Top 20 Private Equity Interview Questions and Answers

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Guide to Private Equity Interview Questions

Every top-notch private equity firm divides the interview questions into two basic types. The first type of question is for everybody. It is to understand whether the person is fit for the firm or not. The second type of question is incredibly tough. These questions help the interviewer sort out the best from the rest.

In this article, we will take the top 20 Private Equity Interview Questions and Answers (of both types) and guide you to answer those questions rightly.

If you are new to Private Equity, then do have a look at the following resources –

Guide to Private Equity Interview Questions

Top 20 Private Equity Interview Questions and Answers Explained in a Video

Let's get started with the Questions in the Private Equity Interview.

#1 - Why are you interested in Private Equity? Why our firm?

This is a general Private equity Interview Question. The interviewer wants to understand how much passion and interest you have for private equity at a basic level. So for the first question, you need to give a background of your work (or internships) and tell why you have chosen to come into private equity. It will help to structure the answer beforehand so that you can answer it properly.

The second part of this question is how much you know about the firm and how your goals and the firm's goals are in alignment. Again, you need to do your research before the interview to answer this question. And it would be best if you told them what they already know about the company (the types of funds they are handling, the profit margin, the clientele, the growth plans, and so on).

#2 - What do you think this company does, right? What do you think we do wrong?

It is a trick question in a private equity interview, and you shouldn't fall for it.

First of all, no company ever does anything wrong. Rather they have areas to improve upon.

So your answer would be in similar lines. Tell the interviewers about the company's strengths and what sorts of deals it has closed, and how it added value to its clientele. However, don't negatively discuss the improvement areas; rather, mention subtly what it can improve upon and a few things about how it can improve.

#3 - Why not work for a Hedge Fund / Portfolio Company?

This is a trick question in a Private equity interview. Because through this question, the interviewer is trying to understand whether you have a real interest in private equity or your ultimate goal is to exit private equity and join something else.

Here your answer would be short and to the point.

Tell all the pros of private equity (great work environment, great peers, great fund management, etc.) and all the cons of hedge funds (high risk, huge uncertainty, etc.). And then tell the interviewer why you are perfect for private equity.

Also, look at the differences between Private Equity and Hedge Fund

#4 - How did you help your previous company find value?

As a private equity professional, you should be able to have a few solid examples with you where you have helped your previous/current company find value. It can be creating operational efficiencies, which saved cost on M&A deals, or your research that helped the company launch new services/product lines.

Whatever you mention, make sure it is something that you have proof of and where you can use specific numbers to illustrate what you are speaking.

#5 - What makes a great private equity associate/ researcher/deal-maker?

Private equity firms want three things –

To find new, recurring & better investment opportunities.
To make more money &
To save more money.

As a private equity employee, your job would be the same. And you would answer this question by saying something in the same line, like finding new and regular opportunities to create value, delivering on the things you said you would execute, and saving cost through research and operational efficiencies.

#6 - What industry trends will you look at when looking for a potential investment?

This is not exactly a technical Private equity interview question. It would be easier for a PE candidate like you to answer this question. Here's what you should focus on while answering this question –

Market position & competitive advantage: Before LBO, it's important to know the market position & competitive advantage of the potential investment. The characteristics would include high entry barriers, strong customer relationships & high switching costs.
Stable & recurring cash flows: No PE firm would buy an investment without continuous and stable cash flow.
Multiple drivers to trigger growth: This one is crucial. Only one driver wouldn't propel the company to an expansive stage. More drivers, better-diversified growth strategies, and better execution would be essential for long-term growth.
Strong management: Most companies in the industry should have a strong management team so that the PE firm can get strategic guidance toward a better future.

These are the keys that a PE investor would look at before thinking of an LBO. Other than these, he would also look at changing customer habits, enhanced automation, application of disruptive technologies, etc.

#7 - If I want to protect my downside, how would I structure the investment?

The best way to protect the downside is to go for a structured deal, even at the later stage of the investment. For example, in 2010, Temasek invested in GMR Energy through a structured paper that needs to be compulsorily converted into equity. As a result, Temasek invested $200 million in GMR through its fully owned subsidiary Claymore Investments.

#8 - Did you look at our website? What investment did you like most? And why?

To answer this question, all you need to do is research the company before you ever go for the interview. Look at their website. Could you find out about their investments? And browse through every possible news about the firm. And then analyze what you liked and what you didn't like.

And then make a report which can tell them about your preference. Then, if you can explain a little and show them the report, they will understand that you have already done your homework and are very sincere about this job.

#9 - If you can look into only one financial statement, what would it be and why?

This is a basic private equity interview question, but it is often asked.

Most people choose the income statement because of the accrual accounting method. But the most important statement to analyze before anything is the cash flow statement because, through the cash flow statement, only you can see the real picture of how much cash is coming in and how much is going out irrespective of hefty profits and revenues.

#10 - If you can choose two financial statements, what will they be, and why?

This is the variation of the previous question, but the answer to this question would be completely different.

The answer would be a balance sheet and income statement If you have the beginning of the year and the year's ending values for all the items in the balance sheet and the income statement, you can make a cash flow statement by yourself.

#11 - How would you verify the information in a deal book given by an investment banker?

To answer this private equity interview question, you need to have prior experience dealing with investment bankers, or you should ask someone who has dealt with investment bankers.

Usually, it would help if you made a question framework to check the information the investment banker has mentioned in the deal book.

Bill Snow, author of the has mentioned that you can begin to ask the following questions to start the reference check, and later if you need to dig deep, you need to do so as well –

Did they provide you the value that you paid for?
Did they maintain integrity (they did what they said they would do)?
Did they attend all the meetings they said they would attend?
If the buyer has tried to re-trade the deal, how has the investment banker handled it?
Without them, could you do it?

#12 - How would you handle a situation where you have a question and no one has an answer?

This private equity interview question will test your emotional agility in an interview. Therefore, your answer will be brief and to the point when this question is asked.

You may say something like – "According to me, everything is figure-out-able. Let's say no one has an answer to the question I have. Now, if we talk about "no one," the first thing is who these people are? These people are generally relatives, peer-groups, friends, or family members. But what if I can manage to ask a stranger or an expert? In this age of massive connectivity, not getting an answer to a question is the rarest thing."

#13 - If your investment increased by 25% and now you have $100, how much did you begin with in the first place?

It is a simple private equity interview question, and the interviewer wants to see how fast you can answer it. For example, a 25% increase on the principal means a 20% increase on the principal + interest.

That means you have started with = = $80.

#14 - What would you prefer – a lump sum of $1 million right now or $2000 every month for the rest of your life?

This is a private equity interview question based on the time value of money.

From the approach of the time value of money, $2000 this month wouldn't be similar in value next year. So the value of money will reduce with time. So, it's always better to receive a million dollars right now than getting $2000 per month for the rest of your life.

#15 - Do you think that the market for mega-cap LBO/M&A is over?

To answer this private equity interview question, you need to be thorough with the current events in your industry. Read up everything you can. And ask your connections – "what's new in the market?" and soak up knowledge as much as possible. For example, there was a time when the industry was ready for a $100 billion LBO deal. But recently, these have been very infrequent events. You can pick something you have worked on before (if you ever worked on a mega-cap fund) and explain why that isn't a possibility.

#16 - What do you think will happen to LBO / M&A in the next ten years?

This is another private equity interview question that requires you to know about current events.

Learning must be your best friend if you want to get into a top-notch firm. And if you are browsing through the materials related to private equity, LBO & M & M&A, mega-cap funds, acquisitions, financial analysis, etc., you would know what to say to this question.

You need to give your point of view. And if you can cite an example of why you are saying what you are saying, it would separate you from the crowd.

#17 - MNC Company has been struggling with real estate. What would you do – to break it up or try reinvigorating the business?

You can expect typical hypothetical private equity interview questions like this. All you need to know for answering this question is to be informed about any important, recent event in a similar industry.

Pick that up and explain how you would handle this particular situation.

#18 - If you have a chance to go after a company S, would you go after it? And why?

This is another typical hypothetical private equity interview question. For example, if the interviewer talks about company S, maybe this company is in the news.

Suppose you see that this company has a lot of debt and no possible advantages. You should say "no," and if the company has decent financial statements but there are a few operational issues, you need to explain how you would take up the challenge.

#19 - If you want to improve IRRs, what different levers can be used?

This is a technical private equity interview question, and you need to know the exact answer.

Here are some possible levers you can use –

You can increase the amount of debt in the deal. It will increase leverage.
You can reduce the purchase price that the private equity company has to pay to buy out.
You can also increase the company's growth rate to enhance the operating income / EBITDA.

Also, have a look at a detailed article on NPV vs. IRR

#20 - Would you ever invest in an airline? If yes, why? If not, why not?

The answer may vary from person to person, but airlines aren't very profitable on the surface level.

To mention a statistical point of view, US domestic airlines have reported negative net income in 23 out of 31 years since deregulation. However, passenger airlines have made some consistent growth over the years, around 4.9% per year in aircraft and 3.6% in aircraft seats.

But even after all of this, an airline is a very risky investment, and it's better not to get into it.

In the final analysis

To crack the interview at a top-notch private equity firm is a big thing. And you need to have a wide variety of knowledge in the financial industry, economics, mathematics, statistics, business management, current affairs, and various other subjects to answer questions. So the idea is to be a know-it-all.

The above top 20 questions will help you prepare the types of Private Equity Interview Questions you can expect to be asked in an interview.

Prepare hard. All the best for your interview!