Prepare for the 4 most common types of questions
This guide will help you prepare for and ace the most common private equity interview questions. The main types of PE interview questions you will encounter include technical knowledge, transaction experience, firm knowledge, and culture fit. In addition, you may also be asked to complete a practical financial modeling-related case study.
As mentioned above, there are generally four types of questions you’ll usually encounter in a PE interview. The four types are:
In the sections below, we will go through the most common private equity interview questions and answers!
While discounted cash flow analysis is the best method available for assessing the intrinsic value of a business, it has several limitations. One issue is that the terminal value represents a disproportionately large amount of the value of the total business, and the assumptions used to calculate the terminal value (perpetual growth or exit multiple) are very sensitive.
Another issue is that the discount rate used to calculate net present value is very sensitive to changes in assumptions about the beta, risk premium, etc. Finally, the entire forecast for the business is based on operating assumptions that are nearly impossible to accurately predict.
From a valuation perspective, the most important factors in an M&A model are synergies, the form of consideration (cash vs. shares), and purchase price. Synergies enable the acquiring company to realize value by enhancing revenue or reducing operating costs, and this is typically the biggest driver of value in an M&A deal (note: synergy values are very hard to estimate and can often be overly optimistic).
The mix of cash vs. share consideration can have a major impact on accretion/dilution of per-share metrics (such as EPS). To make a deal more accretive, the acquirer can add more cash to the mix and issue fewer shares. Finally, the purchase price and takeover premium are major factors in the value that’s created.
The quickest way to tell if a deal between two public companies would be accretive is to compare their P/E multiples. The company with a higher P/E multiple can acquire lesser valued companies on an accretive basis (assuming the takeover premium is not too high). Another important factor is the form of consideration and mix of cash vs. share (see the previous question).
LBO models are most sensitive to the total leverage the business can service (typically based on the debt/EBITDA ratio), the cost of debt, and the acquisition or exit multiple assumptions. In addition, operating assumptions for the business play a major role as well.
This is one of the most common private equity interview questions. Deciding between company A and B requires a comprehensive analysis of both quantitative and qualitative factors. Assuming they are in the same industry, you could start to compare the businesses based on:
All of the above criteria need to be assessed in three ways: how they are in (1) the past, (2) the near-term future, and (3) the long-term future. This will be the basis of a DCF model (which will have multiple operating scenarios), and the risk-adjusted NPV for each business can be compared against the price the business might be purchased at.
Example answer: One of the most interesting and challenging deals I worked on at the bank was the sale of a private company to PE Firm Z for $275 million.
(To elaborate on your answer, provide highlights of the deal as follows):
All other questions related to the transaction will be some sort of derivative of the above question or dig deeper into the above transaction and expand in more detail on any of the points above.
Image: CFI’s LBO Modeling Course.
This is one of those private equity interview questions that you really have to prepare for. Giving generic answers like “your firm has a great reputation” is not sufficient – you need to point out some real specifics. Spend time going through the company’s website and looking at their current and past portfolio companies.
Make sure you find several that you’re personally interested in and can speak about in detail (see the next question below). Have a solid understanding of the firm’s approach to investing, their track record, who the founders and management team are, and, most importantly, what you like about their approach.
See a list of the largest PE firms to start doing some research.
Research in advance on the firm’s website and write down notes on the portfolio companies you find the most interesting. Obtain and retain facts about their:
To answer this question well, you’ll have to do a lot of research. You can probably find an official statement on their website, but a more insightful answer would come from having read any interviews with founders and partners that talk about their approach, as well as understanding the themes across their portfolio companies and how they all fit together.
These private equity interview questions are designed to see what you’re really like as a person in order to determine how well you would fit with the culture of the firm. Since PE firms are typically a lot smaller than sell-side firms, personality and culture fit matters a lot.
Variations of these fit questions can include:
The key to answering these questions well is to (A) understand what the questions are aiming at – assessing you personally in relation to the firm’s culture, and (B) being relaxed, organized with your thoughts, and showing that you’re a likable person who’s easy to get along with and who works well on a small team.
Every firm and team has its own culture and types of personalities they like best, so it’s important to ask around and see what you can learn about them. General personality traits that nearly every firm values are hard-working, reliable, respectful, humble, honest, easy to work with, inquisitive, organized, and possessing an extremely strong business sense.
Learn more in CFI’s Why Private Equity Guide.
As part of the interview process, you may be asked to complete a case study, either in the office or at home, after the interview. Be prepared to do it right then as part of the interview. If the interviewer says they want you to do it as a “take-home” assignment, look the case over carefully and ask any questions you need to in order to make sure you understand it all properly,
Case studies are a great way for PE firms to quickly get a full picture of your financial modeling skills and valuation skills. It’s one thing to be able to talk about modeling and another thing to actually have best practices when it comes to building models in Excel.
Examples of case studies include the following:
The best way to prepare for case studies is by ensuring you have extremely strong financial modeling skills and brushing up with Financial Modeling Courses if necessary.
Image: CFI’s financial modeling courses.
In summary, there are four main types of private equity interview questions: technical, transactions, firm, and fit. Technical and transaction questions require you to have solid financial modeling and valuation experience, with a strong understanding of how to make good investments. Firm and fit questions are more soft skills type questions and require being prepared to speak in detail about the firm and about yourself.
In addition to the above, you should expect a case study of some kind that requires analyzing a market and or business using financial modeling.
Thank you for reading this guide to Private Equity Interview Questions. To be prepared for interviews, check out the following guides: