All questions tagged Private Equity - Consulting Q&A - PrepLounge.com

Hi,

As said I would clarify what they meaning.
Having worked in leveraged finance, I can tell you that a key metric is the debt payback period, i.e. in how many years the Free Cash Flow accumulated will cover all the principal debt.
A good metric to keep in mind, especially if you apply for the corporate finance practice :)

Hi!

Here is how to be rigorous in your thinking:

1. You need to ALWAYS define your focus metric! Profitability is not universally defined. It is usually profit relative to something (mostly profit/revenue, but can also be profit/cost, profit/customer base or dozens of other versions). Clarifying what profitability means for this particular client is your duty as consultant (candidate).
2. Then you need to deconstruct this focus metric into its components and check, which one has changed in the direction wthat would cause the term to decline (nominator must have increased relatively to the denominator!). Then you drill deeper to isolate the numerical driver of this unfavorable change.
3. Once you know what is mathematically driving the decline in profitability, then you start asking qualitative questions to understand the underlying reasons for this decline.
4. After you understand the problem driver(s) and the underlying reasons, you are well equipped to outline strategic options to adress these very reasons.

Hope this is helpful.

Cheers, Sidi

Hi,

PE is not a common exit, simply because there are so many MBB alums and a very limited number of PE roles.

To give you some context - at my MBA class at Harvard, we had more ex-PEs looking for a PE job than the final PE job offers. As you can see - the PE world is very very small

Salaries are much higher if you stay long term since PE assumes Carry. Once you are in - the salaries are the same no matter what was your background. However, keep in mind that some PEs have operational roles (typical for ex consultants) where the salaries are lower than with investment roles

In private equity interviews, the cases will be much more detailed in the financial part. Depending on the company you'll need to:

• Find the relevant information in P&L and Balance sheet
• Do the simplified valuation using NPV: calculate cash flows and make assumptions about growth rate and discount rate
• Do the valuation using comps - you'll have to explain which comps you will use and why

Good luck!

Hi,
since the 90+% of the PE associates come from MBB, top MBA or top investment bank, with scenarios 1. and 2. you would build the most appealing CV. However, I would recommend applying right now to PE and playing your cards.

Best,
Anto

Hi,
one of the most important aspects to stress in an M&A will be the revenue and cost synergies of the 2 companies.

During a PE investment instead will be crucial to investigate the ability of the target company to increase - in the short-middle term - profit and value. Then, you can think even on synergies with the other firms in the portfolio.

Best,
Antonello

Hi,

I would say it's hard, especially at the later stages. For example, there are more PE alums to Harvard MBA than PE jobs post MBA. So I personally know some people with PE experience who didn't manage to secure a PE offer. The earlier you make the transition - the better.

The role is also important. It's easy to get an ops role that will not have the major benefits of PE - Carry, Bonus. Securing a PE deal desk offer is much harder

Best

Hi,

most frequently from MBB and top MBA.

Best,

Antonello

Hi Anonymous,

since all the experiences you had were internships, I would actually include the consulting one as well. You can easily build the story that you wanted to try different things to understand what is really interesting for you, and after doing both PE and consulting you understood consulting is the most suitable career path.

It is quite normal for people to have internships in different sectors to understand how they are before choosing a career path; so far that the brand name or the sector is fitting consulting, there are no issues with that. I myself did an internship in banking before consulting and that was totally fine for the interviewers.

The fact that you had internships in both consulting and PE and that you now want to start in consulting can actually be considered as a plus. Consulting companies appreciate candidates who are sure about consulting as a career path and the fact you want to go back after trying also other experiences can reinforce that belief.

Best,

Francesco

Hi,

There are two types of cases you can have:

1. Commercial due-diligence of the target company
2. Synergies calculation of two merging companies

Note also that it can be a mix of both.

1. For Due Diligence you can use the following structure (It's the official framework from Bain website):

Market

• Size
• Growth rates
• Profitability
• Segments and growth
• Regulation

Competition

• Market shares of competitors and their segments (see the next point)
• Concentration / fragmentation (Fragmented market with lots of small players is less mature and easier to enter from a scratch. Concentrated market is hard to enter but has potential acquisition targets)
• Unit economics of the players (Margins, relative cost position)
• Key capabilities of the players (e.g. suppliers, assets, IP, etc)

Company

• Revenue and growth rates
• Profits
• Unit economics (Margins, costs) in current or target markets
• Key capabilities

Feasibility of exit (in case of a PE company):

• Exit valuation
• Exit time
• Existence of buyers
• Risks

2. For Synergies Calculation you can use the following structure:

1. Revenue synergies - here you calculate the synergies in price and quantity (depending on the case it may be new geographies, new products, new distribution channels, bigger share on shelves crosselling opportunities, etc.)
2. Cost synergies - typically you use a value chain structure tailored to the industry (e.g. supply-production-distribution-marketing-after sales support)
3. Financial synergies - working capital, capital structure, tax
4. Risks - major risks that can decrease the synergies (tip: don't underestimate the merging companies culture factor)
5. Total synergies potential in $, adjusted by risk (probability of failure)

Good luck!

Hi Mia,

you should be able to find PE cases in the major casebooks online as they are quite popular (eg Kellogg) – just filter the casebook by keywords; VC cases are definitely less frequent, both in casebooks and in interviews, although most of the time the structure you can use is similar.

In case you need specific support with them please feel free to PM me.

Best,

Francesco

Hi there!

The reason why most strategies (80%) fail is execution. I would start by stressing this concept. For sure the PE firm identified a strategy to make the target grow before acquiring it. So, your action plan has two core macro-steps:

1. Communicating the strategy and the change;
2. Implementing the strategy.

In terms of communication, it’s important to make everyone in the company aware of the change and committed to it. You’ve to create the momentum and keep it high (eg., through interviews with colleagues, banners on the walls, newsletter, etc.)

At the same time, you have to start implementing your plan. On the one hand, by focusing on your clients, in order to increase revenues, on the other one, by focusing on internal operations and supply chain management in order to improve your cost structure.

This is the general framework I’d suggest you adopt. The specific actions will depend on the strategy proposed by the PE firm.

Best of luck!

Hi,

There are two types of frameworks you may use:

1. Commercial due-diligence of the target company
2. Synergies calculation of two merging companies

Note also that it can be a mix of both.

1. For Due Diligence you can use the following structure (It's the official framework from Bain website):

Market

• Size
• Growth rates
• Profitability
• Segments and growth
• Regulation

Competition

• Market shares of competitors and their segments (see the next point)
• Concentration / fragmentation (Fragmented market with lots of small players is less mature and easier to enter from a scratch. Concentrated market is hard to enter but has potential acquisition targets)
• Unit economics of the players (Margins, relative cost position)
• Key capabilities of the players (e.g. suppliers, assets, IP, etc)

Company

• Unit economics (Margins, costs) in current or target markets
• Brand
• Product mix
• Key capabilities

Feasibility of exit (in case of a PE company):

• Exit valuation
• Exit time
• Existence of buyers
• Risks

2. For Synergies Calculation you can use the following structure:

1. Revenue synergies - here you calculate the synergies in price and quantity (depending on the case it may be new geographies, new products, new distribution channels, bigger share on shelves crosselling opportunities, etc.)
2. Cost synergies - typically you use a value chain structure tailored to the industry (e.g. supply-production-distribution-marketing-after sales support)
3. Financial synergies - working capital, capital structure, tax
4. Risks - major risks that can decrease the synergies (tip: don't underestimate the merging companies culture factor)
5. Total synergies potential in $, adjusted by risk (probability of failure)

Good luck!

Hi Anonymous,

congratulations on your offer! In terms of the job expectations, you will mainly have to work on due diligence (usually 4-week period projects) to assess if an acquisition makes sense. This normally involves industry analysis (including analysis of market potential, competitors and customers), target analysis (business plan assessment) and synergies analysis (potential revenue/cost gains) to assess if the acquisition makes sense based on the goal of the PE (usually, an exit in a certain number of years for a certain multiple).

In terms of preparing in advance before you start, I would recommend working on technical, communication and stress management skills.

• On the technical side, Excel will be the most important technical thing to master at the beginning, in particular for VLOOKUPs and Pivot tables; you could also review PowerPoint, which you will also use quite a lot.
  • At BCG we got learning courses we could use to improve on them, and you may receive the same for your target firm, but so far that you have already mastered the skills before joining (you can find several courses online for both), even better.
  • Tip for Excel: learn how to use as much as possible the keyword and relegate the touchpad to the minimum – this will skyrocket your productivity in the long term. Some computer programs such as KeyRocket provide tips to improve on this.
• For what concerns communication, I would recommend the classic book on the topic: “How to Win Friends and Influence People” by Dale Carnegie.
• For stress management, I would recommend two books:
  • “The Miracle Morning” by Hal Elrod – great tips to start in the right way your day
  • “The Magic of Thinking Big” by David Schwartz – a great sum up of some of the best tips be positive, productive and achieve more

Below you can also find a list of things that could be useful to practice during your first weeks:

1. Take notes when your manager tells you something – this will help you to remember details and will show you care about them to the team.
2. Always double check. The first impression is very important in consulting: if you show you are reliable from the beginning, you create a reputation of a reliable person. Double checks should be done on expectations for your job, your excel analysis, your slides – basically everything.
3. Define priorities before starting any set of tasks. The majority of the results usually come from a subset of activities – this is true also for your tasks in consulting. You have to identify which they are and prioritize them – the application of the so-called 80-20 rule or Pareto Principle.
4. Socialize with your colleagues and start to build a network. Consulting is a people business and you should build a good network both within and outside the company. A good start is key to develop good relationships long-term
5. Organize your private life activities. You want to organize your calendar to leave some space for personal activities (sport/ friends/ family). This is not easy but can be managed if you organize well, and long-term will be critical to keep a balance between work and private life. Also, it is better to align with your manager/teammates from the beginning on your core needs, so that there are no surprises later on.
6. Ask for feedback every two-three weeks – this will show you are proactive and willing to learn.
7. Ask for help when you don't know what to do – better to let know you are in trouble with meeting a deadline then missing the deadline.
8. Be social and respectful with the support staff – these people are great and influential as well in the company.

Hope this helps,

Francesco

Many (if not all) PE funds would consider applicants from management consultant firms. They generally like the idea of having applicants with a diverse background and can think about problems in a different way than the typical finance kid. That being said, the fund will expect that you have roughly ~80% of the technical financial skills that an applicant coming from a traditional banking background would have.

You may need to devote a little time self-studying the basics. Here is a list of topics to cover and an intermediate level question you could expect in an interview (though they can get significantly more challenging based on the interviewer)

1. Accounting skills: basic understanding of 3 financial statements
   1. Ex: if you sell $10 of inventory for $20 and no cash is collected today, how would impact the 3 financial statements?
2. Financial skills:
   1. 1. Understanding of key financial concepts: equity, debt, enterprise value, WACC etc (ex: how do you calculate the average cost of capital? //what is this number used for? // if we increase the amount of debt on a company, what happens to WACC
      2. Understanding of valuation methods (Comparables, Transaction Comps, DCF) and metrics (P/E, EV / EBIT(DA)) - calculation and applications
      3. Conceptual questions (ex: what sort of companies would you want to use EBIT multiples? // when would you use EBITDA as a multiple? Walk me through a DCF // what is the difference between levered and unlevered free cash flow?
   2. Modeling skills:
      1. Each fund will have you do a case study/modelling test in a later round. You should be able to build a basic LBO model from scratch, decently formatted in around 2 hours

This stuff is not rocket science and will not be overly hard for anyone who went to a decent college in a hard major. That being said, if you have little exposure to this information before I would assume that it represents roughly 1/3 of the volume of work required in a freshman level calculus class.

I would recommend the wall street oasis guide (WSO) or vault guides. They are well worth the money. The WSO guide, in particular, is helpful because they have lots of these technical questions at varying difficulties. I would suggest getting the guides because the questions I have listed above are fairly easy and you can likely expect questions that can be a fair amount more difficult.

Important note: Quotation from Quora

Hi,

I would prepare for the following:

1. Due-diligence of the target company
2. Synergies calculation of two merging companies

1. For DD you can use the following structure:

Market

• Size
• Growth rates
• Profitability
• Segments
• Distribution channels

Competition

• Market shares of competitors and their segments (see the next point)
• Concentration / fragmentation (Fragmented market with lots of small players is less mature and easier to enter from a scratch. Concentrated market is hard to enter but has potential acquisition targets)
• Unit economics of the players (Margins, relative cost position)
• Key capabilities of the players (e.g. suppliers, assets, IP, etc)

Company

• Financial analysis (Profits, Revenues, growth rates, etc)
• Unit economics (Margins, costs) in current or target markets
• Brand
• Product mix
• Key capabilities
• Valuation

Feasibility of exit (If a PE fund):

• Exit multiples
• Exit time
• Existence of buyers

2. For Synergies Calculation you can use the following structure:

1. Revenue synergies - here you calculate the synergies in price and quantity (depending on the case it may be new geographies, new products, new distribution channels, bigger share on shelves crosselling opportunities, etc.)
2. Cost synergies - typically you use a value chain structure tailored to the industry (e.g. supply-production-distribution-marketing-after sales support)
3. Risks - major risks that can decrease the synergies (tip: don't underestimate the merging companies culture factor)
4. Total synergies potential in $, adjusted by risk (probability of failure)

The cases will be much more detailed in financial part. Depending on the company you'll need to:

• Find the relevant information in P&L and Balance sheet
• Do the simplified valuation using NPV: calculate cash flows and make assumptions about growth rate and discount rate
• Do the valuation using comps - you'll have to explain which comps you will use and why

Good luck!

Hi,

M&A Advisory interviews are different from consulting and are usually much more technical and detailed in the financial part. Usually, they give you much more time to prepare and do the valuation on paper. Depending on the company you'll need to:

• Find the relevant information in P&L, Balance sheet, CF statement
• Do the simplified valuation using NPV: calculate cash flows and make assumptions about growth rate and discount rate
• Do the valuation using comps - you'll have to explain which comps you will use and why
• Do the valuation of the synergies
• Play with different scenarios (e.g. how the stock-price will change if the deal terms leak into media, or how should the companies behave in a bidding process)

There are two types of frameworks you may use:

1. Commercial due-diligence of the target company
2. Synergies calculation of two merging companies

Note also that it can be a mix of both.

1. For Due Diligence you can use the following structure:

Market

• Size
• Growth rates
• Profitability
• Segments
• Distribution channels

Competition

• Market shares of competitors and their segments (see the next point)
• Concentration / fragmentation (Fragmented market with lots of small players is less mature and easier to enter from a scratch. Concentrated market is hard to enter but has potential acquisition targets)
• Unit economics of the players (Margins, relative cost position)
• Key capabilities of the players (e.g. suppliers, assets, IP, etc)

Company

• Unit economics (Margins, costs) in current or target markets
• Brand
• Product mix
• Key capabilities

Feasibility of exit (in case of a PE company):

• Exit valuation
• Exit time
• Existence of buyers
• Risks

2. For Synergies Calculation you can use the following structure:

1. Revenue synergies - here you calculate the synergies in price and quantity (depending on the case it may be new geographies, new products, new distribution channels, bigger share on shelves crosselling opportunities, etc.)
2. Cost synergies - typically you use a value chain structure tailored to the industry (e.g. supply-production-distribution-marketing-after sales support)
3. Financial synergies - working capital, capital structure, tax
4. Risks - major risks that can decrease the synergies (tip: don't underestimate the merging companies culture factor)
5. Total synergies potential in $, adjusted by risk (probability of failure)

Good luck!

Hi!

A business plan is a critical tool to carve out a roadmap for launching and running businesses. Reviewing the business plan and updating it regularly gives Management a chance to monitor progress and take corrective action if things aren't going to plan.

A business plan should be continually monitored to make sure that the business objectives are achieve. This mainly encompasses:

• assessing progress to date
• analyzing the most promising ways to further develop the business

The process of reviewing and analysing your business plan is called the business plan cycle. Depending on the type of business, this process can typically be:

• continuous - with the plan regularly updated and monitored
• annual - with the plan broken down into four quarterly operating plans

Sales driven businesses sometimes use a monthly operating plan, and weekly targets and reviews if needed.

Especially in the context of a (potential) acquisition, reviewing the business plan of the target is a crucial element of the wider commercial due diligence.

Cheers, Sidi

Hi!

A commercial due diligence is the process a corporation or PE firm undertakes to assess a target company's commercial attractiveness. It is an analysis of the target company performance and potential problems that may occur as a result of an acquisition.

Generally speaking, there are four major sources of value that can be unlocked by acquiring a business:

1. Achieve synergy benefits. Synergies come from increased utilisation of resources and often are realised by consolidation of assets or reductions in headcount within the combined entity.
2. Achieve revenue growth by introducing new products or services, accessing new markets, entering new geographies or increasing the routes to market for existing products.
3. Achieve a strategic advantage that presents new pathways to future growth. This may include industry disruption enabled by acquired technology, extracting value from underutilised assets, or acquiring capabilities that allow level shifts.
4. Transform a company’s business model by restructure, financial engineering or changes to management structure.

The commercial due diligence provides a full overview of the target's potential to create post-acquisition value against the backdrop of its internal and external environment.

The overall process can be roughly divided into the following stages:

1. A corporation or private equity firm will liaise with a third party to conduct the report on their behalf.
2. The third-party then prepares a commercial due diligence report, outlining the information required for a potential acquisition.
3. This report is then reviewed the prospective buyer, in conjunction with other reports, before a final decision is made.

Typically the report will include the following information:

• Review of the target's business plan and predictions
  • How realistic are these targets?
  • How achievable is the business plan?
• Research and assessment of the market
  • Where is the target positioned within the market?
  • Where is the market heading? How could this affect the value of the target company?
  • What are the trends in the market?
• Analysis of competitors and customer base
  • Who are the strongest and weakest competitors?
  • How does the target perform against its competitors?
  • What is its customer profile?
• Revenue and gross margin modelling
  • Will the target reach its projected revenues?
  • How much can the target company be expected to make over a set period of time?
• Pricing and margins
  • How have average prices fluctuated historically?
  • What is the forecast for prices in the future?

Cheers, Sidi

Hi Anonymous,

as always, the central rule is that you need to understand the OBJECTIVES of the client first! If the client is the seller, he might be heavily interested in the future of the company (in this case you need to include the elements you outlined), or at the other extreme he might be only interested in maximizing the monetary value he can appropriate (in this case these "soft" factors only play a side role in terms of risk factors that could endanger the deal if the buy side is seeing an issue there).

But the central notion is that without clarifying the objective of the client, it is simply impossible to come up with a rigorous structure/decision logic.

Cheers, Sidi