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MASTERING PRIVATE EQUITY CASE STUDIES: A COMPREHENSIVE GUIDE

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Having progressed through the initial stages outlined in our preparation guide, you are now about to enter the case study phase of the interview process. This stage closely mirrors the tasks you'll perform on the job, testing your analytical skills, strategic thinking, and investment rationale. 

Regardless of the level you enter the fund at, the case study is a generally accepted practice and forms one of the three key pillars of any successful interview process: structured interviews, work–based tests, and psychometric assessments based on empirical evidence.

To help you succeed, this guide delves into the nuances of PE case studies, offering insights from industry experts and best practices.

The Essence of the PE Case Study

A private equity case study typically requires evaluating a potential investment opportunity. You’ll receive an Information Memorandum (IM) for a company the PE firm could consider investing in, potentially some supporting information (industry news/benchmarking), and possibly a part-completed model (though often you are asked to prepare this from scratch). Your task is to value the company and formulate an investment proposal, including whether or not to invest. Keep in mind that this task may not be exclusive. The key lies not only in your final decision but also in the depth and logic of your analysis.

Types of PE Case Studies:

1. Paper LBO/DCF

A Paper LBO/DCF involves a simplified leveraged buyout or discounted cashflow model performed on paper or verbally, focusing on core concepts without the aid of a computer.

Preparation Strategy
  • Understand Core Concepts: Be well-versed in the fundamentals of LBO and DCF models.

  • Practice-Without Tools: Get comfortable performing calculations manually or explaining your thought process clearly without visual aids.

2. Timed LBO Modelling Test

A Timed LBO Modelling Test is a fast-paced, 1-3 hour on-site or remote test focused on speed and accuracy. These are often designed to understand the gaps in your skill-set, so it is not about achieving the perfect result, but creating a well thought-through working model. It is therefore important to pace yourself and breakdown what to focus on and when before you start.

Preparation Strategy
  • Speed and Accuracy: Hone your Excel skills and practice building LBO models quickly.

  • Simulate Test Conditions: Replicate the pressure of a timed test to build your endurance and efficiency.

3. Take-home LBO Model and Presentation

The Take-home LBO Model and Presentation involves a comprehensive analysis where you might have a weekend or a week to build a full LBO model and prepare a detailed investment recommendation. Typically, you will then be asked to submit your findings and return to present 

Preparation Strategy
  • Detailed Analysis: Conduct thorough research and develop a comprehensive model. Ensure the numbers balance and that you are not making assumptions based on incorrect data.

  • Effective Presentation: Focus on creating a clear, concise, and compelling presentation of your findings and recommendations.

4. Commercial Case Studies

Commercial case studies are less frequently used but typically deployed when you come from a non-financial background, such as commercial consulting or industry. In this scenario, you are either presented with a CIM or some high-level information about a business and then asked to think through aspects like business model, unit economics, market dynamics, growth opportunities, investment risks, KPIs, and areas of additional diligence.

Develop a Structured Approach: Create a framework for methodically analysing businesses. Practice with a few random CIMs you can find online. Example framework:

  • Revenue Generation: How does the business generate revenue? What does it sell, and how does it sell these products or services?

  • Revenue Evolution: How is the company’s ability to generate revenue likely to evolve? What are its growth prospects?

  • Direct Costs: What are the direct costs associated with its revenue streams? Is it a people-oriented cost structure, a SaaS business, or a materials-based cost structure?

  • Indirect Costs: What indirect costs are required to drive revenue? Consider factors like sales intensity and capital intensity.

  • Financial Understanding: Understand growth rates, margin profiles, operating leverage, unit economics, and cash flow profiles.

  • Market Positioning and Dynamics: Where is the business positioned in the value chain? What external factors, such as changing market dynamics and competition, will impact the business model

Dissecting the Case Study

To effectively analyse a potential investment in a private equity case study, it is crucial to break down the company and its environment into several key areas. Each aspect provides insight into different facets of the business and its viability as an investment. This section outlines the essential components you should examine, from industry dynamics to the specifics of the transaction, ensuring a comprehensive analysis.

Industry Analysis
  • Key Products and Markets: Understand the company’s primary products and markets and the main demand drivers.

  • Market Participants and Competition: Analyse the competitive landscape and the intensity of competition.

  • Industry Cyclicality: Determine the cyclical nature of the industry and external factors influencing it, such as regulatory changes or economic cycles.

Company Analysis
  • Position in Industry: Assess the company’s market position and growth trajectory.

  • Operational Leverage and Margins: Evaluate the cost structure and sustainability of margins.

  • Management and Cash Needs: Consider the effectiveness of the management team and the company’s working capital requirements.

Financial Analysis
  • Revenue Drivers and Stability: Identify revenue drivers, growth potential, and stability.

  • Cost Structure: Examine supplier diversity, fixed versus variable costs, and capex requirements.

  • Competitive Analysis: Assess industry concentration, buyer and supplier power, brand strength, and potential substitutes.

Growth Prospects
  • Scalability and Efficiency: Evaluate scalability and potential efficiency improvements.

  • Due Diligence: Consider environmental, legal, and operational risks.

Transaction Analysis
  • LBO Model: Build a leveraged buyout model to project financial performance and returns.

  • Valuation and Debt Capacity: Justify your valuation and the company’s ability to raise and service debt.

  • Exit Opportunities: Assess potential exit strategies and their impact on returns.

Building a Leveraged Buyout Model

Creating a full 3-statement model is crucial, and it's important to ensure it balances. You will typically build this from scratch, and we recommend a buyout overlay (especially for large-cap funds). While formatting isn't a primary concern, the model should lead you to a clear view of the deal's merits and risks, culminating in a definitive recommendation—whether to invest or not.

Key Components of the Model
  • Income Statement: Shows the company's revenue, expenses, and net income over a specific period.

  • Balance Sheet: Displays the company's assets, liabilities, and shareholder equity at a specific point in time, providing a financial snapshot.

  • Cash Flow Statement: This statement illustrates the company's cash inflows and outflows from operating, investing, and financing activities over a specific period.

Ensuring it balances is a core principle because it reflects the fundamental accounting equation: Assets = Liabilities + Shareholders' Equity. In simpler terms, everything a company owns (assets) must be financed by what it owes (liabilities) and the money invested by shareholders (equity). The 3-statement model is designed to be internally consistent, so changes in one statement should automatically flow through and impact the other statements, ensuring the balance sheet remains balanced.

Buyout Overlay

With a buyout overlay to the model, we can determine:

Financial Assumptions:

  • Buyout Price: Determine the price per share the private equity firm will pay for the company. Techniques for this can include:

  • Market Valuation Techniques

  • Market Multiples: Compares the target company's financial metrics to publicly traded companies in the same industry.

  • Transaction Multiples: Analyses recent M&A deals in the same industry.

  • Discounted Cash Flow (DCF) Valuation: Considers the target company's future cash flows, discounting them to their present value to arrive at a company valuation.

  • Financing Structure: Specify the debt and equity financing mix used to fund the buyout, impacting the company's capital structure and future cash flows.

  • Exit Strategy: Consider the private equity firm's expected exit timeline, influencing future growth assumptions.

Income Statement:

  • Impact on Revenue: Analyse if the buyout will affect the company's pricing strategy, market access, or growth initiatives.

  • Impact on Expenses: Consider potential changes in management structure, financing costs (interest on debt), or one-time transaction fees.

Balance Sheet:

  • Shareholder Equity Elimination: Upon buyout, existing shareholder equity gets replaced by new equity issued to the private equity firm.

  • Debt Assumption: Account for the new debt used to finance the buyout, increasing the company's liabilities.

  • Cash Flow Impact: Model the cash outflow for the buyout transaction and the ongoing cash flow implications of the new debt (interest payments).

Cash Flow Statement:

  • Financing Activities: Reflect the cash inflow from the debt portion of the buyout financing.

  • Debt Service: Include the cash outflow for ongoing interest payments on the new debt.

Iteration and Sensitivity Analysis:

  • Refine Assumptions: Based on industry benchmarks and company-specific factors.

  • Perform Sensitivity Analysis: See how variations in buyout price, financing structure, or growth assumptions impact the model's outputs.

Presenting Back to the Business

Effectively presenting your analysis to the business is a critical part of the private equity case study process. This step involves synthesising your findings into a clear and compelling narrative that highlights the company’s strengths, weaknesses, opportunities, and threats (SWOT analysis). By doing so, you can provide a comprehensive view of the potential investment, showcasing both its merits and risks. Here’s a detailed breakdown of what to consider when presenting your findings to ensure a thorough and persuasive presentation.

Strengths (Internal - Positive)
  • Financial Performance: Examine profitability (margins, net income), revenue growth, and cash flow generation.

  • Competitive Advantage: Identify unique selling propositions or strategic advantages.

  • Management Team: Evaluate the management team's experience, track record, and expertise.

  • Product/Service: Consider the quality, innovation, and market demand for the company's offerings.

  • Operational Efficiency: Analyse production processes, inventory management, and cost structure.

Weaknesses (Internal - Negative)
  • Financial Performance: Identify weaknesses in profitability, cash flow, or high debt levels.

  • Market Position: Assess the company’s competitive challenges.

  • Product/Service: Evaluate the relevance and competitiveness of products or services.

  • Operational Inefficiencies: Identify inefficiencies in production, supply chain, or overhead costs.

  • Management Team: Assess any gaps in management experience or track record.

Opportunities (External - Positive)
  • Market Growth: Identify growth potential in the target market.

  • Industry Trends: Leverage favourable industry trends.

  • Technology Advancements: Consider new technologiesto enhance the company's products or services.

  • Acquisitions: Explore potential acquisitions or partnerships.

  • Economic Conditions: Evaluate positive economic factors that could benefit the company.

Threats (External - Negative)
  • Market Competition: Assess the impact of increasing competition.

  • Economic Downturn: Consider the potential impact of economic slowdowns.

  • Regulatory Changes: Identify new regulations that could increase costs or restrict operations.

  • Technological Disruption: Evaluate the threat of emerging technologies.

  • Political Instability: Consider the impact of political or economic instability in the company’s operating regions.

Key Tips for Success

Prioritise Depth Over Breadth

Concentrate on the most crucial elements of your analysis. It's better to delve deeply into a few critical points than to cover too many topics superficially.

Simulate Realistic Conditions

Practice under time constraints to enhance your speed and accuracy. Replicating the pressure of a real case study will help you perform better during the actual interview.

Utilise Mock Case Studies

Engage with mock case studies and seek feedback from industry professionals. This will help you refine your approach and improve your analytical skills.

Be Honest and Transparent

If you don’t know the answer to a question, admit it. Honesty is valued over attempting to bluff, as interviewers can easily spot insincerity.

Align with the Firm’s Philosophy

Customise your analysis to match the investment strategy of the private equity firm you are interviewing. Understanding and reflecting on the firm’s investment style can distinguish you from other candidates.

Conclusion

Succeeding in a private equity case study requires a blend of analytical rigour, strategic insight, and effective communication. The process tests your technical skills and ability to think like an investor and articulate your ideas clearly. Here are the key takeaways to ensure success:

  • Analytical Rigour: Dive deep into financial data to uncover meaningful insights. Develop a robust understanding of the company's financial health through detailed analysis of income statements, balance sheets, and cash flow statements.

  • Strategic Insight: Go beyond numbers. Assess the company's market position, competitive landscape, growth prospects, and potential risks. Identify where value can be created and understand the broader industry dynamics.

  • Effective Communication: Your ability to present your findings clearly, concisely, and compellingly is crucial. Ensure your presentation is structured logically, highlights the key points, and supports your investment thesis with solid evidence.

  • Value Creation Focus: Always keep the potential for value creation at the forefront of your analysis. Consider how operational improvements, strategic repositioning, or market expansion can enhance the company's value.

  • Practice and Preparation: Simulate real case study conditions to build speed and accuracy. Engage with mock case studies and seek feedback from industry professionals to refine your approach.

  • Customisation: Tailor your analysis to align with the specific investment philosophy of the PE firm you’re interviewing with. Understanding the firm's strategy and past investments can provide valuable context and make your presentation more relevant.

Focusing on these areas can demonstrate your potential as a valuable investment professional. Remember, the case study is not just a test of your analytical abilities but a showcase of how you approach problem-solving and decision-making in a real-world context.