If you want a job in private equity, you need to know how to answer technical interview questions
Private equity interviews go beyond the basics that everyone knows and will ask questions that make you think instead to demonstrate your understanding of concepts.
For technical questions there is almost always a 'right answer' so keep this in mind:
There are an infinite number of technical questions and it's impossible to list and go through every question you might encounter, but there are some common basic and advanced questions you might receive.
If you find you don’t know the answer to a technical question, don't try to fake it - just admit that you don't know rather than stumbling through an attempt.
However, you really do need to know the basic concepts such as simple accounting and valuation. For more advanced modelling, there's greater leeway to say you don't have much experience or don't know the specific answer.
We have put together some of the most common basic and advanced questions you might be asked to help you prepare for success in your private equity interview.
Accounting
- Walk me through the 3 financial statements
- Walk me through how depreciation going up by $10 would affect statements
- Walk me through the major line items of a Cash Flow Statement
- What is working capital? How is it used?
- What is the difference between a balance sheet and an income statement?
- What is EBITDA?
- A company has had positive EBITDA for the past 10 years, but it recently went bankrupt. How could this happen?
- What are deferred tax assets/liabilities and how do they arise?
- Why do you need to add Minority Interest to Enterprise Value?
- Say you knew a company’s net income. How would you figure out its cash flows?
- What is goodwill? How does it affect net income?
- A firm is using LIFO, and prices on supplies start decreasing. What are effects on I/S, BS and CFS?
Finance & Valuation
- Why might a company choose to issue debt vs. equity?
- What could a company do with excess cash on the balance sheet?
- What are the limitations of a DCF model?
- Rank the 3 valuation methodologies from highest to lowest expected value
- How would you value an apple tree?
- How would you calculate a firm’s WACC? What would you use it for?
- What is the beta and where would you go to find a firm’s beta? How and why would you un-lever a beta?
- What is the CAPM?
- What major factors affect the yield on a corporate bond?
- Company A trades at P/E of 20. Company B trades at P/E of 10. Both are considering acquiring Company C, which trades at P/E of 15. For which of the two acquiring companies would the deal be dilutive? For which would it be accretive? Explain why for each
M&A / Modelling
- Why would two companies merge?
- What major factors drive mergers and acquisitions?
- Walk me through a basic merger model
- Is there a rule of thumb for calculating whether an acquisition will be accretive or dilutive?
- Are revenue or cost synergies more important?
- Walk me through the most important terms of a Purchase Agreement in an M&A
Markets
- What is the DJIA at today? NASDAQ? S&P500? What is the long bond at? Fed funds rate?
- Where is the market going? Bond, equity and Forex? Where do you think interest rates will be in the next 12 months?
- What happened on the markets in the past three months?
- Do you read the Wall Street Journal everyday? What’s on the front page today?
- Do you follow an industry, a stock?
- What do you personally invest in?
- What does the yield curve look like?
- What industry do you follow and what numbers do you look at to determine if a firm is doing well in that industry
LBO
- What is an LBO? Why leverage a firm?
- Walk me through a basic LBO model
- What assumptions is an LBO model most sensitive to?
- What variables impact an LBO model the most?
- How do you pick purchase multiples and exit multiples in an LBO?
- What is an 'ideal' candidate for an LBO model?
- How would you determine how much debt can be raised in an LBO and how many tranches there would be?
- What is the difference between bank debt and high-yield debt?
- How could a private equity firm boost its return in an LBO?
- What is meant by the 'tax shield' in an LBO?
- Why would a PE firm choose to do a dividend recap of one of its portfolio companies?
- Tell me about all the different kinds of debt you could use in an LBO and the differences between everything
- How would an asset write-up or write-down affect an LBO model? Walk me through how you adjust the balance sheet in an LBO model
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