PE Recruiting Prep Guide - 2024

Background: I started writing this as a reply on another thread (“travel or prep on-cycle?”) but thought it would make more sense as a standalone post.  Some background: I am an AN2 at an EB in NYC leaving for PE at the end of this month. I secured an offer this past January; the advice/guidance below is informed by my experience preparing for the off-cycle PE recruiting process (mostly recruited September – January of my second year), but I think this structure would apply to the on-cycle process as well. I give this advice during phone calls with incoming analysts in their spring semesters but wanted to memorialize on WSO (partially out of my own laziness, so that I can just point folks here as a prep strategy primer) for folks to reference. I didn’t have a guide like this going into the process and coming from a non-target school that, while sending a good amount of folks to IB, doesn’t have a solid buyside population / support network built out yet, and I think I would have benefited tremendously from a framework like this. Without further ado:

In my view, there are 5 key components of a comprehensive prep strategy and mastery of all of them is critical to success in this process:

1. Behavioral questions
   1. Similar to banking recruiting, you should be prepared to answer a wide range of behavioral questions. These questions can/will include:
      1. Tell me about yourself
      2. Why investing? Why PE? Why not HF/Venture/Growth? Why [specific PE sub-strategy]?
      3. Favorite/least favorite parts of banking? What worries you most about making the transition to PE?
      4. Why did you go to [university]? What was your favorite class in college?
      5. Etc.
   2. You are interviewing with investment professionals whose careers hinge on their ability to smell out BS (exaggeration) – it is crucial that you come off as believable in your responses (ideally you also believe what you are saying…)
   3. The most critical questions / answers in this bucket will be the “why PE” questions as they will be asked in almost every single interview
2. Technical questions
   1. Similar to banking recruiting, you should be prepared to answer a wide range of technical questions. These questions can/will include:
      1. Walk me through how a $10 increase/decrease in depreciation flows through the three financial statements
      2. What is deferred revenue? How does a $10 increase/decrease in deferred revenue flow through the financial statements?
      3. How do you calculate DPO?
      4. Walk me from EBITDA to unlevered free cash flow
      5. Among others – if you are rusty on these concepts, I recommend leveraging the classic 400 Question Guide (or whatever you used to prep for the banking process) to refresh yourself
   2. You will also be asked a range of “pseudo-technical” questions – these aren’t textbook-style questions like the set above, but slightly “softer” questions to evaluate your critical thinking and investment acumen:
      1. What makes a good business to invest in?
      2. What’s in an EBITDA multiple?
      3. What are the three most important things to look at when evaluating a business?
      4. How would you decide what multiple to bid for a business?
      5. What’s your favorite business?
      6. What’s your favorite market?
      7. What’s your macro outlook?
      8. How would you evaluate the maximum level of leverage for an LBO?
   3. Of course, you should also be very comfortable doing a paper LBO. 
3. Financial modeling
   1. You should be comfortable building a basic dynamic LBO model (like the popular “Version 1”) from a blank Excel in 1h – 1h15m to ensure a margin of safety in this recruiting process
   2. Ensure comfort with modeling concepts/functionality like purchase accounting, PIK, add-on acquisitions, dividend recaps, and upside/base/downside case toggles
4. Investing acumen / case study skills
   1. A key part of most PE recruiting processes will be an investment case study, usually after a couple of technical / behavioral rounds. You will typically get 1-3h of individual preparation time, followed by a 1-2h debrief with members of the investment team where you will present your analysis and answer questions
   2. These cases vary in detail / difficulty; some firms may combine this part of the process with the modeling component mentioned above. You may have 3 hours to build a model for a business and use that to inform your investment thesis (in addition to qualitative factors)
   3. Going into these cases, it helps to have an investment framework developed to help structure your thinking and analysis. Some things you may want to look at when evaluating the investment (qualitatively):
      1.  TAM / End Markets
         1. Growing vs. taking share; cyclicality; fragmentation and penetration
      2. Quality of revenue
         1. Customer retention; price vs. volume-driven growth
      3. Margin resilience (competitive advantage)
         1. Barriers to entry; degree of pricing power; proprietary technology (lower production cost)
      4. Growth opportunities
         1. Consolidation through M&A; organic growth (new markets, new products, etc.)
      5. Other considerations
         1. Cash flow conversion, investment exit considerations, COVID bump / normalized earnings, source of growth (price, volume, M&A), recession resilience
   4. It also helps to have an idea of what you would present, if you are not given a template. Some things you may want to include in your presentation:
      1. Business overview
      2. Investment overview (thesis, risks) – what is your position? Do we invest at the given valuation? At what valuation would you invest?
      3. Management projections overview
      4. Valuation / financing
      5. Diligence questions
   5. A good way to practice this would be to give yourself a fixed amount of time to put together a model and memo for a random business. This can be a publicly traded company or you can use an old CIP.
5. Discussing deal experience
   1. You will be expected to know the ins and outs of any deal that you have on your resume
   2. A good framework for 2-minute elevator pitch can be found on the website 10x EBITDA (article title: “How to Walk through a Deal in Private Equity Interviews (and HF)”)
   3. I recommend building an LBO from scratch for each deal on your resume. This will a) give you an additional modeling rep, b) allow you to speak to potential returns, leverage, upside/downside etc., and c) help you better internalize the financials (growth, margins, etc.)
   4. Some other questions that you may be asked:
      1. What are the primary growth drivers?
      2. Was this a good deal? What do returns look like? What about the downside case?
      3. What did leverage look like / what is an acceptable level of leverage? Why?
         1. There isn’t really a right answer to this; I prefer to look at (EBITDA – CapEx) / Cash Interest Expense and keep that under 2-3x but it’s more of an art than a science
      4. What was the end-market mix?
      5. How many employees did the business have?
      6. [Other business-specific questions]
      7. What are the public comps and what do they trade at?
      8. What are the key risks and merits?

Other miscellaneous tips / advice:

• In terms of resources, my EB had a shared recruiting folder that was chock-full of resources; many of these were originals and a few were the standard WSO prep resources. Those can definitely help you build a solid base. For financial modeling, PF and Wall Street Prep have good examples / templates / prompts. For the investment / casing framework, I recommend leveraging a number of resources but also really trying to develop your own investor mindset that you think makes sense. The website 10x EBITDA is also quite good.
• Understand that this is nothing like banking recruiting. Whereas previously you were competing against the “broader population” for many summer analyst spots, you are now competing against a much stronger pool of candidates for a smaller set of buyside seats. Each firm has far fewer seats per class vs. banking, so each hiring decision is far more weighty / risky from the firm’s perspective. The associate roles you are recruiting for are generally much more ‘advanced’ in terms of responsibility and importance on the team than the banking analyst role – expectations and ‘hiring threshold’ are much higher as a result.
• Start preparing early, ideally in the spring semester of your senior year (before you hit the desk). You don’t want to be worrying about this after graduation, when you should ideally be traveling the world enjoying your last few months of “true freedom”.
• Don’t underestimate how long this takes. It’s an incredible amount of effort to be “interview ready” in all 5 broad buckets I laid out above.
• Mock interview with your peers. Although there is no substitute for real world reps in interview processes, you will benefit tremendously from speaking your answers out loud in a mock interview setting. I neglected to do this during my prep but probably would have gotten an offer much faster if I didn’t.
• Seriously consider on-cycle recruiting. I won’t go into too much detail on this since a) I didn’t do it and b) it’s not the point of the guide, but I wish I had followed my own advice and prepared during my senior year and hit on-cycle strong (for reference, it kicked off during the ~last week of August / after Labor Day for my class). If you get an offer, it’s a free insurance policy: if you find you love banking (hate finance), then you can gun for the A2A offer (leave finance) and renege on the PE offer. If you realize that banking isn’t for you and you’d prefer to explore a career in private equity investing, then you already have an offer in hand and don’t have to sweat for your second year of banking. Of course, some folks may disagree with this (better to go slow, focus on succeeding as an analyst instead of recruiting, etc.) but I wanted to throw in my perspective (but, again, not the point of the post).

Happy to take any feedback from folks who have gone through the process as well as answer any questions in the comments if helpful