For summer analyst and 1st year interview processes – these questions are pulled from the same universal set of questions. If you work hard enough, and you get your hands on enough guides, you can memorize the answer to every technical question you could be asked. Ask an investment banker with a few years of experience running interview processes, and there won’t be a technical question out there they haven’t heard before. By contrast, PE technical questions will require you to solve problems. These are often quantitative ‘math-based’ technical questions that can’t be memorized.
For example, a short-hand LBO question with one variable missing: solve for the missing variable. The missing variable could be the entry multiple, opening leverage, management promote, LFCF generation, exit multiple, target IRR, or anything else that impacts an LBO – and there are countless variations to this question. You can’t read the BIW 400 guide and expect to recite a memorized answer. In fact, you could read every guide printed and you should still expect to get questions you’ve never seen before. Studying for these types of questions is akin to studying for a math test: cover the material and study practice problems. Then when you tackle a new problem on the exam that you’ve never seen before – you have the tools to think it through and solve it. This is where a coach can come in to teach you the relevant concepts, give you feedback on your thought process, and help you develop a framework to tackle these types of problems.It’s also common to face a series of questions testing your knowledge of important concepts such as the below:
- What is the difference between an asset sale and a stock sale? What is 338-h-10 election? Which does the seller prefer and which does the buyer prefer? How do asset write-ups change between these sale structures, and what is the tax impact? Can you walk me through how you would account for this in a model
- What is a net operating loss? How do you determine NOL utilization after a change of control? What is Section 382 and what are NUBIGs/NUBILs and how do these impact NOL utilization? What is section 163(j)? What is disallowed interest carryforward? How would you build this into a model?
Most online resources cover these topics in great complexity and are geared towards CPAs – not for PE/IB professionals looking to quickly understand and factor them into an Excel model (or explain them in an interview). An experienced coach can explain these concepts and others in a straightforward way and demonstrate how you would use them in practice so you can sound like an expert.
Here is an example of an interesting technical question:
- A PE company is looking to acquire a business with EBITDA of $10 million and FCF of $15 million. Entry multiple is 5x. Leverage is 3x. Management is given options worth 20% of the equity of the business. At what price must the PE firm sell the business to generate a 3x return?
It takes the traditional LBO question (where you are given the entry and exit assumptions, and asked to solve for IRR), and changes what variable is being solved for. But what happens if it’s a different variable that’s missing? What happens if the sellers roll $5MM of their stake? What is the PE firm’s pro forma ownership percentage in that case? How do you calculate the equity waterfall at exit between the PE firm, the previous seller, and management?
Here is another example:
- Company A is currently trading at a P/E ratio of 15x. It acquires a business that is trading at a 10x P/E ratio using debt at a cost of 7%. Is this accretive or dilutive?
This is a classic interview question, and you can certainly memorize the answer to it. You could even learn the pattern and solve questions with the same structure and different numbers. But do you really understand it? What if the interviewer changed it to the below?
- Company A is currently trading at a P/E ratio of 15x. It acquires a business with $10 million in net income using 100% debt financing at a cost of debt of 6%. How much can it pay and still maintain its 15x P/E ratio?
With a simple adjustment to the question, an interviewer can throw off your pattern recognition. A coach can work with you to develop a framework to think through these questions so you can tackle a new variation that you’ve never seen before.