Private Equity Interview Questions & Answers
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.
Types of Private Equity Interview Questions
As mentioned above, there are generally four types of questions you’ll usually encounter in a PE interview. The four types are:
- Technical knowledge (finance, accounting, modeling)
- Transaction experience (deals you’ve worked on)
- Firm knowledge (what you know about the PE firm)
- Fit and personality (how well you fit in with the culture of the firm)
In the sections below, we will go through the most common private equity interview questions and answers!
#1 Technical Private Equity Interview Questions
What are the limitations of a DCF model?
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.
What are the most important factors in a merger & acquisition model?
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.
What indicators would quickly tell you if an M&A deal is accretive or dilutive?
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).
What assumptions is an LBO model most sensitive to?
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.
Given two companies (A and B), how would you determine which one to invest in?
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:
- Business model – how they generate money, how the company works
- Market share/Size of the market – how defensible is it, opportunities for growth
- Margins & cost structure – fixed vs. variable costs, operating leverage, and future opportunity
- Capital requirements – sustaining vs. growth CapEx, additional funding required
- Operating efficiency – analyzing ratios such as inventory turnover, working capital management, etc.
- Risk – assessing the riskiness of the business across as many variables as possible
- Customer satisfaction – understanding how customers regard the business
- Management team – how good is the team at leading people, managing the business, etc.
- Culture – how healthy is the culture and how conducive it is to success
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.
#2 Transaction Experience Private Equity Interview Questions
Describe a deal you worked on at Investment Bank X.
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):
- Describe the industry and the company’s business model
- Discuss the revenue, EBITDA, or earnings of the business
- Talk about the valuation that the company sold for (EV/EBITDA, or other)
- Do you think it was high, low, or other comments
- Outline the strategic rationale for the transaction
- Point out both the seller’s perspective and the buyer’s perspective on the deal (are they both equally valid?)
- Challenges or hurdles you had to overcome to get the deal done
- Anything else of interest that you learned in the process about the seller, the buyer, the process, etc.
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.
#3 PE Firm-Specific Private Equity Interview Questions
What do you know about us and why do you want to work at our firm?
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.
What do you think about some of our portfolio companies?
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:
- Business model
- Management team
- The transaction the PE firm acquired them in
- The industry they operate in
- Their competitors
- Whatever else you can find out about them
What is our firm’s investment strategy?
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.
#4 Culture Fit Private Equity Interview Questions
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:
Why do you want to work in private equity?
Walk me through your resume.
What are your personal strengths and weaknesses?
What do you like to do when you’re not working?
How do you de-stress?
How do you manage risk in your personal life?
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.
Private Equity Interview Questions – Financial Modeling Case Studies
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:
- Finish a partially completed LBO model
- Build a full model from scratch
- Assess a deal in a completed model
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.
Private Equity Interview Questions Recap
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. CFI is the official provider of the Financial Modeling & Valuation Analyst (FMVA)® certification program, designed to transform anyone into a world-class financial analyst.
To be prepared for interviews, check out the following guides: