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Private Equity Case Studies in 3,017 Words

Since I was getting approximately 53 emails per day aboutthis one, I decided to make it easier and just tell youeverything you need to know about private equity casestudies.

Lots of people are going through private equity recruit ingthis t ime of year, so let’s take a look at what to expectand how to tackle the case study – a crit ical part of mostbuy-side interviews.

Note that these “case studies” are completely dif f erentf rom the “case interviews” you get in managementconsulting (not that I would even waste space onconsultants here, but just to clarif y…).

Why?

Although I labeled these “private equity case studies” above, you’ll encounter them in almost every buy-sideinterview, f rom mega-f unds to t iny 4-person f irms to everything in between.

Not all hedge f unds do them, but any f und that does some long-term investing (as opposed to ef f ectivelyday-trading) will usually make you complete some type of case study as part of the interview process.

Sometimes they’re f ormal and sometimes they’re inf ormal, but they’re always important – if you screwyours up, you probably won’t be moving onto the next round or getting an of f er.

Who?

No matter your prof ile or previous background, you’ll encounter case studies if you’re trying to move intoprivate equity.

So even if you’re a consultant or you’re moving in f rom a dif f erent f ield altogether, you will still have tocomplete case studies.

No one ever says, “Oh, well you you didn’t 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 don’t.

Even if you are applying to PE f irms straight out of undergrad, or you’re applying as an intern, you’re stilllikely to get case studies – multiple f riends who did this had case studies pretty much everywhere.

The only exception here is senior-level hires – but then, if you’re reading this right now you’re probablynot interviewing f or Partner- level posit ions…

What?

The case study is designed to answer 1 simple question: “Should we invest in this company?”

The f irm could ask you to complete the case study in a couple dif f erent ways:

1. Most Common: You get materials on the company they want you to analyze (f inancial statements,5-10 page document describing it, maybe some outside research) and you have anywhere f rom a f ewdays to a week to complete a short presentation.

2. Part of the Interview: Some places will make the case study a part of the interview itself – theymight give you basic inf ormation on the company and then give you 2-3 hours to do your work andpresent to them immediately af terward. More common at mega-f unds.

3. 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 verif y that you actually know how to do this.

This article will f ocus mostly on #1 and #2, since #3 is just a sub-set of those.

Hedge f unds are less “f ormal” than PE f irms if they ask you to do a case study at all, and in other f ields likecorporate development and venture capital you’ll either have more of an inf ormal case study, or you won’tdo one at all.

Case Study Ingredients

At the bare minimum, you’ll usually get some type of Word document describing the company in question(called an “Inf ormation Memorandum” (IM) or “Of f ering Memorandum” (OM) or “Executive Summary” inbanker terminology).

It might be short (10 pages or less) or it might be quite long – dozens or even 100+ pages. If you’reanalyzing a public company, they might just point you to the 10-K or 10-Q (annual report and quarterlyreport, respectively) instead.

It ’s rare to get extremely detailed operating models because you don’t have t ime to go into pages ofdetail. Outside research is similarly rare.

The f irm usually won’t give you guidance on how to value the company or how to build your models, butthat’s f or an entirely dif f erent reason: they want you to f igure it out .

Structure: Simple FTW!

Simplicity is the most important word f or your case study.

If they don’t give you a structure to adhere to, I would recommend the f ollowing:

1. 1 Summary slide in the beginning.

2. 2-3 Qualitative slides discussing the market, management, and anything unique to the deal.

3. 3-4 Quantitative slides that go into the appropriate valuation, and what kind of returns the f irm canexpect.

4. 1 Conclusion slide summing up everything and giving a yes/no investment decision.

Yes, f or actual portf olio companies (in PE) and clients (in banking) your presentations and models will bemore 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 you’re showing graphs or the outputof valuations or your LBO model, don’t squeeze 25 dif f erent things on one page. Keep it to a max of 3-4dif f erent charts or graphs per slide (roughly 1 per quadrant) or it gets very conf using.

Rather than trying to f it a huge mass of text on each slide – as you might do in pitch books – you want tofocus on the main points only because you’re going to present live to your interviewer(s) later on.

Put too much text in your presentation and the interviewers will f ocus on the text rather than what you’resaying.

Summary Slide

Do the f ollowing in 3-4 major bullets:

Do we invest in this company? Yes or no – no “maybes” or “conditional upon” statements – theywant a decision one way or the other.

Support your decision with major points: Give 1-2 bullets to support your decision, f ocusing onthe major items – not t iny details that don’t matter.

Hedge your decision by pointing out the key investment risk: No investment is perf ect, andeverything has risks associated with it – point out the major 1 or 2 risks that are apparent with yourcompany right here.

This may sound stupid to you, but a Partner at a middle market PE f irm once told me that over half theinterviewees failed to make a decision one way or another in their case studies.

Here’s an example of what you might write in your summary slide if we were considering the buyout ofHarrah’s casino chain back in 2006:

Harrah’s is a compelling investment that could generate a 5-year IRR of 15-20% with reasonableassumptions

Supported by strong market f undamentals, success in recent international expansion, and healthycash f low

Current public market valuation under-values company by approximately 10%, creating solidinvestment opportunity

Key investment risk is strength of US economy and risk of consumer spending f alling

Yes, I realize this deal was a great example of an investment gone horribly wrong once the casino industryimploded, but these points are f or illustrative purposes.

Qualitative Slides

These slides are highly dependent on the company you’re analyzing – at a minimum, though, you need tothink about the f ollowing:

Market: Is this an industry that’s growing? Will it grow more quickly/slowly in f uture years? Do yousee posit ive or negative trends due to technology / regulations / competitors? Where does thiscompany stand next to the competit ion?

Competit ion: How does this company f are against its competitors? Does it have some type ofunique advantage that others can’t replicate? What about the barriers to entry?

Growth Opportunit ies: How quickly can the company grow in the f uture? Is there any “low hangingf ruit” or room to easily win more customers / revenue in the f uture? Do you expect it to grow f asteror 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 competit ion? To government regulations? And is there any way ofmitigating these risks?

Other: If there’s anything especially notable about the management team, the products/services orother items unique to the deal, you can mention them as well – but stay away f rom saying, “The CEOis great!” because you have no way of knowing that.

Focus on the f irst 4 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 thef ollowing:

1. Spending hours and hours searching f or EBITDA add-backs and adjustments f or each company intheir f ilings.

2. Spending hours debating which pub comps and transaction comps you should be using.

3. Creating a detailed LBO model that handles 500 dif f erent cases and also adjusts perf ectly f or itemsthat 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 (orwhatever inf ormation service you use) to gather the data automatically.

A sample structure f or this section might look like:

Valuation Overview: How much is this company worth, and what methodologies are you basing iton? This is where your “f ootball f ield” chart goes.

Valuation Detail: Here you can show the pub comps and transaction comps you picked, along withyour DCF output. Depending on the company and situation, you may be using dif f erent or additionalmethodologies as well – this is most common f or real estate, energy, and f inancial services.

LBO Model Output: Don’t go into a ton of detail here – just show your assumptions and the outputof the model under a range of sensit ivit ies (even though this is a simplif ied model, it ’s still importantto show sensitivity 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-f ull of numbers – this isn’t banking.

Valuation

Do a simple Capital IQ search f or companies in the same industry with revenue or market caps in the samerange, and if you know anyone at the relevant industry group at your f irm, request that inf ormation f romthem.

If you’re not in banking and/or you don’t have Capital IQ access, this section will be more dif f icult tocomplete – try to get a f riend who has access to send you login inf ormation, or get the inf ormation directlyf rom f riends with access.

And if you absolutely can’t get access or you are under extreme time pressure (it ’s an “on the spot” casestudy), you can skip parts of this and just show a DCF (or DDM if it ’s a f inancial company, etc.) to supportyour valuation.

You def initely need to give some indication of value here – but if you don’t have or can’t get access to allthe inf ormation you need, f ocus on what you can do (e.g. DCF in place of public/transaction comps).

LBO Models

Forget about all the complex LBO models you’ve built: you want to make this as simple as possible. I’vealready written at length about what a PE interview LBO model needs to include in the article on privateequity interviews, but just to recap some of that here:

1. Assumptions – Purchase/Exit EBITDA multiples, leverage, growth, and prof itability.

2. Sources & Uses – How much debt / equity you’re using, and then how much of that is being spenton acquiring the company vs. transaction f ees / paying of f debt.

3. Simple Income Statement / Cash Flow Statement / Debt Schedule – The Balance Sheet is notnecessary if you think about it, so I would only include it if they specif ically ask f or it, or you need itbecause of an unusual investment scenario. Excluding the Balance Sheet saves you time without

detracting much f rom your model.

4. Returns & Sensit ivit ies – Do a simple IRR calculation and show IRR over a range of purchase/exitmultiples and your other assumptions.

Forget about multiple tranches of debt, PIK, PP&E schedules, asset write-ups, book/cash taxreconciliations, management option pools, and f ocus on the bare minimum.

You may have to stray f rom this if your company has NOLs (Net Operating Losses) and anything unusualthat needs to be taken into account (minority interests, other unusual investments, pending divestituresetc.) but you 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 f or PEinterviews.

Conclusions Slide

This should not be much dif f erent f rom your Summary Slide in the beginning – just re-state what you hadthere in dif f erent words, and perhaps add more detail.

Instead of just making a yes/no investment decision, f or example, you can also specif y here at whatprice level you’d 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 oron 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 don’t have it easy: it ’s never a clear-cut decision. But remember thatyour actual yes/no decision doesn’t really matter that much – what matter is how you back it up andsupport it with your work.

Making investment decision goes way beyond the scope of this article, but here are a f ew guidelines:

The numbers matter, but mostly f or init ially testing whether or not something could work – if acompany is already over-valued by 50%, f or example, chances are it will be a bad investment. If yourLBO model never shows the IRR going above 10% even with crazily optimistic assumptions, it ’s alsoa bad idea.

Your decision should ult imately come down to qualitative factors, with the valuation and returnsyou calculated to be used as support.

Your support shouldn’t be “We should invest in this company because it ’s under-valued by 10%.”

You want to say, “We should invest in this company because it ’s set to grow f aster than the overall market,it ’s light-years ahead of its competit ion, and on top of all that we could get a 20% IRR even with veryconservative assumptions.”

So, What Matters?

Anyone reviewing your case study will be most concerned with your thought process – unlike banking,f ormatting and small details don’t matter much.

Your communication skills are more important than your knowledge of f inance f or these case studyexercises – if you can’t explain your points simply and reach a solid conclusion, you won’t get an of f er.

So don’t get preoccupied with minutiae – f ocus on your investment thesis and the major reasons you’rerecommending or not recommending an investment.

Factors Outside the Slides

Your presentation style, the number of people watching, and how much time you’re given can also comeinto play, but it ’s very dif f icult to generalize here because each f irm does it dif f erently.

You might present to just 1 interviewer, or it might be to all Partners at the f irm – in which case you betterknow your stuf f .

A lot of this comes down to public speaking, which again is beyond the scope of this article – but here area f ew guidelines I’ve f ollowed when giving speeches and making presentations:

Have some notes with you, but don’t write down word-f or-word what you’re going to say.

Speak twice as slowly as you normally would and look at dif f erent people in your “audience” everyf ew seconds (only applicable if you are presenting to multiple people, of course).

Always practice beforehand, even if you only have 15 minutes – just practice running through it inf ront of the mirror and going through all your points, without reading anything word-f or-word.

How Much It Matters

The case study certainly weighs in heavily, though it ’s not the only f actor in private equity interviews – topf irms usually have many, many rounds of interviews, and even smaller and middle-market f irms can takeweeks or months to make a decision, simply because they can af f ord to be very selective about who theyhire.

I would compare a case study in private equity interviews to technical questions in investment bankinginterviews: doing a poor job can kill your chances, but being a superstar won’t necessarily 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”af ter you’ve cleared the technical hurdles – if everyone likes you and is conf ident you’d do well, you have agood shot at getting an of f er.

Also note that while private equity interviews are very competit ive, you would be mistaken to overestimatethe competit ion.

Most candidates have terrible “stories” and also have no idea why they actually want to do anything in lif e –f rom getting into investment banking or consulting to moving into private equity.

The last thing a PE f irm wants to see is yet another person who’s trying to get in because they heard itwas cool, because all their f riends were doing it, or because they want to make a lot of money and have noidea how else to do it.

So if you make sure your “story” is solid, come across as a likable person, and do your case studyreasonably well, you stand a good shot at getting an of f er no matter how “competit ive” it is.

No, I Don’t Have Any Sample Case Studies and I Don’t Have a Guide (Yet)

Bef ore anyone asks: no, I don’t have any sample case studies because I lost all my documents f rombanking.

If you want to “practice,” I would suggest getting a CIM or OM on a company you don’t know well andrunning through the exercise above – or just pick a random public company and go through their f ilings.

I receive many questions on a PE interview guide, but again I don’t have anything at the moment – PEinterviews are less about specif ic technical questions (except at mega-f unds) 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 andnext year is the earliest it would be out.

But hey, until then you have this article and everything else here on private equity interviews, private equityresumes, and how to get a private equity job in the f irst place.