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    Hi guys,

    I have a final round private equity interview (summer internship) this week and it consists of a 45min case study with several interviews. They said the 45min case study will require you to read, analyse and form your opinion on 2 investment opportunities, then discuss. So I was wondering what you think is required of the candidate in the 45mins? Do you think it's more down the lines of, here's a financial statement and balance sheet, carry out general equity analysis e.g. ratios, multiples? I'm struggling to see how you could fit 2 simple LBO models in 45mins.

    Thank you in advance!
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    It's very unlikely you'll do a model but understand the drivers behind a possible investment. Especially if you're reviewing 2 investments

    Key topics to understand - Is this a good PE asset? Why? Has it got good growth potential? (Not always necessary but key for mid market PE firm) How cashflow generative is the business? This will drive the debt element.

    I've interned in PE before. Happy to answer more questions - pm me.

    btw is this for UK or US fund? Mid market or Large Cap? That can sometimes affect interview questions.
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    Likely you'll get summary financials of both companies and maybe a snapshot description of the company and its industry. Focus on the cash flow generation and stability of the businesses. Balance sheet is unlikely to be important unless you're looking at a financial services company.

    You're unlikely to be doing any modelling in that interview.
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    Concur with the comment above.

    However, be prepared to walk through the basics of operating model, valuation, LBO models and maybe Merger model. Considering it is just a summer internship, I guess the questions should not be that technical at all, probably testing your business sense (similar to those said above, identifying drivers, growth potentials etc.)

    I actually wonder if they would have projected financial for you to do a simple DCF...hmm.... not too sure about this one.
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    is this for an associate level position? if so the case study could very well include a basic model and anyone with experience in IB should be able to put together a model in very little time.

    if on the other hand you have no experience than I doubt modelling will be a factor. Know key metrics and which are used for their certain sectors and the more qualitative drivers which people overlook as being too simplistic.
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    (Original post by Prince of Zamunda)
    Likely you'll get summary financials of both companies and maybe a snapshot description of the company and its industry. Focus on the cash flow generation and stability of the businesses. Balance sheet is unlikely to be important unless you're looking at a financial services company.

    You're unlikely to be doing any modelling in that interview.
    Balance sheet can be important for looking at level of tangible assets firm can monetize to pay off debt. More assets means more cash flow, which obviously makes the firm more attractive. You'd also want to look at any liabilities already outstanding, and how much cash the firm's sitting on in retained earnings.

    OP, I think what everyone else has said is generally right. I would just suggest you also research what makes a good LBO target/investment opportunity, and then look out for those qualities in the firms in the case study.
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    (Original post by Zweihander)
    Balance sheet can be important for looking at level of tangible assets firm can monetize to pay off debt.
    You will rarely find a firm with assets that can be easily sold off to pay down a significant portion of debt without eating into the firm's EV or sponsor's IRR. Sure, a business may have a profitable undervalued unit which can be spun off, but you won't figure this out by looking at the balance sheet. Balance sheet only becomes important if it will be a significant factor in the firm's valuation, but outside of firms in a few specialist industries (e.g. banks; loan portfolio), I can't think of any type of firm where the balance sheet would be an important factor considered in the first few hours of analysis (assumming whole firm is being purchased)

    (Original post by Zweihander)
    More assets means more cash flow, which obviously makes the firm more attractive.
    How does more assets = more cash flow?

    (Original post by Zweihander)
    You'd also want to look at any liabilities already outstanding, and how much cash the firm's sitting on in retained earnings.
    (i) Outstanding liabilities will be refinanced (ii) Not sure what you meant, but cash sits in assets, and the company would be bought out net of cash, making any outstanding cash irrelevant anyway

    If you have anything from 30 mins to 3 hours to analyse a firm as a possible buyout candidate, outside of financials (banks, insurance companies etc), the balance sheet will rarely be the dealbreaker.
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    Hi,

    Just a quick question about balance sheets.

    On a balance sheet which figures do I have to look at to know that my balance sheet is balanced?

    For example:

    On my balance sheet two items match:
    1) 'Total Assets' and..

    2)'Total Liabilities & Net Worth' <(Known as closing capital)

    Therefore does this mean that by looking at these two figures my balance sheet balances? Or am I looking at the wrong figures?

    Thanks! Help much appreciated!
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    (Original post by Prince of Zamunda)
    You will rarely find a firm with assets that can be easily sold off to pay down a significant portion of debt without eating into the firm's EV or sponsor's IRR. Sure, a business may have a profitable undervalued unit which can be spun off, but you won't figure this out by looking at the balance sheet.
    cash and cash-equivalents as well as a variety of investments that some firms have
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    (Original post by Prince of Zamunda)
    You will rarely find a firm with assets that can be easily sold off to pay down a significant portion of debt without eating into the firm's EV or sponsor's IRR. Sure, a business may have a profitable undervalued unit which can be spun off, but you won't figure this out by looking at the balance sheet. Balance sheet only becomes important if it will be a significant factor in the firm's valuation, but outside of firms in a few specialist industries (e.g. banks; loan portfolio), I can't think of any type of firm where the balance sheet would be an important factor considered in the first few hours of analysis (assumming whole firm is being purchased)


    How does more assets = more cash flow?


    (i) Outstanding liabilities will be refinanced (ii) Not sure what you meant, but cash sits in assets, and the company would be bought out net of cash, making any outstanding cash irrelevant anyway

    If you have anything from 30 mins to 3 hours to analyse a firm as a possible buyout candidate, outside of financials (banks, insurance companies etc), the balance sheet will rarely be the dealbreaker.
    What about working out asset turns? Obviously, it depends on how long you have but breaking out operating/financial position and looking how a company is investing has always been very useful for me. As well, again this depends on how long you have, but I have found the BS can be useful for validating changes in CF statement esp. for acquisitive companies that are mixing op/inv CFs. Finally, looking at something like ROTA is always useful, again, for acquisitive companies with big goodwill balances it should be pretty useful. I am not trying to pick holes its just I have found the BS can be pretty useful and for some companies with big financial positions, unusual accounting, or has been involved in M&A it is impossible to see understand the company and its returns without it.

    Also, I have seen in some books that a rough LBO value can be backed out from EBIT/interest expense ratio. So if you think, for whatever reasons, lenders want 1.5x EBIT/IE, a company with $10m in EBIT had can take $6.6m in interest which, with a 7% rate, implies $94m in debt and applying a debt to equity ratio of 75/25 means an EV of $125m. Assuming the company has no debt or cash outstanding at the date of the LBO, is that a reasonable model of how a private equity company would look at it? Any interesting books on the topic (apart from the Rosenbaum/Pearl one)?
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    (Original post by Prince of Zamunda)
    You will rarely find a firm with assets that can be easily sold off to pay down a significant portion of debt without eating into the firm's EV or sponsor's IRR. Sure, a business may have a profitable undervalued unit which can be spun off, but you won't figure this out by looking at the balance sheet. Balance sheet only becomes important if it will be a significant factor in the firm's valuation, but outside of firms in a few specialist industries (e.g. banks; loan portfolio), I can't think of any type of firm where the balance sheet would be an important factor considered in the first few hours of analysis (assumming whole firm is being purchased)

    How does more assets = more cash flow?

    (i) Outstanding liabilities will be refinanced (ii) Not sure what you meant, but cash sits in assets, and the company would be bought out net of cash, making any outstanding cash irrelevant anyway

    If you have anything from 30 mins to 3 hours to analyse a firm as a possible buyout candidate, outside of financials (banks, insurance companies etc), the balance sheet will rarely be the dealbreaker.
    I should have specified that I meant mostly non-core assets for disposals. That's what I meant when I said "more assets = more cash flow". But yeah as you mentioned, divesting business lines is probably the most "significant" way a firm can generate cash flow post-acquisition.

    In an LBO, the amount of debt you can take on is constrained by EBITDA. If all pre-acquisition debts have to be refinanced let's say, half way through the sponsor's holding period, that's something that would affect how much debt it could take on right now. That would impact the debt repayment schedule, which might not be something that's material in the OP's 45 min case study, but it's definitely a key consideration.
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    (Original post by KLL)
    cash and cash-equivalents as well as a variety of investments that some firms have
    You buy the business net of its cash, not inclusive of it. A buyout of a company is in effect, a buyout of a firm's 'non-cash assets' and liabilities. Any cash you may require for the business will be provided via the new sources of capital.
    (Original post by crcr)
    What about working out asset turns? Obviously, it depends on how long you have but breaking out operating/financial position and looking how a company is investing has always been very useful for me.
    Lets use an example. Company A has €1bn in PP&E and while company B in the same industry has €500mm in PP&E.
    Both companies generate the same top line revenue, steady predictable EBITDA of €150mm, and annual FCF (pre-debt service) of 100mm. Ceteris paribus, assuming the market values comparable companies at 8x EBITDA, both companies will be valued at €1.2bn.
    The varying asset utilisation rates might prompt questions such as (i) How is company A valuing their assets? (ii) could company B use company A's assets more efficiently? (in which case a roll up strategy could be considered) (iii) Does A have a lot of over-capacity? Perhaps they have greater scope to grow in an economic rebound then? Or maybe they have good candidates for asset disposals?
    Problem is you would only be able to come up with those if given two companies to compare (A and B). If you were just given A, you would have no idea how its asset utilisation looked relative to the rest of the industry unless you were an expert in it.
    (Original post by crcr)
    Finally, looking at something like ROTA is always useful, again, for acquisitive companies with big goodwill balances it should be pretty useful.
    Why?
    (Original post by crcr)
    I am not trying to pick holes its just I have found the BS can be pretty useful and for some companies with big financial positions, unusual accounting, or has been involved in M&A it is impossible to see understand the company and its returns without it.
    Just to clarify any possible misunderstanding I'm not saying the balance sheet isn't important at all .. rather, that if you only have 30 mins to 2 hours to do a PE case study, a cautionary glance at the balance sheet to make sure there's nothing 'weird' on there should be ok.
    (Original post by crcr)
    Also, I have seen in some books that a rough LBO value can be backed out from EBIT/interest expense ratio. So if you think, for whatever reasons, lenders want 1.5x EBIT/IE, a company with $10m in EBIT had can take $6.6m in interest which, with a 7% rate, implies $94m in debt and applying a debt to equity ratio of 75/25 means an EV of $125m. Assuming the company has no debt or cash outstanding at the date of the LBO, is that a reasonable model of how a private equity company would look at it?
    Lenders will focus on key credit statistics like
    - Leverage (Net Debt / EBITDA)
    - Interest cover (FCFF / interest)
    - Debt service cover ratio [or DSCR] (FCFF / debt service) where debt service = interest + mandatory debt amortisation
    Now, there are two ways I can immediately think off to come up with a capital structure for the target company
    1) Assume 2-3x EBITDA of senior secured debt and another 2-3x of Mezz debt with the rest financed by equity (typical structure today), and tweak above assumptions to match what you think lenders would be comfortable with
    2) Backward induction like you mentioned. Today, lenders would probably require an equity cheque of 40% so a 60/40 ratio means an EV of $157m in your case. What is relevant to the PE firm however, is what IRR and cash on cash return they get on their equity contribution. If the expected returns are justified, there's no reason why they can't bid more than $157m and fund the excess with further equity.
    Any interesting books on the topic (apart from the Rosenbaum/Pearl one)?
    Haven't read it myself, but I've heard the Rosenbaum one is very good. Can't think of anything that could be better.
    (Original post by Zweihander)
    I should have specified that I meant mostly non-core assets for disposals. That's what I meant when I said "more assets = more cash flow". But yeah as you mentioned, divesting business lines is probably the most "significant" way a firm can generate cash flow post-acquisition.
    You can't identify business lines/divisions on the balance sheet, so it still makes no sense to look at it for that purpose. Revenue and EBITDA breakdown by business would still be more useful.
    (Original post by Zweihander)
    In an LBO, the amount of debt you can take on is constrained by EBITDA. If all pre-acquisition debts have to be refinanced let's say, half way through the sponsor's holding period, that's something that would affect how much debt it could take on right now. That would impact the debt repayment schedule, which might not be something that's material in the OP's 45 min case study, but it's definitely a key consideration
    Pre-acquisition debt would most likely be refinanced on transaction close. You don't buyout a company and stick on new debt without refinancing the existing debt for a number of reasons
    (i) Lenders would prefere to be in the same inter-creditor agreement (legal document basically stating what rights lenders have with respect to one another). Would be difficult if there are pre-existing lenders on different agreements.
    (ii) Change of control clauses require the full repayment of existing debt if the business ownership changes. Most loan docs will have these and they would be triggered on a buyout
    (iii) Sponsor will want to avoid the problem of debt maturing sooner than their planned exit date
    Probably many more ...
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    (Original post by Prince of Zamunda)
    You buy the business net of its cash, not inclusive of it. A buyout of a company is in effect, a buyout of a firm's 'non-cash assets' and liabilities. Any cash you may require for the business will be provided via the new sources of capital.
    Thanks for the info, the PE perspective is always interesting. I couldn't think of any interesting books either but thought it best to ask. About ROTA, my point was that if you have a company with a large goodwill line and lets say the deal didn't work out. If you use ROTA (I would personally take out cash from tangibles as well) you can pick up changes in operations that don't filter through to more conventional measure of performance such as ROA/ROE/RNOA (depending on how you calculate). This isn't to say a big pile of money hasn't been flushed away but sometimes it is worth looking closely at the balance sheet. Although, as you say, I don't think you were saying the BS is totally useless.
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    (Original post by crcr)
    Thanks for the info, the PE perspective is always interesting. I couldn't think of any interesting books either but thought it best to ask. About ROTA, my point was that if you have a company with a large goodwill line and lets say the deal didn't work out. If you use ROTA (I would personally take out cash from tangibles as well) you can pick up changes in operations that don't filter through to more conventional measure of performance such as ROA/ROE/RNOA (depending on how you calculate). This isn't to say a big pile of money hasn't been flushed away but sometimes it is worth looking closely at the balance sheet. Although, as you say, I don't think you were saying the BS is totally useless.
    ROA/ROE/RNOA all calculate returns based on balance sheet asset values. In an acquisition, your concern should lie with the market value of the company's assets (i.e. €1.2bn for both firms in the earlier example), not the balance sheet value (€0.5bn and €1bn in the earlier example). A 100mm FCF company is a 100mm FCF company regardless of whether owners paid X or Y to get there. If management sucks, they can be replaced. And future investment opportunities would be available to both firms.
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    (Original post by Prince of Zamunda)
    Pre-acquisition debt would most likely be refinanced on transaction close. You don't buyout a company and stick on new debt without refinancing the existing debt for a number of reasons
    (i) Lenders would prefere to be in the same inter-creditor agreement (legal document basically stating what rights lenders have with respect to one another). Would be difficult if there are pre-existing lenders on different agreements.
    (ii) Change of control clauses require the full repayment of existing debt if the business ownership changes. Most loan docs will have these and they would be triggered on a buyout
    (iii) Sponsor will want to avoid the problem of debt maturing sooner than their planned exit date
    Probably many more ...
    Why are LBOs considered such a bad thing for bondholders/CDS writers then? I guess the CDS just "switches" to the new debt.
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    (Original post by Teenage Pirate)
    Why are LBOs considered such a bad thing for bondholders/CDS writers then? I guess the CDS just "switches" to the new debt.
    Where did you read that they are bad for bondholders? In 99% of cases, the LBO requires the sponsor to expire existing debt as part of the total EV of an acquisition and therefore the bondholder of pre-LBO bond assume no risk post LBO. The new debt is then issued to a new set of investors. Is that right?

    Not sure how that works with CDS but if the CDS is on the company itself, rather than a particular instrument, then the cost can rise because increased financial risk.
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    (Original post by consultius)
    Where did you read that they are bad for bondholders? In 99% of cases, the LBO requires the sponsor to expire existing debt as part of the total EV of an acquisition and therefore the bondholder of pre-LBO bond holders assume no risk post LBO. The new debt is then issued to a new set of investors. Is that right?

    Not sure how that works with CDS but if the CDS is on the company itself, rather than a particular instrument, then the cost can rise because increased financial risk.
    umm it's quite often thrown around. as an example (first thing that comes up with googling LBO Bondholders) http://www.marketwatch.com/story/lbo...or-bondholders

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