Top 20 Private Equity Interview Questions and Answers

Guide to Private Equity Interview Questions

Every top-notch private equity firmTop-notch Private Equity FirmPrivate equity firms are investment managers who invest in many corporations' private equities using various strategies such as leveraged buyouts, growth capital, and venture capital. The top private equity firms include Apollo Global Management LLC, Blackstone Group LP, Carlyle Group, and KKR & Company LP.read more 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 –

• What is Private Equity?What Is Private Equity?Private equity (PE) refers to a financing approach where companies acquire funds from firms or accredited investors instead of stock marketsread more
• Private Equity AnalystPrivate Equity AnalystA private equity analyst is an analyst who looks for undervalued companies for a private equity investor to buy, take them private and earn profits. The companies are primarily unlisted, and the risk is higher.read more
• How to Get Into Private Equity?How To Get Into Private Equity?You can break into Private Equity if you're an undergraduate in finance or relevant fields like economics, accounting or an investment banking analyst or already been working in a PE firm.read more

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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 marginProfit MarginProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more, 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 interestReal InterestReal interest rates are interest rates calculated after taking inflation into account. It is a means of obtaining inflation-adjusted returns on various deposits, loans, and advances, and thus reflect the real cost of funds to the borrower. read more 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 managementFund ManagementFund management is the process of a company taking a person's, company's, or another fund management company's financial assets (generally high net worth individuals) and investing them in companies that use those funds as an operational investment, financial investment, or any other investment in order to grow the fund.read more, 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 FundDifferences Between Private Equity And Hedge FundPrivate equity funds are funds used by investors to acquire public corporations or invest in private companies. Hedge funds, on the other hand, are privately owned entities that raise funds from investors and then reinvest them in financial instruments with complex portfolios.read more

#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 barriersEntry BarriersBarriers to entry are the economic hurdles that a new entrant must face in order to enter a market. For example, new entrants must pay fixed costs regardless of production or sales that would not have been incurred if the participant had not been a new entrant.read more, strong customer relationships & high switching costsSwitching CostsSwitching cost is the cost suffered by a customer when switching a service, product, or supplier. It includes not only financial costs, but also psychological costs, time costs, and so on.read more.
• 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 LBOAn LBOLBO (Leveraged Buyout) analysis helps in determining the maximum value that a financial buyer could pay for the target company and the amount of debt that needs to be raised along with financial considerations like the present and future free cash flows of the target company, equity investors required hurdle rates and interest rates, financing structure and banking agreements that lenders require.read more. 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 methodAccrual Accounting MethodAccrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made. read more. 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 statementBalance Sheet And Income StatementIncome statement is one of the financial statements of the company which provides the summary of all the revenues and the expenses over the time period in order to ascertain the profit or loss of the company, whereas, balance sheet is one of the financial statements of the company which presents the shareholders’ equity, liabilities and the assets of the company at a particular point of time.read more. 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 statementCash Flow StatementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more 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 Mergers & Acquisitions for Dummies 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 = [100 – (100 * 20%0] = $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 moneyTime Value Of MoneyThe Time Value of Money (TVM) principle states that money received in the present is of higher worth than money received in the future because money received now can be invested and used to generate cash flows to the enterprise in the future in the form of interest or from future investment appreciation and reinvestment.read more, $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 analysisFinancial AnalysisFinancial analysis is an analysis of finance-related projects/activities, company's financial statements (balance sheet, income statement, and notes to accounts) or financial ratios to evaluate the company's results, performance, and trends, which is useful for making significant decisions such as investment, project planning and financing activities.read more, 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 / EBITDAEBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business's performance with that of its competitors.read more.

Also, have a look at a detailed article on NPV vs. IRRNPV Vs. IRRThe Net Present Value (NPV) method calculates the dollar value of future cash flows which the project will produce during the particular period of time whereas the internal rate of return (IRR) calculates the profitability of the project.read more

#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!

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