal structuring, definitions of technical terms, and an interesting insight into entrepreneurship.

Mr. China*

Mr. China is not only a book about doing business in China. It tells the real story of a tough Wall Street banker coming to China to buy companies, eventually spending $400m buying Chinese companies in the ‘90s, with somewhat disastrous (and sometimes hilarious) results. It is incredibly well-written, and provides a very good insight into doing private equity in China, and also about how difficult it is for private equity firms to manage and turn around the companies they buy.

* Not technical **Some technical language *** For advanced/experienced professionals.

Overview of LBO Debt Financing

When a private equity firm conducts a "leveraged buyout", or LBO, it uses a significant amount of debt. The list below is a high-level explanation of the different types of debt instruments that are commonly used in LBO transactions. When purchasing a company, the private equity fund will usually provide anything between 30% to 50% of the purchase price in equity (i.e. the fund’s own money), and borrow the rest. The 30% to 50% range varies depending on market conditions and the type of company that is bought, but most LBOs usually fall in that range. The type of debt used, in order of risk (from the lending bank's perspective), includes:

Senior Debt

This debt ranks above all other debt and equity capital in the business, meaning it needs to be repaid before other lenders can receive any cash. The debt has very strict requirements (i.e. must comply with specific financial ratios), and is usually secured against specific assets of the company. This means that the lender can automatically acquire these assets if the company breaches its obligations. Therefore, it has the lowest interest rate of all these types of debt and, from the lender’s perspective, this is the most secure form of financing. Debt repayments can be spread over a four to nine-year period or be paid in one final payment in the last year.

Subordinated Debt

This debt ranks behind senior debt in order of priority on any liquidation. Repayment is usually required in one payment at the end of the term (as opposed to spreading the repayments over a number of years), and the maturity can range between seven to ten years. The requirements of the subordinated debt are usually less stringent than senior debt, but since subordinated debt gives the lender less security than senior debt, lending costs are typically higher.

Mezzanine Debt

This is usually high-risk subordinated debt, and ranks behind senior debt and unsecured debt. Interest on mezzanine debt is much higher, but while part of the interest needs to be paid in cash, another part (called a PIK, or “paid in kind”) is rolled up into the principal. For example, if you borrow 100 shares of mezzanine at 10%, with 5% cash and 5% PIK, you will have to pay 5 in cash in interest in the first year, and the remaining 5 will accrue to the principal. Therefore, the following year, you will need to pay 10% on the new principal of 100 + 5 accrued in previous year (which equals 105), and this continues until maturity when the full principal needs to be repaid (usually within 10 years). Sometimes the mezzanine debt will also include warrants or options so that the lender can participate in equity returns.

What do Private Equity professionals do?

Private Equity is essentially about buying and selling companies. But what do private equity professionals really do on a day-to-day basis? The time of private equity professionals is divided between four main categories:

Raising money

This task is mostly performed by the senior partners in a private equity fund, but sometimes a dedicated fundraising team will work within some of the larger funds. Essentially, every four to five years or so, the senior management will go knock at the door of international investors such as pension funds, banks, insurance companies and high net worth individuals to raise money for their next fund. This goes in cycle: when the current fund is close to being fully spent (i.e. ~70-80% of the money has been invested in companies), the senior management will go on the road and ask for fresh money. Fundraising involves presenting the past performance of the fund, its strategy, and the individuals working in the firm who will be in charge of making investments. All of this is needed to convince those institutions to invest money with the firm.

Sourcing and making investments

The "sourcing" (i.e. finding investments) part is largely done by mid-to senior management, and involves looking for potential targets and reaching out to the management of those companies, either directly or via a middleman such as an investment bank. Many private equity funds will specialise in sectors and/or regions; their dedicated teams will have very strong knowledge of all the attractive companies in a specific sector and will also know potential targets' management teams well. The "making" part, which represents the process of acquiring a company, is the responsibility of the junior team, under the seniors’ supervision. This involves drilling into the financial performance of the company, analysing the trends in the industry, negotiating with the target, and coordinating the work of advisors: investment banks, accountants, strategy consultants, lawyers, technical experts, etc. Once they have analysed sufficient information, the team will present an "investment paper" to the senior partners to propose the investment. The senior partners will then vote to accept or reject the investment.

Managing investments

Once a company has been acquired, it needs to be managed for a couple of years until it is sold off. While private equity professionals are not involved in the day-to-day running of the companies they buy, they will monitor performance and be involved in important strategic decisions. While some firms have specialist teams that manage investments ("operations teams"), most of the time the team that worked on the transaction will be in charge of monitoring the company.

Selling off companies

Returns are only really generated when companies are sold (at a profit). Investments are typically kept for three to five years, and will be sold after that time period. This process is also usually managed by the more junior team under senior management supervision. Companies can be sold though a sale to another company, a sale to another private equity firm, or via an IPO on the stock market.

What Is So Good About Private Equity?

If you work in investment banking long enough, you'll often hear about private equity and meet bankers wanting to move to private equity. But why do people want to get into this field and why is it so competitive? A few answers below:

The job is considered more intellectually challenging than investment banking

In investment banking, you are merely advising companies on what to acquire and divest, or on ways to optimize their finances, while private equity professionals take the risks by directly investing money in companies. A private equity job not only involves crunching numbers and pitching ideas, it also requires finding attractive potential targets, understanding key dynamics in various industries, understanding how companies are run, and actually helping to organize the management of those companies. PE professionals must have the necessary personal and communication skills to get on with the management and create a solid network, and obviously, you need to understand M&A and financial modelling extremely well. Overall, private equity is thought of as a much more "well-rounded" job.

The lifestyle is better than investment banking

Private equity firms do not have clients, and in general don't have to prepare presentations at the last minute, so all-nighters are highly unlikely. They also outsource many of the more labour-intensive tasks: banks help them find targets while managing acquisition and sale processes, consulting firms help them with due diligence, and accountants help them with the financial side. This is not to say that private equity professionals do not work hard when they are on deals,and there will definitely be quite a lot of late nights during due diligence process, but on average the hours are significantly better. On the flip side though, while the pressure is not as constant as in investment banking, PE firms give a lot of responsibility to their juniors, so pressure to perform is actually much greater: you won’t have an associate or VP to double-check your work before it goes to the partner, so you're on your own. Also, private equity is often considered to be a "solitary" job compared to investment banking: you don't have as many colleagues and the camaraderie is just not the same in private equity firms, compared with investment banks.

The long-term pay is better

If you work in private equity, one part of your long-term compensation will come in the form of "carry", which is essentially a percentage share of the gain that the fund makes when selling investments. This can be a substantial amount and equal to several millions over a few years if the fund is successful, hence the attractiveness of the private equity business model.

The "prestige" factor is greater

Private equity investors are on top of the financial food chain. They buy and sell large companies across sectors and countries, sit on management boards, coach and advise CEOs, and have top investment banks and consulting firms working for them. For example, firms such as the Carlyle Group manage over \000 billion and, through their investments, employ over 400,000 people globally. Current and former employees include George Bush Sr, George W Bush, John Major (former British PM), two former prime ministers of Thailand, the former President of the Philippines and the brother of French President Sarkozy. In addition, private equity jobs are highly competitive because those firms employ very few people, and those people tend to stay for many years or decades with the same firm. Therefore, they are able to be extremely picky about who they employ, and the lucky few to make it in the industry can pride themselves as being among the "cream of the crop".

What Can You Do After Private Equity

Private Equity is often viewed as the “holy grail” for many professionals working in finance, especially for those from investment banking and strategy consulting. However, those who manage to make the switch to Private Equity usually do so at a very young age, either in their mid-twenties or early thirties. So, do they keep working in private equity for the next 30 years? Can they change jobs? Below is an overview of the potential career exits open to private equity professionals.

1. Moving to a hedge fund

Many private equity professionals get frustrated by the slow pace and tedious administrative tasks of deal-making, and by the long time it takes to make large profits. If you work in private equity, you will not be able to become millionaire overnight - it will take at least five to ten years. Therefore, a lot of PE professionals decide to move to hedge funds, where returns can be made quickly and money can be earned (but also lost) more rapidly. There are some similarities between hedge funds and private equity; both are about investing money wisely, so junior private equity professionals can easily make the switch.

2. Becoming a venture capitalist

Some private equity professionals may also find that doing large deals is not as exciting as investing in startups, and may switch to VC funds. This is more common for people that have a sector focus such as Media, Technology or Healthcare, given that those sectors are favoured by Venture Capitalists.

3. Launching your own fund

This is not really a career change per se, but many private equity professionals dream about launching their own funds. This happens more frequently for senior professionals who have a track record and large networks.

4. Joining a Corporate / Portfolio Company

One of the most interesting aspects of working in private equity is helping the portfolio companies to grow. Private Equity professionals quite commonly decide to go to work for one of their portfolio companies in a senior position (i.e. CFO, CEO, Head of Business Development). This can become quite lucrative, as you would usually be granted stock in the company and make a substantial profit if the exit is successful. It doesn't even have to be one of the portfolio companies - the private equity skillset if very well suited to roles in corporate strategy and finance.

5. Moving back to advisory roles (i.e. investment banking, private equity strategy consulting)

This is not the most common move, but some private equity professionals can decide to move back to investment banking or other advisory roles for a variety of reasons, including redundancy, failed fundraising, poor economic environment, or if they just find it to be more lucrative.

6. Secondary funds, Fund of Funds

Some PE professionals leave to join secondary funds or fund of funds companies. Secondary funds are funds that purchase portfolio companies from private equity funds directly (it can be one or many), usually at a steep discount. The private equity funds often need some liquidity for a variety of reasons, i.e. they want to exit from a specific sector or close down the fund rapidly. Funds of funds are funds that invest in private equity companies as opposed to investing in companies.

7. Entrepreneurship

Most private equity professionals are highly entrepreneurial and always have some great business idea at one point or another, especially at the junior level. Private equity is also very helpful if you want to become an entrepreneur, because the opportunities to learn and network are fantastic.

Private Equity Compensation Structure

The whole private equity business model is based on "profit sharing" i.e.sharing the profits made from the investments. Therefore, compensation is quite different from what you would encounter in a typical corporate environment, or within investment banking.

How do Private Equity firms get paid?

Private equity firms get paid in two main ways: management fees and carried interest.

- Management fees are paid regularly by the Limited Partners (i.e. the people who gave the money to the firm to invest) to the fund. This is calculated as a % of the assets under management. For example, if the Limited Partners invested $1 billion with a private equity fund, they will pay something around 2% of that amount (1bn x 2% = $20 million) per year to the fund as a management fee. Why do they have to pay this given that they already gave the fund money to invest? This is because the private equity funds have a lot of ongoing expenses that they need to cover: salaries, deal fees (that they pay to investment banks, consultants), travel, etc.

- Carried interest: this is a percentage of the profits that the fund gains on the investments. For example, if a company is bought for $100 million and sold for $300 million, the profit is $200 million. The private equity firm usually takes about 20% of that amount ($40 million), and the rest goes to the investors. However, it is not that straightforward in reality - there is often a "hurdle" rate of return that the fund has to make before they get paid anything. For example, the Limited Partners may ask that the fund only gets paid if the return is over 8% per annum. In addition, the profit is calculated for the performance as a whole for the whole amount invested (that may be 10 to 15 deals), not on a deal-by-deal basis.

- "Others": some private equity firms charge "deal fees". That means that each time they buy a company, they may charge some extra money to the investors. This is in theory to cover the extra expenses incurred during a deal. How do Private Equity professionals get paid? Private equity professionals’ compensation reflects the way the overall firm gets paid:

- Base salaries: usually on par with investment banking or consulting (sometimes slightly lower)

- Year-end bonuses: usually lower than what you would get in investment banking

- A "carry" component: represents the individual's share of profits. The more senior your level in the fund, the larger percentage you will receive of the overall carried interest. This profit share is always paid when all the profits in the fund have been realised (which can take five to seven years), and this can be very substantial because private equity funds are small, but they can manage very large amounts of money.

- Coinvestments: some private equity firms allow employees to invest their own money in some deals, and if the deal is successful, you could realise a significant profit as well.

What makes a good private equity investment?

This is a very common Private Equity interview question, and you might also encounter that type of question in interviews for investment banking, equity research or even capital markets roles. Not all companies are suitable targets for LBOs, and private equity firms will only invest in companies exhibiting the following characteristics:

Strong and stable cash flows

Private equity deals get enhanced returns because they use a significant portion of debt to finance their investments. For example, if the company costs £100, they can typically use £50 of their own cash to pay for it, and £50 of debt. The process of using debt is called "leveraging" or "gearing" a company. This means that the company will have to make substantial monthly or quarterly interest and principal repayments on the debt, and it cannot afford to miss any of those payments. For this reason, the bankers will only be happy to lend significant amounts of money to companies that have strong, stable, and predictable cash flow.

Low capital expenditure requirements

Private equity tends to stay away from companies that require heavy investments in plants, machinery, or equipment as these are a drain on cash. Examples of capital expenditure intensive industries are energy, utilities, manufacturing, construction, and transportation. Industries that require less capital expenditure are software companies, online businesses, and publishing ventures.

Leading market positions

Attractive companies have proven products and good management, which usually translates into a "top three" positioning. Strong positioning is also typically synonymous with strong and more stable cash flow.

High barriers to entry, niche markets

High barriers to entry and niche positioning will protect the company from competition, which could hurt cash flow and the company's ability to repay debt. 

Potential for margin improvement or cost reduction

This can be observed by comparing the company cost structure to its competitors and will be a source of value creation for private equity, which will "restructure" the business to some degree. Private equity firms often hire consultants that identify those strategic and cost improvements.

Strong existing management team or availability of new management team

Strong management is always a positive, even though new management is often brought in during a LBO.

Acquisition opportunities

Acquisitions are a good way to grow companies quickly. Therefore, private equity firms will analyse the industry to identify potential targets. An industry with many players is called "fragmented".

Good exit potential

A private equity firm will need to be convinced that a suitable exit can be found. This will normally occur by way of trade sale (selling to another company), secondary sale (selling to another private equity firm) or IPO. A buyer will typically have a time horizon of between three and five years, although a number of financial buyers target longer or shorter periods.

What is Private Equity?

Private equity funds are private pools of money managed by "general partners" who aim to generate a return to the investors ("limited partners") who are investing their money in the fund. Private equity funds can manage anything from £50 to 100 million to several billions.

The general partners will charge a percentage fee of the total amount that they manage (typically 1.5% to 2% per year) and they will also keep a share of the profits they generate (usually 20%). Private Equity is called "private" because it is a source of funds that do not originate from "public" sources such as bonds or listed equity. The funds are used to invest in companies, usually acquiring a significant stake to gain control over the firm's management. When a private equity firm makes an acquisition, they use significant amounts of debt, and therefore such acquisitions are called "Leveraged Buy Outs" or LBOs. The practice of LBOs was pioneered by firms such as Kohlberg, Kravis & Roberts (KKR) in the 1970s and over the last three decades, LBOs have assumed roles of ever-greater importance in the financial world.

How does an LBO work? How do they make money?

Private Equity funds buy companies using significant amounts of debt instead of their own money, which holds a number of advantages:

1. Interest on debt is tax-deductible.

2. If the company has a lot of debt, a small change in its overall value will have a strong impact on the equity value (i.e. the money invested by the fund). This effect is called "gearing". A simple example: imagine you buy something for £10 by borrowing £9 and using £1 of your own money. Three years later, it is worth £12 (20% increase). You pay back the £9 of debt and you keep the £3 extra, so you made 300%! In real life, the process is complicated by taxes, interest, and debt repayments but the theory is the same. Bear in mind that the interest you pay on the debt is fixed, so the private equity firm can pocket all the extra return.

3. Because cash flow is tight due to debt repayment, debt keeps management disciplined.

4. Most LBOs are structured so that management is also given a substantial incentive to perform in the form of equity.

5. Private Equity funds will then help the company to achieve an optimal strategy (i.e. revenue growth, cost-cutting) with the aim to exit and sell the company within four to five years (after some of the debt has been repaid), either to another company, another private equity fund, or through an IPO.

How are they different from venture capital or hedge funds?

Venture Capital firms invest in early-stage companies (or "start-ups"), and make smaller investments (a few millions at maximum). Venture Capital firms also target very high-growth companies with huge potential, i.e. Internet companies such as Facebook, Google, and other innovative technology firms in healthcare, renewable energy, biotech, etc. but that also have more potential to go bust! Hedge Funds invest in publicly listed securities and usually do not seek to gain control of companies they invest in. Also, hedge funds tend to appeal to very short-term investors (from days to less than one month).

Where does the money come from?

Wealthy individuals, pension funds, and mutual funds are the typical investors in private equity funds.

What kind of companies do Private Equity funds buy?

Because LBO returns (on average 20-30% over four to five years) can only be achieved with a lot of debt and good growth potential, the target companies have to be quite stable. So strong, niche, market-leading companies with cost-cutting and expansion potential in non-cyclical industries are favoured targets.

What kind of people work for private equity?

In the UK, there are four kinds of backgrounds:

  • Ex-investment bankers
  • Ex-strategy consultants
  • Ex-Big 4 accountants
  • Industry experts such as ex-CEOs or senior managers of corporations.

Many of these people come from Oxbridge/Ivy League universities, often with top MBAs.

What about job prospects and salaries?

Because firms are very small (10 to 20 people on average), there are very few jobs available. Also, requirements are very high due to the high level of responsibility. This makes the industry extremely competitive, even much more than investment banking. Salaries are on par with investment banking, bonuses are usually lower, but you will get the opportunity to share in the profits generated by the fund, which can be substantial.

You can check our list of London-based PE funds

List of London Hedge Funds

Below is a list of the top hedge funds based in London. This list only includes the large hedge funds, with assets under management of at least over $1 billion. Note however that those hedge funds are a mix of macro funds, relative value, credit, equity long/short, multi-strategy, fixed-income, arbitrage, activist, bonds and so on.

Paper LBO model example

This type of paper LBO test is an interview exercise you will be facing, often multiple times, in the course of a Private Equity recruitment process. Make sure you are able to go through this exercise reasonably quickly and without the help of Excel or a calculator. Clearly state the simplifying assumptions you are making and their implications.

Investment assumptions

* The team is considering the purchase of a company on the 31st of December of Year 0;

* Entry multiple: 6.0x LTM EBITDA;

* Entry Debt quantum: 3.0x LTM EBITDA;

* Assuming no financing and transaction fees;

* Interest rate for the debt negotiated at 5%;

* Debt repaid as a bullet at the end of the investment period;

* Sales: $100m in Y0, growing at 10% year-over-year (y-o-y) for the next 5 years;

* EBITDA: historical margin at 40% of Sales;

* Depreciation & Amortization: $30 million per year, steady;

* Capital Expenditure: 15% of Sales;

* Net Working Capital (NWC) requirements expected to increase by $2 million each year;

* Marginal tax rate of 25%;

* Exit at the same entry EBITDA multiple, after 5 years.

NB: On most occurrences, you will not be given such a data set and will therefore be expected to either ask for some more information or come up with your own assumptions.

Step-by-step model

1. Transaction metrics

Start by calculating the firm value at entry, the debt quantum, and deduce the equity acquisition price. Sales for Year 0 were $100m with an EBITDA margin of 40%, which gives an LTM EBITDA of $40m and therefore an entry Firm Value of $240m. The quantum of debt is determined in a similar way, giving $120m. The equity cheque is therefore $120m.

Other interviewers will give a leverage ratio instead of a debt multiple; the debt is then computed directly from the Firm Value.

2. Sales and EBITDA

Use growth and margin assumptions to calculate the Sales, then EBITDA, for every year. Do not hesitate to ask your interviewer if rounding is acceptable; it will save you a lot of time, show that you are fully aware of the approximation you are making, and gives excellent results.

3. Interests & taxes

Apply the interest rate provided to the Debt nominal amount to calculate the yearly interest expense. Taking out the interest expense from the EBITDA leads to the EBT, from which taxes are calculated. This then leaves us with the Net Income.

4. Cash flows

The goal here is to come up with the cash flows available for debt repayment for every year. From the Net Income, all the cash expenses (here Capex and increase in NWC) should be taken out. Since D&A is a non-cash expense, it should be added back in.

5. Firm Value at exit

Applying the exit multiple to the year 5 EBITDA, we come up with the exit Firm Value. The debt at exit is the debt at entry, minus the cumulative cash flow available for debt repayment. Subtracting this new debt number from the firm value gives the exit Equity amount.

6. Cash multiple and IRR

The cash multiple (also called money multiple) is defined as the ratio of exit to entry equity.

The IRR is the yearly return of the investment. This often requires a calculator, nevertheless, a few approximated figures are worth remembering, e.g. a cash multiple of 3x over 5 years is equivalent to a 25% IRR. For more accurate figures, have a look at the conversion table below.

All done, congratulations!!

Now, repeat this exercise with only a pen and paper and come up with new sets of assumptions. Train and train again until you are able to do all this by heart and fairly quickly.

For mode practice, check out our private equity case studies and modelling tests here.

All done, congrats !! 

Now, repeat this exercise with only a pen and paper and come up with new sets of assumptions. Train and train again until you are able to do all this by heart and fairly quickly. 

For mode practice, check out our private equity case studies and modelling tests here

Private Equity Case Study Example – Smart Gaming

Operating assumptions

Revenues:

Smart Gaming Ltd develops games for smartphone users. The main product is sold for £19.90 per download (this is a one-off cost). The company sold 1.5 million copies in 2011 (the first year it started trading) and 2.5 million copies in 2012. The number of downloads is expected to grow by 30%, 20%, 15% and 10% going forward over the next four years. Every game sold generates an extra £5 revenue per year (i.e. in-game products and advertising) which is recurring and increases by 20% every year. However, only 30% of the users keep the app on their smartphone every year (that is, only 30% of the previous year user base keeps using the product).

Cost / cash flow items:

  • Royalties to patent owners = £4.00 one-off per download
  • Customer acquisition cost = £2.00 one-off per download
  • Fees paid to smartphone companies = 15% of sale price one-off
  • Rent = £150,000 annually, growing 5% every year
  • License fee to telecom Internet providers = $1.5 million annually, growing 3% every year
  • Salaries and benefits = £1.75 million annually, growing 30% every year
  • Other administrative costs = £450,000 annually, growing 25% every year
  • Fixed assets depreciation: 5 years straight-line from 2012
  • No change in working capital
  • Intangible / other assets: no change
  • Capital expenditure: £300,000 per year
  • Tax: 25%

Candidate Instruction

  • Build an LBO model based on the information below, including the following:
  • Flexibility for base, upside, and conservative cases on sales growth
  • Exit Returns schedule (including both cash-on-cash and IRR) showing the returns to the financial sponsor equity
  • Time allocated: 3 hours

Good Luck!

For a worked out answer, please check here

For higher level practice, we also have more case studies here

Key mistakes in Private Equity interviews

Private equity interviews are notoriously difficult and compeitive, with 1000s of CVs and often 100s of candidates being interviewed for a single position. Therefore, private equity firms can afford to be very demanding and small mistakes can prove to be fatal in private equity interviews.

1. You didn't research the private equity fund deals

Altough this may sound basic, a very common mistake of private equity interview candidates is to forget to do proper research on the fund they are interviewing with. At minimum, one should have read the website, read the recent news, and memorised 2 or 3 investments that the fund has made. Fair questions may include "which deal do you like most and why", "which deal do you like the least", "why do you think we invested in XXX", and "have you read about our latest deals". Make sure you understand the investment thesis for at least 3 of them, read press articles and any other source of information you can find. Even better, if you get the chance to have informal conversations with other members of the team, do ask them about their deals. Similarly, if you know a banker or consultant that worked on the deal, try to gather some information. Well informed and prepared candidate always impress, and unprepared candidates will seem not motivated.

2. You didn't prepare investment ideas

Another fair question in private equity interviews is "do you have any investment ideas for us?". This is a very standard questions and I would recommend to prepare at least 2 ideas (ideally 3) that are well developed and thought out. Those should be real companies and investment opportunities. You will not be expected to know all the details, however you will be expected to know the investment rationale, some key financials, some industry trends and why you think it would be a good fit for the fund. Typical mistake include having too broad ideas (i.e. I think a bank would be a good investment), or something innapropriate for the fund (because of size, geography or sector, for example). 

3. You don't know your deals

Anything on your CV is fair game.If you are a banker or consultant, you will be expected to know about any transaction you worked on in great detail (especially for the recent ones). Rationale, financials, deal specifics, strucuture, process, pricing of debt intruments, your exact role in the deal, etc. Anything that is not confidential could potentiall be asked. Typical mistakes and red flags are vague answers or lack of understanding of the deals you worked on. After all, as an investor, you should demonstrate great attention to detail and curiosity, as well as an ability to think like an investor.

4. Not getting the culture fit

Culture fit is always a tough one. However, reading up on firms history, the team member profiles, a bit of social networking stalking (i.e. linkedin) combined with help from the headhunter if you are using one, should help you understand the "cutlure fit". To illustrate, a fund may be looking for highly technical, hard driving people. This may be obvious from the team members backgrounds (i.e. bulge brackets, technical degrees, etc.). In this case you should emphasise this skillset. Some other funds may look for more "humble" attitudes especially as you decrease in investment size, and again this may be evidenced by the dress code, more diverse backgrounds (i.e. accountants vs bankers, less elitist schools, etc.) and you should therefore adjust your interview style accordingly. 

5. Not being prepared for the obvious interview questions

The reality is that you are able to predict with a great degree of certainty at least 80% of the interview questions. Therefore, failing to give a clear and straight answer to questions about your deals, your CV, why private equity, why this particular fund, etc. is usually not well received. Most of the unknows are around the case studies, modelling tests and some fit questions - the rest is fairly standard. 

6. Lacking number skills

Many funds like to put candidates under pressure, and testing numerical skills are a good way to do this. Arithmetic questions, brainteasers, doing simple LBO modelling in your head and converting Cash on Cash returns toIRRs should be something you are very comfortable with. If not - do practice! Also, when asked technical questions or numerical questions, it is absolutely fine to take a bit of time to answer. The key here is the control your stress and getting it right.

7. Being overly confident

While all of the above mistakes involve some lack of preparation, another red flag in private equity interviews is overconfidence and arrogance, which can actually be fairly common in interviews. Make sure that you are not leaning back on your chair, o not be overfriendly with the senior members of the team, and, at all times, make sure that you demonstrate that you are very keen to get the job. 

Differences between Investment Banking and Private Equity culture

A large majority of private equity professionals have an investment banking background, and many investment bankers are thinking of making a switch to private equity one day. However, there are some major differences in skillset and culture between those two professions. Often, private equity firms would like to hire bankers "early," i.e. after one or two years’ experience at an investment banks. The reason is that those firms are sometimes afraid that a potential recruit who has spent too much time in investment banking will acquire a "banker mindset". Below are some of the key differences between those two jobs.

Private equity involves using your brain a lot more

A lot of investment bankers tend to be deal-driven. The "hunger" to close many large deals is actually a weakness in private equity because it’s not about generating fees anymore. Private equity professionals need to do good deals and be ready to step back even after months of hard work if the deal will not generate sufficient returns. What does this mean in practice? This means that you will spend a lot of time analysing the industry in much greater detail compared to banking, assessing management team's ability to meet the targets, think about exit strategy, incentives, deal structure, all possible or potential downside risks, and countless other issues that could make the deal good or bad. Private equity is not gambling or even venture capital investing in which you would typically expect a few losses. Private equity is about generating consistent high returns with minimum risk.

Private equity is a long-term game (5+ years)

While the pay might be a little bit higher or lower in PE (depending on the fund size), the money is made from the “carry”, i.e. the share of the profits when companies are sold. This carry is earned over time, so it doesn't make sense to jump from one place to another anymore. A bad year in banking might prompt you to change your employer, but a bad year in private equity will just be a fact of life and you need to take a more long-term view. In addition, the few partners who run the firm will make the decisions about carry allocation, so building long-term relationships with them will be very important to your financial success.

You think you are good at modelling? Think again

While many bankers are very good at modelling, private equity modelling tends to be much more detailed and focus on completely different issues. Modelling in private equity often depends on designing the optimal capital structures (debt/equity) and also the incentive structures (preference shares, bonuses, management equity, etc.). The modeling tends to be much more complex and detailed, so assumptions in your operating model will be challenged by the team and due diligence advisors. In addition, the pressure is much more intense because the deal team will rely on your model to make investment decisions, so millions will be at stake.

Showing an entrepreneurial mindset is key

Being creative and entrepreneurial are very desirable characteristics for most PE funds. Finding deals, networking, formulating new ideas, and considering all kinds of risks and opportunities around deals and companies can make a substantial difference to the profitability of the firm. Also, private equity professionals need to understand the in-depth aspects of overseeing companies; therefore professionals with some start-up or entrepreneurial experience are valued because they understand all of those important details.

Working hours may not be shorter!

If you work for a very large firm - hours will be banking hours. Even if you go to a smaller firm, you will still work a good 60+ hours per week and your schedule will remain somewhat unpredictable due to due diligence meetings, management meetings, and other deal-related, last-minute requests. While the lifestyle is better, you're still working in a deal-driven environment.

The pay

The base salary and bonus structure might not differ that much from that in banking, but the money in private equity is made when a fund closes and when exits are made. Don't be expecting a steady bonus and promotions every few years. What matters most now is the fund performance, not your own individual achievement. You may have built the best models and worked on the biggest deals, but if the returns are not there, you won't get paid.

The grunt work

The amount of grunt work definitely decreases in private equity. There are fewer administrative tasks, printing of books, and many people-intensive tasks can be outsourced to banks and advisors. But essentially, what you do is the same as in banking: analysing companies, building operating and LBO models, dealing with all the legal documentations (i.e. reviewing NDAs, term sheets) and making presentations to the investment committee.

Finding deals

Finding deals is something completely new for investment bankers. While you will not be expected to bring deals immediately, eventually the team members will expect you to be able to build relationships with bankers and screen through the deals to find some that are appealing, and also to cold call or approach companies directly. This is a key aspect of becoming a private equity professional; many junior bankers find the transition difficult as they have been handed out deals to work on in their banking days.

Social life

Social life in investment banking can actually be quite exciting. You're working in firms with thousands of employees; there are many peers to discuss and to share your war stories with, junior bankers are usually all below 30 and there is a work hard/play hard mentality. Also, the turnover is quite high in banks; new analyst and associate classes arrive every year, so it can be a very stimulating environment. Private equity is completely different. Teams are small (maybe 10 to 30 people), many of the partners and senior investors are much older, and people don't really move upward or downward. Considering that the typical profiles of private equity professionals tend to be quite "standard" (i.e. top school, investment banking/strategy consulting background, etc.), therefore social life tends to be less fun. Choosing the right firm with the right culture fit is very important and you need to make sure that you will get along with your interviewers. 

Communication skills are extremely important 

Communication skills and personal skills are extremely important in private equity. You can be a top  modeller and be extremely hardworking. However, to convince the investment committee, get people in the firm to support you, get the management team to work with you, and find out the best deals from the intermediaries, you will need for people to like you. Most of the senior private equity professionals are charismatic individuals (at least when they need to be), and there is little space for professionals who are either too shy or arrogant.

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