PE Deals Case Study

8/13/2019 PE Deals Case Study

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Since I was getting approximately 53 emails per day about this one, I decided to

make it easier and just tell you everything you need to know about private equity

case studies. Lots of people are going through private equity recruiting this time

of year, so lets take a look at what to expect and how to tackle the case study a

critical part of most buy-side interviews. Note that these case studies are

completely different from the case interviews you get in managementconsulting (not that I would even waste space on consultants here, but just to

clarify). Why? Although I labeled these private equity case studies above,

youll encounter them in almost every buy-side interview, from mega-funds to

tiny 4-person firms to everything in between. Not all hedge funds do them, but

any fund that does some long-term investing (as opposed to effectively day-

trading) will usually make you complete some type of case study as part of the

interview process. Sometimes theyre formal and sometimes theyre informal,

but theyre always important if you screw yours up, you probably wont bemoving onto the next round or getting an offer. Who? No matter your profile or

previous background, youll encounter case studies if youre trying to move intoprivate equity. So even if youre a consultant or youre moving in from adifferent field altogether, you will still have to complete case studies. No one

ever says, Oh, well you you didnt do much modeling so we can just skip that

part of the interview. Instead, they assume that you know how to do it and then

weed out people who dont. Even if you are applying to PE firms straight out ofundergrad, or youre applying as an intern, youre still likely to get case studies multiple friends who did this had case studies pretty much everywhere. The

only exception here is senior-level hires but then, if youre reading this right

now youre probably not interviewing for Partner-level positions What? The

case study is designed to answer 1 simple question: Should we invest in this

company? The firm could ask you to complete the case study in a coupledifferent ways: Most Common: You get materials on the company they want

you to analyze (financial statements, 5-10 page document describing it, maybe

some outside research) and you have anywhere from a few days to a week to

complete a short presentation. Part of the Interview: Some places will make

the case study a part of the interview itself they might give you basic

information on the company and then give you 2-3 hours to do your work and

present to them immediately afterward. More common at mega-funds. Just the

LBO Model: This is less common, but they could also give you 30 minutes to

create a simple LBO model of a company just to verify that you actually know

how to do this. This article will focus mostly on #1 and #2, since #3 is just a sub-

set of those. Hedge funds are less formal than PE firms if they ask you to do acase study at all, and in other fields like corporate development and venture

capital youll either have more of an informal case study, or you wont do one atall. Case Study Ingredients At the bare minimum, youll usually get some type of

Word document describing the company in question (called an InformationMemorandum (IM) or Offering Memorandum (OM) or Executive Summaryin banker terminology). It might be short (10 pages or less) or it might be quite

long dozens or even 100+ pages. If youre analyzing a public company, they

might just point you to the 10-K or 10-Q (annual report and quarterly report,

respectively) instead. Its rare to get extremely detailed operating models

because you dont have time to go into pages of detail. Outside research issimilarly rare. The firm usually wont give you guidance on how to value the


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company or how to build your models, but thats for an entirely different reason:they want you to figure it out. Structure: Simple FTW! Simplicity is the most

important word for your case study. If they dont give you a structure to adhere

to, I would recommend the following: 1 Summary slide in the beginning. 2-3

Qualitative slides discussing the market, management, and anything unique to

the deal. 3-4 Quantitative slides that go into the appropriate valuation, andwhat kind of returns the firm can expect. 1 Conclusion slide summing up

everything and giving a yes/no investment decision. Yes, for actual portfolio

companies (in PE) and clients (in banking) your presentations and models will

be more complex, but you do those over months and years. Slide Structure Have

a maximum of 3 or 4 (large) bullet points on each slide and if youre showing

graphs or the output of valuations or your LBO model, dont squeeze 25 differentthings on one page. Keep it to a max of 3-4 different charts or graphs per slide

(roughly 1 per quadrant) or it gets very confusing. Rather than trying to fit a

huge mass of text on each slide as you might do in pitch books you want to

focus on the main points only because youre going to present live to your

interviewer(s) later on. Put too much text in your presentation and the

interviewers will focus on the text rather than what youre saying. SummarySlide Do the following in 3-4 major bullets: Do we invest in this company? Yes

or no no maybes or conditional upon statements they want a decision one

way or the other. Support your decision with major points: Give 1-2 bullets to

support your decision, focusing on the major items not tiny details that dontmatter. Hedge your decision by pointing out the key investment risk: No

investment is perfect, and everything has risks associated with it point out the

major 1 or 2 risks that are apparent with your company right here. This may

sound stupid to you, but a Partner at a middle market PE firm once told me that

over half the interviewees failed to make a decision one way or another in theircase studies. Heres an example of what you might write in your summary slide

if we were considering the buyout of Harrahs casino chain back in 2006:

Harrahs is a compelling investment that could generate a 5-year IRR of 15-20%

with reasonable assumptions Supported by strong market fundamentals,

success in recent international expansion, and healthy cash flow Current public

market valuation under-values company by approximately 10%, creating solid

investment opportunity Key investment risk is strength of US economy and

risk of consumer spending falling Yes, I realize this deal was a great example of

an investment gone horribly wrong once the casino industry imploded, but these

points are for illustrative purposes. Qualitative Slides These slides are highly

dependent on the company youre analyzing at a minimum, though, you need to

think about the following: Market: Is this an industry thats growing? Will itgrow more quickly/slowly in future years? Do you see positive or negative

trends due to technology / regulations / competitors? Where does this company

stand next to the competition? Competition: How does this company fare

against its competitors? Does it have some type of unique advantage that others

cant replicate? What about the barriers to entry? Growth Opportunities: Howquickly can the company grow in the future? Is there any low hanging fruit or

room to easily win more customers / revenue in the future? Do you expect it to

grow faster or slower than the market as a whole? Risks: Every investment

carries with it risks are the key risks here related to the market, or theeconomy as a whole? To the competition? To government regulations? And is


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there any way of mitigating these risks? Other: If theres anything especiallynotable about the management team, the products/services or other items

unique to the deal, you can mention them as well but stay away from saying,

The CEO is great! because you have no way of knowing that. Focus on the first4 items because those are the main ones that impact your investment decision.

Quantitative Slides These slides should address valuation and expected returns.The biggest mistake you can make is going into an unnecessary level of detail by

doing any of the following: Spending hours and hours searching for EBITDA

add-backs and adjustments for each company in their filings. Spending hours

debating which pub comps and transaction comps you should be using.

Creating a detailed LBO model that handles 500 different cases and also adjusts

perfectly for items that no one cares about. No one is going to look at how you

came up with these numbers, so keep it simple and use Capital IQ (or whatever

information service you use) to gather the data automatically. A sample

structure for this section might look like: Valuation Overview: How much is

this company worth, and what methodologies are you basing it on? This is where

your football field chart goes. Valuation Detail: Here you can show the pubcomps and transaction comps you picked, along with your DCF output.

Depending on the company and situation, you may be using different or

additional methodologies as well this is most common for real estate, energy,

and financial services. LBO Model Output: Dont go into a ton of detail here

just show your assumptions and the output of the model under a range of

sensitivities (even though this is a simplified model, its still important to showsensitivity tables on the IRR and it takes 2 seconds to add). Depending on how

much output you have, these sections could comprise anywhere between 3 and 4

slides. Resist the temptation to write 20 slide chock-full of numbers this isnt

banking. Valuation Do a simple Capital IQ search for companies in the sameindustry with revenue or market caps in the same range, and if you know anyone

at the relevant industry group at your firm, request that information from them.

If youre not in banking and/or you dont have Capital IQ access, this section willbe more difficult to complete try to get a friend who has access to send youlogin information, or get the information directly from friends with access. And

if you absolutely cant get access or you are under extreme time pressure (its anon the spot case study), you can skip parts of this and just show a DCF (or DDM

if its a financial company, etc.) to support your valuation. You definitely need to

give some indication of value here but if you dont have or cant get access to all

the information you need, focus on what you can do (e.g. DCF in place of

public/transaction comps). LBO Models Forget about all the complex LBO

models youve built: you want to make this as simple as possible. Ive alreadywritten at length about what a PE interview LBO model needs to include in the

article on private equity interviews, but just to recap some of that here:

Assumptions Purchase/Exit EBITDA multiples, leverage, growth, and

profitability. Sources & Uses How much debt / equity youre using, and thenhow much of that is being spent on acquiring the company vs. transaction fees /

paying off debt. Simple Income Statement / Cash Flow Statement / Debt

Schedule The Balance Sheet is not necessary if you think about it, so I wouldonly include it if they specifically ask for it, or you need it because of an unusual

investment scenario. Excluding the Balance Sheet saves you time withoutdetracting much from your model. Returns & Sensitivities Do a simple IRR


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calculation and show IRR over a range of purchase/exit multiples and your other

assumptions. Forget about multiple tranches of debt, PIK, PP&E schedules, asset

write-ups, book/cash tax reconciliations, management option pools, and focus on

the bare minimum. You may have to stray from this if your company has NOLs

(Net Operating Losses) and anything unusual that needs to be taken into account

(minority interests, other unusual investments, pending divestitures etc.) butyou should still focus on what you need rather than what looks cool. The LBO

modeling course in Breaking Into Wall Street covers the type of model that you

could use for PE interviews. Conclusions Slide This should not be much different

from your Summary Slide in the beginning just re-state what you had there indifferent words, and perhaps add more detail. Instead of just making a yes/no

investment decision, for example, you can also specify here at what price level

youd invest, either in dollars per share (public companies) or as a lump sum

(private companies / divestitures). You may also want to go into more detail on

what can be done to mitigate the risks you brought up here or on the Intro slide.

Decision-Making Reading all this, you might be wondering, But wait

how do I

actually make an investment decision? And that tells you exactly why investors

dont have it easy: its never a clear-cut decision. But remember that your actual

yes/no decision doesnt really matter that much what matter is how you back itup and support it with your work. Making investment decision goes way beyond

the scope of this article, but here are a few guidelines: The numbers matter,

but mostly for initially testing whether or not something could work if acompany is already over-valued by 50%, for example, chances are it will be a bad

investment. If your LBO model never shows the IRR going above 10% even with

crazily optimistic assumptions, its also a bad idea. Your decision shouldultimately come down to qualitative factors, with the valuation and returns you

calculated to be used as support. Your support shouldnt be We should invest inthis company because its under-valued by 10%. You want to say, We should

invest in this company because its set to grow faster than the overall market, itslight-years ahead of its competition, and on top of all that we could get a 20%

IRR even with very conservative assumptions. So, What Matters? Anyonereviewing your case study will be most concerned with your thought process

unlike banking, formatting and small details dont matter much. Yourcommunication skills are more important than your knowledge of finance for

these case study exercises if you cant explain your points simply and reach a

solid conclusion, you wont get an offer. So dont get preoccupied with minutiae

focus on your investment thesis and the major reasons youre recommendingor not recommending an investment. Factors Outside the Slides Your

presentation style, the number of people watching, and how much time youregiven can also come into play, but its very difficult to generalize here becauseeach firm does it differently. You might present to just 1 interviewer, or it might

be to all Partners at the firm in which case you better know your stuff. A lot of

this comes down to public speaking, which again is beyond the scope of this

article but here are a few guidelines Ive followed when giving speeches andmaking presentations: Have some notes with you, but dont write down word-

for-word what youre going to say. Speak twice as slowly as you normally

would and look at different people in your audience every few seconds (only

applicable if you are presenting to multiple people, of course). Always practicebeforehand, even if you only have 15 minutes just practice running through it


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in front of the mirror and going through all your points, without reading

anything word-for-word. How Much It Matters The case study certainly weighs

in heavily, though its not the only factor in private equity interviews top firms

usually have many, many rounds of interviews, and even smaller and middle-

market firms can take weeks or months to make a decision, simply because they

can afford to be very selective about who they hire. I would compare a casestudy in private equity interviews to technical questions in investment banking

interviews: doing a poor job can kill your chances, but being a superstar wontnecessarily help you. Case studies are more of a way to weed out people than

anything else. As with any other type of interview, your success comes down to

fit questions and your story after youve cleared the technical hurdles if

everyone likes you and is confident youddo well, you have a good shot at gettingan offer. Also note that while private equity interviews are very competitive, you

would be mistaken to overestimate the competition. Most candidates have

terrible stories and also have no idea why they actually want to do anything in

life

from getting into investment banking or consulting to moving into private

equity. The last thing a PE firm wants to see is yet another person whos tryingto get in because they heard it was cool, because all their friends were doing it, or

because they want to make a lot of money and have no idea how else to do it. So

if you make sure your story is solid, come across as a likable person, and doyour case study reasonably well, you stand a good shot at getting an offer no

matter how competitive it is. No, I Dont Have Any Sample Case Studies and I

Dont Have a Guide (Yet) Before anyone asks: no, I dont have any sample casestudies because I lost all my documents from banking. If you want to practice, I

would suggest getting a CIM or OM on a company you dont know well andrunning through the exercise above or just pick a random public company and

go through their filings. I receive many questions on a PE interview guide, butagain I dont have anything at the moment PE interviews are less about specific

technical questions (except at mega-funds) and more about your deal / client

experience and the case study. If I were to create such a guide, it would be mostly

example-based and next year is the earliest it would be out.

PE Deals Case Study

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