Most Frequently Asked Private Equity Interview Questions And Answers

If you want to break into private equity, then you better make sure you are prepared for interviews right after you start your investment banking job. I know it may seem crazy, but typically interview season for private equity associate jobs start just a few months after you start working full time. You may have no idea what you want to do longer term, but because just about everyone else in your analyst class in gunning for a private equity job, you feel like you have to do the same.

To prepare for interviews, make sure you understand what a private equity firm looks for in a candidate and study up on the most common interview questions that these firms ask.

When to start preparing for private equity interviews?

When I was a young investment banking analyst I had absolutely no idea what I wanted to do. At the time when I was in banking, private equity interviews started about seven months into my first year. Those who landed the best private equity jobs were the ones that prepared months in advance before interviews started.

Don’t procrastinate if you want to land a private equity role. Since interview season starts a few months after you begin your first job, you need to start preparing for interviews right when you start your first job in investment banking.

That said, if you are unable to land a job during the crazy interview season, all hope is not lost. I know plenty of people who landed private equity jobs after the initial rush of interviews. It is just a little bit harder given the interview process is not structured and firms are able to take their time before handing out offers. Your best bet is to break into private equity is on-cycle when all the firms are scrambling to find the best candidates.

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Best background for a career in private equity

The easiest way to break into private equity is to start your career in investment banking. The fact is that 85%+ of people who work in private equity were investment banking analysts. The other 15% are primarily consultants who worked at McKinsey, Bain or Boston Consulting Group or people who broke into private equity right out of undergrad.

I don’t want to say it is impossible, but it is extremely hard to break into private equity without an investment banking background. You need to have a really good connection with higher ups in private equity if you want to break in without the typical background.

Given most private equity firms are thinly staffed, nobody is going to teach you all the basics you need to know to be good at the job. Investment banking provides the perfect foundation that gives you the skillset to do well in private equity.

PE firms want to see that you have the basic skills necessary to be a good Associate. You need to be good at:

• Excel and PowerPoint
• Understanding what makes a good private equity investment
• Anything around the financial statements, accounting and valuation
• Communication skills – need to be able to talk to management teams and run due diligence calls

What qualities do private equity firms look for in a candidate?

Before beginning the interview process, you need to understand the type of candidate that private equity firms love to hire. These are the common traits that any type of buyside job looks for, whether you are interviewing for a private equity or a hedge fund role.

• Confident but humble
• Hard working / good work ethic
• Analytical mindset
• Easy to work with
• Good attitude
• Good technical skills
• Intellectually honest
• Attention to detail
• Curious

The work you do as a private equity associate is not really that hard as long as you are okay with working hard. You get good at most jobs after just a year of working there, especially as a junior employee. The hard parts of being successful in private equity come in later when you need to build relationships to find deals and put real money to work.

Most common private equity interview questions and answers

Now that you know what private equity firms look for in a candidate, the next step is to make sure you don’t say something stupid during the actual interview. Below are the most common interview questions a private equity firm will ask you. I guarantee these questions will constantly come up once you start going through the interviews.

Why private equity?

Do not say that you want to make a lot of money. Yes, private equity professionals can make a ton of money, especially as you get promoted and start to get carried interest in the fund (more about private equity salaries and bonuses here). You need to be able to convince the interviewer 1) why you don’t want to work in investment banking longer term and 2) that private equity is actually what you want to do because you are interested in investing and learning about businesses. There are a lot of private equity professions who quit their jobs even though they make upwards of $500K per year, so money is not a good answer to this question.

• “I have been fortunate to be in able to work at [XYZ bank] where I have able to learn a ton about [XYZ industry]. And what I have realized is that the parts of the job I really enjoy are learning about new businesses and industries, their fundamentals and really understanding what drives their growth/performance over the longer-term. And that is why I want to transition to private equity because not only are you are constantly looking at new industries and potential businesses to acquire, you also get to focus on figuring out different ways to create value longer-term.”

Why are you interested in working at [this firm]?

This one you need to do some research for and figure out what makes the fund you are interviewing at unique.

• “[XYZ Firm] is one of the only private equity firms out that has been extremely successful in adapting to changes in the consumer environment. When I look at your portfolio, traditionally it seems like you guys had a ton of exposure to retail, but now you’ve been able to pivot away from that to service based businesses that benefit from changes we’ve seen in consumer spending habits over the last decade. Consumers are now spending more on experiences these days. So, I think you guys are one of the few that have been able to adapt to the change in trends
• Secondly, it seems that you guys are really open to growing talent from within – As I look at the investment team there are a lot of partner that started out as associates at the firm – and that is not something you usually see at many private equity firms.”

Walk me through your resume

This is self-explanatory, you should be prepared to answer this question in any interview. Don’t memorize what you are going to say because you will bore the interviewer. Sound excited to be there, walk through all the important parts of your background, the experience you are getting in your current role and end with why you want to transition into private equity.

Walk me through your case study on XYZ company

After a few initial interviews, you will likely be asked to do a private equity case study which can be structured in different ways depending on the firm and whether you are interviewing during on cycle recruiting (those few weeks when there is an all out blitz from private equity firms to hire investment bankers).

This is the most important round during the interview process, especially if asked to do a full take-home case study, so make sure to read the Best Private Equity Case Study Guide to figure out everything you need to do to come up with a good answer.

Are you interviewing for other types of roles? Why private equity over hedge funds?

Here the interviewer is trying to gauge how serious you are about a career in private equity, or if you are just one of those candidates who interviews at every firm hoping to land a spot. It is understandable if you are interviewing at all the different buyside shops, hedge funds/private equity/venture capital, but you should make it known to the interviewer that private equity is your sole focus after investment banking. Learn more about the differences between HF/PE/VC to figure out what career path is best for you.

• “Hedge funds these days are becoming increasingly short term oriented. From the people I have talked to that work at hedge funds, they seem to be focused on the next 6 to 12 months, which to me seems extremely speculative. In private equity you get to take control positions in businesses and really think about how to drive value over the long run, which is an investment style that is much more interesting to me.”

What was said on your mid-year/year-end review?

Now because on-cycle private equity interviews start before your mid-year reviews, you may not have been given any formal feedback that you could use in interviews. If you are recruiting later in off-cycle, then you should be able to explain what your strengths and weaknesses are.

Here you should definitely point out if you were a top bucket ranked analyst [link]. If you weren’t then I wouldn’t mention it. But if the interviewer asks what rank you were, then you should be truthful and explain why you didn’t receive a top bucket rank. Explain that top bucket ranking is not given out freely and usually given to people who were lucky to work on a big deal for the firm. When it comes to deal flow, most people understand that there is an element to lucky involved with whether a big deal closes or not. 

• “My review went well. This past year, I was fortunate to be given a lot of responsibility with the [XYZ deal] and was ranked top bucket. During my review I was told that my deal teams said I was a good team player, did a great job on all the technical work/financial analysis and was able to work independently without much guidance. In terms of my weaknesses, initially the first 6 months into the job, my one area of improvement was to communicate more and raise potential issues and analytical findings more often. I was still getting used to the role and being comfortable around my team, so it was an area that I focused on afterwards and have been able to speak up more and share my own opinions.”

What is an LBO / Walk me through an LBO

Easiest way to really know how to answer this question is to build an LBO model yourself and see the different parts and how everything flows through.

• “An LBO is an acquisition of a company with the use of a mix of both debt and equity. Usually debt makes up ~60% of the purchase price of the company while the sponsor puts in the remaining 40%. Over time, the cash flows of the business are used to pay down debt, creating value for equity holders when the business sells years down the road.”
• “An LBO starts with assumptions around the EBITDA multiple paid and the sources/uses of cash/debt used to fund the acquisition. Then you project out the three statements over the next 5-10 years and make assumptions around debt paydown and equity distributions to the sponsor in any given year. Lastly, you assume some terminal value based on an EBITDA exit multiple and calculate an IRR based on the cash flows remaining to the equity holders.“

Walk me through [XYZ deal] on your resume

Make sure you know everything there is to know about the deals you list on your resume. I guarantee you won’t get the job if you try to BS your way through your deal experience.

These are the metrics to know off the top of your head for each deal:

• Financial Metrics: EBITDA, EBITDA margins, historical and future revenue growth CAGR, leverage
• Valuation Metrics: EBITDA multiple, market capitalization/enterprise value, comparable company multiples, precedent transaction multiples
• Other key items: deal rationale, industry characteristics, strength/weaknesses of the business, is the company a good LBO target (why or why not)?

If the deal was a merger of equals, then you need to know these stats for both the acquiror and the target. Make sure to outline these key stats and information for each deal so you can easily memorize them. Also, be sure to talk about your involvement in the deal (i.e. led the financial model/valuation analysis, analyzed strategic alternatives, researched the peer/industry landscape, etc.). 

What’s the best business you’ve ever seen and why?

Find a good business that has predictable recurring cash flows, high growth potential, low capex needs and a strong competitive advantage. Don’t pick one of the FANG stocks since they are so obvious.

Bloomberg is a good example of a really good business that most people don’t think about.

• Have a monopoly on the market for the past three decades, allowing them to charge a subscription fee of ~$25K per terminal each year
• Large competitive moat due to network effects of the instant Bloomberg messaging platform – if people want quick access to existing and future clients, they need to have the messaging platform.
• Little capex or working capital needed to scale. Adding another terminal doesn’t cost anything.

What are the different ways to value a company?

You should know this from your investment banking interviews. Make sure you are able to talk through each of these valuation techniques if asked. Know the pros and cons of using each methodology.

• Discounted cash flows
• Precedent transactions
• Comparable public multiples
• Sum of the parts
• LBO

What makes a good LBO target?

1. Low capex and working capital needs
2. Multiple ways to win – ex. organic growth (from industry or ability to take market share), accretive M&A, increase customer penetration, expense reduction/margin improvements
3. Non-cyclical recurring cash flows
4. Sustainable industry growth tailwinds
5. Strong market position (#1 or #2 player in the industry)

What are five ways that private equity firms create value?

1. Leverage / debt paydown with the use of cash flows – Classic leverage buyout value creation. PE firms usually put 40% equity in a deal and take on 60% debt. Over time the cash flows of the business pay down the debt, creating equity value to the equity owners
2. EBITDA growth through topline growth / M&A
3. Margin expansion – businesses usually aren’t run as efficiently as they can be. PE firms like to cut costs and drive synergies from M&A
4. Multiple expansion – a lot of PE firms start off with a small business that they acquired for ~6x EBITDA and grow it to scale, selling a much larger, more attractive business down the road for a double digit multiple
5. Dividend recapitalizations – one of the most common ways to extract value without having to sell a portfolio company

Walk me through how the three financials statements link together

This is another question you should know from your banking interviews. A lot of private equity interviews will ask questions around the financial statements and how everything flows through. For example, you could get asked questions regarding how a certain change on the income statement or balance sheet (i.e. changes in revenue growth, D&A, debt) impacts all the three statements in Year 0 and in Year 1.

If asked how the three statements are linked together and how everything flows through, then start with the income statement, move to the cash flow statement and end on the balance sheet where you tie it all out.

• Income statement
  • Balance sheet: D&A links to PPE and intangible assets on the balance sheet, interest expense links to long-term debt on the balance sheet, net income flows through shareholder’s equity.
  • Cash flow statement: Net income, interest expense and D&A link to items in the cash flow from operations
• Balance sheet
  • Any working capital item in current asset/liabilities links to items in cash flow from operations, ending cash balance links to cash at end of period on the cash flow statement, PP&E links to both D&A in cash from operations and capex spend in cash from investing activities
• Other random items
  • Stock based compensation on the cash flow from operations (and embedded in G&A on the income statement) links to AOCI on the balance sheet
  • Dividends in cash flows from financing links to shareholders equity on the balance sheet

Working capital questions

If accounts receivable/inventory increases (or if accounts / payable / accrued expenses increase), how does that impact working capital and free cash flow?

There will always be some questions around changes in working capital. Be able to know the cash impact if any of the current assets or current liabilities items go up or down in a given period. If current assets increase, then that is a cash outflow versus if current liabilities increase that is a cash inflow.

Difference between private equity and hedge fund interviews

Now the big question you need to answer before beginning interviews is if you want to go the hedge fund route or the private equity route. You should absolutely not try to interview for both types of positions. You will already have a lot on your plate form being an investment banking analyst, so you need to focus on which path you want to take.

Recruiters want to see that you are laser focused on getting a private equity job before they introduce you to their clients. If you say you aren’t sure or are interviewing at both hedge funds and private equity, then you will not be a top candidate for them.

Hedge fund interviews are typically a lot less structured given there is no set recruiting process like there is in private equity. Hiring usually is concentrated in the first few months of each year, but there are a good number of hedge funds that hire on an as needed basis throughout the year. More on hedge fund interviews here.

For private equity as mentioned before, there is one big time of year for interviews in the fall during your first year as an investment banking analyst. This is where most people land their jobs and the best time to do so as most firms feel rushed to give out offers before the best candidates are taken by other firms. If you don’t land a position during this time, don’t sweat it. You still have a year and a half to find a private equity job and there are a good number of firms that recruit in the off season.

How to land a private equity job

With any goal in life, you need to have laser focus on what you want to accomplish. Follow these steps to find and get that job you love and don’t make any of the common resume mistakes in finance.