Private Equity Interview

You're headed into a private equity interview. What are the top five questions you'll be asked?

Well, first things first: before you walk into the interview, you’ve checked out the company’s website, right? Looked at their history, the companies they’ve invested in...and then Googled the crap out of those companies, right? Then you’ve looked up on LinkedIn in quasi-stalker-like fashion each of the key partners in the firm, especially the people you’re meeting with, right? And you jot down the random connections. Like...one was also a nationally ranked squash player. And be sure you note that this is very different from your grandfather, who was a nationally ranked squash grower.

So those are the very basics. But more importantly you have to know whether it is actually a real private equity investment company the old school way...or if it's instead a growth capital investment company. Huge diff.

In the olden days, private equity was all about finding fallen angels, companies that used to be vaunted, respected, loved. Then, for whatever reason, demand suddenly changed (hi, newspaper industry), or its management did stupid things, like tick off its distribution retail partners (hello, Coach Luggage, we’re lookin’ at you). Or the brand itself just got tired (hi, Adidas). And the stock went from trading at 20 times EBITDA to 5 times, as the Street fell out of love with it. Private equity investors then would borrow a whole heap of cash and take the company private, with the intention of fixing it and then taking it public, using higher profits to pay down debt and return the company to growth so that it would carry a multiple a lot closer to the 20x it carried when people loved it than the 5x it carried when you bought it.

So that’s private equity old school. Growth capital is something very different. Growth capital is just money already-healthy companies need to uh...grow…more. If whatever.com had another $100M in cash, it could open…China. And then, wow...if everyone in China just bought one thing on whatever.com, well then, wow, the company would add 8 billion dollars in profits to its bottom line.

So growth capital is a totally different animal. There’s not debt. No turnaround. No firing of half the workforce and redoing union contracts. It’s just about investing for growth at some price.

Got all that? Ok, so here are the five questions:

1) What investments from the industry have you liked or at least followed?

Answer: You’d better have followed a few. They’re not necessarily going to ask you for specifics, but it’d be fair if they had a big, fat, high-profile winner in their portfolio, it’d be fair to ask you what you thought of it. And the answer there? You loved it. Genius. Such insight. This is how and where I want to learn blah blah blah.

2) Walk us through the math of private equity.

Okay, so…not technically a question. But here, you might start blathering about debt-to-EBITDA ratios and valuations of wildly optimistic internet companies. And then you’ll realize that they were talking about their own compensation...how they charge their own limited partner investors...and what carry or profit participation means to the partners, their golden goose (or geese), and their 3 homes or second set of spouses and families.

3) What’s your industry gonna be?

If you’ve made it this far, then you already have some area of expertise. Banks? Retail? Tech? Argentina? Drug distribution? Uh, the legal kind? Hopefully this one. Since you’re notionally an expert in it, it'll be easy. You’ve followed the industry for at least 3 years, and got a check-plus on your final homework assignment. Just remember that the guy sitting across the table from you has probably followed the industry for 30 years, knows every CEO and their secret lovers, and also got a check-plus on their final homework assignment.

4) How much do you wanna work?

Answer: Lots. Whatever you need. Anything. You name it, I’ll be there. Sweep the leg. Bend the knee. Whatever it takes.

5) Why not public equity?

Well, public equity is about nerve, private equity is about muscle. You can’t brute force your way to picking Amazon over Sears. There’s just a gut feel that public market investors get, where they have access to scant data, and very little knowledge that is direct to go on. Regulation FD requires companies to basically disclose little more than their quarterly reports and the name of their company. Private equity, however, has essentially no regulation, so when you invest in it, you get every detail you’d ever want, and through sheer will and force of doing amazingly detailed, quality research, a private equity deal may not be 100x return, but very few of them go big-time bust the way public stocks do, and your temperament is simply set more for muscle than nerve.

There you go...you’re all set for your interview. Don’t forget the binaca.