If you could only use one financial statement, which would you use to evaluate an investment?
We should use the cash flow statement, because it tells us the most about a company’s financial health. Cash is king, because we ultimately decide on a company’s value based on its cash flows. The income statement only shows net income, but this is an accounting number and it does not show important cash flow […]
Why do many traditional mid-market PE firms avoid holding the real estate when buying a company?
Many traditional mid-market PE firms which focus on buying companies for their cash flows and do not have any real estate groups will try to avoid having to buy a lot of real estate in order to complete an LBO. This is because they prefer to focus on their core competencies in buying companies with […]
Tell me about an industry trend you’re following in private equity.
You should try to speak to a trend that is related to the group you’re interviewing for or the subsectors that the PE firm focuses on. For example, if the group is focused on infrastructure, you can speak to how solar power projects have been significantly boosted from the US infrastructure spending bill, and many […]
Walk me through a deal you’ve worked on. (1-2 min)
First, you should provide the context of the deal and company. Explain the target business in an easy-to-understand way, and describe its key segments. Provide a quick overview of the acquirer and its strategic rationale. It’s important to explain upfront why the deal is happening and what the industry backdrop is. For example, is this […]
If Company A is 30% equity, 70% debt currently, but will have a capital structure of 50% equity, 50% debt in year 5, which capital structure do you use for your DCF?
The 50/50% capital structure would be used. When calculating WACC, we assume the optimal target capital structure, which is the capital structure the company will have in the long term and the optimal capital structure for a company in that industry.
What are some key debt metrics, and why are they important?
The leverage multiple, debt / EBITDA, is a common metric comparing debt and EBITDA. EBITDA is a proxy for cash flow that can be used to pay back the debt. It’s also a measure of the core profitability of the business that remains neutral in terms of capital structure, tax jurisdiction, and accounting policies. The […]
Do private equity companies add more value to portfolio companies through financial engineering or operational improvements?
Operational improvements adds more value as the impact is far more permanent than temporarily playing around with the capital structure. Strategic shifts or operational improvements may last a lifetime, while capital structure changes and financial engineering will only affect the company until the PE firm sells the company. This kind of question is usually asked […]
Would a company with a capital lease have a higher or lower EV / EBITDA multiple compared to an operating lease?
This depends if the ratio between the capital lease and the lease payment is higher or lower than the EV / EBITDA of the company. A capital lease is like buying the asset with debt. You pay interest and principal repayments. These payments are below EBITDA, meaning they are not treated as operating expenses (OPEX), […]
How can a PE firm incentivize management to stay and perform?
A PE firm can incentivize management to stay by getting management to put up some equity for the acquisition, also known as management rollover. Usually, management will anywhere from 5-20% of the company to ensure they have “skin in the game.” Another common method to incentivize management is with options. Options give management a percentage […]
What are the advantages and disadvantages of leading a deal by yourself vs. doing the deal with other PE firms as partners?
The advantage of being the only PE firm involved in the LBO is that you have complete control. You can dictate the type of debt financing to be raised and take full control when negotiating the financing terms with banks / institutions. You can choose whether or not to hire an investment bank as an […]
