If you're interviewing for a job in a private equity firm, then you will almost certainly come across a case study. Be warned: recruiters say this is the hardest part of the private equity interview process and how you handle it will decide whether you land the job.
“The case study is the most decisive part of the interview process because it’s the closest you get to doing the job," says Gail McManus of Private Equity Recruitment. It's purpose is to make you answer one question: 'Would you invest in this company?'
In most cases, you'll be given a 'Confidential Information Memorandum' (CIM) relating to a company the private equity fund could invest in. You'll be expected to a) value the company, and b) put together an investment proposal - or not. Often, you'll be allowed to take the CIM away to prepare your proposal at home.
“The case study is still the most decisive element of the recruitment process because it’s the closest you get to actually doing the job. Candidates can win or lose based on how they perform on case study. People who are OK in the interview can land the job by showing the quality of their thinking, ” says McManus. “You need to show that you can think, and think like an investor.”
"The end decision [on whether to invest] is not important," says one private equity professional who's been through the process. "The important thing is to show your thinking/logic behind answer."
Preparing for a PE case study has distinctive challenges for consultants and bankers. If you're a consultant, you need to, "make a big effort to mix your strategic toolkit with financial analysis. You need to prove that you can go from a strategic conclusion to a finance conclusion," says one PE professional. Make sure you're totally familiar with the way an LBO model works.
If you're a banker, you need to, "make a big effort to develop your strategic thinking," says the same PE associate. The fund you're interviewing with will want to see that you can think like an investor, not just a financier. "Reaching financial conclusions is not enough. You need to argue why certain industry is good, and why you have a competitive advantage or not. Things can look good on paper, but things can change from a day to another. As a PE investor, hence as a case solver, you need to highlight and discuss risks, and whether you are ready or not to underwrite them."
Kadeem Houson, partner at KEA consultants, which specialises in hiring junior to mid-level PE professionals, says: “If you’re a banker you’re expected to have great technical skills so you need to demonstrate you can think commercially about the numbers you plugged in. Conversely, a consultant who is good at blue sky thinking might be pressed more on their understanding of the model. Neither is better or worse – just be conscious of your blank spots.”
A good business versus a good investment
For McManus, one of the most important things to consider when looking at the case study is to understand the difference between a good business and a good investment. The difference between a good business and a good investment is the price. So you might have a great business but if you have to pay hugely for it it might not be a great business. Conversely you can have a so-so business but if you get it a good price it might make a great investment. “
McManus says as well as understanding the difference between a good business and a good investment, it’s important to focus on where the added value lies. This has become a critical element for private equity firms to consider as competition for assets has become even more fierce, given the amount of dry powder that funds now have at their disposal through a wide array of funds. “Because of the competition for transactions generally you have to overpay to win a deal. So in the case study it’s really important you think about where the value creation opportunity lies in this business and what the exit would be,” says McManus.
She advises candidates to be brave and state a specific price, provided you can demonstrate how you’ve arrived at your answer.
Another private equity professional says you shouldn't go out on a limb, though, and you should appear cautious: "Keep all assumptions conservative at all times so as not to raise difficult questions. Always highlight risks, downsides as well as upsides."
Research the fund – find the angle
One private equity professional says that understanding why an investment might suit a particular firm could prove to be a plus. Prior to the case study, check whether the fund favours a particular industry sector, so that when it comes to the case study, you can add that to the investment thesis. “This enables you to showcase you have read up on the firm’s strategy/unique characteristics Something that would make it more likely for the fund you’re interviewing with winning the deal in what’s a very competitive market, said the PE source, who said this knowledge made him stand out.
However, the primary purpose of the case study is to test the quality of your thinking - it is not to test you on your knowledge of the fund. “Knowing about the fund will tick an extra box, but the case study is about focusing on the three most critical things that will drive the investment decision,” says McManus.
You need to think through these questions and issues:
We spoke to another private equity professional who's helpfully prepared a checklist of points to think about when you're faced with the case study. "It's a cheat sheet for some of my friends," he says.
When you're faced with a case study, he says you need to think in terms of: the industry, the company, the revenues, the costs, the competition, growth prospects, due dliligence, and the transaction itself.
The questions from his checklist are below. There's some overlap, but they're about as thorough as you can get.
When you're considering the industry, you need to think about:
- What the company does. What are its key products and markets? What's the main source of demand for its products?
- What are the key drivers in that industry?
- Who are the market participants? How intense is the competition?
- Is the industry cyclical? Where are we in the cycle?
- Which outside factors might influence the industry (eg. government, climate, terrorism)?
When you're considering the company, you need to think about:
- Its position in the industry
- Its growth profile
- Its operational leverage (cost structure)
- Its margins (are they sustainable/improvable)?
- Its fixed costs from capex and R&D
- Its working capital requirements
- Its management
- The minimum amount of cash needed to run the business
When you're considering the revenues, you need to think about:
- What's driving them
- Where the growth is coming from
- How diverse the revenues are
- How stable the revenues are (are they cyclical?)
- How much of the revenues are coming from associates and joint ventures
- What's the working capital requirement? - How long before revenues are booked and received?
When you're considering the costs, you need to think about:
- The diversity of suppliers
- The operational gearing (What's the fixed cost vs. the variable cost?)
- The exposure to commodity prices
- The capex/R&D requirements
- The pension funding
- The labour force (is it unionized?)
- The ability of the company to pass on price increases to customers
- The selling, general and administrative expenses (SG&A). - Can they be reduced?
When you're considering the competition, you need to think about:
- Industry concentration
- Buyer power
- Supplier power
- Brand power
- Economies of scale/network economies/minimum efficient scale
- Input access
When you're considering the growth prospects, you need to think about:
- Change of asset usage (Leasehold vs. freehold, could manufacturing take place in China?)
- How to achieve efficiencies
- Limitations of current management
When you're considering the due diligence, you need to think about:
- Change of control clauses
- Environmental and legal liabilities
- The power of pension schemes and unions
- The effectiveness of IT and operations systems
When you're considering the transaction, you need to think about:
- Your LBO model
- The basis for your valuation (have you used a Sum of The Parts (SOTP) valuation or another method - why?)
- The company's ability to raise debt
- The exit opportunities from the investment
- The synergies with other companies in the PE fund's portfolio
- The best timing for the transaction
BUT: keep things simple.
While this checklist is important as an input and a way to approach the task, when it comes to presenting the information, quality beats quantity. McManus says: “The main reason why people aren’t successful in case studies is that they say too much. What you’ve got to focus on is what’s critical, what makes a difference. It’s not about quantity, it’s about quality of thinking. If you do 30 strengths and weaknesses it might only be three that matter. It’s not the analysis that matters, but what’s important from that analysis. What’s critical to the investment thesis. Most firms tend to use the same case study so they can start to see what a good answer looks like.”
Houson agrees that picking out the most important elements in the case study are more important than spending too much time on an elaborate model. “You don’t necessarily need to demonstrate such technical prowess when it comes to building the model. But you need to be comfortable about being challenged around the business case. Frankly it’s better to go for a simple answer which sparks a really interesting conversation rather than something that is purely judged from a technical standpoint. The model is meant to inform the discussion, not be the discussion itself.”
Softer factors such as interpersonal skills are also important because if the case study is the closest thing you’ll get to doing the job, then it’s also a measure of how you might behave in a live situation. McManus says: “This is what it will be like having a conversation at 11am with your boss having been given the information memorandum the day before. Not only are the interviewers looking at how you approach the case study, but they’re also looking at whether they want to have this conversation with you every Tuesday morning at 11am.”
The exercise usually takes around four hours if you include the modelling aspect, so there is time pressure. “Top tips are to practice how to think in a way that is simple, but fit for purpose. Think about how to work quickly. The ability to work under pressure is still important,” says Houson.
But some firms will allow you do complete the CIM over the weekend. In that case on one private equity professional says you should get someone who already works in PE to check it over for you. He also advises getting friends who've been through case study interviews before to put you through some mock questions on your presentation.
But McManus says this can lead to spending too much time and favours the shorter method. “It’s fairer and you can illustrate the quality of your thinking over a short space of time.”
The case study is conducted online, and because of Covid, so too are many of the follow-up discussions, so it’s worth thinking about how to present yourself on zoom or Teams. “Although a lot of these case studies over the last couple of years have been done remotely, in many ways that’s even more reason to try to bring out a bit of engagement and personality with the people you’re talking to."
“There’s never a right or wrong answer. Rather it’s showing your thinking and they like to have that discussion with you. It’s the nearest you get to doing the job. And that cuts both ways – if you don’t like the case study, you won't like doing the job. “
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