How do rising interest rates affect the PE landscape, and how would you adjust your financial models and investment strategy in light of rising rates? (1 min)
As of 2022, the Federal Reserve has committed to raising interest rates to combat 7% inflation in the US, possibly by as much as 50 basis points which would drive up borrowing costs materially. This means that interest payments on existing senior debt will rise since they are typically floating rates based on a spread […]
What makes a good investment banking analyst or associate?
The purpose of this question is to see if you understand what it takes to excel in IB. Here are some examples of important traits: Strong work ethic Necessary to survive the hours and stress of the business; IB hours can be anywhere from 80 to 100 hours a week Attention to detail Bankers need […]
When should we use management assumptions / projections in an LBO model? When shouldn’t we? (1 min)
We should use management assumptions and projections in an LBO model only if management has given us significant back-up data and rationale supporting their assumptions. For example, if management is projecting a certain range of revenue growth for each of their segments, we should find out what is underpinning that growth and their reasoning for […]
If you were an investor, what would you look for in the balance sheet?
As an investor, you would be focused on both the book value of the company’s shares as displayed on the balance sheet, which can be calculated as total assets less liabilities. This shows how much the company is worth based only on its accounting books. Another way of thinking of the book value of a […]
Why do changes in inventory affect the income statement?
Ending Inventory = Beginning Inventory + Purchases – Cost of Goods Sold (COGS) Purchases do not affect the income statement, since they represent purchases of unsold inventory which have not been delivered to the customer. However, COGS does show up on the income statement, since it represents inventory that has been sold and delivered to […]
What are the advantages and disadvantages of sourcing a deal through proprietary means vs. participating in a competitive auction? (1 min)
Sourcing a deal through proprietary means can potentially give you a competitive advantage, especially if other private equity firms have not discovered or participated in this niche / sector. For example, a private equity firm could identify a subsector of an industry that is attractive, which has not seen much private equity activity. There may […]
What are the 10 most common ways to increase IRR in an LBO?
10 ways to increase IRR include: 1. Growing revenue by expanding into new markets and ultimately increasing EBITDA2. Growing revenue through add-on acquisitions and ultimately increasing EBITDA3. Growing revenue by cross-selling to existing customers or achieving deeper customer penetration, therefore increasing EBITDA4. Improving gross margins through greater bargaining power, sourcing better suppliers, or improving labor […]
What are the 3 most common ways to increase IRR in an LBO?
The 3 most common ways to increase IRR are: growing EBITDA, paying off debt, and increasing the exit multiple. Growing EBITDA is the most common way to increase IRR. Most PE firms plan to grow EBITDA either by increasing revenues, cutting costs, or some combination of the two. Even if they sell the company at […]
Why does Price / EBITDA not make sense?
Price is an equity value metric, meaning that it only accounts for the equity value and does not account for the debtholders. It represents either stock price or market capitalization. EBITDA is an enterprise value metric, meaning that it goes to both equity holders and debt holders. This is EBITDA is before interest, so we […]
Why not private equity?
Although some candidates may be interested in private equity, it’s important to speak to your interest in investment banking. The focus should be talking about all the advantages of investment banking, rather than talking about the disadvantages of private equity. For example, maybe you enjoy the client presentation aspect of investment banking, which requires you […]
