Mastering Your Private Equity Case Study: Essential Preparation Tips.

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.?

The case study is the pivotal phase of a private equity interview, demonstrating your ability to perform the job effectively.

It involves assessing a Confidential Investment Memorandum (CIM) related to a potential investment. You'll need to value the company and propose an investment strategy.

While some firms may allow preparation at home, most prefer an in-office setting. The decision to invest or not is not that important, it’s more about your logic and thinking behind the answer.

Tailor your preparation based on your background.

• 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 firm 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 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 private equity 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 versus a good investment?

When approaching the case study, distinguish between a good business and a good investment, with the key difference being the price. A great business might not translate into a great investment if the acquisition cost is exorbitant. Conversely, a mediocre business can become a solid investment if acquired at the right price.

Emphasize the business's intrinsic value, a crucial factor for PE firms, given. the heightened competition for assets and the significant capital available. With competitive global transactions, overpaying for deals is common. Therefore, in the case study, pinpoint the potential value creation opportunities within the business and contemplate the exit strategy.

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.?

Before the case study, it's advisable to check if the fund has a specific investment focus. 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 comprehensive 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