private equity case study practice

• Education Requirement
• Experience Requirement
• Learning Resources
• CPEP™ Journey
• Register for CPEP™
• Examination
• Careers in Private Equity

Our commitment to fostering the growth of private equity professionals is reflected in the introduction of Private Equity Central, a virtual community that serves as your comprehensive resource and networking platform for success in this ever-evolving industry.

•  myUSPEC
• Career in Private Equity
• Private Equity Central
• Help Center

Don't Have an Account?

Start your CPEP™ journey and manage your profile conveniently by creating your myUSPEC Account today.

Sign In to Your my USPEC Account

• Remember Password
• Forgot Password?

Create myUSPEC Account >

Reset Your Password

Please enter the Email ID you use to sign-in to your account:

Private Equity Case Study: Tips, Prompt & Presentation

Private equity case studies serve as a pivotal stage in recruitment. They offer firms a window to assess candidates' analytical, investing, and presentation skills. Understanding the nuances of these case studies can significantly enhance your preparation and success rate.

This comprehensive guide provides insights into the types of case studies, preparation strategies, and key aspects of presentation and analysis. Whether you're new to private equity or a seasoned professional, mastering these case studies is essential for succeeding in a competitive industry.

What Should You Expect in a Private Equity Case Study?

Private equity case studies are a critical component of the recruitment process, offering firms a valuable opportunity to assess candidates' analytical, investing, and presentation skills. Understanding what to expect in a private equity case study can significantly enhance your preparation and improve your chances of success.

What are the Types of Private Equity Case Studies?

Private equity case studies can take various forms, each presenting its unique set of challenges. Candidates can anticipate encountering one of the following formats.

• Candidates are provided with company information and tasked with evaluating the feasibility of an investment. This type of case study typically involves preparing a comprehensive presentation or investment memo, supported by a detailed LBO (leveraged buyout) model, within a specified timeframe.
• Candidates are granted several days to a week to research a company, develop a model, and formulate a recommendation for or against an acquisition. This type of case study necessitates critical thinking and external research.
• Similar to the take-home assignment, but completed on-site at the firm's office within a few hours. Candidates must construct a financial model and make an investment decision based on the provided information.
• A 1-3-hour test, either conducted on-site or remotely, where candidates must swiftly build an LBO model. Proficiency in Excel shortcuts and familiarity with modelling tests are crucial for success.
• A condensed version of an LBO model completed either on paper or verbally. This type of case study focuses on the fundamental aspects of the model and requires candidates to demonstrate their understanding without the use of Excel.
• Candidates construct a simple leveraged buyout model using pen-and-paper or mental calculations, estimating the internal rate of return (IRR) using rounded figures.

Preparation Strategies

To prepare effectively for a private equity case study, focus on developing your investment thesis, honing your presentation skills, and enhancing your ability to respond to questions thoughtfully. Remember, the complexity of your model is secondary to your capacity to construct a compelling argument for or against the investment.

How to Present a Private Equity Case Study?

Presenting a private equity case study requires a strategic and thorough approach to effectively convey your analysis and recommendations. Whether you're preparing for a take-home assignment or an in-person presentation, mastering the art of presentation is crucial for success in the private equity recruitment process.

The core question you'll encounter in any private equity case study is whether you would invest in the company under consideration. To answer this, you'll need to analyze the provided materials and construct a leveraged buyout (LBO) model to assess the potential return on investment. Typically, a return of 20% or higher is sought.

The case study prompt often includes specific assumptions to guide your LBO model construction, such as the pro forma capital structure, financial assumptions, and acquisition and exit multiples. Some firms may provide an Excel template for the LBO model, while others may expect you to create one from scratch.

Presentation

In a take-home assignment scenario, you'll likely be required to present your investment memo during the interview. This presentation is typically conducted in front of one or two representatives from the private equity firm.

The presentation format may vary among firms, with some expecting you to present first and then field questions, while others may prefer the reverse. Regardless of the format, be prepared to articulate your findings and respond to inquiries.

While technical proficiency is important in private equity recruitment, communication skills and attention to detail are equally critical. Interviewers will assess your ability to convey complex ideas clearly and concisely, as well as your meticulousness in addressing all aspects of the case study.

In the private equity interview process, every detail matters. Therefore, strive to provide a comprehensive and well-structured presentation, demonstrating your analytical rigour and ability to communicate effectively.

How to Do a Private Equity Case Study?

When tackling a private equity case study, a structured approach is crucial to deliver a comprehensive analysis and recommendations.

Step 1: Read and Understand the Material

Begin by thoroughly reading and understanding the provided materials. Gain insights into the company's background, industry dynamics, and financials.

Step 2: Construct a Basic LBO Model

Build a fundamental leveraged buyout (LBO) model using the ASBICIR method (Assumptions, Sources & Uses, Balance Sheet, Income Statement, Cash Flow Statement, Interest Expense, and Returns). This foundational model will underpin your analysis.

Step 3: Enhance Your LBO Model

Incorporate advanced features into your LBO model as required by the case study prompts. While it's essential to cover all aspects, prioritize completing the core financial model to ensure thoroughness.

Step 4: Develop Your Investment Thesis

Step back and formulate your investment view based on your analysis. Consider critical assumptions, conditions for proceeding with the investment, key risks, and primary drivers of returns.

Step 5: Craft Your Presentation

Organize your insights and analysis into a structured presentation. Clearly articulate your investment thesis, supporting analysis, and key findings.

Step 6: Practice Your Presentation

Rehearse your presentation to ensure clarity and confidence. Be prepared to engage in a discussion and defend your investment thesis.

Approaching a private equity case study with this methodical approach demonstrates your analytical prowess and strategic thinking.

How to Succeed in a Private Equity Case Study?

Succeeding in a private equity case study demands a strategic blend of analytical prowess, strategic acumen, and effective communication.

• Master the Fundamentals: Start by focusing on the foundational aspects of the case study before delving into the complexities. Build a solid understanding of financial modelling principles and investment analysis basics. This will provide you with a strong grounding to tackle more intricate tasks with confidence.
• Demonstrate Nuanced Investment Judgment: Avoid simplistic yes or no answers when presenting your investment recommendation. Instead, offer a nuanced analysis that considers the price point at which you would consider investing and the key assumptions driving your decision. Highlight potential avenues for value creation in the deal and discuss the primary risks and uncertainties involved.
• Engage in Meaningful Dialogue: While the ability to build complex financial models is important, what truly sets you apart is your capacity to think critically and engage in intelligent discussion about the investment. Focus on presenting a well-considered recommendation supported by solid reasoning and analysis. Be prepared to discuss your model and elaborate on your investment thesis clearly and concisely.
• Prioritize Substance Over Complexity: While showcasing your proficiency in financial modelling is essential, the goal is not to build the most intricate model. Concentrate on constructing a model that is accurate, logical, and well-structured. The true measure of success lies in your ability to derive meaningful insights from the model and utilize them to make informed investment decisions.
• Highlight Value-Creation Opportunities: In addition to identifying risks, emphasize the potential opportunities for value creation in the deal. Discuss how you would leverage these opportunities to enhance the company's performance and generate returns for investors.

By following these strategies, you can significantly enhance your prospects of success in a private equity case study. Demonstrating your ability to think critically, analyze investments, and communicate effectively will showcase your thought leadership and analytical prowess.

How Do I Prepare for a Private Equity Case Study?

Preparing for a private equity case study requires a structured approach and a solid understanding of the fundamentals of financial analysis and investment evaluation.

• Understand the Case Study Objective: Begin by understanding the objective of the case study, which is typically to evaluate the investment potential of a company. Familiarize yourself with the key concepts and methodologies used in private equity investing.
• Review Financial Modeling Basics: Brush up on your financial modelling skills, focusing on key concepts such as revenue forecasting, expense modelling, and valuation techniques. Practice building and analyzing financial models to prepare for the case study.
• Familiarize Yourself with LBO Modeling: Since leveraged buyout (LBO) modelling is a common aspect of private equity case studies, make sure you are comfortable with building LBO models. Understand the key components of an LBO model, such as debt structure, cash flow projections, and exit strategies.
• Practice Case Studies: Practice solving case studies to hone your analytical skills and improve your ability to think critically. Look for case studies online or create your own based on real-world scenarios to simulate the interview experience.
• Stay Updated on Industry Trends: Keep yourself informed about the latest trends and developments in the industries you are interested in. This will help you make informed assumptions and recommendations during the case study.
• Develop a Structured Approach: Develop a structured approach to solving case studies, including how you will analyze the company's financials, identify key risks and opportunities, and formulate your investment thesis.
• Seek Feedback: Seek feedback from mentors, peers, or professionals in the field to improve your case study skills. Consider participating in case study competitions or workshops to gain practical experience.

FAQs (Frequently Asked Questions)

1. How do you approach a private equity case study? Approach a private equity case study by understanding the objective, reviewing financial basics, practicing LBO modelling, staying updated on industry trends, and developing a structured analysis approach.

2. How can I stand out from other candidates? Stand out by demonstrating nuanced investment judgment, engaging in meaningful dialogue, prioritizing substance over complexity in modelling, and highlighting value-creation opportunities.

3. What is the role of modelling in a private equity case study? Modelling plays a crucial role in a private equity case study as it helps evaluate investment potential, assess risks, and determine the feasibility of an acquisition.

Most Popular

Brought to you by USPEC

Never miss an insight!

Keep reading valuable insights when you sign up for our newsletter.

Stay Updated!

Get the latest in Private Equity with USPEC Newsletter straight to your inbox.

This website uses cookies to enhance website functionalities and improve your online experience. By browsing this website, you agree to the use of cookies as outlined in our privacy policy .

• Our Services
• Assessment Solutions
• Diversity & Inclusion
• The LCap Group
• Current Mandates
• Investment Practice
• Portfolio Practice
• Meet the Team
• Careers with Altus Partners
• News and Insights

• Private Equity Case Studies
• Private Equity Recruitment
• Private Equity Interviews

MASTERING PRIVATE EQUITY CASE STUDIES: A COMPREHENSIVE GUIDE

Share this article.

​ Having progressed through the initial stages outlined in our preparation guide , you are now about to enter the case study phase of the interview process. This stage closely mirrors the tasks you'll perform on the job, testing your analytical skills, strategic thinking, and investment rationale. 

Regardless of the level you enter the fund at, the case study is a generally accepted practice and forms one of the three key pillars of any successful interview process: structured interviews, work–based tests, and psychometric assessments based on empirical evidence.

To help you succeed, this guide delves into the nuances of PE case studies, offering insights from industry experts and best practices.

The Essence of the PE Case Study

A private equity case study typically requires evaluating a potential investment opportunity. You’ll receive an Information Memorandum (IM) for a company the PE firm could consider investing in, potentially some supporting information (industry news/benchmarking), and possibly a part-completed model (though often you are asked to prepare this from scratch). Your task is to value the company and formulate an investment proposal, including whether or not to invest. Keep in mind that this task may not be exclusive. The key lies not only in your final decision but also in the depth and logic of your analysis.

Types of PE Case Studies:

1. paper lbo/dcf.

A Paper LBO/DCF involves a simplified leveraged buyout or discounted cashflow model performed on paper or verbally, focusing on core concepts without the aid of a computer.

Preparation Strategy

Understand Core Concepts: Be well-versed in the fundamentals of LBO and DCF models.

Practice-Without Tools: Get comfortable performing calculations manually or explaining your thought process clearly without visual aids.

2. Timed LBO Modelling Test

A Timed LBO Modelling Test is a fast-paced, 1-3 hour on-site or remote test focused on speed and accuracy. These are often designed to understand the gaps in your skill-set, so it is not about achieving the perfect result, but creating a well thought-through working model. It is therefore important to pace yourself and breakdown what to focus on and when before you start.

Speed and Accuracy: Hone your Excel skills and practice building LBO models quickly.

Simulate Test Conditions: Replicate the pressure of a timed test to build your endurance and efficiency.

3. Take-home LBO Model and Presentation

The Take-home LBO Model and Presentation involves a comprehensive analysis where you might have a weekend or a week to build a full LBO model and prepare a detailed investment recommendation. Typically, you will then be asked to submit your findings and return to present 

Detailed Analysis: Conduct thorough research and develop a comprehensive model. Ensure the numbers balance and that you are not making assumptions based on incorrect data.

Effective Presentation: Focus on creating a clear, concise, and compelling presentation of your findings and recommendations.

4. Commercial Case Studies

Commercial case studies are less frequently used but typically deployed when you come from a non-financial background, such as commercial consulting or industry. In this scenario, you are either presented with a CIM or some high-level information about a business and then asked to think through aspects like business model, unit economics, market dynamics, growth opportunities, investment risks, KPIs, and areas of additional diligence.

Develop a Structured Approach: Create a framework for methodically analysing businesses. Practice with a few random CIMs you can find online. Example framework:

Revenue Generation: How does the business generate revenue? What does it sell, and how does it sell these products or services?

Revenue Evolution: How is the company’s ability to generate revenue likely to evolve? What are its growth prospects?

Direct Costs: What are the direct costs associated with its revenue streams? Is it a people-oriented cost structure, a SaaS business, or a materials-based cost structure?

Indirect Costs: What indirect costs are required to drive revenue? Consider factors like sales intensity and capital intensity.

Financial Understanding: Understand growth rates, margin profiles, operating leverage, unit economics, and cash flow profiles.

Market Positioning and Dynamics: Where is the business positioned in the value chain? What external factors, such as changing market dynamics and competition, will impact the business model

Dissecting the Case Study

To effectively analyse a potential investment in a private equity case study, it is crucial to break down the company and its environment into several key areas. Each aspect provides insight into different facets of the business and its viability as an investment. This section outlines the essential components you should examine, from industry dynamics to the specifics of the transaction, ensuring a comprehensive analysis.

Industry Analysis

Key Products and Markets: Understand the company’s primary products and markets and the main demand drivers.

Market Participants and Competition: Analyse the competitive landscape and the intensity of competition.

Industry Cyclicality: Determine the cyclical nature of the industry and external factors influencing it, such as regulatory changes or economic cycles.

Company Analysis

Position in Industry: Assess the company’s market position and growth trajectory.

Operational Leverage and Margins: Evaluate the cost structure and sustainability of margins.

Management and Cash Needs: Consider the effectiveness of the management team and the company’s working capital requirements.

Financial Analysis

Revenue Drivers and Stability: Identify revenue drivers, growth potential, and stability.

Cost Structure: Examine supplier diversity, fixed versus variable costs, and capex requirements.

Competitive Analysis: Assess industry concentration, buyer and supplier power, brand strength, and potential substitutes.

Growth Prospects

Scalability and Efficiency: Evaluate scalability and potential efficiency improvements.

Due Diligence: Consider environmental, legal, and operational risks.

Transaction Analysis

LBO Model: Build a leveraged buyout model to project financial performance and returns.

Valuation and Debt Capacity: Justify your valuation and the company’s ability to raise and service debt.

Exit Opportunities: Assess potential exit strategies and their impact on returns.

Building a Leveraged Buyout Model

Creating a full 3-statement model is crucial, and it's important to ensure it balances. You will typically build this from scratch, and we recommend a buyout overlay (especially for large-cap funds). While formatting isn't a primary concern, the model should lead you to a clear view of the deal's merits and risks, culminating in a definitive recommendation—whether to invest or not.

Key Components of the Model

Income Statement: Shows the company's revenue, expenses, and net income over a specific period.

Balance Sheet: Displays the company's assets, liabilities, and shareholder equity at a specific point in time, providing a financial snapshot.

Cash Flow Statement: This statement illustrates the company's cash inflows and outflows from operating, investing, and financing activities over a specific period.

Ensuring it balances is a core principle because it reflects the fundamental accounting equation: Assets = Liabilities + Shareholders' Equity. In simpler terms, everything a company owns (assets) must be financed by what it owes (liabilities) and the money invested by shareholders (equity). The 3-statement model is designed to be internally consistent, so changes in one statement should automatically flow through and impact the other statements, ensuring the balance sheet remains balanced.

Buyout Overlay

With a buyout overlay to the model, we can determine:

Financial Assumptions:

Buyout Price: Determine the price per share the private equity firm will pay for the company. Techniques for this can include:

Market Valuation Techniques

Market Multiples: Compares the target company's financial metrics to publicly traded companies in the same industry.

Transaction Multiples: Analyses recent M&A deals in the same industry.

Discounted Cash Flow (DCF) Valuation: Considers the target company's future cash flows, discounting them to their present value to arrive at a company valuation.

Financing Structure: Specify the debt and equity financing mix used to fund the buyout, impacting the company's capital structure and future cash flows.

Exit Strategy: Consider the private equity firm's expected exit timeline, influencing future growth assumptions.

Income Statement:

Impact on Revenue: Analyse if the buyout will affect the company's pricing strategy, market access, or growth initiatives.

Impact on Expenses: Consider potential changes in management structure, financing costs (interest on debt), or one-time transaction fees.

Balance Sheet:

Shareholder Equity Elimination: Upon buyout, existing shareholder equity gets replaced by new equity issued to the private equity firm.

Debt Assumption: Account for the new debt used to finance the buyout, increasing the company's liabilities.

Cash Flow Impact: Model the cash outflow for the buyout transaction and the ongoing cash flow implications of the new debt (interest payments).

Cash Flow Statement:

Financing Activities: Reflect the cash inflow from the debt portion of the buyout financing.

Debt Service: Include the cash outflow for ongoing interest payments on the new debt.

Iteration and Sensitivity Analysis:

Refine Assumptions: Based on industry benchmarks and company-specific factors.

Perform Sensitivity Analysis: See how variations in buyout price, financing structure, or growth assumptions impact the model's outputs.

Presenting Back to the Business

Effectively presenting your analysis to the business is a critical part of the private equity case study process. This step involves synthesising your findings into a clear and compelling narrative that highlights the company’s strengths, weaknesses, opportunities, and threats (SWOT analysis). By doing so, you can provide a comprehensive view of the potential investment, showcasing both its merits and risks. Here’s a detailed breakdown of what to consider when presenting your findings to ensure a thorough and persuasive presentation.

Strengths (Internal - Positive)

Financial Performance: Examine profitability (margins, net income), revenue growth, and cash flow generation.

Competitive Advantage: Identify unique selling propositions or strategic advantages.

Management Team: Evaluate the management team's experience, track record, and expertise.

Product/Service: Consider the quality, innovation, and market demand for the company's offerings.

Operational Efficiency: Analyse production processes, inventory management, and cost structure.

Weaknesses (Internal - Negative)

Financial Performance: Identify weaknesses in profitability, cash flow, or high debt levels.

Market Position: Assess the company’s competitive challenges.

Product/Service: Evaluate the relevance and competitiveness of products or services.

Operational Inefficiencies: Identify inefficiencies in production, supply chain, or overhead costs.

Management Team: Assess any gaps in management experience or track record.

Opportunities (External - Positive)

Market Growth: Identify growth potential in the target market.

Industry Trends: Leverage favourable industry trends.

Technology Advancements: Consider new technologiesto enhance the company's products or services.

Acquisitions: Explore potential acquisitions or partnerships.

Economic Conditions: Evaluate positive economic factors that could benefit the company.

Threats (External - Negative)

Market Competition: Assess the impact of increasing competition.

Economic Downturn: Consider the potential impact of economic slowdowns.

Regulatory Changes: Identify new regulations that could increase costs or restrict operations.

Technological Disruption: Evaluate the threat of emerging technologies.

Political Instability: Consider the impact of political or economic instability in the company’s operating regions.

Key Tips for Success

Prioritise depth over breadth.

Concentrate on the most crucial elements of your analysis. It's better to delve deeply into a few critical points than to cover too many topics superficially.

Simulate Realistic Conditions

Practice under time constraints to enhance your speed and accuracy. Replicating the pressure of a real case study will help you perform better during the actual interview.

Utilise Mock Case Studies

Engage with mock case studies and seek feedback from industry professionals. This will help you refine your approach and improve your analytical skills.

Be Honest and Transparent

If you don’t know the answer to a question, admit it. Honesty is valued over attempting to bluff, as interviewers can easily spot insincerity.

Align with the Firm’s Philosophy

Customise your analysis to match the investment strategy of the private equity firm you are interviewing. Understanding and reflecting on the firm’s investment style can distinguish you from other candidates.

Succeeding in a private equity case study requires a blend of analytical rigour, strategic insight, and effective communication. The process tests your technical skills and ability to think like an investor and articulate your ideas clearly. Here are the key takeaways to ensure success:

Analytical Rigour: Dive deep into financial data to uncover meaningful insights. Develop a robust understanding of the company's financial health through detailed analysis of income statements, balance sheets, and cash flow statements.

Strategic Insight: Go beyond numbers. Assess the company's market position, competitive landscape, growth prospects, and potential risks. Identify where value can be created and understand the broader industry dynamics.

Effective Communication: Your ability to present your findings clearly, concisely, and compellingly is crucial. Ensure your presentation is structured logically, highlights the key points, and supports your investment thesis with solid evidence.

Value Creation Focus: Always keep the potential for value creation at the forefront of your analysis. Consider how operational improvements, strategic repositioning, or market expansion can enhance the company's value.

Practice and Preparation: Simulate real case study conditions to build speed and accuracy. Engage with mock case studies and seek feedback from industry professionals to refine your approach.

Customisation: Tailor your analysis to align with the specific investment philosophy of the PE firm you’re interviewing with. Understanding the firm's strategy and past investments can provide valuable context and make your presentation more relevant.

Focusing on these areas can demonstrate your potential as a valuable investment professional. Remember, the case study is not just a test of your analytical abilities but a showcase of how you approach problem-solving and decision-making in a real-world context.

VOICES OF OUR INTERNS: THEIR INSIGHTS AND APPRECIATION OF DIVERSITY

​At Altus Partners, we proudly partnered with The 10,000 Intern Foundation for another successful year of hosting an intern, demonstrating our com...

REFLECTING ON THE ‘BOOKMARK: READ TO SUCCEED’ CHARITY GALA

​We want to extend our heartfelt thanks to everyone who attended the ‘Bookmark: Read to Succeed’ charity gala at Hotel Café Royal, London. The eve...

​Having progressed through the initial stages outlined in our preparation guide, you are now about to enter the case study phase of the interview p...

ALTUS PARTNERS IS DELIGHTED TO ANNOUNCE THE RECENT PROMOTIONS OF BEN SMITH AND JAMES CLOW TO DIRECTOR IN OUR PORTFOLIO PRACTICE

Altus Partners is delighted to announce the recent promotions of Ben Smith and James Clow to Director in our Portfolio Practice.Ben joined Altus P...

THE IMPACT OF GERMAN LEGISLATION ON M&A ACTIVITY IN THE PRIVATE-EQUITY HEALTHCARE LANDSCAPE

​To some, the anecdote ‘German bureaucracy’ brings with it vivid connotations of red-tape, paper-pushing, and headaches. However, this anecdote is ...

• #Investment
• #PrivateFunds

THE CONSOLIDATION WAVE: HOW PRIVATE EQUITY FIRMS CAN RETAIN TALENT

The private equity (PE) sector stands on the brink of a significant transformation, a shift underscored by the predictions of industry luminaries s...

• #ExecutiveSearch

NAVIGATING THE NEW TALENT LANDSCAPE IN PRIVATE EQUITY

​The Evolution of Executive SearchExecutive search, once a function of management consulting, has evolved to earn its independent consultancy model...

• #AltusPartners

BUILDING AN M&A FUNCTION FROM SCRATCH IN 2024? AVOID THESE COMMON MISTAKES

​2023 was a year to forget for large-cap M&A, as mismatched valuations meant many IMs were abandoned. Global M&A volume was down 20% on 2022 accord...

• Privacy Policy

Savoy Hill House

7-10 Savoy Hill

0203 137 3250

altus-partners

[email protected]

Altus Partners 2023 © All rights reserved.

Connect with us

Buyside Hustle

Investment Banking, Private Equity, Hedge Fund Career Advice

Don’t Get Left Behind

Stay up to date with real advice and have new posts emailed to you. Promise we will never send spam.

By Buyside Hustle Leave a Comment

Best Private Equity Case Study Guide + Excel Model + Example

The most important part of the private equity interview is the case study round. After meeting a few people and going through a number of interviews, you will most likely get hit with a case study where you have to analyze whether a company is a good leveraged buyout target or not.

Your performance during the private equity case study round will determine whether or not you will get an offer. It is the most important part of the interview process, so you need to make sure you are well prepared and create a work product that sets you apart from the other candidates you are competing against.

Private Equity Case Study Example + Full LBO Excel Model

Private Equity Case Study Example + Model

It’s hard to know how to complete a full private equity case study if you don’t actually have experience working in private equity. With just an investment banking background or someone who is straight out of undergrad, you just don’t have the experience to understand how to structure and write a good case study.

Make sure you get access to a full private equity case study that was used in a real interview. You can use this as a reference on how to write your response and build the LBO model with all the key outputs.

Get access here before reading on. It becomes much easier to build a proper LBO model and complete a case study when you can refer to one that is already fully completed.

The case study was written by a private equity professional and includes a:

• Real Private Equity Case Study Example and Response
• Full Detailed LBO Excel Model

How is a Private Equity Case Study Structured

The private equity interview process is a lot more structured relative to hedge fund interviews. Most interviews happen during “on-cycle” recruiting your first six months in investment banking right out of undergrad. This is the best time to land an offer as you have dozens upon dozens of firms that are fighting to get the top talent to work at their firms. People will land offers after a matter of days after answering the basic private equity interview questions because of all this competition.

Unlike hedge fund case studies , private equity case studies are a bit different as it depends on if you are interviewing during the rush of on-cycle recruiting where firms fight for talent. You can expect the case study to be structured in either three ways:

• LBO Modeling Test

If you are going through the crazy all-out blitz of private equity interviews during on-cycle recruiting, you will like get either of the first two types of case studies, the modeling test and/or the paper LBO.

For an interview that is done outside of this period and at most of the smaller middle-market funds, you may get a longer take-home case study that is more comprehensive. It really just depends on the firm and how they conduct interviews.

1. LBO Modeling Test

The LBO modeling test is used in person during on-cycle recruiting very frequently. Usually when on-cycle interviews start, you’ll get invited along with other candidates to do a modeling test over the course of a few hours, then proceed with the usual interviews either before or after.

There is no reason why anyone can’t pass the modeling test. All it takes is practice after practice, just like how you’d get good at anything else. Back when I was an investment banking analyst, the only way I would learn how to do anything was by looking at previous models done by prior analysts saved on the shared drive and recreating those models from scratch over and over again. It’s the best way to learn how to get good at any type of Excel model – looking at precedent then recreating from scratch.

Wall Street Prep was another tool I used back during my investment banking analyst days. There is a course that was specifically created for Private Equity interviews and LBO modeling that teaches you everything you need to know. It was the best resource I was able to find to get prepared for private equity interviews and teaches you how to complete a full LBO model step-by-step from start to finish.

Start preparing today and sign up for the course below if you really want to break into private equity. I promise you will have a very low chance of landing a private equity offer if you do not know the basics of how to build an LBO.

Get 15% off if you use the coupon code in the link below:

Private Equity Masterclass: Step-By-Step Online Course​

A Complete LBO and PE Training Program. Whether you’re preparing for an LBO Modeling test or you want to learn to build an LBO model and become a better PE professional, this course has you covered.

Special Offer: Get 15% Off On Wall Street Prep’s Private Equity Course

2. Paper LBO

The paper LBO is used during interviews to make sure you have spent the time to learn the basics of how an LBO works. Usually, you are given a set of assumptions, a pen/paper and asked to work through a paper LBO live during the interview without the help of a computer or calculator.

 You need to be able to walk through how to:

• Calculate the purchase price
• Calculate sources and uses
• Build a simple income statement and projections
• Build to levered free cash flow
• Calculate the exit value, IRR and multiple on invested capital

The Wall Street Prep course above walks through how to do all this in detail and provides a few paper LBOs that you can use for practice.

3. Private Equity Take-Home Case Study + Written Memo

Now the full-blown take-home case study is the hardest and most in-depth analysis a private equity firm can ask of you during interviews. Outside of on-cycle recruiting, this is the most common type of case study that is given. Most firms will give you a week to work on it independently at home.

This case study round is the most important part of the interview. If you do not have a well-written case study with a good backup model that you can present to the interviewer, you will not get an offer.

The majority of case studies will ask either two questions:

• Look into XYZ company and tell us whether it’s a good LBO target
• Find an attractive LBO target and give us your thoughts

To answer the first question, you need to screen a universe of public companies and find one that could be an attractive target. You need to find a business that has the following characteristics:

• Growing market dynamics – markets that have structural tailwinds is a good place to start
• Strong competitive advantages – study Porter’s Five Forces if you haven’t already
• Stable recurring cash flows – business is going to be levered up in a buyout so it needs to have positive EBITDA and stable cash flows to pay off interest payments
• Low working capital / capex needs

Quickly eliminate all companies in your screen that have:

• Negative EBITDA
• High capex needs (capex is >75% of EBITDA)
• High valuation (EV/EBITDA is > 15x)

You can quickly eliminate companies in your screen that have negative EBITDA or high capex needs. Once you’ve found your target company (or if already given one), then you can start working on the actual meat of the case study.

Steps to Finish a Private Equity Case Study

This guide will walk you through all the steps required to complete a case study, from start to finish. You will learn everything from what documents you need to download, to how to build the LBO/model with all the key outputs, to how to actual write a good memorandum/presentation, to all the common mistakes to avoid.

• Download and organize all documents in one folder
• Research the industry to understand trends and key metrics
• Read the filings and take notes
• Input financials in Excel and build the LBO model
• Work on the presentation / memo

1. Download and organize all documents in one folder

You want to have everything in one folder that you can quickly access. Key websites to use for company filings are:

• www.sec.gov/edgar/searchedgar/companysearch.html – for direct access to filings
• www.Bamsec.com – access to filings in an organized fashion
• You want to save down (at the very least) the latest 10K and the prior four 10Qs, last four transcripts, earnings releases, investor presentations and supplements
• Other sources if you have access to them: Bloomberg, CapIQ, FactSet
• Sell-side research – sell-side research is how you gauge market expectations and quickly understand the business. Most initiating coverage reports will give a good overview of the company, its strengths, weaknesses and competitive landscape. Ask around for others to send you research if you don’t have direct access
• Other write-ups online – read all of the articles on Seeking Alpha and look at ValueInvestorsClub.com. Research on Seeking Alpha is usually very bad, but there may be articles that do a good job summarizing any fundamental pressures / tailwinds

2. Research the industry to understand trends and key metrics

If you have access to sell-side research, then go through the latest industry analysis for your target company or initiating coverage reports. When a sellside research firm initiates coverage, they write up a very in-depth review of the company. These reports provide a very good summary of a company and the industry it’s in with all relevant metrics.

If you don’t have access to sell-side research, then go through prior investor presentations of the company or any of its peers. There should be an industry/market overview and benchmarking metrics vs. peers in these presentations.

If you do not understand what is happening in the industry that the company is in, you will not know if there are any big headwinds or tailwinds that are directly impacting the company. A lot of private equity LBOs focus on growth and consolidation within an industry, so you need a good understanding of the market and what the growth opportunities are.

3. Read the filings and take notes

Create a new word document to copy and paste anything notable that you read. You can create sections in your notes for company overview, revenue / cost drivers, fixed versus variable costs, industry tailwinds/headwinds, key questions for items you don’t understand or need to follow-up with management on, etc.

The most important part of every 10K/10Q is the management’s discussion and analysis section (MD&A). This is where the company talks in detail about how the business has performed over the quarter/year relative to prior year’s performance. You should focus on the sections of the MD&A that talk about the revenue and cost drivers. Make a table in Excel and copy and paste commentary every quarter on what impacted revenue growth and margins (COGS and SG&A). Once you lay it all out in Excel, the fundamental picture of the Company becomes clearer and you can see what has had a major impact on recent results.

The most important thing you should read are the transcripts and investor presentations. Management usually gets into more detail on the overall strategy and key tailwinds / headwinds of the business. Additionally, you can gauge what the sell-side is most focused on in the Q&A section at the end of every transcript.

Lastly, read the risk section of the latest 10K to note what the Company finds to be the biggest risks to its overall performance. Pay close attention to the top few items listed here as you want to see what the structural/secular challenges are to the business.

4. Input financials in Excel and build the LBO model

Since private equity interviews can start very quickly after you start your first job in investment banking, most do not know how to properly build an LBO model. Every single private equity firm builds an LBO when looking at any investment. If you want to work in private equity, you need to make sure you spend time understanding an LBO, how it works and how to build one in your sleep.

Like I mentioned before, sign up for Wall Street Prep if you don’t know how to build an LBO. It’s the best resource available to learn how to build a LBO model and provides step-by-step instructions using a real public company example.

5. Work on a presentation or write a memo

Once you have done all the research and finished the modeling, you need to create outputs in a presentation or word doc format. The interviewer may specify what kind of output they prefer, but if not than do what you most comfortable with.

This presentation/memo will be what your interviewer will focus on, so the outputs need to be nicely formatted just like how you create outputs in investment banking. Formatting may not seem that important to you, but showing that you can present analysis in a clean, formatted manner without errors is what will set you apart from your peers.

Continue reading below to learn everything you need to know on what to include in this presentation or memo.

Private Equity Case Study Presentation / Memo

Background and company overview.

If you had to screen to find a company, briefly summarize the criteria you used to choose your company. List the financial metrics and any other factors you used when making the decision.

Then you need to summarize what that company does in around five sentences. If you were provided the company to analyze, the interviewer already knows what the company does so no need to go that much in depth as you can describe more in person if asked. Make sure to describe how the company makes money (a revenue breakdown), where they make money (what markets drive the most revenue), who their customers are (customer concentration), etc.

This is the easiest section as you can open up the latest 10K and within the first few pages there is a business description section that outlines what the company does. You should also check the latest investor presentations (if available) and sell-side research initiating coverage reports as they usually give good overviews of the company.

You need to make sure you yourself understands what the company does and what the revenue and cost drivers are. Anybody can copy the business descriptions written by the Company and sell-side research. You should make sure you know the company well enough to be able to talk about it without looking at your notes.

Investment Thesis/Highlights

Here you list out the top reasons why a company is a good leverage buyout target or not. The most common investment highlights discussed in a potential target can be:

• Attractive market dynamics due to XYZ reasons – could be due to fragmented market / consolidation opportunities, growing market dynamics, geographic expansion lack of competition, etc.
• Multiple ways to win – private equity firms love businesses that don’t just rely on one avenue of growth, so point out all the different ways value can be created either through revenue growth, expense rationalization, multiple expansion, etc.
• Recurring revenues – leverage buyout targets need to have steady cash flows since the business is going to be levered up in an acquisition and so cash flows need to be steady to support high recurring interest payments on the debt. Revenues need to be stable, recurring and non-cyclical in nature.
• Asset-light business – Also, PE firms like businesses that are asset-light (low capital expenditures or working capital requirements) and have low variable costs (little need to increase the expense base to grow revenues, also known as operating leverage).
• Valuation – if a company is underappreciated in the public markets and trades at a low valuation relative to peers, then returns can be very high if you can somehow grow/fix the business and make it more attractive at exit in the future. High LBO returns come from both growing cash flows and multiple expansion. Usually, you want to assume the same exit multiple (the multiple you sell the business for) in your model compared to your entry multiple (the multiple you purchased the business for). Purchasing a business at a high multiple and selling it at a lower multiple in the future will lead to significantly lower returns and can be a big risky.

Like I mentioned earlier, make sure you understand Porter’s Five Forces to understand the main competitive advantages/disadvantages a business can have.

Recommendation to Investment Committee

Summarize whether or not you think the company you chose to analyze (or were provided) is a good LBO target or not. Everything depends on the purchase price, so if you mention that it is not a good LBO target then make sure to describe why and at what price do you think makes the deal attractive.

Financials/Return Summary

Your LBO model should have summary outputs that describe how attractive the deal looks from a financial perspective. At minimum, you need to show:

• Returns at various prices
• Sources and uses
• Pro forma capitalization
• Sensitivity table on returns, showing IRR/MOIC at various premiums and exit multiples
• 5-year levered free cash flow bridge
• Main model assumptions

The private equity case study example shows you all of these outputs and more, which you can replicate for your model.

Here you talk about the main risk factors and any potential unexpected events that would cause the firm to lose money on its investment. Look in the Risk Factors section of the 10K or sellide research to understand what the main risks are to the business. Analyze the most important risk factors to see if they have any merit and the potential implications to your analysis if the risk factor is realized. Examples of risks include technology disruption, realization of synergies / other cost savings initiatives, commodity price changes, wage or cost inflation in general, cyclicality/seasonality, changes to regulations, etc.

Outstanding Diligence Questions

Depending on the company, there may or may not be very detailed information on the company in public filings. Usually the bigger the market capitalization, the better the disclosures are.

You want to show the interviewer a list of diligence items you would still want to ask from the company to better understand the business. These questions should be around unit economics, profitability by segment/region, strategic plan over the next five years, cost structure plans/initiatives, etc.

Model Output/Exhibits

Either in a separate PDF or in the exhibits, you want to have a full output of the entire LBO model. At most private equity firms, associates print out the full model to discuss key assumptions with others on the deal team and to make sure everything is working properly. Make sure your Excel is nicely formatted and is already in print format.

The model should have all the outputs described above as well as full detailed 3-statement financials, revenue build and the levered free cash flow waterfall.I know this seems like a lot of work, but it’s the minimum that you need to do for a take home private equity case study.

General Tips and Common Mistakes to Avoid

Get Access to a Real Private Equity Case Study Example + Excel Model

If you need an example case study used in an real interview, then get instant access to one in the link below. You can use this as a reference as you complete a case study to make sure you are building the LBO model correctly, having all the key outputs, and learning how to put it all together in a written memo.

Check your model for errors

One of the worst things you can do is send a model that has a huge bust that changes all the outputs and return metrics. It’s the quickest way to get axed during the interview process, so make sure you spend time going through each cell of your model after completion to make sure there are no errors.

Spend time properly formatting the case study

Being able to cleanly present your analysis is a very important skill in private equity. Most firms create decks and go to investment committee to present a deal, so you need to show that you can format properly and present financials in a clean manner.

There are a ton of people applying for the same job as you are, so you need to figure out a way to differentiate yourself. If you were previously or currently an investment banker, then you should have no problem properly formatting the Excel model and the memorandum.

Understand the firm’s investment style

Every private equity firm has their own approach to making investments. Make sure that you understand the types of investments the firm likes to make and the key qualities to look for.

Then if given a case study, point out these key qualities. It’s good to show that you can analyze investments in a similar manner as the private equity firm you are interviewing at if possible.

Prepare for the most common private equity interview questions

Private equity is one of the most sought career paths and one of the Best Paying Jobs in Finance and Wall Street . There are so many young, smart, Ivy League educated investment bankers trying to break into private equity, so you must make sure you stand apart from the crowd in both your case study and when answering the most common private equity interview questions .

Don’t lie or try to bullshit if asked a question you do not know the answer to

The problem with a lot of smart people in this industry is that they are reluctant to say “I don’t know” and tend to talk as if they know what they are talking about. Interviewers will easily see through the bull shit as they likely know the company well and have heard others talk about the company.

Be a “straight shooter.” Be honest if you do not know the answer to a question and say you will follow-up with the interviewer. That said, you should know the company and industry inside out before presenting the case study and be confident when you speak about facts that you know are true.

Memorize key metrics

When discussing the case study in person with the interviewer, make sure you are an expert in the company and can answer questions on the spot without having to reference your written case study. Key metrics you should know off the top of your head include EBITDA, capex, interest, margins, market cap, total enterprise value, leverage, valuation metrics, valuation metrics versus peers, IRR/MOIC, etc.

Recent Posts

• What is Ethereum? The Global Financial Settlement Layer
• Will Home Prices Go Down? Get Ready for a Downturn
• Complete List Of Finance Firms In Miami Florida
• Reality Of Working At A Hedge Fund – An Insider’s Guide
• Safest Cash Investments Ranked – Maximize Returns Today

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Notify me of follow-up comments by email.

Notify me of new posts by email.

This site uses Akismet to reduce spam. Learn how your comment data is processed .

How to prepare for the case study in a private equity interview

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.

Get Morning Coffee  ☕  in your inbox. Sign up here.

“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?'

When the case study interview starts, you usually 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 this 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.”

Felix Beuttler, a former Goldman Sachs associate and founder of FinEx Academy, says bankers and consultants have different strengths and weaknesses when it comes to the case study interview. "Consultants are often too focused on the qualitiative elements and bankers are too focused on getting the numbers right," he says. Both need to prepare with a view to overcoming their weaknesses.

A good business or 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 now that rates are higher, prices are still comparatively high, and adding value is more difficult. "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:

Beuttler advises his students to assemble a deck filled with a particular set of slides, including investment highlights, investment risks, a value creation strategy, returns analysis and a clear conclusion. You will also want to include slides outlining the route to deriving a return on the investment.

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

- Substitutes

- Input access

When you're considering the growth prospects, you need to think about:

- Scalability

- Change of asset usage (Leasehold vs. freehold, could manufacturing take place in China?)

- Disposals

- 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.”

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.

Have a confidential story, tip, or comment you’d like to share? Contact: +44 7537 182250 (SMS, WhatsApp or voicemail). Telegram: @SarahButcher.  Click here to fill in our anonymous form , or email [email protected]. Signal also available.

Bear with us if you leave a comment at the bottom of this article: all our comments are moderated by human beings. Sometimes these humans might be asleep, or away from their desks, so it may take a while for your comment to appear. Eventually it will – unless it’s offensive or libelous (in which case it won’t.)

Sign up to Morning Coffee!

The essential daily roundup of news and analysis read by everyone from senior bankers and traders to new recruits.

Boost your career

The man you must never mention in a private equity interview

Associate at US bank said to die after working 120 hour weeks

Morning Coffee: Graduates joining banks on $120k salaries chased by firms paying $320k before they start. Moelis cancels Jonathan Kaye

Morning Coffee: Cause of death of banking associate disclosed. Family offices hiring juniors on $300k

Morning Coffee: HSBC sent rejected candidates an unfortunate email. Citi compliance officer says she was fired for whistleblowing

What is a strat job in a bank? At Goldman Sachs and beyond...

Deutsche Bank's new ex-Morgan Stanley head of credit trading is surveying some empty seats

Senior trader resigns after new boss from Citi goes on vacation

Citi's "nice guy" technology MD resurfaced at Nomura, which is hiring despite a UK loss

Goldman Sachs' London office: Fewer people, higher pay

Related articles

How to move from banking to private equity, by a former associate at Goldman Sachs

The banks with the best and worst working hours

Private equity pay: where the money has been made

Receive our daily roundup of news and analysis read by bankers, traders, and new recruits.

S T R E E T OF W A L L S

Lbo modeling test example.

When interviewing for a junior private equity position, a candidate must prepare for in-office modeling tests on potential private equity investment opportunities—especially LBO scenarios. In this module, we will walk through an example of an in-office LBO modeling test. In-office case studies and modeling tests can occur at various stages of an interview process, and additional interviews with other members of the private equity team could occur on the same day. Therefore, you should strive to be able to do these studies effectively and efficiently without draining yourself so much that you can’t quickly rebound and move on to the next interview. Make sure to take your time and build every formula correctly, since this process is not a race. There are many complex formulas in this test, so make sure you understand every calculation.

This type of LBO test will not be mastered in a day or even a week. You must therefore begin practicing this technique in advance of meeting with headhunters. Repeated practice, checking for errors and difficulties and learning how to correct them, all the while enhancing your understanding of how an LBO works, is the key to success.

• Investment Scenario Overview

Given Information (Parameters and Assumptions)

Step 1: income statement projections, step 2: transaction summary, step 3: pro forma balance sheet.

• Step 4: Full Income Statement Projections

Step 5: Balance Sheet Projections

Step 6: cash flow statement projections, step 7: depreciation schedule, step 8: debt schedule, step 9: returns calculations.

Below we provide the given information from a real-life LBO test that was given to a pre-MBA associate candidate at a large PE firm. We will use it as an example of how to build an LBO model from scratch during the interview. Remember that candidates will receive a laptop and a printout with key information regarding the transaction to complete this assignment.

ABC Company, Inc.

Scenario Overview and Revenue Assumptions:

ABC Company, Inc. is a developer of software applications for smartphone devices. The company sells two products for the various smartphones. The first is a software application called Cloud that tracks weather data. The second application, Time, acts as a calendar that keeps track of a user’s schedule. ABC Company prices Cloud at $16.00 and Time at $36.00 per software license. ABC Company sold 1.5 million copies of Cloud and 3 million copies of Time in 2010. That was the first year ABC Company generated any revenue.

Each software application requires the payment of a $5.00 renewal fee every year. ABC Company renews approximately 25% of the licenses it sold in the prior year; this renewal fee acts as a source of recurring revenue. To simplify, assume that renewals happen for only one additional year and that the recurring revenue stream is based on the prior year’s new licenses. Note that ABC Company does not incur any additional costs for renewals.

COGS assumptions (assume constant throughout the projection period):

• Packaging costs = $1.50 per unit
• Royalties to technology patent owners = $3.00 per unit
• Marketing expense = $3.00 per unit
• Fulfillment expense = $4.00 per unit
• Fees to smartphone companies = 15% of sale price (does not include renewal fees)
• ABC Company incurs a 15% bad debt allowance on total revenues (consider this as part of cost of sales, wherein ABC Company is unable to collect from customers’ credit card companies).

G&A and other assumptions (assume constant throughout the projection period):

• Rent of development property and warehouse facilities = $350,000 annually
• License fee to telecom internet providers = $1.5 million annually
• Salaries and benefits = $1.75 million annually
• Sales commissions = 5% of all sales including renewals
• Offices and other administrative costs = $750,000 annually
• CEO salary and bonus = $1.25 million annually + 3% of all sales including renewals
• Federal tax rate = 35% and state tax rate = 5% on EBT

Starting Balance Sheet:

Investment Assumptions:

Due to the depressed macroeconomic and investing environment, the PE fund is able to acquire ABC Company for the inexpensive purchase price of 5.0x 2011 EBITDA (assuming a cash-free debt-free deal), which will be paid in cash. The transaction is expected to close at the end of 2011.

• Senior Revolving Credit Facility: 3.0x (2.0x funded at close) 2011 EBITDA, LIBOR + 400bps, 2017 maturity, commitment fee of 0.50% for any available revolver capacity. RCF is available to help fund operating cash requirements of the business (only as needed).
• Subordinated Debt: 1.5x 2011 EBITDA, 12% annual interest (8% cash, 4% PIK interest), 2017 maturity, $1 million required amortization per year. (Hint: add the PIK interest once you have a fully functioning model that balances.)
• Assume that existing management expects to roll-over 50% of its pre-tax exit proceeds from the transaction. Existing management’s ownership pre-LBO is 10%.
• Assume a minimum cash balance (Day 1 Cash) of $5 million (this needs to be funded by the financial sponsor as the transaction is a cash-free / debt-free deal).
• Assume that all remaining funding comes from the financial sponsor.
• Assume that all cash beyond the minimum cash balance of $5 million and the required amortization of each tranche is swept by creditors in order of priority (i.e. 100% cash flow sweep).
• Assume that LIBOR for 2012 is 3.00% and is expected to increase by 25bps each year.
• The M&A fee for the transaction is $1.5 million. Assume that the M&A fee cannot be expensed (amortized) by ABC and will be paid out of the sponsor equity contribution upon close.
• In addition, there is a financing syndication fee of 1% on all debt instruments used. This fee will be amortized on a five-year, straight-line schedule.
• Assume New Goodwill equals Purchase Equity Value less Book Value of Equity.
• Assume Interest Income on average cash balances is 1%.

Hint: The first forecast year for the model will be 2012. However, you will need to build out the income statement for 2010 and 2011 to forecast the financial statements for years 2012 through 2016.

• Build an integrated three-statement LBO model including all necessary schedules (see below).
• Build a Sources and Uses table.
• Make adjustments to the closing balance sheet of ABC Company post-acquisition.
• Build an annual operating forecast for ABC Company with the following scenarios (using 2010 as the first year for the revenue forecast; note that 2010 EBITDA should be approximately $25 million). Assume that in 2011 there is 5% growth in units sold (both Cloud and Time units).
• Upside Case: 5% annual growth in units sold (both Cloud and Time units)
• Conservative Case: 0% annual growth in units sold (both Cloud and Time units)
• Downside Case: 5% annual decline in units sold (both Cloud and Time units)
• Build a Working Capital schedule using Accounts Receivable Days, Accounts Payable Days, Inventory Days, and other assets and liabilities as a percentage of Revenue. Assume working capital metrics stay constant throughout the projection period and assume 365 days per year.
• Build a Depreciation Schedule that assumes that existing PP&E depreciates by $1 million per year, and that new capital expenditures of $1.5 million per year depreciate on a five-year, straight-line basis.
• Build a Debt schedule showing the capital structure described earlier. Use average balances for calculating Interest Expense (except for PIK interest—assume that PIK interest is calculated based on the beginning year Subordinated Debt balance and not the average over the year).
• Create an Exit Returns schedule (including both cash-on-cash and IRR) showing the returns to the PE firm equity based on all possible year-end exit points from 2012 to 2016, with exit EBITDA multiples ranging from 4.0x to 7.0x.
• Display the results of all of these calculations using the “Upside Case.”

Note that the above description incorporates all of the information, assumptions and assignments that were given in this LBO in-person test example.

As part of the first step, build out the core operating Income Statement line items for years 2010 through 2016.

• Make a distinction between 2011 assumptions and 2012-2016 assumptions
• Take the provided assumptions and make the revenue and cost build based upon them.

• OFFSET is a simple Excel formula that is used commonly to interchange scenarios, especially if the model becomes very complex. It simply reads the value in a cell that is located an appropriate number of rows/columns away, based on the parameters given to the function. Thus, for example, =OFFSET(A1, 3, 1) will read the value in cell B4 (3 rows and 1 column after A1).

Next, build the costs related to Revenue based upon the information given in the case.

Then, build the G&A expenses from the given information.

Finally, build a simple summary schedule for the above projections.

As part of the second step, build out the transaction summary section which will consist of the Purchase Price Calculation, Sources and Uses, and the Goodwill calculation.

• This model assumes a debt-free/cash-free balance sheet pre-transaction for simplification. Without debt or cash, the transaction value is simply equal to the offer price for the equity (before fees and minimum cash—discussed below).
• The funding for this model is fairly simple: the funded credit facility is 2.0x 2011E EBITDA, the subordinated debt is 1.5x, and the remaining portion is the equity funding, which is a combination of management rollover equity and sponsor (PE firm) equity. (Note that the 5.0x 2011E EBITDA is the offer value for the equity before the M&A and financing fees and the minimum cash balance, not after. After fees/cash, it ends up being 5.25x.)
• The management rollover is simply half of the management team’s proceeds from selling the company. Since management owned 10% of the company before the transaction, it constitutes 5% of the offer price for the original equity.
• The sponsor equity is the “plug” in this calculation. In other words, it is the amount that is solved for once all other amounts are known (offer price + minimum cash + fees – debt instruments – management rollover equity).
• The total equity (including management rollover) represents about 30-35% of the funding for the deal, which is about right for a typical LBO transaction.
• Goodwill is simply the excess paid for the original equity (offer price – book value of equity).

As a next step, build out the Pro Forma Balance Sheet using the given 2011 balance sheet. To do this, you need to incorporate all the transaction and financing-related adjustments needed to produce the Pro Forma Balance Sheet. Each adjustment is discussed in detail below.

• Since this is a cash-free and debt-free deal to start, there are no Pro Forma adjustments for the cancelling or refinancing of debt.
• Cash increases by $5 million upon close because the sponsor is funding the minimum cash balance (minimum cash that is assumed to be needed to run the business).
• The New Goodwill is simply the purchase value of the equity (not including fees) less the original book value of the equity.
• The adjustment for Debt Financing Fees reflects the cost of issuing the new debt instruments to buy the company. This fee is considered an asset, and is capitalized and amortized over 5 years.
• The Debt-related adjustments reflect the new debt instruments for the new capital structure.
• The Equity adjustment reflects the fact that the original equity is effectively wiped out in the transaction—the “adjustment” amount shown here is simply the difference between the new equity value and the old one. The new equity value will equal the amount of the total equity funding for the transaction (sponsor plus management’s rollover) less the M&A fee, which is accounted for as an off balance-sheet cost.
• VERY IMPORTANT: This stage of the LBO model development (once Pro Forma adjustments have been made to reflect the impact of the transaction on the balance sheet) is a very good time to check to make sure that everything in the model so far balances and reflects the given assumptions. This includes old and new assets equaling old and new liabilities plus equity; new sources of capital equaling the transaction value, which equals the offer price for the original equity (adjusting for cash, old debt and fees), etc.

Step 4: Full Income Statement

Next, build the full Income Statement projections all the way down to Net Income. Note that a few line items (especially Interest Expense!) will be calculated in later steps. Once the Cash Flow section and other schedules are built, link all the final line items to complete the integrated financials.

• You can link the Revenue, COGS and SG&A calculations to the operating model (built in Step 1) to get to EBITDA.
• D&A will be linked to the Depreciation Schedule that you will need to build (schedule of the Depreciation of the existing PP&E and new Capital Expenditures made over the projection period).
• Interest Expense and Interest Income will be linked to the Debt Schedule that you will need to build. There will be a natural circular reference because of the cash flow sweep feature of the LBO model, combined with the fact that Interest Expense is dependent upon Cash balances. This is usually one of the last things you should build in an LBO model.
• The amortization of Deferred Financing Fees is fairly straightforward: it uses a straight-line, 5 year amortization of the fees described in the case write-up and computed in Step 2.
• The tax rates apply to EBT after all of these expenses have been subtracted out. They are given in the case write-up.

Next, forecast the Balance Sheet from 2011 to 2016. Note that we start with the 2011 Pro Forma Balance Sheet from Step 3 , not the original Balance Sheet.

• Laying out the Balance Sheet is similar to laying out the Income Statement—you’ll have to set up the framework for some line items and leave the formulas blank at first, as they will be calculated in the other schedules you will create.
• Cash remains at $5 million throughout the life of the model, as we’re assuming a 100% cash flow sweep and that the minimum cash balance is $5 million. (Cash would only start to increase if we project out long enough that all outstanding Debt is paid off.)
• Accounts Receivable (AR): Calculate AR days (AR ÷ Total Revenue × 365) for 2011 and keep it constant throughout the projection period.
• Inventory: Calculate Inventory days (Inventory ÷ COGS × 365) for 2011 and keep it constant throughout the projection period.
• Other Current Assets: Keep this line item as a constant percentage of revenue throughout the projection period.
• Accounts Payable (AP): Calculate AP days (AP ÷ COGS × 365) for 2011 and keep it constant throughout the projection period.
• Other Current Liabilities: Keep this line item as a constant percentage of revenue throughout the projection period.
• Total Deferred Financing Fees are computed based upon the Debt balances and percentage assumptions given in the model. Deferred financing fees are then amortized, straight-line, over 5 years.
• The Credit Facility and Subordinated Debt line items will link to your Debt schedule. Their balances will decrease over time as a function of the cash available for Debt paydown (since the case write-up specifies a 100% cash sweep function).
• Equity (specifically Retained Earnings) will increase each year by the same amount as Net Income, because there are no dividends being declared. If dividends were to be added into the model, you would calculate ending Retained Earnings as Beginning Retained Earnings + Net Income – Dividends Declared.
• As discussed earlier, the balance sheet has the pleasing feature that if it balances, the model is probably operating correctly! Now is another good time to make sure everything balances before proceeding.

Next, forecast the Cash Flow Statement as requested in the Exercises section.

• Start with Net Income and add back non-cash expenses from the Income Statement, such as D&A, Non-Cash Interest (PIK), and Deferred Financing Fees.
• Next, subtract uses of Cash that are not reflected in the Income Statement. These include the increase in Operating Working Capital (which you calculated using your balance sheet) and Capital Expenditures (which is calculated here or, alternatively, could be calculated in the Depreciation Schedule to be built shortly).
• Next, calculate the change in cash, which will be interconnected with the Debt schedule. In this case, the model is assuming a 100% cash flow sweep (after mandatory debt amortization payments), so cash should not change after the 2011PF Balance Sheet amount of $5 million.
• Even though the amount is not changing, the Cash line item should link back to the Balance Sheet. This is because the model could later be used to relax the assumption that 100% of excess cash is swept to pay down Debt. If it’s less than 100%, Cash would accumulate, and that would need to tie in to the other financial statements.

Next, forecast the Depreciation schedule as requested in the Exercises section.

• The original PP&E is depreciated $1 million annually, as stated in the assumptions.
• New Depreciation is calculated based on the annual investment in Capital Expenditures over the projection period. This new Depreciation is created using a waterfall (see above): each year new Capital Expenditures occur and need to be depreciated; each year, Capital Expenditures from previous projection years in the model may have to be partially depreciated in that year. The sum of all of the component Depreciation line items (one row for each year, plus the Depreciation on the original PP&E) gives the total Depreciation Expense for the year.

Note that this model is less complex than it could be. Given that Capital Expenditures do not change each year, and that each new Capital Expenditure is depreciated according to the same simple schedule, the numbers and calculations are fairly straightforward. Here, we’re simply assuming that new Capital Expenditures are expensed evenly over a 5 year period (using straight-line depreciation), as specified in the case write-up.

Next, forecast the Debt Paydown and Interest Expenses for each year via the Debt Schedule, as requested in the Exercises section.

• WARNING: Be very careful about changing formulas once you have built the iterative calculation. If you do so and introduce an error, it could bust your entire model if you’re not careful. This is because the error will travel all the way through the iterative calculations and end up everywhere! If you run into this problem, break the circular reference entirely (by deleting it), reconstruct the calculations for the first forecast year (2012), and then copy and paste them across the columns, one year at a time (2013, then 2014, etc.). Many PE professionals have spent late nights in the office trying to recover from an accidental error introduced into a circular LBO model formula!
• The non-discretionary portion is the required amortization payments made on debt (in this case, there is only required pay-down for subordinated debt).
• The discretionary portion is the sweep portion of the remaining LFCF less required amortization. Since we’re assuming a 100% cash flow sweep, all of the LFCF is used to pay down debt—first the Senior Credit Facility, then the Subordinated Debt. The cash flow sweep and required payments will help you calculate the beginning and ending balances of both of the debt tranches.
• Also note that we need to include a fee for the availability of the unused portion of the RCF, even if the business never uses it—this is a typical, annual commitment fee arrangement for revolving credit facilities.
• The interest rate on the debt is a floating rate (this means an interest rate that is dependent on LIBOR, according to the assumptions provided). We need to calculate interest based on this rate times the average S/RCF balance over the year.
• The 8% cash interest is calculated based upon the average of the debt balance, just like with the S/RCF.
• However, the 4% PIK (non-cash) interest will accrue based upon the beginning debt balance, not the average.
• Because of this difference (and the fact that one source of interest uses cash and the other does not), we need to make sure we’re using separate line items for the two types of Interest Expense.
• We also need to be aware of the mandatory amortization payment of $1 million per year, provided in the assumptions. This amount will get paid down out of LFCF no matter what.
• Interest Income on Cash is fairly easy to calculate—it is the Cash interest rate (1%) times the average balance throughout the year. This amount will increase Cash.
• Total Interest needs to be linked to the Income Statement.
• Non-Cash Interest needs to be added back to Net Income in the Statement of Cash Flows to assist in deriving LFCF (it’s a non-cash expense).
• Any LFCF that is not used to pay down Debt needs to link to the Cash line item of the Balance Sheet. (In this model none will, but you should include this measure in case the model is later used to either relax the 100% cash sweep assumption, or to project financials beyond the point at which all debt has been paid off).
• All Debt balances paid down by LFCF need to link to the Debt line items on the Balance Sheet.

In the final step of the LBO test, build out the Returns calculation required in the Exercises section.

• For each year, we simply take EBITDA multiplied by a range of purchase multiples to get to a total Exit Value for the company (Transaction Enterprise Value, or TEV).
• Next, we subtract out Net Debt (which is dependent on the 3-statement model you just created) to get to Equity Value.
• Next, we calculate the portion of the Equity Value that belongs to the management and the sponsor by using the initial equity breakdown for each party.

LBO Case Study: Conclusion and Final Comments

We hope that this case study provides some insight into all of the considerations that need to be made in building a realistic LBO model based on a case study in a Private Equity interview, and that the 9-step breakdown helps you simplify the task into easy-to-replicate and easy-to-execute steps.

No one becomes an expert LBO modeler overnight, so the key to doing well in this portion of the process is practice, practice, and more practice. With enough sample LBO cases, you should be able to master the steps needed to confidently build a fully functioning, professional LBO model on interview day.

Good luck with the modeling case and with the interviews!

• Video Tutorials
• Knowledge Base
• Group Licenses
• Why Choose Us?
• Certificates

• Leveraged Buyouts and LBO Model Tutorials

Paper LBO Example: Full Tutorial for Private Equity Interviews

In this tutorial, you’ll learn how to complete a “paper LBO” test in a private equity interview and how to approximate the IRR in a leveraged buyout using pencil and paper.

• Tutorial Summary
• Files & Resources
• Premium Course

Paper LBO Definition: In a “paper LBO” test, a private equity firm describes the leveraged buyout of a company and asks you to approximate the IRR or money-on-money multiple in the deal without using Excel or a calculator .

Key Tips for Paper LBO Tests

Paper LBOs are not true “financial modeling tests” in the same way that other Excel-based exercises are; they’re more like extended mental math questions.

To succeed with paper LBO tests, you must round and simplify the numbers as much as possible so you can finish the calculations within the time limit (often 30 minutes or less).

It’s also important to start with the end in mind so you can check yourself along the way.

For example, if the PE firm is targeting a 25% IRR over 5 years, you should know that it corresponds to a 3x multiple of the initial Investor Equity (see: our tutorial on how to calculate IRR manually ).

Core Financial Modeling

Learn accounting, 3-statement modeling, valuation/DCF analysis, M&A and merger models, and LBOs and leveraged buyout models with 10+ global case studies.

If you finish most of the exercise and you can tell that the deal will generate nothing close to a 3x multiple, you can immediately reject it.

It’s best to simplify the transaction assumptions as well, which means “ignore the transaction and financing fees” and “assume all deals are cash-free, debt-free” (i.e., that the target company’s Cash and Debt immediately go to 0 after the deal closes).

Finally, you may assume that the Debt issued to fund the leveraged buyout stays the same or that 100% of the company’s Free Cash Flow is used to repay the Debt principal.

More complicated assumptions, such as “cash flow sweeps,” make it too difficult to track the numbers and calculate everything with pencil and paper.

Paper LBO Example: Real Case Study

Click here to get the case study prompt for this exercise .

In short, the PE firm is acquiring a company for 10x EBITDA and using 6x Debt to fund the deal.

They provide numbers for the company’s revenue, EBITDA, cash flow line items, and the details of the Debt funding, such as the interest rates and principal repayments.

The PE firm is targeting a 20% IRR over 5 years, so we have to complete this paper LBO and recommend or reject the deal based on this target.

You can click here to get the full solutions to this exercise , but we’ll present the highlights below:

Paper LBO, Step 1 – Determine the End Goal

You should know that a 20% IRR over 5 years is approximately a 2.5x multiple of invested capital because a 2x multiple is a ~15% IRR over 5 years, and a 3x multiple is a ~25% IRR.

The case document gives us the company’s initial EBITDA of $250 million.

Since the company spends 60% of Revenue on COGS and 15% on SG&A, its EBITDA Margin equals 1 – 60% – 15% = 25%.

So, the company’s Revenue is $250 / 25% = $1,000.

A 10x purchase multiple means a Purchase Enterprise Value of $2,500, and the deal is funded with 6x Debt and 4x Equity, so the Investor Equity is $2,500 * 40% = $1,000.

Therefore, this deal must generate $1,000 * 2.5x = $2,500 in Equity Proceeds to be viable.

We need to determine the Year 5 EBITDA and the Year 5 Debt to see if that happens.

Paper LBO, Step 2 – Project Revenue and EBITDA

The case document gives us the initial numbers:

To project the Revenue figures, we can use approximations. For example:

• $1,000 * 5% –> This is easy; it’s an increase of $50.
• $1,050 * 7.5% –> This is halfway between $52.5 and $105, so we can round it to $80.

Once we have all the Revenue figures, we can use a similar strategy for EBITDA.

For example, if we know the Year 1 Revenue is $1,050 and the EBITDA Margin is 24%, we can approximate the Year 1 EBITDA like this:

$1,050 * 24% –> $1,050 is a bit higher than $1,000, and 24% is a bit lower than 25%, so we can say the EBITDA is still $250.

After completing these steps, we arrive at these estimates for Revenue and EBITDA:

Paper LBO, Step 3 – Calculate the Annual Free Cash Flow

In the context of this simplified “model,” we can define Free Cash Flow like this:

Free Cash Flow = EBITDA – Interest – Taxes +/– Change in Working Capital – CapEx – Purchases of Intangibles.

CapEx, Purchases of Intangibles, and the Change in Working Capital are all simple percentages of Revenue, so we can group them together:

FCF = EBITDA – Interest – Taxes – “Other Items.”

CapEx = –8% of Revenue, Intangible Purchases = –4%, and Change in WC = +2%.

The first two are negative, and the Change in WC is positive, so “Other Items” represents negative 10% of Revenue.

To calculate the Taxes and Interest, we need the Taxable Income first.

Taxable Income = EBIT – Interest, and EBIT = EBITDA – D&A.

The D&A is simple, but the Interest changes each year as the company repays Debt.

So, let’s start with the D&A: it’s 5% of Revenue, so we can multiply each of the “Other Items” above by 50% to estimate it.

The Interest Expense is the toughest part because the company repays its Term Loan balance over time, and many of the numbers are interdependent:

Interest: Depends on the Debt balance, but the Debt balance depends on FCF.

FCF: Depends on the Interest and Taxes.

Taxes: Depends on the Interest.

We have to complete this process iteratively , starting with the Interest in Year 1.

The initial Term Loan is $1,000, or $250 * 4, and the initial Senior Notes are $500, or $250 * 2, so the initial Interest Expense is $1,000 * 5% + $500 * 10% = $100:

The Term Loans have 2% annual principal repayments, which might seem complicated at first.

But since the company’s FCF is higher than 2% * $1000 = $20 per year, we can combine the mandatory and optional repayments and assume that 100% of the company’s FCF is used to repay Debt principal.

The Senior Notes stay the same at $500 per year, so only the Term Loan balance changes.

Once we have the Year 1 numbers, we can continue to Year 2, where Interest = 5% * $975 + 10% * $500.

We round all the Interest numbers to units of 5 or 10 to simplify the math.

The company’s FCF never changes by a huge amount, so we use figures such as $25, $30, and $35 in each period.

We also round all the Tax numbers to ones that end in 5 or 0, as shown below:

Once we have the numbers for Years 1 and 2, we go through the same process for each of the following years.

It’s impossible to track all these numbers in your head, so it’s essential to write down the whole schedule on paper.

The finished “ Debt Schedule ” looks like this:

Paper LBO, Step 4 – Calculate the Exit Proceeds

To finish, we need to calculate the Exit Enterprise Value, Exit Equity Value, money-on-money multiple, and IRR.

We know the Year 5 EBITDA is approximately $300 and the Year 5 Exit Multiple is 12x (from the case document):

$300 * 12 = $300 * 10 + $300 * 2 = $3,600 for the Exit Enterprise Value ($3.6 billion).

We have no information on the Cash balance, but we know it has NOT changed because all the company’s FCF was used to repay the Term Loan .

Since the remaining Debt in Year 5 is $1,360, the Exit Equity Value = $3,600 – $1,360 = $2,240; we can round this to $2,200 or $2,300.

This range produces a multiple of 2.2x to 2.3x because $2,200 / $1,000 = 2.2x and $2,300 / $1,000 = 2.3x.

To get a 20% IRR over 5 years, we need a 2.5x multiple on the $1,000 of Investor Equity.

Therefore, this deal is not viable .

The exact IRR here is probably between 15% and 20%, so it’s not a bad outcome – but it’s also below what the PE firm was targeting.

The “Paper LBO” in Excel Format

If you want to “see” this paper LBO in Excel format, click here to download the Excel recreation , which has the exact numbers rather than approximations.

Note that it’s completely pointless to build this model in Excel because the purpose of a paper LBO test is to finish it using pencil and paper and mental math.

If you use Excel, you might as well try a full-blown LBO modeling test that takes 2-3 hours to complete.

How Important is the Paper LBO in Private Equity Interviews?

Some private equity firms like to administer paper LBO tests, but you’re more likely to get real Excel-based modeling tests and case studies.

So, if you’re going through the private equity interview process , it’s worth practicing a few paper LBO tests, but don’t go through dozens of exercises or spend days on them.

You should spend that time improving your story, reviewing and discussing your deal experience, and practicing real LBO modeling tests.

Paper LBOs, when they do come up, tend to occur in earlier rounds of interviews and are mostly used to eliminate candidates.

You’re never going to win a private equity job offer because you ace a paper LBO test.

But if you perform poorly, you could easily lose a job offer.

About Brian DeChesare

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

Files And Resources

Premium Courses

Other biws courses include:.

Learn Financial Modeling from A to Z

Learn accounting, valuation, and financial modeling from the ground up with 10+ global case studies.

A happy hub for resources on private equity, private markets, … bits, pieces, and I

• Published Papers
• Working Papers
• Case Studies
• Executive Education
• Book Companion
• Press Coverage
• Transparency

Free Case Studies

If you are teaching a Private Equity (or related) course, you are at the right place.

The book contains case studies. Here, you can find details about these cases. In particular, why and how to use these cases in the classroom. All of them are free of charge!! For the teaching note, you need to email me from a university email address and give me the link to your professional webpage.

I also did this a long time ago: put together a huge set of mini case studies. The idea was to have a one-pager on many deals and to classify these in terms of performance and duration. Basically, what I observed was that most of the high-performers (even when measured in absolute amount) were quick flips. So, I wanted to read many cases to try to understand this better. This got nowhere but I have tons of case-studies I am sitting on. it is all based on public information. All the files are here — enjoy!

Financial Modeling & Impact

Can Financial Acumen Supercharge Social Impact?

The Movi e.

Lenders vs General Partners

The Role Play.

Limited vs General Partners

Benchmarking LBO Returns

Hilton Hotels (private equity real estate)

The Endowment Model

Queen’s college Oxford (portfolio allocation strategies)

Join 307,012+ Monthly Readers

Get Free and Instant Access To The Banker Blueprint : 57 Pages Of Career Boosting Advice Already Downloaded By 115,341+ Industry Peers.

• Break Into Investment Banking
• Write A Resume or Cover Letter
• Win Investment Banking Interviews
• Ace Your Investment Banking Interviews
• Win Investment Banking Internships
• Master Financial Modeling
• Get Into Private Equity
• Get A Job At A Hedge Fund
• Recent Posts
• Articles By Category

The Timed LBO Modeling Test: Full Tutorial for a 60-Minute Case Study

If you're new here, please click here to get my FREE 57-page investment banking recruiting guide - plus, get weekly updates so that you can break into investment banking . Thanks for visiting!

The LBO modeling test , just like the private equity case study , is one of the scariest parts of the recruiting process for many candidates.

But it’s a bit misleading to call it a “modeling test.”

Given the time constraints – often between 1 and 3 hours – it’s more of an Excel speed test .

If you know the shortcuts and formulas like the back of your hand, and you can enter data quickly, you should do quite well.

And if not, you better start learning and practicing ASAP.

We’ll go through a full practice run in this tutorial for a 60-minute test starting from a blank sheet:

Types of LBO Modeling Tests

As discussed in the PE case study article , there are different types of “modeling tests” and “case studies”: simple paper LBOs, 1-3-hour timed tests, and open-ended take-home case studies.

The 1-3-hour timed tests are most common in the on-cycle recruiting process at large firms in the U.S.

However, they could come up in any recruiting process; for example, some firms in London start with a simple, timed test to screen candidates before advancing them to the next rounds.

The good news is that these timed tests require far less critical thinking, creativity, and research than the open-ended case studies.

The bad news is that if you want to get good at them, you’ll need to “put in the reps” by completing many practice exercises.

What to Expect in a Timed LBO Modeling Test

The two main categories are tests that give you an Excel template and tests in which you start from a blank sheet .

The ones with templates tend to have more complex formulas, and the ones where you start from scratch have simpler formulas but are more challenging to finish under time pressure.

Here’s a summary of the likely differences based on the type and allotted time:

The 60-Minute LBO Modeling Test from a Blank Sheet

You can find examples of tests with provided templates fairly easily, so I thought it would be more interesting to look at an example without a template here.

You can get the case study prompt, the answers, and the completed Excel file below:

• 60-Minute LBO Modeling Test – Case Study Prompt (PDF)
• 60-Minute LBO Modeling Test – Completed Excel File (XL)
• Answers to Case Study Questions (PDF)
• Overview of Main Points in 60-Minute LBO Modeling Test – Slides (PDF)

There is no “blank” or “beginning” file because we create a new sheet in Excel and enter everything from scratch in this tutorial.

You can get the video version of this entire tutorial below:

Table of Contents:

• 2:24: Part 1: Likely Requirements in Modeling Tests
• 7:43: Part 2: Transaction Assumptions and Sources & Uses
• 17:24: Part 3: Model Drivers and Income Statement
• 32:14: Part 4: Free Cash Flow and Debt Schedule
• 46:04: Part 5: Returns and Sensitivities
• 56:22: Part 6: Answers to the Case Study Questions
• 1:03:12: Recap and Summary

This example is not taken from our courses – it’s new for this article – but it is similar to one of the many case studies in our Core Financial Modeling course :

Core Financial Modeling

Learn accounting, 3-statement modeling, valuation/DCF analysis, M&A and merger models, and LBOs and leveraged buyout models with 10+ global case studies.

The full course has a different 60-minute example and a 90-minute test as well. And if you want more complex LBO models and a “take-home” example, check out the Advanced Financial Modeling course :

Advanced Financial Modeling

Learn more complex "on the job" investment banking models and complete private equity, hedge fund, and credit case studies to win buy-side job offers.

Part 1: Likely Requirements in an LBO Modeling Test

The chart above sums up the likely requirements for tests of different lengths. To be more specific, you can expect the following in a 60-minute test starting from a blank sheet:

• Assumptions: Purchase Enterprise Value or Equity Value and a simple Sources & Uses schedule . There may be a working capital adjustment as well, but it’s fairly simple and makes a low impact on the model.
• Debt Schedule : Perhaps 2-3 tranches of Debt with slightly different interest rates and repayment terms (e.g., fixed vs. floating interest, cash vs. PIK, and mandatory and optional repayments for one tranche). A Revolver is possible but unlikely.
• Revenue, Expenses, and Cash Flow: These will often be simple percentage assumptions, but they could be a bit more complicated, such as Units Sold * Average Unit Price or Market Share * Market Size.
• Financial Statements: A simple Income Statement and partial Cash Flow Statement; you just need enough to calculate Free Cash Flow and Cash Flow Available for Debt Repayment.
• Returns Calculations: These will be fairly simple, but there could be a small twist, such as an earn-out, options pool, or management rollover.
• Sensitivity Analysis : You might create 1-2 tables if the returns calculations were simple, but you might skip these if they were more complex. The case study questions determine whether or not you “need” these tables.
• Total # of Rows: Probably ~100 or less (including blank rows), but you could go up to ~130 if there are sensitivities.

Unless they specifically ask you to do so, you should NOT build a full 3-statement model .

It’s a waste of time when you have only 60 minutes and adds nothing over the cash flow projections.

You should also skip other bells and whistles such as purchase price allocation , scenarios, complex Debt schedules, etc.

And do not include anything beyond bare-bones formatting, or you’ll never finish on time – number formats are OK, but forget about colors and borders for headers, input boxes, etc.

Part 2: Transaction Assumptions and Sources & Uses

The first part of this exercise is simple: we enter the assumptions provided in the case study document, focusing on ones that stay the same each year :

Since this is a cash-free, debt-free deal , we use Purchase Enterprise Value on the Uses side of the Sources & Uses schedule.

One slightly tricky part is the $25 million “Cash Injection” when the deal closes; the case document strongly hints that we need to include this:

“Cash-free, debt-free” means the company has 0 Cash and 0 Debt immediately after the deal closes – but that changes a second later due to the new Debt used to fund the deal.

There isn’t always a “Cash injection” right after the deal closes, but in this case, there is.

The rest is straightforward, and the Investor Equity is a standard “plug,” as shown above (Total Uses – Sources So Far).

Part 3: Model Drivers and Income Statement

It helps to start by setting up a sketch of the Income Statement, so we know what we’re building up to:

Then, we can go back and fill in some of the drivers, starting with widget unit sales and the average price per widget:

The document gives us information about the factories, including Maintenance CapEx and Growth CapEx, but it’s vague about the Depreciation.

You might be tempted to do something complicated, such as a detailed Depreciation schedule based on annual CapEx spending.

Or you might want to use functions like ROUNDUP to ensure that the factory count can only be in whole units rather than decimals (“8.5 factories” doesn’t make logical sense).

I recommend avoiding all of this and keeping the drivers as simple as possible because these details do not matter in a time-pressured test.

We drive the # of factories with the Widget Unit Sales and the Widgets per Factory, which is 500,000 based on the initial year (4 million widgets / 8 factories).

Depreciation is a simple % of sales, set to percentages slightly below the CapEx ones:

The COGS and Operating Expenses ( “Fixed Expenses” here) are simple; COGS is based on the Gross Margin % , and Fixed Expenses = (Sales – EBITDA) – COGS.

They grow at the same rate as average widget pricing:

We can then put together all the pieces to build the Income Statement down to Net Income , skipping the Interest deduction for now:

Part 4: Free Cash Flow and Debt Schedule

Free Cash Flow , at least under U.S. GAAP, is defined as Cash Flow from Operations minus CapEx (roughly).

“Cash Flow from Operations” is simple because this company is simple: start with Net Income, add Depreciation and Non-Cash Interest, and add/subtract the Change in Working Capital .

And then subtract Total CapEx from the model drivers to calculate FCF:

To complete the blank lines here, we need the Interest numbers – but to get the Interest expense, we need the Debt balances first.

But before we can project the Debt balances, we need to think about optional repayments , otherwise known as “cash flow sweeps.”

In other words, if the company generates positive cash flow available for Debt repayment in one year, how much of that cash flow could it use to repay the Term Loans optionally?

The case document explicitly tells us the answer is “50%”:

However, it’s NOT as simple as using 50% of the “Free Cash Flow” to repay these Term Loans.

“Cash Flow Available for Debt Repayment” is different from “Free Cash Flow” because more line items factor into it:

• FCF Generated in the Year: This increases the cash the company could potentially use to repay the Term Loans.
• Beginning Cash: The higher the company’s initial Cash balance, the more it can potentially use to repay Debt.
• Mandatory Repayments: If the company must repay 5%, 10%, or 15% of the Term Loans, these payments reduce how much it can pay optionally.
• Minimum Cash: Finally, Widget Co. must maintain 5% of its previous year’s sales as a minimum Cash balance at all times, which reduces the amount it can use to repay Debt.

Putting these pieces together, we get this sketch:

At this stage, we should move to the Debt balances below and link the Term Loans to the mandatory and optional repayments and the Senior and Subordinated Notes to PIK Interest :

And then, we can go back and calculate the Cash Flow Used for Debt Repayment and the Ending Cash each year:

NOTE: In the video, the Ending Cash calculation is incorrect at first. We go back and fix it a few minutes later. The screenshot above reflects the correct numbers at this stage of the model.

The Cash Flow Used for Debt Repayment is the minimum between the Cash Flow Available * Sweep % and the remaining Term Loan balance after the mandatory repayment.

This formula ensures that if, for example, $50 of the Term Loan remains, but we have $200 * 50% = $100 in available cash flow, only the remaining $50 is repaid.

The Ending Cash is based on the Beginning Cash minus Mandatory Debt Repayments plus Free Cash Flow minus Optional Repayments (“CF Used for Debt Repayment”).

The final step is to calculate the interest for each tranche of Debt, which we split into Cash and PIK to make it easier to link the statements later:

We then go back and link the total Interest Expense into the Income Statement and add back the Paid-in-Kind portions to calculate Free Cash Flow:

As a result of these Interest links, the company’s Cash balance grows to a lower level, and it repays the Term Loans more slowly.

To avoid circular references, we can use the beginning Debt balance as well (for more, see our tutorial on how to remove circular references in Excel ).

Part 5: Returns and Sensitivities

The basic returns calculations here are simple: we apply an Exit Multiple to the EBITDA in Year 4 or 5 to calculate the Exit Enterprise Value, subtract the remaining Debt, and add the remaining Cash:

The 5% management options pool makes things trickier, as we need to factor in the Cash the management team pays to exercise their options and the Equity they receive.

By paying to exercise their options, the management team increases the total Equity, which means they no longer own exactly 5% of the total Equity .

Management owns 5% / (1 + 5%) = ~4.8% of this expanded pool, so the Equity to Management Option Holders is based on that percentage times the expanded total Equity:

If you get this slightly wrong, it’s not the end of the world; this point barely affects the returns.

You just need to show some small outflow of proceeds, assuming the Exit Equity Value is higher than the initial Investor Equity (meaning the options are exercisable).

We can then calculate the IRR and multiple of invested capital and create a few simple sensitivity tables:

If you’re wondering about the exit multiple range of 9-13x, the purchase multiple was 12x, and the company is growing more slowly by the end of the holding period (~9% vs. ~16%), so we assumed modestly lower multiples.

Ideally, we’d look at the ROIC and comparable companies to estimate the exit multiple, but we do not have the time or information for those.

With that, we’re done with the Excel portion of this modeling test.

Part 6: Answers to the Case Study Questions

You can read the answers yourself , but in short, we recommend doing this deal because the likely IRRs are between 20% and 30%, with MOICs between 2x and 3x.

The company’s financial projections may be slightly aggressive in terms of margin expansion (with EBITDA margins increasing from 20% to 25%), but growth is also slowing, so they’re not crazy.

If the PE firm wants to boost its returns, the easiest solution is to use more Debt .

The company can support more than 5x Debt / EBITDA because it pays off the Term Loans by Year 5, with Total Debt falling by over $200 million in that period.

So, the PE firm could increase the initial Debt to 6x or do a Dividend Recap midway through the holding period (or even a simple cash dividend).

How to Master the LBO Modeling Test

Overall, this is a fairly challenging LBO modeling test .

I intentionally inserted multiple ways to make mistakes and waste time on marginally useful tasks.

That said, you do not need to score 100% to “pass” – the median score on these tests is often below 50%.

So, if you can finish the model and get most of it correct, you should be in good shape, even with some mistakes here and there.

But the key part of that sentence is “finish the model.”

If you don’t know Excel quite well, you will struggle to finish in 60 minutes.

If it takes you 2-3 hours to finish, that’s a fine result for your first try.

At that level, you could reduce your time to the 60-minute range with repeated practice.

Similar to standardized tests like the SAT and GMAT, there are only so many features they could throw at you in an LBO modeling test.

Once you’ve done 5-10 practice tests, you’ll be ready for ~90% of future tests.

And if the average person suddenly learned the truth about what it takes to get into private equity , they might start wondering what explains those sky-high salaries …

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

Free Exclusive Report: 57-page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews

Learn Valuation and Financial Modeling

Get a crash course on accounting, 3-statement modeling, valuation, and M&A and LBO modeling with 10+ global case studies.

Paper LBO: A Step-By-Step Guide with Interview Examples

Preparing for private equity or growth equity interviews is quite an undertaking. Whether it’s your first interview or your tenth, there’s a lot you need to prepare. 

Preparing for that first one is especially tricky, though, because you’re facing your first paper LBO exercise. 

The paper LBO requires knowledge of the ins-and-outs of a leveraged buyout model, as well as strong analytical skills, knowledge of the deal, and a quick mind for mental math. 

Once you know how to do it, be sure to practice – you don’t want to have the additional challenge of feeling pressured while you think. 

In this article, we’ll cover what a Paper LBO model is, how to prepare, and example prompts so you can go into it feeling extremely confident.

What is a paper LBO?

At its most basic level, a paper LBO highly is a simplified LBO model that uses certain simplifying assumptions that allow you to either calculate using pen and paper (or verbally).  It allows you to estimate returns for a deal quickly without a full model.  

The paper LBO is not actually used much “on the job” but it is often asked for during private equity interviews (and even growth equity interviews). 

In an interview situation, the interviewer will commonly ask the candidate to pencil out a paper LBO for a company or deal they’ve worked on in their previous job.  In other cases, the interviewer might present a new company and supply the candidate with assumptions and financial metrics to use.

Because the paper LBO simplifies the math, usually you can complete a paper LBO using paper & pen, or verbally in an interview.  Sometimes interviewers will lead you along with questions, as you complete the Paper LBO live on the fly.  

Usually the paper LBO exercise will last 5-20 minutes during an interview.

Paper LBO in Interviews

Paper LBO calculations are mostly for private equity interviews , although they can show up in growth equity interviews as well.  

The Paper LBO assesses many key skills for private equity and growth equity jobs and internships :  

First, it’s an excellent way to quickly assess your knowledge of the mechanics of LBO modeling. 

It’s also a great way for an interviewer to assess your communication and quantitative skills. Can you make quick calculations on the fly?  Can you sift through financial metrics in your head and calculate orally with confidence? 

Additionally, the Paper LBO allows the interviewer to dig into a deal on your resume by asking you to sketch out a Paper LBO for the deal.  This allows in-depth follow up questions.

Finally, because usually the Paper LBO is requested for a company/deal you’ve worked on, it tests your level of preparation for the interviews, because in order to complete it successfully you need to remember or memorize key financial metrics for the company and deal.

Paper LBO vs full LBO model

The paper LBO you might encounter in an interview is a highly simplified version of a full leveraged buyout model. 

Here are a couple key ways that paper LBO models differ from full LBO models:

• Instead of building a full 3-statement model, simply focus on projecting Revenue, EBITDA, and free cash flow every year (memorize these for the entire projection period for all your deals!)
• Since you are memorizing financial numbers for Revenue, EBITDA, and FCF, it’s OK to use figures that are rounded to the nearest $5 million 
• Often, you’ll assume growth in metrics over the projection period is linear, allowing you to memorize the year 0 and year 5 metric values (and assume linear growth between them)
• No need to build out balance sheet or debt schedule; you’ll capture their impact by simply projecting FCF

Sometimes interviewers will throw in a complicating factor or two, but the calculations are all designed to be completed without a computer in less than ~20 minutes.  

Step-by-step process for Paper LBO

In many ways, completing a paper LBO is the same as completing any other financial model. 

For any model, you can remember the ASBICIR process.  This stands for the following steps:

• A ssumptions – gather all your operating and entry assumptions (incl. pro forma valuation and debt figures); start with the purchase price and debt/equity financing split. 
• S ources and uses – using the assumptions, fill out your sources and uses, which shows where the cash flows to and from in the acquisition transaction.  Ultimately, this will get you to your “Sponsor Equity” which is the investment amount upon which you should base your IRR
• (Pro forma) B alance sheet – With your Sources & Uses done, you can now complete your pro forma balance sheet, and start laying the foundations for projecting it forward until the exit year.  This includes setting up your debt schedule, if your modeling an LBO
• I ncome statement – next, you can start projecting forward your income statement, all the way down to net income; notably, do not yet integrate interest expense; leave this blank for now
• C ash flow – with your income statement and balance sheet up, you can project forward your cash flows.  This and the prior two steps will be iterative as you set up schedules and make calculations that are interdependent on multiple statements (e.g. D&A)
• I nterest – finally, once your 3-statements are connected and projected forward, always the last step is to calculate interest expense and connect it to the income statement; turn on model iterations
• R eturns – the last step is to make an assumption about your exit, and to calculate your returns by comparing the entry investment amount to the exit investment amount

For the paper LBO, the only differences are:

• No need for B alance Sheet and I nterest Expense steps; these are both excluded; given this, you’re left with the Paper LBO short version: ASICR
• Instead of building a full 5-year projection, instead build up the model for Year 0 and Year 5 (from memory).  To estimate the intervening years, you can either assume linear growth or you can use the “average” method
• To estimate the debt balance at exit (year 5), take the average of Year 0 FCF and Year 5 FCF.  This will give you average FCF across all 5 projection years.  Then take this number and multiply it by 5.  This is an estimate of the total amount debt will decrease during the hold period
• Round numbers to the nearest $5 million

• 12+ video hours
• Excels & templates

PREMIUM COURSE

Become a Private Equity Investor

Paper LBO format

Sometimes your interviewer will give you calculation aids like a calculator or basic Excel functionality (which you shouldn’t count on).

However, most of the time your interviewer will want to hear you talk through your thought process. After all, they are hiring human talent, not a calculating robot. (AI isn’t coming for private equity – yet.) 

Follow the ASICR flow above as you calculate and speak. 

Plan anywhere between 5 and 20 minutes for total exercise time, both calculating and speaking. 

As you practice, record yourself going through the entire thing, both to time yourself and to assess your confidence and speaking ability.

Paper LBO Example

This is a sample paper LBO prompt you might be given in an interview situation. 

The assumptions here are pretty standard, but if there are any different ones in your interview, you will know about them. The final result of your paper LBO calculations will be the IRR and MoM for the deal. 

Here’s the sample prompt:

Imagine our firm is considering an LBO of Company X, and you’re on our investment team.  Right now, create a paper LBO live with your interviewer to estimate the IRR and Multiple-on-Money return for the deal. Use the following assumptions: All dollar amounts are in millions.  Year 0 revenue: $100  Revenue growth: $10 every year Year 0 EBITDA margin: 40% in Year 0 EBITDA margins: remain constant every year Entry timing: at end of Year 0 Entry multiple: 10x LTM EBITDA Pro forma debt: 6.0x LTM EBITDA with blended average interest rate of 5%  Year 0 D&A: $5, flat across projection CapEx = D&A throughout projection Working capital: Cash investment of $10 every year Tax rate: 40% Entry timing: at end of Year 5 Assume entry-exit multiple parity

When you pencil out this Paper LBO, what IRR do you get?  I get ~21% or 2.6x MoM.

Below are the key steps with outputs.

Step 1/2: Assumptions + Sources & Uses

Steps 3/4: Income & Cash flow Statements

Step 5: Returns

Special tricks for solving

• Follow the flow. The interviewer wants to see that you know how to think like an investor, and wants to see a clear, logical train of thought from beginning to end. Logical shortcuts are fine, as long as the interviewer can follow what you are doing. 
• IRR is tough to calculate, but the multiple on money, or cash-on-cash return, is easy to calculate. You will need the beginning and ending equity values for the company. Then, you can use this to help you find IRR.
• Since IRR involves time value of money, it’s tricky to find without Excel or a calculator. A good rule of thumb is the Rule of 72. The Rule of 72 states that the time it takes to double your money is 72 divided by the MoM rate of return. There are also IRR tables you can memorize for common IRR values over a 5-year horizon, but the Rule of 72 has the advantage of being more flexible and easier to remember.

Paper LBO prep plan

Private equity headhunters and interviewers alike are looking for one thing: expertise. 

Since the paper LBO calculation is one of the most technical things you will cover in your interview, it is worth your while to practice.  Timing yourself is also key. 

Memorize key deal financials

For each of the major deals you list on your resume, memorize the following financial metrics:

• Revenue- Year 0 (entry) and Year 5 (exit)
• EBITDA – Year 0 and Year 5 
• FCF (calculated from EBITDA) – Year 0 and Year 5 
• Entry valuation multiple
• Exit valuation multiple
• IRR & MoM of deal

If the deal wasn’t an LBO or acquisition, you should still memorize these figures because you might be asked to pencil out an LBO for it anyway.

Memorize the Rule of 72 and Rule of 115

These will help you go from multiple on money to IRR calculations for a 5 year period.

Practice with pen and paper

If you are working from pen-and-paper case studies, see if you can get your time down to 5-10 minutes for a straightforward case study, or 10-15 for a more complex example (e.g. read more about private equity case studies ). 

Practice with your deals

You can also use deals on your private equity resume to generate paper LBO calculations. Go through each deal you completed and create a paper LBO scenario. 

Basically, you need to reduce the full model from the actual deal to a simplified paper calculation. Ensure that the relevant ending metrics, such as the internal rate of return and the cash-on-cash return, are the same between the original and simplified versions (within rounding error). 

Since it has more meaning to you than a case study, you should be able to memorize each paper LBO scenario for previous deals. Not only will this help you become more efficient with your paper LBO calculations, but it will also make you a more confident interviewee. 

FAQ: How long should a paper LBO take?

A simple case study with pen and paper provided and no complicating factors can be completed in five minutes. 

A more complex calculation where Excel is allowed should not take more than five minutes either. 

If the LBO study has complicating factors like multiple investors or a one-time cash outflow within the case study timeline, it can take longer, but no more than about 20 minutes including discussion time. 

FAQ: Are paper LBOs actually on paper?

Yes!  Sometimes.

They can be on paper. Some firms may choose to do a simplified Excel version for more complex LBO examples. 

Other firms may have paper or may simply do a fully verbal interview with a simpler example.

• Articles in Guide
• More Guides

DIVE DEEPER

The #1 online course for growth investing interviews.

• Step-by-step video lessons
• Self-paced with immediate access
• Case studies with Excel examples
• Taught by industry expert

Get My Best Tips on Growth Equity Recruiting

Just great content, no spam ever, unsubscribe at any time

Copyright © Growth Equity Interview Guide 2023

[email protected]

HQ in San Francisco, CA

Phone: +1 (‪415) 236-3974

Growth Equity Industry & Career Primer

Growth Equity Interview Prep

How To Get Into Private Equity

Private Equity Industry Primer

Growth Equity Case Studies

SaaS Metrics Deep Dive

Investment Banking Industry Primer

How To Get Into Investment Banking

How To Get Into Venture Capital

Books for Finance & Startup Careers

Growth Equity Jobs & Internships

Mike Hinckley

Growth stage expertise.

Coached and assisted hundreds of candidates recruiting for growth equity & VC

with Mike Hinckley

Premium online course

• Private equity recruiting plan
• LBO modeling & financial diligence
• Interview case studies

Register for Waitlist

FREE RESOURCES

Get My Best Growth Equity Interview Tips

No spam ever, unsubscribe anytime

Username or Email Address

Remember Me

• Recently Active
• Top Discussions
• Best Content

By Industry

• Investment Banking
• Private Equity
• Hedge Funds
• Real Estate
• Venture Capital
• Asset Management
• Equity Research
• Investing, Markets Forum
• Business School
• Fashion Advice
• Private Equity Forum PE

Direct Lending / Private Credit Case Study - Questions

• Share on Facebook
• Share on Twitter
• Share on LinkedIn
• Share via Email

In process with a prominent credit shop and was guided towards a 3-hour case study as the next step. Wanted some advice on the following: 

For the 3-hour test, I'm assuming this is going to include a model and memo portion. Would it be advisable to just run a CF model without including a balance sheet and include appropriate credit stats? What is an appropriate split of time between modeling and memo'ing? 

Would you advise I run multiple cases through the model? I was thinking management, base, and downside case. Or would it be more advisable to try to think through multiple downside cases instead (i.e. base case, downside 1, downside 2). Maybe thinking through 2 downsides is overkill? 

To wit, how do you usually think about your base and downside cases? Do the case materials usually provide a split between fixed and variable expenses so you don't need to think through fixed/variable assumptions on the fly? For me, base case would just be a simple industry growth on the top line, COGS split by fixed/variable, Opex kept fixed, no changes in WC or capex assumptions. Essentially business grows at a tepid pace without significant alterations to the business model. On the downside, which is more important here, I understand that this is dependent on the business itself and varies. For me, I'd think about hitting top-line by a similar drop to what it may have experienced in a prior recession , key customer(s) loss, key product discontinuation/disintermediation. Perhaps margin degradation due to raw material fluctuation. 

Most importantly, given this case study is a first for me, how exactly have past succesful candidates going through MM / MF processes structured their memo write-up? What are the essentials to include? How many slides should it be? I understand you'd want a page on Merits and Risks / Mitigants. Model output. Company overview (is it necessary)? 

Thank you for the advice! Any examples on sample models / memos would be greatly appreciated - I can PM you. 

Have done a few of these and know people that have done with other firms too. 

• Yes that's appropriate unless if they explicitly ask for balance sheet . They 90% won't ask for BS but likely a very short version if so (i.e. 2.5 statement model vs. 3 statement ). I'd say read CIM once and mark up / take notes, build out model shell, then read through CIM and mark up & refine assumptions accordingly. Try to give yourself an hour+ on the memo to figure out your thoughts - model should be reflection of your considerations in the memo. 
• They will likely ask for at least two cases, base and downside. Go per their direction and don't overkill - try to be concise with your assumptions of every line item. 2 downsides is definitely overkill. 
• It honestly depends - you'll likely have a split based on historicals on those items so pretty safe bet to mirror those at least for the base case. For revenue growth and such, make sure you know historicals cold - middle market business may show slightly higher growth than overall industry at least in the inner years and then outer it's fair to mirror industry. You can then adjust gross margin vs. EBITDA margin based on your reasoning of the credit (be very thoughtful and detailed in this - downside case will obviously squeeze margins and you need to have a solid assumption / reasoning behind how your risks impact the margin profile).
• They'll give you an outline on what they want to see. Most likely a 3 hour case study won't have a ppt / slide deck, but instead a word doc that is easier to run through and you don't have to worry about formatting. Usually Company / Situation Overview (short is fine), merits, risks, thoughts on cap structure (how much you think the biz can be levered and why), and lastly, your recommendation and why that piece of cap stack (likely will show you 1L, 2L, and equity portions). 

Feel free to PM me if helpful too. It was a learning process for me so messed up a couple times in interviews before I got it pat down. Hope you're very quick on building models from scratch etc. 

That helps a ton! Just PM'd you for a few follow-ups. Thanks! 

summermonkey649

Thanks for the above. Would love your thoughts on the below:-

1) What credit metrics would you suggest including in your model: DSCR/Cash Cover etc.? It also seems as though everyone defines them differently. 

2) How would you go about deciding which piece of the cap stack you would choose? 

Hey, thank you for this - super insightful as I'm new to credit and have a case myself.

Can I please ask you in what ways the downside scenarios translate into decision making?

as in, if I'm given a CIM and I build the model and tweak cases to squeeze CFADS, what is it that I'm looking for? what should happen that will make me recommend not doing the loan in a given scenario - covenant breaches and inability to repay principal/interest? if the company is able to repay and stay above leverage ratios and covenants even in my downside scenario, is the company good or was I being too gentle with my DS scenario assumptions? 

Cash flows being too negative and leverage going through the roof (well beyond recovery values / blowing through equity cushions). It's up to you to make reasonable assumptions as to how bad things could get when stuff hits the fan. For example if your top customer is 30% of revenue, and you model losing them, think through what cadence revenue would fall at (likely not all at once but phased as the customer grows into a replacement), any gross margin impact from that loss, and any operating leverage from that loss / how the business would respond. 

Case Study - Credit/Direct Lending - helped WSO ppl on a few different but similar versions of these. Would love to connect and see if I can help. Definitely have a good idea on structure of the memo and key sections and subsections to hit. I find this is the most vague area and they offer limited guidance.

By the way - by some of the points you’ve made it’s clear you know the space - you’re def gonna crush it given proper guidance. Also agree w/ all your points on downside mimicking past recession, key product/contract loss etc. seem bright - u should get this job! Feel free to DM

I'm in a similar boat but for an Associate role with a middle market Financial Sponsors and Leveraged Finance group. I'd love to connect

Thanks, PM'd!

Ullam commodi amet quos dolorem aliquid. Culpa quae quisquam possimus recusandae omnis. Vel saepe ut soluta quibusdam consequatur recusandae ratione et. Qui officiis et dignissimos saepe et. Nam maiores deleniti et expedita iure dolores rerum. Ut quia voluptas voluptatem sed exercitationem animi quo veniam. Totam id nulla nihil aliquam accusamus perferendis dolorem.

Qui ut id nihil. Corporis aliquid vel asperiores officia. Aspernatur voluptatum optio repudiandae atque nihil cupiditate. Dolorum cupiditate maiores blanditiis voluptatem culpa.

See All Comments - 100% Free

WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)

or Unlock with your social account...

Want to Vote on this Content?! No WSO Credits?

Already a member? Login

Trending Content

Career Resources

• Financial Modeling Resources
• Excel Resources
• Download Templates Library
• Salaries by Industry
• Investment Banking Interview Prep
• Private Equity Interview Prep
• Hedge Fund Interview Prep
• Consulting Case Interview Prep
• Resume Reviews by Professionals
• Mock Interviews with Pros
• WSO Company Database

WSO Virtual Bootcamps

• Aug 17 Investment Banking Interview Bootcamp 10:00AM EDT
• Aug 24 Foundations Bootcamp 10:00AM EDT
• Sep 07 Venture Capital Bootcamp 10:00AM EDT
• Sep 14 Financial Modeling & Valuation Bootcamp Sep 14 - 15 10:00AM EDT
• Sep 21 Investment Banking Interview Bootcamp 10:00AM EDT

Career Advancement Opportunities

August 2024 Private Equity

Overall Employee Satisfaction

Professional Growth Opportunities

Total Avg Compensation

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

• Silver Banana
• Banana Points

“... I believe it was the single biggest reason why I ended up with an offer...”

Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.

or Want to Sign up with your social account?