We are a private equity firm operating primarily in the automotive industry. We would like you to figure out whether we should increase our portfolio in the sensor market or not.
We would like you to do a profit/margin growth potential analysis and tell us how we can add value to this company given the other companies in our portfolio.
The case is designed to be presented to the candidate by an interviewer, who plays the role of a major stakeholder in an Private Equity firm operating primarily in the automotive industry.
Short Solution (Expand) (Collapse)
The interviewee should perform a back-of-envelope calculation which answers two key questions:
- Profit growth potential of the company
- How can we add value to this company given the companies in our portfolio?
1. Could you offer some insights on the market potential?
2. Is there any growth potential beyond automotive industry?
3. Do we have any data on the investments required to operate a company in sensor market?
4. Do we have any idea about the key demand drivers?
The customers of sensor manufacturers are OEMs. Since electronic systems are seen as a source of differentiation, they place high value on leading-edge technology.
5. How does the competition look like?
Key question 1: Profit growth potential of the company
- Growth rate = 5%
- Cost of capital = 10%
Calculation and Conclusion
Present Value estimation reveals a positive return of $1.25M taking a time horizon of three years into account.
Key question 2: How can we add value to this company given the companies in our portfolio?
Discussion and Conclusion:
- New technologies that can be used by our portfolio companies could be accessed
- Expansion in other growing industries (beyond automotive industry)
- Since the market is currently fragmented, the firm could aim to be the industry leader
- Size of entities dealing with OEM customers could be enlarged
- Good chance that a significant investment will be required to stay competitive as the OEMs place high value on leading-edge technology
- Acquisition could also be expensive
- Risks are high as there is a long lead time from R&D to market
III. Concluding Observations
The present value estimation reveals a positive return of $1.25M at the end of three years.
To add value to this company given the companies in the firm's portfolio, the firm should expand beyond automotive industry, access technologies which could be used by other companies and enlarge the size of entities.
If the interviewee solves the case very quickly, you can come up with more challenging questions.