The chance to get into Private Equity is always competitive and challenging. In the top-notch private equity firm, the interview questions are much difficult to sort out the best from the rest. So, the more you prepare, the higher chance you pass the interview.

If you are new to Private Equity, you can have a look at these following resources 

  • Private Equity
  • Private Equity Associate
  • Private Equity Salary 

1. Private Equity Recruitment Process

There are 2 types of recruiting processes: The on-cycle process and Off-cycle process. They both aim to recruit for the Associate role but they differ in timing, the hiring criteria, steps, and interview.

1.1 On-Cycle Recruitment Process

Who can join?

The on-cycle process is mostly meant to hire the top Associate from bulge bracket and elite boutique banks.

What should I notice?

  • The process can start as early as after a few starting months of analysts at bulge bracket and elite boutique banks 
  • If you finish the process and you get the job offer, you can only start in the next 1.5 – 2 years. For example, if you get the job offer in 20×1, you will only start your job in 20×3.
  • The process will be conducted very fast from the start to finish and the headhunter, they have the full power on the recruitment process so you’d better show up well prepared and win the headhunter.

1.2 Off-Cycle Recruitment Process

Who can join?

The Off-cycle process aims for recruiting the Analyst roles straight out from college or roles for non-experience in Investment Banks.

What should I notice?

  • This type of recruitment offers successful candidates to start working instantly unlike the On-cycle Process. The process of recruiting will start earlier than the On-cycle one, instead of conducting in October, the process of this recruitment often starts in January.
  • The off-cycle recruiting process has the duration longer, which recruiters want to assess your “fit” and critical thinking abilities on deeper levels and they also require more thought and preparation of a real investment thesis. 
  • Headhunters have little power here so you should try to catch his/her attention by networking and well represent yourselves.

So, how can I spot out the differences between the two cycles?

 

 

On-cycle 

Off-cycle

Target Candidates

Investment Banking Analysts

  • Analysts at smaller firms/banks
  • People who do not work in banks 
  • Roles not in the NYC 

Timespan 

  • Days to weeks 
  • Starts and ends very quickly 

Usually months 

Case Study 

Lots of heavy time pressures

Focuses on the in-depth thought process 

When to start the job? 

1.5 – 2.0 years after receiving the offer 

Immediately 

 

2. The Interview Process

After passing the resumes round, you will receive the official invitation to the interview. Almost all Private Equity interview process has the similar characteristics:

  • Multiple Interview Rounds: The number of this round depends on the firms. Typically, you’ll always go through at least 2-3 rounds of interviews with different levels such as speaking with junior to senior professionals at the firm.
  • Interview Topics: is diverse so knowing them beforehand will help a lot. During the interview, you will have to answer many types of question, for instance:
  • Fit/background questions.
  • Technical questions.
  • Deal/client experience questions.
  • Firm’s strategies and portfolio questions.
  • Market/industry questions.
  • Complete case studies and modeling tests.

There are something you should notice before coming to the interviews:

  • Timing: In the mega-funds, it takes several months for the recruitment process from start to finish. Interviews at the largest firms duration is 24-48 hours. In contrast, at smaller PE firms, interviews start later and the entire process lasts for several weeks.
  • Tests: In the on-cycle process of large funds, they focus more on asking you the modeling questions and deal/client experience question. In smaller funds and in off-cycle interviews, they will focus more on your practical experience with clients and deals or they want you to explain the reason behind case studies or modeling tests.

3. Interview Questions And Answers

Generally, there are four types of question four types of questions you will encounter in a PE interview:

  1. Technical Knowledge
  2. Deal/Client Experience
  3. Firm and Industry Knowledge
  4. Fit and Personality

Fit and personality Questions

Why are you interested in Private Equity? Or  Why are you interested in our firm?

This is a common Private equity Interview Question.The interviewer wants to understand how much passion and interest you have for private equity and their firm.

To answer the first question, you need to give a background of your work (or internships) and tell the reason why you have chosen to come into private equity.

For the second part of this question, you should show how you know about the firm and how your goals and the firm’s goals are in alignment. 

Describe a time that you failed. Why did you fail, and what did you learn?

There are three key things employers are looking for when they ask this question:

  • They want to see that you’re accountable and upfront, instead of making excuses.

  • Next, they want to see that you can learn from your mistakes and use the experience to get better.

To make the impression, your answer should contain these points:

  • Show them you take responsibility for past mistakes instead of putting the blame on others.
  • So make sure you show them what you learned from the experience and how you used it to improve.
  • Keep your story on-track and brief. You can describe the situation you were in, the choice you made, and how it turned out in 1-2 minutes. Then you can spend 30 more seconds talking about how you used the experience to improve in the future.
What are your proudest accomplishments?

With a question about the greatest or proudest accomplishment(s), you are given the opportunity to choose a story you want to highlight in the interview. There is no limit for you to talk about teamwork or leadership or a work accomplishment.

This question can be the “trap” from the interviewer because you tend to talk a lot about yourself and forget about the time and the story structure. To solve this problem, you should use the STAR format to tell your accomplishment story. 

  • S/T (Situation/Task ): you can start by  providing a brief overview of the project or situation. You should try to make it short, provide enough context to help your interviewer understand the difficulty and importance.
  • A (Action): In this part, you can walk the interviewers through your key actions and the competencies to solve the tasks.
  • R (Result): It’s essential that your story should have a “happy ending”. The last part of your answer should describe the positive and concrete outcome(s)  to impress the interviewers.
What are your strengths and weaknesses?

These types of questions are typical but it is not easy to meet the needs of the interviewers. With this question, They want to know what you see as your strengths and weaknesses and also observe how you respond to a challenge with it. The employer also wants to know that you have the skill set, experience, and attitude necessary to get the job done.

Here are a few tips you can use to answer this question:

  • Focus on strengths you have that are required for the job. 
  • Put a positive spin on your answer. 
  • Be honest and sincere in your response. 
  • Avoid weaknesses that would make you unfit for the position. 
How would you characterize yourself in a group dynamic?

Most hiring managers want to know if you’re a good team player before they commit to working with you every day so the ability to work with others is considered critical for most positions from entry to C-level.

Here are some tips for choosing the best stories to share in your interviews:

  • Choose the recent team experience (last year from now) to share in the interview to make your story more up-to-date.
  • Pick an experience that really allowed you to shine. Maybe you stepped up to solve a problem, resolve a conflict, or bring the group together. 
  • Keep the story relevant to the job description to get a better understanding of the type of collaboration required.
  • Pick a story that also highlights your leadership talents, your numbers acumen, or your expertise.
  • Use the STAR format to structure your story.

Firm and Industry Knowledge

What industry trends will you look at when you are looking for a potential investment?

This is not exactly a technical Private equity interview question but you have to be the know-it-all guy to impress the interviewers. At a time, there are many investment trends occurring. You can choose any trend to tell the interviewers and make sure you alreadt cover these points: 

  • Market position & competitive advantage: Before LBO, it’s important to know the market position & competitive advantage of the potential investment. The characteristics would include high entry barriers, strong customer relationships & high switching cost.
  • Stable & recurring cash flows: Without continuous and stable cash flow, no PE firm would buy an investment.
  • Multiple drivers to trigger growth: Only one driver wouldn’t make the company to an expansive stage. More drivers, better-diversified growth strategies, and better execution would be essential for long-term growth.
  • Strong management: Most of the companies in the industry should have a strong management team so that the PE firm can get strategic guidance toward a better future.
What investment of this firm did you like most?

Technical Knowledge

Accounting

Why do capital expenditures increase assets (PP&E), while other cash outflows, like paying salary, taxes, etc., do not create any asset, and instead instantly create an expense on the income statement that reduces equity via retained earnings?
How is it possible for a company to show positive net income but go bankrupt?

Yes.

There is one example helping answer this question. It involves the deterioration of working capital ( increasing accounts receivable – a company cannot collect money from its customers, decreasing accounts payable – the company cannot negotiate with its suppliers to reprieve on its payment). Although the company’s revenue is up and the income statement posts a positive net income, it can cause negative cash flow which reflects the situation of the company – on the brink of bankruptcy.

Why are increases in accounts receivable a cash reduction on the cash flow statement?
Is it possible for a company to show positive cash flows but be in grave trouble?

Yes.

One example involves working capital. A company sells off its inventory and delays payments to suppliers, it creates positive cash flow. However, the companies may be in serious trouble. 

How do you value a company?

A company can be valued  by two primary valuation methodologies: Intrinsic value (discounted cash flow valuation), and Relative valuation (comparables/multiples valuation).

Intrinsic value (DCF)

This approach is the more academically respected approach. The DCF says that the value of a productive asset equals the present value of its cash flows. The answer should run along the line of “project free cash flows for 5-20 years, depending on the availability and reliability of information, and then calculate a terminal value.

Discount both the free cash flow projections and terminal value by an appropriate cost of capital (weighted average cost of capital for unlevered DCF and cost of equity for levered DCF).  In an unlevered DCF (the more common approach) this will yield the company’s enterprise value (as known as firm and transaction value), from which we need to subtract net debt to arrive at equity value.  Divide equity value by diluted shares outstanding to arrive at equity value per share.

Relative valuation (Multiples)

The second approach involves determining a comparable peer group – companies that are in the same industry with similar operational, growth, risk, and return on capital characteristics. Truly identical companies of course do not exist, but you should attempt to find as close to comparable companies as possible. Calculate appropriate industry multiples.

Apply the median of these multiples on the relevant operating metric of the target company to arrive at a valuation.Common multiples are EV/Rev, EV/EBITDA, P/E, P/Book, although some industries place more emphasis on some multiples vs. others, while other industries use different valuation multiples altogether. It is not a bad idea to research an industry or two (the easiest way is to read an industry report by a sell-side analyst) before the interview to anticipate a follow-up question like “tell me about a particular industry you are interested in and the valuation multiples commonly used.”

Valuation

How do you value a company?

A company can be valued  by two primary valuation methodologies: Intrinsic value (discounted cash flow valuation), and Relative valuation (comparables/multiples valuation).

Intrinsic value (DCF)

This approach is the more academically respected approach. The DCF says that the value of a productive asset equals the present value of its cash flows. The answer should run along the line of “project free cash flows for 5-20 years, depending on the availability and reliability of information, and then calculate a terminal value.

Discount both the free cash flow projections and terminal value by an appropriate cost of capital (weighted average cost of capital for unlevered DCF and cost of equity for levered DCF).  In an unlevered DCF (the more common approach) this will yield the company’s enterprise value (as known as firm and transaction value), from which we need to subtract net debt to arrive at equity value.  Divide equity value by diluted shares outstanding to arrive at equity value per share.

Relative valuation (Multiples)

The second approach involves determining a comparable peer group – companies that are in the same industry with similar operational, growth, risk, and return on capital characteristics. Truly identical companies of course do not exist, but you should attempt to find as close to comparable companies as possible. Calculate appropriate industry multiples.

Apply the median of these multiples on the relevant operating metric of the target company to arrive at a valuation.Common multiples are EV/Rev, EV/EBITDA, P/E, P/Book, although some industries place more emphasis on some multiples vs. others, while other industries use different valuation multiples altogether. It is not a bad idea to research an industry or two (the easiest way is to read an industry report by a sell-side analyst) before the interview to anticipate a follow-up question like “tell me about a particular industry you are interested in and the valuation multiples commonly used.”

What is the appropriate discount rate to use in an unlevered DCF analysis?

The discount rate in an unlevered DCF is the weighted average cost of capital to all providers of capital (both debt and equity). Since the free cash flows in an unlevered DCF analysis are cash flow before taking debt into account (as if it had no debt – so no interest expense, and no tax benefit from that interest expense), the cost of the cash flows relate to both the lenders and the equity providers of capital.

The cost of debt is the yield on debt with equivalent risk, while the cost of equity is more difficult to estimate.

Cost of equity is typically estimated using the capital asset pricing model (CAPM), which links the expected return of equity to its sensitivity to the overall market.

Two companies are identical in earnings, growth prospects, leverage, returns on capital, and risk. Company A is trading at a 15 P/E multiple, while the other trades at 10 P/E. which would you prefer as an investment?

 

How would you value a company with negative historical cash flow?

Given that negative profitability will make most multiples analyses meaningless, a DCF valuation approach is appropriate here.

LBO Model

Why would you use leverage when buying a company?
How do you use an LBO model to value a company, and why do we sometimes say that it sets the “floor valuation” for the company?
A PE firm acquires a $150 EBITDA company for a 10x multiple using 60% Debt. The company’s EBITDA increases to $200 by Year 3, $225 by Year 4, and $250 by Year 5, and it pays off all its Debt by Year 3. The PE firm sells its stake evenly over Years 3 – 5 at a 10x EBITDA multiple. What’s the approximate IRR?”

Quick IRR Maths

Deals/Clients Experience

Walk me through a deal that you had handled.

Deal/Client Experience questions are one of the important parts of PE Interview. It may be easier for those who already have the relevant experience, but no matter what the experience you have, your answer should be delivered structurally and coherensively.

There are 4 things you should cover in this part:

  1. Type of transaction (buy / sell / merger / other)
  2. Your bank’s role
  3. Who the buyers / sellers are
  4. Your Perspectives
  5. Size of the transaction
Say you are at a meeting with a client and your Managing Director is giving a presentation. You suddenly notice a mistake in some of the calculations, which you have prepared. Do you mention it? When? What do you say?

4. Tips to Ace the Interview

4.1 Prepare for the interview

Private equity firms look for the candidates who have the thinking like an investor rather than just being capable of performing the tasks for deal execution. The PE recruiting process is much more intense, and the firm is looking for something different than the investment bank. PE interview preparation is very similar to the preparation for investment banking interviews, but the real interview in PE is much harder.There are some simple steps for you to prepare:

  • Prepare and remember what you write in the resumes.
  • Think about the focus of the position or the industry you want to work in.
  • Think about the type of private equity fund you want to get in (Mega/large fund or middle market fund), Geographic location of PE firm, and the investment style (buyout, growth capital,etc.)
  • Practice the questions with others to prepare for the interview. 

4.2 Sample questions to ask the Interviewers

The last important factor after the interview process is Q&A time. You will have the opportunity to ask the interviewers a few questions, and the interviewers will assess how interested you are to the firm. You shouldn’t take this part for granted yet prepare well for it. The following list provides some examples of questions for your reference:

  • Can you elaborate on the typical day-to-day activities and responsibilities for this position?
  • What is one thing you like about working at this firm and what is one thing you think you would improve about the firm? (This question shows that you are trying to get more insight into the reality of working at this specific firm)
  • What’s your favorite deal that you’ve worked on at the firm?
  • How is the quality of the investment opportunity sourcing at the firm?
  • What are the key characteristics that you expect from an individual that will be selected for this position?
  • In brief, what are the firm’s long-term goals?
  • Is there an opportunity for an associate to build his or her career at this firm over the medium to long-term?
  • How do you manage work, family, and community involvement?
  • What part of this job do you find the most rewarding and challenging?

To get the offer from PE firms, not to mention the mega firms, you have to be the know-it-all guy. The wide knowledge and deep understanding in the financial industry, economics, statistics, mathematics, business management are needed to go through the interview process. Don’t forget to understand yourself, prepare your own story and define exactly what you want in the position you are applying for in PE. 

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