How to Prepare for Your Upcoming Private Equity Case Study.
One of our mentors currently working with Blackstone shared her lowdown on how to best prepare for private equity case studies.
As a junior private equity professional, I’d say that the case study is the hardest part of the private equity interview process as it’s the closest you get to showing that you can do the job and it’ll be the most decisive part of your application.
For most case studies, you'll be given a Confidential Investment Memorandum (CIM) relating to a company the private equity fund could invest in. You'll be expected to value the company and put together an investment proposal - or not. You may be allowed to take the CIM away to prepare your proposal at home, although most firms would prefer for you to complete this in 'controlled' conditions at their office. The decision to invest or not is not that important, it’s more about your logic and thinking behind the answer.
My advice on how to prepare for the case study depends on what type of background you’re coming from. If you're a consultant, I would advise that you 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. I would also advise that you ensure that you’re totally familiar with the way a LBO model works prior to the case study!
If you’re coming from a banking background, then you need to make a big effort to develop your strategic thinking. The fund that you’re interviewing with will want to see that you can think like an investor, not just a financier. Reaching a financial conclusion is not enough. The PE firm will need to see that you can argue why a certain sector is good, and whether that firm/sector has a competitive advantage or not. Things can look good on paper, but the success of a business can change from one day to another. As a PE investor, you need to highlight and discuss risks, and whether you are ready or not to underwrite them.
Here are a few things that you should prepare for:
Can you determine a good business vs a good investment?
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 is mainly the price. You might have a great business but if you have to pay hugely for it then it might not be a great business. Conversely you can have a so-so business but if you get it a good price it could potentially make a great investment.
It’s also important to focus on what the value of the business is. This has become a critical element for PE firms when assessing investments as the competition for assets has become fiercer, given the amount of capital that funds now have at their disposal. Due to the competition for global transaction, PE firms generally have to overpay to win a deal so it’s important in the case study to think where the value creation opportunity lies in this business and what the exit would be.
Research the fund and understand their investment strategy.
It will be easier for you to define whether an investment may or may not suit a particular fund if you thoroughly understand their strategy.
Prior to the case study I would advise to check whether the fund is focused on a particular investment sector, so that when it comes to the case study, you can add that to the investment thesis. Understanding the firm’s investment strategy and including this knowledge in your thesis shows that you have done your research and could make you stand out in the case study.
Think through these questions and issues.
Here’s our checklist of points to think about for your next case study! There is some overlap, but they're about as thorough as you can get…
1. When you're considering the industry, you need to think about:
What does the company do? What are its key products and markets? What is 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)?
2. 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
3. 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?
4. 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?
5. 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
6. 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
7. 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
8. 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
