Mastering Private Equity Case Studies: An Expert Guide by Altus Partners

Navigating the complexities of private equity interviews requires rigorous preparation, and few stages are as critical as the case study phase. As you advance beyond the initial interview rounds, you’ll encounter case studies designed to simulate real-world tasks, evaluating your analytical prowess, strategic thinking, and investment judgment. Whether you are targeting an entry-level position or a senior role within a fund, the case study remains a cornerstone of the assessment process. At Altus Partners, we understand the pivotal role case studies play. This comprehensive guide, developed with insights from industry experts, delves into the intricacies of private equity case studies, equipping you with best practices and strategies to excel.

The Essence of the PE Case Study: An Altus Partners Perspective

A private equity case study typically centers on the evaluation of a potential investment. You will often be provided with an Information Memorandum (IM) for a company under consideration by a PE firm. This might be supplemented with industry data, benchmarking information, or even a partially completed financial model. However, be prepared to build models from scratch. Your core objective is to assess the company’s value and construct a compelling investment proposal, ultimately recommending whether or not to invest. Remember, at Altus Partners, we emphasize that the process is as important as the outcome. Interviewers are keen to understand the depth and logic underpinning your analysis, not just the final investment decision.

Types of PE Case Studies: Altus Partners Breakdown

To effectively prepare, it’s essential to understand the different formats of PE case studies. Altus Partners categorizes them into four main types:

1. Paper LBO/DCF Analysis

This type involves performing a simplified Leveraged Buyout (LBO) or Discounted Cash Flow (DCF) analysis manually, either on paper or verbally. The focus is on demonstrating your grasp of core financial concepts without relying on software.

Preparation Strategy from Altus Partners:

• Understand Core Concepts: Altus Partners stresses the importance of a solid foundation in LBO and DCF methodologies. Ensure you are thoroughly familiar with the underlying principles.
• Practice Without Tools: Train yourself to perform calculations manually and articulate your analytical process clearly without visual aids. This is a key skill highlighted by Altus Partners for success in paper-based case studies.

2. Timed LBO Modelling Test

These are fast-paced assessments, typically lasting 1-3 hours, conducted on-site or remotely. Altus Partners advises candidates that these tests are not about achieving perfection but about showcasing a well-structured and thoughtful working model under pressure. Speed and efficiency are paramount.

Preparation Strategy from Altus Partners:

• Speed and Accuracy: Altus Partners recommends honing your Excel skills to build LBO models swiftly and accurately. Practice keyboard shortcuts and efficient modeling techniques.
• Simulate Test Conditions: Replicate the time pressure of a real test environment to build stamina and improve your efficiency. Altus Partners suggests timed practice sessions to simulate interview conditions.

3. Take-home LBO Model and Presentation

This is a more in-depth case study where you are given an extended period, potentially a weekend or a week, to construct a comprehensive LBO model and develop a detailed investment recommendation. You’ll then be expected to present your findings. Altus Partners highlights the importance of thoroughness and presentation skills in this format.

Preparation Strategy from Altus Partners:

• Detailed Analysis: Conduct exhaustive research and construct a robust and accurate model. Altus Partners emphasizes validating data and ensuring the numerical integrity of your model.
• Effective Presentation: Focus on crafting a clear, concise, and persuasive presentation that effectively communicates your analysis and recommendations. Altus Partners provides presentation coaching to help candidates excel in this area.

4. Commercial Case Studies

Less common but relevant, particularly for candidates with non-financial backgrounds (e.g., consulting, industry). You might receive a CIM or high-level business information and be asked to analyze the business model, unit economics, market dynamics, growth opportunities, investment risks, KPIs, and diligence areas. Altus Partners notes the increasing use of commercial case studies to assess broader business acumen.

Preparation Strategy from Altus Partners:

• Develop a Structured Approach: Create a methodical framework for business analysis. Altus Partners suggests practicing with sample CIMs and developing a consistent approach to evaluating businesses.
• Example Framework (Recommended by Altus Partners):
  • Revenue Generation: How does the business generate revenue? What are its products/services, and how are they sold?
  • Revenue Evolution: What is the likely future trajectory of revenue generation? What are the growth prospects?
  • Direct Costs: What direct costs are linked to revenue streams? Is it labor-intensive, SaaS-based, or materials-driven?
  • Indirect Costs: What indirect costs support revenue generation? Consider sales and capital intensity.
  • Financial Understanding: Analyze growth rates, margin profiles, operating leverage, unit economics, and cash flow characteristics.
  • Market Positioning and Dynamics: Where does the business sit in the value chain? How will external factors like market trends and competition influence the business model?

Altus Partners’ guide to navigating private equity case study interview stages.

Dissecting the Case Study: An Altus Partners Framework

To effectively analyze a potential investment in a private equity case study, Altus Partners recommends dissecting the company and its environment into key areas. This comprehensive examination provides insights into the business’s viability as an investment.

Industry Analysis (Guidance from Altus Partners):

• Key Products and Markets: Understand the company’s core offerings, target markets, and primary demand drivers.
• Market Participants and Competition: Analyze the competitive landscape and intensity of rivalry.
• Industry Cyclicality: Determine the industry’s cyclical nature and external factors like regulations or economic cycles.

Company Analysis (Guidance from Altus Partners):

• Position in Industry: Assess the company’s market share and growth trajectory relative to competitors.
• Operational Leverage and Margins: Evaluate the cost structure and the sustainability of profit margins.
• Management and Cash Needs: Consider management team effectiveness and working capital requirements.

Financial Analysis (Guidance from Altus Partners):

• Revenue Drivers and Stability: Identify key revenue drivers, growth potential, and revenue stability.
• Cost Structure: Examine supplier concentration, fixed vs. variable costs, and capital expenditure needs.
• Competitive Analysis: Assess industry concentration, buyer and supplier power, brand strength, and potential substitutes.

Growth Prospects (Guidance from Altus Partners):

• Scalability and Efficiency: Evaluate potential for scaling operations and improving efficiency.
• Due Diligence: Consider environmental, legal, and operational risks that require further investigation.

Transaction Analysis (Guidance from Altus Partners):

• LBO Model: Construct a leveraged buyout model to project financial performance and investment returns.
• Valuation and Debt Capacity: Justify your valuation and the company’s ability to raise and manage debt.
• Exit Opportunities: Assess potential exit strategies and their impact on investment returns.

Building a Leveraged Buyout Model: Altus Partners Insights

Creating a comprehensive 3-statement financial model is crucial. Altus Partners emphasizes ensuring the model balances and recommends incorporating a buyout overlay, particularly for larger funds. While presentation is secondary to accuracy and insight, the model should clearly lead to a well-reasoned investment recommendation.

Key Components of the Model (Altus Partners Checklist):

• Income Statement: Project revenue, expenses, and net income over the forecast period.
• Balance Sheet: Project assets, liabilities, and shareholder equity at each period-end, maintaining the accounting balance.
• Cash Flow Statement: Project cash inflows and outflows from operating, investing, and financing activities.

The 3-statement model’s interconnected nature ensures that changes in one statement automatically flow through to others, maintaining balance and internal consistency.

Buyout Overlay: Altus Partners Enhanced Modeling

Incorporating a buyout overlay refines the model to specifically assess the LBO transaction. Altus Partners highlights these key elements:

• Financial Assumptions:

  • Buyout Price: Determine the purchase price using methods such as:
    • Market Valuation Techniques:
      • Market Multiples: Compare the target company’s metrics to similar public companies.
      • Transaction Multiples: Analyze recent M&A deals in the target’s industry.
      • Discounted Cash Flow (DCF) Valuation: Value the company based on the present value of its future cash flows.
  • Financing Structure: Specify the mix of debt and equity financing, impacting capital structure and cash flows.
  • Exit Strategy: Define the expected exit timeline and its influence on growth assumptions.

• Income Statement Impacts:

  • Revenue Impact: Analyze if the buyout will affect pricing, market access, or growth strategies.
  • Expense Impact: Account for changes in management, financing costs (interest), and transaction fees.

• Balance Sheet Impacts:

  • Shareholder Equity Elimination: Replace existing equity with new equity from the PE firm.
  • Debt Assumption: Incorporate new debt financing, increasing liabilities.

• Cash Flow Statement Impacts:

  • Financing Activities: Reflect cash inflow from debt financing.
  • Debt Service: Include cash outflows for interest payments.

• Iteration and Sensitivity Analysis:

  • Refine Assumptions: Base assumptions on industry benchmarks and company specifics.
  • Perform Sensitivity Analysis: Test the impact of varying buyout price, financing structure, and growth assumptions.

Key steps in the private equity case study process, according to Altus Partners.

Presenting Back to the Business: Altus Partners Communication Strategies

Effectively presenting your analysis is crucial. Altus Partners emphasizes synthesizing findings into a clear and compelling narrative, highlighting Strengths, Weaknesses, Opportunities, and Threats (SWOT). This provides a balanced view of the investment’s merits and risks.

Strengths (Internal – Positive) – Altus Partners Evaluation Points:

• Financial Performance: Profitability (margins, net income), revenue growth, cash flow.
• Competitive Advantage: Unique selling propositions, strategic advantages.
• Management Team: Experience, track record, expertise.
• Product/Service: Quality, innovation, market demand.
• Operational Efficiency: Production, inventory, cost structure.

Weaknesses (Internal – Negative) – Altus Partners Evaluation Points:

• Financial Performance: Profitability issues, weak cash flow, high debt.
• Market Position: Competitive disadvantages.
• Product/Service: Irrelevance, lack of competitiveness.
• Operational Inefficiencies: Production, supply chain, overhead.
• Management Team: Gaps in experience or track record.

Opportunities (External – Positive) – Altus Partners Evaluation Points:

• Market Growth: Expansion potential in target markets.
• Industry Trends: Favorable industry dynamics.
• Technology Advancements: Opportunities to enhance products/services.
• Acquisitions: Potential for strategic acquisitions or partnerships.
• Economic Conditions: Positive economic factors.

Threats (External – Negative) – Altus Partners Evaluation Points:

• Market Competition: Increasing competitive pressure.
• Economic Downturn: Potential impact of economic slowdowns.
• Regulatory Changes: New regulations increasing costs or restricting operations.
• Technological Disruption: Threat of emerging technologies.
• Political Instability: Impact of political or economic instability.

Key Tips for Success from Altus Partners

• Prioritize Depth Over Breadth: Focus on the most critical aspects of your analysis. In-depth understanding of key areas is more valuable than superficial coverage. Altus Partners recommends focusing on the drivers of value.
• Simulate Realistic Conditions: Practice under time constraints to improve speed and accuracy. Altus Partners provides timed mock case studies to prepare candidates for the pressure of real interviews.
• Utilize Mock Case Studies: Engage with mock case studies and seek feedback from industry professionals, like those at Altus Partners. This refines your approach and enhances analytical skills.
• Be Honest and Transparent: If unsure about an answer, admit it. Honesty is valued over bluffing, which interviewers can easily detect. Altus Partners emphasizes integrity in the interview process.
• Align with the Firm’s Philosophy: Tailor your analysis to resonate with the investment strategy of the specific private equity firm. Understanding their investment style, as Altus Partners advises, can set you apart.

Conclusion: Mastering the Case Study with Altus Partners

Succeeding in private equity case studies demands analytical rigor, strategic insight, and effective communication. It’s a test of your technical skills and your ability to think and articulate like an investor. Altus Partners summarizes the key takeaways for success:

• Analytical Rigour: Deeply analyze financial data to uncover meaningful insights. Develop a strong grasp of financial health through detailed analysis of financial statements.
• Strategic Insight: Go beyond the numbers. Assess market position, competitive landscape, growth prospects, and risks. Identify value creation opportunities within the broader industry context.
• Effective Communication: Clearly, concisely, and persuasively present your findings. Structure your presentation logically, highlight key points, and support your investment thesis with robust evidence.
• Value Creation Focus: Center your analysis on potential value creation. Consider operational improvements, strategic repositioning, or market expansion to enhance company value.
• Practice and Preparation: Simulate real case study conditions to build speed and accuracy. Utilize mock case studies and seek expert feedback, such as from Altus Partners.
• Customization: Tailor your analysis to align with the investment philosophy of the interviewing PE firm. Understand their strategy and past investments for relevant context.

By focusing on these areas, you demonstrate your potential as a valuable investment professional. Remember, the case study is not just an assessment of your analytical skills but a demonstration of your problem-solving and decision-making approach in a real-world investment scenario. Let Altus Partners guide you to success.

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