what is a private equity case study

Private Equity Case Study: Example, Prompts, & Presentation

Private equity case studies are an important part of the private equity recruiting process because they allow firms to evaluate a candidate’s analytical, investing, and presentation abilities. 

In this article, we’ll look at the various types of private equity case studies and offer advice on how to prepare for them. 

This guide will help you ace your next private equity case study, whether you’re a seasoned analyst or new to the field.

Types Of Private Equity Case Studies

Case studies are very common in private equity interviews, and they are a key part of the overall recruiting process.

While you’re extremely likely to encounter a case study of some kind during your recruiting process, there is considerable variety in the types of case studies you might face.

Below I cover the major types:

Take-home assignment

In-person lbo modeling assignment.

For this case study, you’ll get some company information (e.g. a 10-K or a CIM) and be asked to assess whether or not you’re likely to invest. 

Generally, you’ll get between 2-7 days to prepare a full presentation or investment memo with your recommendations that you’ll present to the interviewer.  To support your investment recommendation, you’ll be expected to complete a full LBO model .  The prompt may give certain details or assumptions to include in the model.

This type of test is most common during “off-cycle” hiring throughout the year, since firms have more time to allow you to complete the assignment. 

This is pretty similar to the take-home assignment. You’re given company materials, will build a financial model, and decide whether you would invest. 

The difference here is the time you’re given to complete the case. You’ll generally get between two to three hours, and you’ll typically complete the case study in the firm’s office, though some firms are becoming newly open to completing the assignment remotely. 

In this case, you’ll typically only complete an LBO model. There is usually no presentation or investment memo. Rather, you’ll do the model and then have a short discussion afterward. 

This is a shorter, more condensed version of an LBO model. You can complete a paper LBO with a piece of paper and a pen. Alternatively, you may be asked to discuss it verbally with the interviewer. 

Rather than using an Excel spreadsheet, you use an actual sheet of paper to show your calculations. You don’t go into all the detail but focus on the essence of the model instead. 

In this article, we’ll be focusing on the first two types of case studies because they are the most widely used. But if you’re interested, here is a deep dive on Paper LBOs . 

Private Equity Case Study Prompt

Regardless of the type of case study you’re asked to do, the prompt from the interviewer will ultimately ask you to answer: “would you invest in this company?”

To answer this question you’ll need to take on the provided materials about the company and complete a leveraged buyout model to determine whether there is a high enough return. Generally, this is 20% or higher. 

Usually, prompts also provide you with certain assumptions that you can use to build your LBO model. For example:

• Pro forma capital structure
• Financial assumptions
• Acquisition and exit multiples

Some private equity firms provide you with the Excel template needed for an LBO model, while others prefer you to make one from scratch. So be ready to do that. 

Private Equity Case Study Presentation

As you’ve seen above, if you get a take-home assignment as a case study, there’s a good chance you’re going to have to present your investment memo in the interview. 

There will usually be one or two people from the firm present for your presentation. 

Each PE firm has a different interview process, some may expect you to present first and then ask questions, or the other way around. Either way, be prepared for questions. The questions are where you can stand out!

While private equity recruitment is there to assess your skills, it’s not all about your findings or what your model says. The interviewers are also looking at your communication skills and whether you have strong attention to detail. 

Remember, in the private equity interview process, no detail is too small. So, the more you provide, the better. 

How To Do A Private Equity Case Study

Let’s look at the step-by-step process of completing a case study for the private equity recruitment process:

• Step 1: Read and digest the material you’ve been given. Read through the materials extensively and get an understanding of the company. 
• Step 2: Build a basic LBO model. I recommend using the ASBICIR method (Assumptions, Sources & Uses, Balance Sheet, Income Statement, Cash Flow Statement, Interest Expense, and Returns). You can follow these steps to build any model. 
• Step 3: Build advanced LBO model features, if the prompts call for it, you can jump to any advanced features. Of course, you want to get through the entire model, but your number 1 priority is to finish the core financial model. If you’re running out of time, I would skip or reduce time on advanced features.
• Step 4: Take a step back and form your “investment view”. I would try to answer these questions:
• What assumptions need to be present for this to be a good deal?
• Under what circumstances would you do the deal? 
• What is the biggest risk in the deal? (e.g. valuation, growth, and margins). 
• What is the biggest driver of returns in the deal? (e.g. valuation, growth, and debt paydown).

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How To Succeed In A Private Equity Case Study

Here are a few of my tips for getting through the private equity fund case study successfully. 

Get the basics down first

It’s very easy to want to jump into the more complex things first. If you go in and they start asking you to complete complex LBO modeling features like PIK preferred equity, getting to that might be on the top of your list. 

But I recommend taking a step back and starting with the fundamentals. Get that out the way before moving on to the complicated stuff. 

The fundamentals ground you, getting you through the things you know you can do easily. It also gives you time to really think about those complex ideas. 

Show nuanced investment judgment; don’t be too black-and-white

When giving your investment recommendation for a private equity fund you shouldn’t be giving a simple yes or no. 

It’s boring and gives you no space to elaborate. Instead, go in with what price would make you interested in investing and why. Don’t be shy to dig in here. 

Know where there is a value-creation opportunity in the deal, and mention the key assumptions you need to believe to create that value.

Additionally, if you are recommending that the investment move forward then bring up things you would want to know before closing a deal. You can highlight the key risks of the investment, or key things you’d want to ask management if you could meet with them. 

At the end of the day, financial modeling is a commodity skill.  Every investor can do it.  What will really set you apart is how you think about the deals, and the nuance you bring to analyzing them. 

You win by talking about the model

Along those lines, you don’t win by building the best model. Modeling is just a check-the-box thing in the interview process to show you can do it. The interviewers need to know you can do the basics with no glaring errors. 

What matters is showing that you can discuss the investment intelligently. It’s about bringing a sensible recommendation to the table with the information to back it up. 

How Do I Prepare For A Private Equity Case Study?

There is no one-size-fits-all when it comes to preparing for a private equity case study. Everyone is different. 

However, the best thing you can do is PRACTICE, PRACTICE, and more PRACTICE!

I know of a recent client that successfully obtained an offer from multiple mega funds . She practiced until she was able to build 10 LBO models from scratch without any errors or help … yes, that’s 10 models! 

Now, whether it takes 5 or 20 practice case studies doesn’t matter. The whole point is to get to a stage where you feel confident enough to do an LBO model quickly while under pressure. 

There is no way around the pressure in a private equity interview. The heat will be on. So, you need to prepare yourself for that. You need to feel confident in yourself and your capabilities. 

You’d be surprised how pressure can leave you stumped for an answer to a question that you definitely know.

It’s also a good idea to think about the types of questions the private equity interviewer might ask you about your investment proposal. Prepare your answers as far as possible. It’s important that you stick to your guns too when the situation calls for it, because interviewers may push back on your answers to see how you react.. 

You need to have your answer to “would you invest in this company?” ready, and also how you got to that answer (and what new information might change your mind).   

Another thing that gets a lot of people is limited time.  If you’re running out of time, double down on the fundamentals or the core part of the model.  Make sure you nail those.  Also, you can make “reasonable” assumptions if there’s information you wish you had, but don’t have access to. Just make sure to flag it to your interviewer 

How important is modeling in a private equity case study? 

Modeling is part and parcel of private equity case studies. Your basics need to be correct and there should be no obvious mistakes. That’s why practicing is so important. You want to focus on the presentation, but your calculations need to be correct first. They do, after all, make up your final decision. 

How can I stand out from other candidates? 

Knowing your stuff covers the basics. To stand out, you need to be an expert in showing how you came to a decision, a stickler for details, and inquisitive. Anyone can do the calculations with practice, but someone who thinks clearly and brings nuance to their discussion of the investment will thrive in interviews. 

Private equity case studies are a difficult but necessary part of the private equity recruiting process . Candidates can demonstrate their analytical abilities and impress potential employers by understanding the various types of case studies and how to approach them. 

Success in private equity case studies necessitates both technical and soft skills, from analyzing financial statements to discussing the investment case with your interviewer. 

Anyone can ace their next private equity case study and land their dream job in the private equity industry with the right preparation and mindset. If you’re looking to learn more about private equity, you can read my recommended Private Equity Books.

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How to prepare for the case study in a private equity interview

If you're  interviewing for a job in a private equity firm , then you will almost certainly come across a case study. Be warned: recruiters say this is the hardest part of the private equity interview process and how you handle it will decide whether you land the job.

“The case study is the most decisive part of the interview process because it’s the closest you get to doing the job,"  says Gail McManus of Private Equity Recruitment. It's purpose is to make you answer one question: 'Would you invest in this company?'

In most cases, you'll be given a  'Confidential Information Memorandum'  (CIM) relating to a company the private equity fund could invest in. You'll be expected to a) value the company, and b) put together an investment proposal - or not. Often, you'll be allowed to take the CIM away to prepare your proposal at home.

 “The case study is still the most decisive element of the recruitment process because it’s the closest you get to actually doing the job.  Candidates can win or lose based on how they perform on case study. People who are OK in the interview can land the job by showing the quality of their thinking, ” says McManus. “You need to show that you can think, and think like an investor.”

"The end decision [on whether to invest] is not important," says one private equity professional who's been through the process. "The important thing is to show your thinking/logic behind answer."

Preparing for a PE case study has distinctive challenges for consultants and bankers. If you're a consultant, you need to, "make a big effort to mix your strategic toolkit with financial analysis. You need to prove that you can go from a strategic conclusion to a finance conclusion," says one PE professional. Make sure you're totally familiar with the way an  LBO model  works.

If you're a banker, you need to, "make a big effort to develop your strategic thinking," says the same PE associate. The fund you're interviewing with will want to see that you can think like an investor, not just a financier. "Reaching financial conclusions is not enough. You need to argue why certain industry is good, and why you have a competitive advantage or not. Things can look good on paper, but things can change from a day to another. As a PE investor, hence as a case solver, you need to highlight and discuss risks, and whether you are ready or not to underwrite them."

Kadeem Houson, partner at KEA consultants, which specialises in hiring junior to mid-level PE professionals, says: “If you’re a banker you’re expected to have great technical skills so you need to demonstrate you can think commercially about the numbers you plugged in.    Conversely, a consultant who is good at blue sky thinking might be pressed more on their understanding of the model. Neither is better or worse – just be conscious of your blank spots.”

A good business versus a good investment

For McManus, one of the most important things to consider when looking at the case study is to understand the difference between a good business and a good investment. The difference between a good business and a good investment is the price. So you might have a great business but if you have to pay hugely for it it might not be a great business. Conversely you can have a so-so business but if you get it a good price it might make a great investment. “

McManus says as well as understanding the difference between a good business and a good investment, it’s important to focus on where the added value lies.  This has become a critical element for private equity firms to consider  as competition for assets has become even more fierce, given the amount of dry powder that funds now have at their disposal through a wide array of funds.   “Because of the competition for transactions generally you have to overpay to win a deal. So in the case study it’s really important you think about where the value creation opportunity lies in this business and what the exit would be,” says McManus.

She advises candidates to be brave and state a specific price, provided you can demonstrate how you’ve arrived at your answer.

Another private equity professional says you shouldn't go out on a limb, though, and you should appear cautious: "Keep all assumptions conservative at all times so as not to raise difficult questions. Always highlight risks, downsides as well as upsides."

Research the fund – find the angle

One private equity professional says that understanding why an investment might suit a particular firm could prove to be a plus. Prior to the case study, check whether the fund favours a particular industry sector, so that when it comes to the case study, you can add that to the investment thesis. “This enables you to showcase you have read up on the firm’s strategy/unique characteristics Something that would make it more likely for the fund you’re interviewing with winning the deal in what’s a very competitive market, said the PE source, who said this knowledge made him stand out.

However, the  primary purpose of the case study  is to test  the quality of your  thinking - it is not to  test you on your knowledge of the fund. “Knowing about the fund will tick an extra box, but the case study is about focusing on the three most critical things that will drive the investment decision,” says McManus. 

You need to think through these questions and issues:

We spoke to another private equity professional who's helpfully prepared a checklist of points to think about when you're faced with the case study. "It's a cheat sheet for some of my friends," he says.

When you're faced with a case study, he says you need to think in terms of: the industry, the company, the revenues, the costs, the competition, growth prospects, due dliligence, and the transaction itself.

The questions from his checklist are below. There's some overlap, but they're about as thorough as you can get.

When you're considering the  industry, you need to think about:

- What the company does. What are its key products and markets? What's the main source of demand for its products?

- What are the key drivers in that industry?

- Who are the market participants? How intense is the competition?

- Is the industry cyclical? Where are we in the cycle?

- Which outside factors might influence the industry (eg. government, climate, terrorism)?

When you're considering the company, you need to think about:  

- Its position in the industry

- Its growth profile

- Its operational leverage (cost structure)

- Its margins (are they sustainable/improvable)?

- Its fixed costs from capex and R&D

- Its working capital requirements

- Its management

- The minimum amount of cash needed to run the business

When you're considering the revenues, you need to think about:

- What's driving them

- Where the growth is coming from

- How diverse the revenues are

- How stable the revenues are (are they cyclical?)

- How much of the revenues are coming from associates and joint ventures

- What's the working capital requirement? - How long before revenues are booked and received?

When you're considering the costs, you need to think about:

- The diversity of suppliers

- The operational gearing (What's the fixed cost vs. the variable cost?)

- The exposure to commodity prices

- The capex/R&D requirements

- The pension funding

- The labour force (is it unionized?)

- The ability of the company to pass on price increases to customers

- The selling, general and administrative expenses (SG&A). - Can they be reduced?

When you're considering the competition, you need to think about:

- Industry concentration

- Buyer power

- Supplier power

- Brand power

- Economies of scale/network economies/minimum efficient scale

- Substitutes

- Input access

When you're considering the growth prospects, you need to think about:

- Scalability

- Change of asset usage (Leasehold vs. freehold, could manufacturing take place in China?)

- Disposals

- How to achieve efficiencies

- Limitations of current management

When you're considering the due diligence, you need to think about: 

- Change of control clauses

- Environmental and legal liabilities

- The power of pension schemes and unions

- The effectiveness of IT and operations systems

When you're considering the transaction, you need to think about:

- Your LBO model

- The basis for your valuation (have you used a Sum of The Parts (SOTP) valuation or another method - why?)

- The company's ability to raise debt

- The exit opportunities from the investment

- The synergies with other companies in the PE fund's portfolio

- The best timing for the transaction

BUT: keep things simple.

While this checklist is important as an input and a way to approach the task, w hen it comes to presenting the information, quality beats quantity.  McManus says: “The main reason why people aren’t successful in case studies is that they say too much.  What you’ve got to focus on is what’s critical, what makes a difference. It’s not about quantity, it’s about quality of thinking. If you do 30 strengths and weaknesses it might only be three that matter. It’s not the analysis that matters, but what’s important from that analysis. What’s critical to the investment thesis. Most firms tend to use the same case study so they can start to see what a good answer looks like.”

Houson agrees that picking out the most important elements in the case study are more important than spending too much time on an elaborate model.   “You don’t necessarily need to demonstrate such technical prowess when it comes to building the model. But you need to be comfortable about being challenged around the business case. Frankly it’s better to go for a simple answer which sparks a really interesting conversation rather than something that is purely judged from a technical standpoint.  The model is meant to inform the discussion, not be the discussion itself.”

Softer factors such as interpersonal skills are also important because if the case study is the closest thing you’ll get to doing the job, then it’s also a measure of how you might behave in a live situation.  McManus says: “This is what it will be like having a conversation at 11am  with your boss having been given the information memorandum the day before.  Not only are the interviewers looking at how you approach the case study, but they’re also looking at whether they want to have this conversation with you every Tuesday morning at 11am.”

The exercise usually takes around four hours if you include the modelling aspect, so there is time pressure. “Top tips are to practice how to think in a way that is simple, but fit for purpose. Think about how to work quickly. The ability to work under pressure is still important,” says Houson.

But some firms will allow you do complete the CIM over the weekend. In that case on one private equity professional says you should get someone who already works in PE to check it over for you. He also advises getting friends who've been through case study interviews before to put you through some mock questions on your presentation.

But McManus says this can lead to spending too much time and favours the shorter method. “It’s fairer and you can illustrate the quality of your thinking over a short space of time.”

The case study is conducted online, and because of Covid, so too are many of the follow-up discussions, so it’s worth thinking about how to present yourself on zoom or Teams. “Although a lot of these case studies over the last couple of years have been done remotely, in many ways that’s even more reason to try to bring out a bit of engagement and personality with the people you’re talking to." 

“ There’s never a right or wrong answer. Rather it’s showing your thinking and they like to have that discussion with you. It’s the nearest you get to doing the job. And that cuts both ways – if you don’t like the case study, you won't like doing the job. “

Contact:  [email protected]  in the first instance. Whatsapp/Signal/Telegram also available (Telegram: @SarahButcher)

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Private equity describes investment partnerships that buy and manage companies before selling them. Private equity firms operate these investment funds on behalf of institutional and accredited investors .

Private equity funds may acquire private companies or public ones in their entirety, or invest in such buyouts as part of a consortium . They typically do not hold stakes in companies that remain listed on a stock exchange .

Private equity is often grouped with venture capital and hedge funds as an alternative investment . Investors in this asset class are usually required to commit significant capital for years, which is why access to such investments is limited to institutions and individuals with high net worth .

Key Takeaways

• Private equity firms buy companies and overhaul them to earn a profit when the business is sold again.
• Capital for the acquisitions comes from outside investors in the private equity funds the firms establish and manage, usually supplemented by debt.
• The private equity industry has grown rapidly; it tends to be most popular when stock prices are high and interest rates low.
• An acquisition by private equity can make a company more competitive or saddle it with unsustainable debt, depending on the private equity firm's skills and objectives. 

In contrast with venture capital , most private equity firms and funds invest in mature companies rather than startups . They manage their portfolio companies to increase their worth or to extract value before exiting the investment years later.

The private equity industry has grown rapidly amid increased allocations to alternative investments and following private equity funds' relatively strong returns since 2000. In 2022, private equity buyouts totaled $654 billion, the second-best performance in history. Private equity investing tends to grow more lucrative and popular during periods when stock markets are riding high and interest rates are low and less so when those cyclical factors turn less favorable.

Private equity firms raise client capital to launch private equity funds , and operate them as general partners, managing fund investments in exchange for fees and a share of profits above a preset minimum known as the hurdle rate .

Image by Sabrina Jiang © Investopedia 2020

Private equity funds have a finite term of 10 to 12 years, and the money invested in them isn't available for subsequent withdrawals. The funds do typically start to distribute profits to their investors after a number of years. The average holding period for a private equity portfolio company was about 5.6 years in 2023.

Several of the largest private equity firms are now publicly listed companies in the wake of the landmark initial public offering (IPO) by Blackstone Group Inc. ( BX ) in 2007. In addition to Blackstone, KKR & Co. Inc. ( KKR ), Carlyle Group Inc. ( CG ), and Apollo Global Management Inc. ( APO ) all have shares traded on U.S. exchanges. A number of smaller private equity firms have also gone public via IPOs, primarily in Europe.

Mira Norian / Investopedia

Some private equity firms and funds specialize in a particular category of private-equity deals. While venture capital is often listed as a subset of private equity, its distinct function and skillset set it apart, and have given rise to dedicated venture capital firms that dominate their sector. Other private equity specialties include:

• Distressed investing , specializing in struggling companies with critical financing needs
• Growth equity, funding expanding companies beyond their startup phase
• Sector specialists, with some private equity firms focusing solely on technology or energy deals, for example
• Secondary buyouts , involving the sale of a company owned by one private-equity firm to another such firm
• Carve-outs involving the purchase of corporate subsidiaries or units.

The deals private equity firms make to buy and sell their portfolio companies can be divided into categories according to their circumstances.

The buyout remains a staple of private equity deals, involving the acquisition of an entire company, whether public, closely held or privately owned. Private equity investors acquiring an underperforming public company will often seek to cut costs, and may restructure its operations.

Another type of private equity acquisition is the carve-out, in which private equity investors buy a division of a larger company, typically a non-core business put up for sale by its parent corporation. Examples include Carlyle's acquisition of Tyco Fire & Security Services Korea Co. Ltd. from Tyco International Ltd. in 2014, and Francisco Partners' deal to acquire corporate training platform Litmos from German software giant SAP SE ( SAP ), announced in August 2022. Carve-outs tend to fetch lower valuation multiples than other private equity acquisitions, but can be more complex and riskier.

In a secondary buyout, a private equity firm buys a company from another private equity group rather than a listed company. Such deals were assumed to constitute a distress sale but have become more common amid increased specialization by private equity firms. For instance, one firm might buy a company to cut costs before selling it to another PE partnership seeking a platform for acquiring complementary businesses.

Other exit strategies for a private-equity investment include the sale of a portfolio company to one of its competitors as well as its IPO.

By the time a private equity firm acquires a company, it will already have a plan in place to increase the investment's worth. That could include dramatic cost cuts or a restructuring, steps the company's incumbent management may have been reluctant to take. Private equity owners with a limited time to add value before exiting an investment have more of an incentive to make major changes.

The private equity firm may also have special expertise the company's prior management lacked. It may help the company develop an e-commerce strategy, adopt new technology, or enter additional markets. A private-equity firm acquiring a company may bring in its own management team to pursue such initiatives or retain prior managers to execute an agreed-upon plan.

The acquired company can make operational and financial changes without the pressure of having to meet analysts' earnings estimates or to please its public shareholders every quarter. Ownership by private equity may allow management to take a longer-term view, unless that conflicts with the new owners' goal of making the biggest possible return on investment .

Making Money the Old-Fashioned Way With Debt

Industry surveys suggest operational improvements have become private equity managers' main focus and source of added value.

But debt remains an important contributor to private equity returns, even as the increase in fundraising has made leverage less essential. Debt used to finance an acquisition reduces the size of the equity commitment and increases the potential return on that investment accordingly, albeit with increased risk .

Private equity managers can also cause the acquired company to take on more debt to accelerate their returns through a dividend recapitalization , which funds a dividend distribution to the private equity owners with borrowed money.

Dividend recaps are controversial because they allow a private equity firm to extract value quickly while saddling the portfolio company with extra debt . On the other hand, the increased debt presumably lowers the company's valuation when it is sold again, while lenders must agree with the owners that the company will be able to manage the resulting debt load .

Private equity firms have pushed back against the stereotype depicting them as strip miners of corporate assets, stressing their management expertise and examples of successful transformations of portfolio companies.

Many are touting their commitment to environmental, social, and governance (ESG) standards directing companies to mind the interests of stakeholders other than their owners.

Still, rapid changes that often follow a private equity buyout can often be difficult for a company's employees and the communities where it has operations.

Another frequent focus of controversy is the carried interest provision allowing private equity managers to be taxed at the lower capital gains tax rate on the bulk of their compensation. Legislative attempts to tax that compensation as income have met with repeated defeat, notably when this change was dropped from the Inflation Reduction Act of 2022 .

How Are Private Equity Funds Managed?

A private equity fund is managed by a general partner (GP) , typically the private equity firm that established the fund. The GP makes all of the fund's management decisions. It also contributes 1% to 3% of the fund's capital to ensure it has skin in the game . In return, the GP earns a management fee often set at 2% of fund assets, and may be entitled to 20% of fund profits above a preset minimum as incentive compensation, known in private equity jargon as carried interest.  Limited partners are clients of the private equity firm that invest in its fund; they have limited liability .

What Is the History of Private Equity Investments?

In 1901, J.P. Morgan bought Carnegie Steel Corp. for $480 million and merged it with Federal Steel Company and National Tube to create U.S. Steel in one of the earliest corporate buyouts and one of the largest relative to the size of the market and the economy.

In 1919, Henry Ford used mostly borrowed money to buy out his partners, who had sued when he slashed dividends to build a new auto plant. In 1989, KKR engineered what is still the largest leveraged buyout in history after adjusting for inflation , buying RJR Nabisco for $25 billion.

Are Private Equity Firms Regulated?

While private equity funds are exempt from regulation by the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 or the Securities Act of 1933 , their managers remain subject to the Investment Advisers Act of 1940 as well as the anti-fraud provisions of federal securities laws. In February 2022, the SEC proposed extensive new reporting and client disclosure requirements for private fund advisers including private equity fund managers. The new rules would require private fund advisers registered with the SEC to provide clients with quarterly statements detailing fund performance, fees, and expenses, and to obtain annual fund audits. All fund advisors would be barred from providing preferential terms for one client in an investment vehicle without disclosing this to the other investors in the same fund.

For a large enough company, no form of ownership is free of the conflicts of interests arising from the agency problem . Like managers of public companies, private equity firms can at times pursue self-interest at odds with those of other stakeholders, including limited partners. Still, most private equity deals create value for the funds' investors, and many of them improve the acquired company. In a market economy , the owners of the company are entitled to choose the capital structure that works best for them, subject to sensible regulation.

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S&P Global. " Private Equity Firms Go Public as Valuations Soar, Retail Investors Buy In ."

Carlyle. " The Carlyle Group Agrees to Acquire ADT Korea from Tyco for $1.93 Billion ."

Francisco Partners. " Francisco Partners to Acquire Litmos From SAP ."

PwC. " Driving Transformative Value Creation in Private Equity Carve Outs ."

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PitchBook. " Specialization in Private Equity Buyout Funds and Niche Investment Strategies ."

10X. " Private Equity Buyout Strategies That Generate Superior Returns ."

McKinsey & Company. " Private Equity Exit Excellence: Getting the Story Right ."

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KPMG. " Delivering on the Promise of Value Creation ."

The New York Times. " Private Equity Firms Are Piling On Debt to Pay Dividends ."

Oaktree Capital Management, L.P. " Case Study: Elgin National Industries ."

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Davis, Steven J. and et al. " The Economic Effects of Private Equity Buyouts. " National Bureau of Economic Research , Working Paper 26371, July 2021, pp. 1-89.

The New York Times. " The Carried Interest Loophole Survives Another Political Battle ."

Fogelström, Erik and Gustafsso, Jonatan. " GP Stakes in Private Equity: An Empirical Analysis of Minority Stakes in Private Equity Firms ." MSc Thesis in Finance , Stockholm School of Economics, pp. 1.

Harvard Business School, Baker Library, Bloomberg Center. " The Founding of U.S. Steel and the Power of Public Opinion ."

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The Henry Ford. " Henry Ford: Founder, Ford Motor Company ."

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U.S. Securities and Exchange Commission. " Private Fund ."

U.S. Securities and Exchange Commission. " SEC Proposes to Enhance Private Fund Investor Protection ."

U.S. Securities and Exchange Commission. " Proposed Rule: Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews ."

Kirkland & Ellis. " SEC Proposes Sweeping Rule Changes for Private Fund Advisers (Part 1 of 2) ."

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• 22 Apr 2024
• Research & Ideas

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AI and Machine Learning in Private Equity: A Case Study

Feat. Blueprint Prep, a New Harbor Capital portfolio company

In today's ever-evolving technological landscape, private equity firms must remain agile and adaptable to stay on top of advancing technology such as artificial intelligence (AI) and machine learning. AI has the power to revolutionize how private equity firms operate, streamlining processes and unlocking the power of data for firms.

In this Partnership Perspectives blog post, we will highlight some ways in which private equity firms like New Harbor Capital and our portfolio companies are beginning to think about and deploy AI.

Identifying Relevant Investment Opportunities

The deal origination process is the heart of any private equity firm’s operations. Firms are constantly looking for new investment opportunities, but it can be challenging to identify relevant deals in a competitive market. AI can help private equity firms identify relevant investment opportunities by analyzing large datasets and identifying patterns and trends that would be difficult or impractical to spot manually. AI can also conduct industry research and competitor analyses to supplement a private equity deal team’s sourcing efforts.

Enhancing the Due Diligence Process

Due diligence is a critical step in the private equity investment process, where firms meticulously assess the risks and opportunities associated with a potential investment. AI can support and streamline the due diligence process by automating repetitive tasks like data aggregation and analysis. AI can quickly and efficiently analyze financial statements, contracts, and other legal documents to identify potential red flags or risks associated with a target company. This not only saves teams time, but also enhances accuracy, ensuring firms gain a comprehensive understanding of a potential investment.

Streamlining Operational Efficiency

AI can modernize operational efficiency for private equity firms by automating repetitive tasks and streamlining internal processes, such as meeting scheduling, compliance and regulatory reporting, and project management, freeing up human capital as a result. This allows private equity professionals to redirect their efforts toward more value-added activities, like deal origination and relationship management.

Blueprint Prep: A Case Study in AI-Powered Personalized Learning

New Harbor is not only leveraging AI at a firm level to gain a competitive advantage - we are also encouraging our portfolio companies to do the same. One example is Blueprint Prep , a leading platform for high-stakes test preparation and continuing education. Blueprint has been using AI to drive personalized learning at scale for several years.

Founded in 2005, Blueprint Prep is a leading platform for test prep related to high stakes exams, certification and licensure in the U.S., offering live and self-paced online courses, private tutoring, self-study materials, and question banks for pre-law, pre-med, and medical school students, as well as residents, practicing physicians, PAs, and NPs.

Blueprint began its journey with AI by focusing on personalized and adaptive practice question banks. The Blueprint team has developed machine learning models that feed each learner the highest-value practice content at every step of their journey. They also use AI tools to build personalized study plans for students.

Most recently, Blueprint released a first-gen AI feature : a conversational AI chatbot that acts as a tutor for MCAT students, helping them understand the strategy behind certain exam questions. The AI chatbot, named Blue, is the first of its kind in the MCAT test preparation market. It can provide students with personalized guidance on how to tackle Critical Analysis and Reasoning Skills (CARS) questions through genuine one-on-one conversations while adapting in real time to their individual learning needs.

The launch of Blue comes at a time when interest in the use of AI in medical school and healthcare education is on the rise. AI offers medical schools the ability to provide a more personalized curriculum that can adjust to each student's needs. As the demand for medical education increases, AI technology is fast becoming necessary to meet the evolving needs and preferences of students.

Blueprint’s Founder and CEO, Matt Riley, believes that AI will continue to be a disruptive force in the education and online learning industry: “In our space, AI will be incredibly beneficial to learners. No longer will they need to labor through piles of content without knowing how to drive results. With AI, we can now make the entire learning journey more efficient and enjoyable, which will unlock tons of untapped human potential.”

As private equity firms strive to maintain competitiveness amidst a constantly evolving technological landscape, the adoption of AI and machine learning will be increasingly important. By embracing AI’s capabilities, private equity firms can gain a distinct advantage — identifying more relevant investment opportunities, enhancing the due diligence process, streamlining internal operations, and adeptly managing risks. As AI continues to advance, private equity firms that embrace and integrate it into their operations and workflows will be at a significant competitive advantage.

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Infrastructure Private Equity: The Definitive Guide

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If I put together a list of the longest-running “unfulfilled requests” on this site and BIWS , infrastructure private equity would be near the top of that list.

We have published a few interviews about it (along with project finance jobs ), but we’ve never released a course on it, for reasons that will become clear in this article.

UPDATE: We now have a Project Finance Modeling course . Check it out!

And while I’m skeptical about the long-term prospects of private equity , especially at the mega-funds, there are some bright spots – and I think infrastructure is one of them.

But before delving into deals, top firms, salaries/bonuses, interview questions, and exit opportunities, let’s start with the fundamentals:

What is Infrastructure Private Equity?

At a high level, infrastructure private equity resembles any other type of private equity : firms raise capital from outside investors (Limited Partners) and then use that capital to invest in assets, operate them, and eventually sell them to earn a high return.

Profits are then distributed between the Limited Partners (LPs) and the General Partners (GPs) – with the GPs representing the private equity firm.

Just as in traditional PE, professionals spend their time on origination (finding new assets), execution (doing deals), managing existing assets, and fundraising.

The difference is that infrastructure PE firms invest in assets that provide essential utilities or services.

Real estate private equity is similar because both firm types invest in assets rather than companies.

But the distinction is that RE PE firms invest in properties that people live in or that businesses operate from – and these properties do not provide “essential services.”

Sectors within infrastructure include utilities (gas, electric, and water distribution), transportation (airports, roads, bridges, rail, etc.), social infrastructure (hospitals, schools, etc.), and energy (power plants, pipelines, and renewable assets like solar/wind farms).

Many of these assets are extremely stable and last for decades.

Some, like airports, also have natural monopolies that make them incredibly valuable (well, except for when there’s a pandemic…).

Infrastructure assets have the following shared characteristics:

• Relatively Low Volatility and Stable Cash Flows – Power plants can’t just “shut down” unless human civilization collapses.
• Strong Cash Yields – Unlike traditional leveraged buyouts, where all the returns might depend on the exit, infrastructure assets usually yield high cash flows during the holding period.
• Links to the Macro Environment and Inflation – Investors often view infrastructure assets as “inflation hedges” because they’re linked to population growth, GDP, and other macro factors that change the demand for infrastructure.
• Low Correlation with Other Asset Classes – For example, returns in infrastructure investing don’t correlate that closely with those in traditional PE, equities, fixed income, or even real estate.

On the last point, here’s what JP Morgan found when comparing infrastructure, real estate, and the S&P 500 from 1986 to 2013:

Holding periods are also longer, partially because customer contracts tend to be lengthy, such as power purchase agreements that last for 15 years.

Overall, infrastructure private equity sits above fixed income but below equities in terms of risk and potential returns; it might be comparable to mezzanine funds .

The History and Scale of Infrastructure Investing

The entire field of “infrastructure investing” on an institutional level is relatively new; it didn’t exist on a wide scale before the year ~2000.

It started in Australia in the 1990s, spread to Canada and Europe in the early 2000s, and eventually made its way to the U.S. as well.

Partially because it is a newer field, infrastructure private equity has raised less in funding than real estate private equity or traditional private equity:

• Infrastructure PE: $50 – $100 billion USD per year globally
• Real Estate PE: $100 – $150 billion
• Traditional PE: $200 – $500 billion

Despite the lower fundraising, “small deals” are quite rare in infrastructure because of the nature of the assets.

The average deal size is over $500 million, and the top 10 deals each year are in the multi-billions, up to $10+ billion.

Public Finance vs. Project Finance vs. Infrastructure Private Equity  vs. “Infrastructure Investing”

Several terms are closely related to infrastructure, so let’s go down the list and clarify the differences before moving on:

• “Infrastructure Investing” – This one is the broadest term and could refer to investing in the debt or equity of infrastructure assets. Investors could fund the construction of new assets or acquire existing, stabilized ones. And the investors could be PE firms, pensions, sovereign wealth funds , and many others.
• Infrastructure Private Equity – This term refers to investing in the equity of infrastructure assets to gain ownership and control. There are dedicated infra PE firms, but plenty of pensions, large banks, SWFs, and other entities also make “equity investments in infrastructure.”
• Project Finance – This one refers to investing in the debt of infrastructure assets (both new and existing ones), which is mostly about assessing the downside risk, how much money could be lost in the worst-case scenario, and then offering terms commensurate with the risk.
• Public Finance – This one also relates to investing in the debt of infrastructure assets, but in this case, it’s to support governments and tax-exempt entities that need to raise funds to build assets.

Infrastructure Private Equity Strategies

The main investment strategies are similar to the ones in real estate private equity: core , core-plus, value-add , and opportunistic .

The main difference is slightly different names: “greenfield” refers to brand-new assets that a sponsor is building, while “brownfield” refers to existing assets that it is acquiring.

Here’s a quick summary by category:

• Core: There’s limited-to-no growth here; examples might be regulated electricity distribution assets, such as power lines. Governments set rates, so there’s little revenue risk. Most of the returns come from the asset’s cash flows, and the expected IRRs are usually below 10%.
• Core-Plus: These assets have modest growth potential (via additional CapEx or other improvements), or they’re stabilized assets operating in regions outside developed markets. The expected IRRs might be in the low teens.
• Value-Add: These assets require serious operational improvements or re-positioning. The risk and potential returns are higher, and more of the potential returns come from capital appreciation rather than cash flows during the holding period. An example might be acquiring a small airport and then performing additional construction to turn it into more of a regional hub.
• Opportunistic: These deals are the riskiest ones because they often produce limited-to-no cash flow for a long time, and they depend on building new and unproven assets (e.g., a new power plant or toll road). The potential IRRs might be 15%+, but there’s also a huge downside risk.

A single infrastructure PE firm could have different types of funds, each one specializing in one of these categories, but in practice, the first three strategies are the most popular ones.

One final note: in addition to everything above, public-private partnerships (PPP) represent another strategy within this sector.

For example, a private firm might build a toll road, and the local government might guarantee a certain amount in revenue per year as an incentive to complete the project.

Sometimes PPP deals are labeled “core” even when the asset changes significantly or is built from scratch because the revenue risks are much lower if there’s government backing.

Yes, construction overruns and delays could still be issues, but the overall risk is lower.

The Top Infrastructure Private Equity Funds

You can divide infrastructure investors into a few main categories: actual private equity firms (“fund managers”), large banks, pension funds, sovereign wealth funds, and the investment arms of insurance companies.

Technically, only the private equity firms count as “infrastructure private equity” – but each firm type here still invests in the equity of infrastructure assets.

For many years, fund managers dominated the market, but institutional investors such as pension funds have been building their internal investment teams to do deals directly.

Private Equity Firms and Fund Managers

Some PE firms focus on infrastructure; examples include Global Infrastructure Partners, IFM Investors, Stonepeak Infrastructure Partners, I Squared Capital, ArcLight Capital, Dalmore Capital, and Energy Capital Partners.

Then, some firms invest in a broader set of “real assets,” with Brookfield in Canada being the best example (it has also raised the third-highest amount of capital for infrastructure worldwide).

In the U.S., Colony Capital and AMP Capital are examples (they do both real estate and infrastructure).

Finally, there are large, diversified private equity firms that also have a presence in infrastructure, such as KKR, EQT, Blackstone, Ardian, and Carlyle.

Large Banks

The biggest “infrastructure investing firm” worldwide is Macquarie Infrastructure and Real Assets (MIRA) , which is a branch of the Australian bank Macquarie.

Many of the other large banks also do infrastructure investing, but they often use different names for their infra businesses (e.g., Goldman Sachs and “West Street Infrastructure Partners” or Morgan Stanley and “North Haven Infrastructure Partners”).

JP Morgan and Deutsche Bank are also active in the space.

There are also infrastructure investment banking groups , which advise sponsors and asset owners on deals rather than investing in debt or equity directly.

Pension Funds

Canadian pension funds , such as CPPIB and OTPP, are some of the biggest investors in the infrastructure space, and they all have internal teams to do it.

These funds have advantages over traditional PE firms because their returns expectations are lower, and they’re non-taxable in Canada , so they can afford to out-bid other parties and pay high prices for Canadian assets.

In Europe, various pension managers, such as APG and PGGM in the Netherlands and USS in the U.K., also invest in infrastructure, and in Australia, plenty of “superannuation funds” (AustralianSuper, QSuper, etc.) also do domestic infrastructure deals.

Sovereign Wealth Funds

These are very similar to pension funds: historically, they acted as Limited Partners, but they’ve been building their internal teams to invest in infrastructure directly.

Just like pensions, they also target lower returns, but they also have far more capital since they’re backed by governments in places like the Middle East and Asia.

Names include the Abu Dhabi Investment Authority, the Abu Dhabi Investment Council, the China Investment Corporation, and GIC in Singapore.

For more about these points, please see our coverage of investment banking in Dubai and sovereign wealth funds .

Insurance Companies

Most insurance companies do not invest directly in infrastructure, but many are Limited partners of existing funds.

Well-known names include Swiss Life, Allianz Capital Partners in Germany, and Samsung Life Insurance in South Korea.

Other Investment Firms

There are plenty of “miscellaneous” firms that do infrastructure investing as well.

For example, some construction companies invest their cash into infrastructure, and some larger, energy-focused PE funds such as Encap and Riverstone have also gotten into it.

There’s a blurry line between “energy private equity” and “infrastructure private equity” in the U.S., which is why firms like ArcLight and Energy Capital could be in either category.

Infrastructure Private Equity Jobs: The Full Description

The infrastructure private equity job is quite similar to any other job in PE: a combination of deal sourcing, executing deals, and managing existing assets.

Deal sourcing consists of inbound flow from bankers, competitive auctions, secondary deals from other financial sponsors, and sometimes buying entire infrastructure companies or individual assets.

Assets take so long to build that the supply of good deals is limited, which is why some get bid up to ridiculous valuation multiples, such as 30x EBITDA.

When evaluating deals, assessing the downside risk is critical because the upside is quite limited.

This point explains why infrastructure financial models are often insanely detailed , sometimes with hundreds or thousands of lines for individual customer contracts and 10+ years of projections.

You can’t just say, “Assume revenue growth of 5%” – it has to be backed by contract-level data and extensive industry research.

As in real estate, infrastructure deals often use high leverage (think: 80%+), and the debt may be “sculpted” to meet a minimum Debt Service Coverage Ratio (DSCR) requirement:

When you evaluate deals, you focus on:

• Contracts – How does the asset earn revenue, how much water/electricity/energy has it promised to deliver, and are there any onerous terms? Are there step-ups for inflation? Are any counterparties promising to pay for fuel or other expenses?
• Expenses and CapEx – Will the asset need major CapEx for maintenance or expansion? What do its ongoing operating expenses look like, and are they expected to grow in-line with inflation or above/below it?
• Growth Opportunities – The asset’s overall growth rate should be aligned to its key macro drivers, especially for “core” deals. For example, if air traffic in the region is growing at 2% per year, but an airport’s revenue is growing by 5%, something is off – unless the airport is planning to expand in some way.
• Downside Protection – What happens if inflation exceeds expectations? How easily can customers cancel their contracts? If something goes wrong, does the government back the asset or promise anything? What if there’s a construction delay or cost overrun?
• Debt – How much leverage is being used, what are the rates, and how much refinancing risk is there? Could the asset potentially support a dividend recap ? Is there any chance that it might not be able to comply with covenants, such as a minimum Debt Service Coverage Ratio (DSCR)?

Project Finance & Infrastructure Modeling

Learn cash flow modeling for energy and transportation assets (toll roads, solar, wind, and gas), debt sculpting, and debt and equity analysis.

Infrastructure Private Equity Salary and Bonus Levels

Now to the bad news: salary and bonus levels in infrastructure range from “a bit lower” to “quite a bit lower” than traditional private equity compensation because:

• Management fees tend to be lower (1.0% to 1.5% rather than 2.0%).
• Carry is still based on 20% of the profits and an ~8% hurdle rate, but since holding periods are much longer, it takes more time to earn the carry. Also, it’s more difficult to exceed the hurdle rate.

Infrastructure Investor has a good set of recent compensation figures , excluding carry.

To summarize and round the numbers a bit, compensation ranges at dedicated infrastructure and energy PE firms are:

• Associates: $150K – $300K total compensation (50/50 base/bonus)
• Vice Presidents: $250K – $500K
• Directors: $400K – $900K
• Managing Directors: $750K – $1.8 million

If you also factored in carried interest, these numbers would increase modestly for Directors and MDs.

Expect lower compensation at pension funds, sovereign wealth funds , and insurance firms because they do not have carried interest at all.

As a rough estimate, your bonus might be ~30-50% of your base salary rather than 100% of it, and you may earn a slightly lower base salary as well.

The upside is that the lifestyle is also much better: you might work only ~40-50 hours per week at some of these funds.

You get busier when deals are heating up, but it’s still a vast improvement over the typical IB/PE hours .

The Recruiting Process: How to Get into Infrastructure Private Equity

Similar to real estate private equity, infrastructure private equity firms are also more forgiving about candidates’ backgrounds.

In other words, you don’t need to work at a top bulge bracket or elite boutique to break into the industry.

You could potentially get into the industry from many different backgrounds:

• Investment banking , ideally in groups like infrastructure , energy , renewables , or power & utilities that are directly related.
• Project finance since PF represents the debt side of infrastructure deals, and you need to understand both equity and debt to evaluate any deal.
• Real estate since some segments of infrastructure, such as schools and hospitals, overlap quite a bit; also, many companies structured as REITs own infrastructure assets.
• Other areas of private equity , such as firms that focus on renewables, energy, or power and utilities, since they’re all related to infrastructure.
• Infrastructure corporations/developers for obvious reasons (especially if you target greenfield-focused firms).

Some people also get in from areas like infrastructure/project finance law or infrastructure groups at Big 4 firms.

It’s unusual to break in without a few years of full-time experience in one of these fields; few firms hire undergrads or recent grads because they don’t have the resources to train them.

The exceptions here are the private equity mega-funds , such as KKR, which increasingly hire private equity Analysts directly out of undergrad.

Most infrastructure PE firms use off-cycle processes to recruit (i.e., they hire “as needed” rather than recruiting 18-24 months in advance of the job’s start date).

Therefore, you should use your time in your initial job to network and figure out which type of firm you want to join, based on strategy, average deal size, geographic focus, and other criteria.

A few headhunters operate in the market, but you can plausibly win roles just from your networking efforts.

One Search is the one recruiting firm dedicated to “real assets” (infrastructure, energy, and real estate), and they’re the best source for positions at infra PE firms – if you decide to go through recruiters.

The Infrastructure Private Equity Interview Process

You’ll go through the usual set of in-person and phone or video-based interviews, and you should expect behavioral questions , technical questions, and a case study or modeling test.

The behavioral/fit questions are all standard: walk me through your resume , describe your past deals, tell me your strengths and weaknesses, and so on.

The technical questions tend to focus on the merits of different infrastructure assets, the KPIs and drivers, and how you evaluate deals and use the right amount of leverage.

And the case studies and modeling tests are much simpler than on-the-job models because you usually have only 1-3 hours to complete them.

If you’re already familiar with Excel, LBO modeling, and/or real estate financial modeling , these tests should not be that difficult.

You do need to learn some new terminology, but projecting the cash flows and debt service and calculating the IRR are the same as always.

Infrastructure Private Equity Interview Questions And Answers

Here are a few examples of sector-specific interview questions:

Q: Why infrastructure investing?

A: You like working on deals involving long-term assets that provide an essential service and also do some social good.

Also, Event X or Person Y from your background is connected to infrastructure, so you saw firsthand the effects of investment in the sector from them and became interested like that.

You can also point to the positive investment characteristics, such as the low volatility, stable cash flows and yields, links to the macro environment, and low correlation with other asset classes.

Q: What are the key drivers and key performance indicators (KPIs) for different types of infrastructure assets?

A: This is a broad question because each asset is different, but to give a few examples:

• Power Plants: Capacity (maximum output), production (electricity produced, which is a fraction of the total capacity), contracted rates for both of those, fixed and variable operating expenses, annual escalations for the revenue rates and expenses, and required maintenance or growth CapEx.
• Airports: Total passenger volume and average fees per passenger, fees from rent and fuel, operating expenses such as payroll, insurance, maintenance, and utilities, required CapEx, and assumed inflation rates for all of these.
• Toll Roads: Traffic levels and Year-Over-Year (YoY) growth rates, the toll rate per vehicle per day, fixed expenses for operations and maintenance and variable expenses linked to per-car figures, required CapEx, and inflation rates for all of these.

Q: Walk me through a typical greenfield deal/model.

A: You assume a certain amount of construction costs and a timeline for the initial development, and you draw on equity and debt over time to fund it, putting in the equity first to satisfy lenders. Interest on the debt is capitalized during the construction period.

When construction is finished, the construction loan may be refinanced and replaced with a permanent loan as the asset starts operating and eventually stabilizes.

Then, you forecast the revenue, expenses, and cash flow in different scenarios and size the debt such that it complies with requirements, such as a minimum Debt Service Coverage Ratio (DSCR).

At the end of the holding period, you assume an exit based on a percentage of the asset’s initial value or a multiple of EBITDA or cash flow.

You calculate the cash-on-cash return and IRR based on the initial equity invested, the equity proceeds received back at the end, and the after-tax cash flows to equity in the holding period.

Q: Walk me through a typical brownfield deal/model.

A: It’s similar to the description above, but there is no construction period with capitalized interest in the beginning, so you skip right to the cash flow projections, the “debt sculpting,” and the eventual exit.

Q: How would you compare the risk and potential returns of different infrastructure assets? For example, how does a regulated water utility differ from an airport, and how do they differ from telecom infrastructure like a cell tower?

A: Regulated utilities for water and electricity have lower risk, lower potential returns, and a higher percentage of total returns coming from the cash yields.

That’s because local governments set the allowed rates, and demand doesn’t fluctuate much unless the local population grows or shrinks significantly.

On the other hand, there’s also little downside risk because people can’t stop drinking water or using electricity even if there’s an economic crisis.

Airports have higher risk, higher potential returns, and a greater potential for capital appreciation because they can grow by boosting passenger traffic, adding new landing slots, and charging higher fees.

But there’s also more risk because passenger traffic could plummet in an economic recession, a war, or a pandemic.

With telecom assets like cell phone towers, the risk and potential returns are even higher, with much of the returns expected to come from capital appreciation.

There are different lease types (ground leases and rooftop leases), and location is even more critical than with other infrastructure, so these assets are closer to real estate in some ways.

Q: How would you value a toll road or an airport?

A: You almost always use a DCF model for these assets because cash flows are fairly predictable.

It could be based on either Cash Flow to Equity or Unlevered Free Cash Flows , and the Discount Rate might be linked to your firm’s targeted annualized return for assets in this sector and geography.

If the Discount Rate is the Cost of Equity, then it’s linked to the targeted equity returns; for WACC , the Cost of Debt is linked to the weighted average interest rate on the debt used in the deal.

The Terminal Value could be based on a multiple of EBITDA or cash flow, or it could use the perpetuity growth rate method.

Q: Why can you use high leverage in many infrastructure deals? And what are some of the important credit stats and ratios?

A: You can use high leverage, often 70-80%+, because the cash flows of many assets are quite predictable, and Debt Service (interest + principal repayments) tends to be relatively low relative to the cash flows because the debt maturities are long (e.g., 10-15+ years).

Some of the most important ratios include the Debt Service Coverage Ratio (DSCR) and the Loan Life Coverage Ratio (LLCR) , along with standard ones like the Leverage and Coverage Ratios used in debt vs. equity analysis .

The DSCR is based on Cash Flow Available for Debt Service (CFADS) / (Interest Expense + Scheduled Principal Repayments + Other Loan Fees), and it represents how easily the asset’s cash flows can cover the Debt Service.

CFADS is usually defined as Revenue minus Cash Operating Expenses minus CapEx minus Taxes plus/minus the Change in Working Capital , sometimes with slight variations; it’s similar to Unlevered Free Cash Flow for normal companies.

Importantly, depreciation must be excluded, except for its tax impact, because it’s non-cash.

The LLCR is defined as the Present Value of the total Cash Flow Available for Debt Service over the loan’s life divided by the current Debt balance.

The Discount Rate should be based on the weighted average interest rate on the Debt.

Higher numbers are better because it means the asset’s cumulative cash flows can more easily pay for the debt.

Q: What is “debt sculpting” in infrastructure deals, and why is it so common?

A: In infrastructure, the amount of Debt is often based on a minimum DSCR or LLCR rather than a percentage of the purchase price or a multiple of EBITDA.

Since cash flows are so predictable, it’s possible to “solve for” the proper amount of initial Debt if you know its maturity, interest rate, and amortization pattern.

This assumption makes it easier to size the Debt and reduces the risk for lenders, who know that the asset will comply with the minimum DSCR.

Infrastructure Case Study Example

UPDATE: Please see our Project Finance & Infrastructure Modeling course for many additional and better case study examples.

Real-life infrastructure models can be complex, but time-pressured case studies are a different story.

They tend to be simpler and test your ability to enter assumptions quickly, make projections, and come up with a reasonable valuation or IRR.

Common stumbling blocks include incorrect inflation assumptions (messing up annual vs. quarterly vs. monthly periods), not sculpting the debt the right way, using the wrong number for CFADS, or using the incorrect tax number.

Here’s a simple example of a valuation case study (no solutions, sorry):

“Your firm is considering acquiring a brand-new natural gas power plant with the following characteristics:

• Capacity: 500MW
• Heat rate: 7,500Btu/kWh
• Annual dispatch: Expected capacity factor of 50%

The plant’s revenue sources include:

• Capacity payment: $135/kW-year
• Energy payment: $10/MWh, escalating at 2% per year

Operating expenses include the following:

• Fixed O&M expense: $30/kW-year, escalating at 2% per year
• Labor and operations: $5/MWh, escalating at 3% per year
• Water and consumables: $1/MWh, escalating at 2% per year

Annual fuel is not an expense because the contract counterparty provides it.

Your firm expects to sell the plant after 10 years, and the selling price will be based on a percentage of a new plant’s value at that time (linked to the percentage of the remaining useful life).

Comparable projects cost $1,000/kW currently and are expected to increase in price at 2% per year, with a useful life of 40 years.

The Debt will be based on the following terms:

• Tenor: 10 years, fully amortizing
• Interest Rate: 5%, fixed rate
• Amortization: Sculpted amortization to achieve a 1.40x Debt Service Coverage Ratio (DSCR) in each year based on Cash Flow Available for Debt Service (CFADS)

Please value the power plant on an after-tax basis using a 12% Cost of Equity and assuming a 25% tax rate and 20-year depreciation based on MACRS.”

Infrastructure Private Equity Exit Opportunities

The most common entry points into infrastructure PE are also the most common exit opportunities: investment banking, project finance, real estate, other areas of PE, infrastructure corporates/developers, and Big 4 infrastructure groups.

It tends to be difficult to move into generalist roles coming from infrastructure because the perception is that it’s very specialized.

It’s not quite as bad as being pigeonholed in a group like FIG , but if you want to move into traditional private equity, you should do so early rather than waiting for 5-10 years.

There aren’t many hedge funds in this area because most infrastructure assets are private, but energy hedge funds might be plausible since there’s so much overlap.

Venture capital is not a likely exit opportunity because infrastructure assets are the opposite of early-stage startups: stable, with highly predictable cash flows and growth profiles.

Resources for Learning More About Infrastructure Private Equity

Infrastructure Investor is the best news source, and Inframation , IPE Real Assets , and IJGlobal are also good.

Preqin issues good infrastructure reports once per year, which you can Google, and this guide from JP Morgan also has a concise sector overview .

And, of course, there’s our Project Finance & Infrastructure Modeling course if you want both short/simple and longer case study examples and video-based training:

Infrastructure Private Equity: Pros and Cons

Summing up everything above, here’s how you can think about the industry:

Benefits/Advantages:

• High salaries and bonuses , at least if you work at a dedicated PE firm rather than a pension, SWF, or insurance company.
• You get to work on deals that do some social good , at least in certain sectors, and that provide benefits to individuals, such as diversification, inflation hedging, and strong cash yields.
• Each asset requires different assumptions and drivers, so you’re always learning new skills (compared with vanilla IB/PE, where deals start to look the same after a while).
• The hours and lifestyle are better if you’re at a pension, SWF, or insurance company – but total compensation is also below standard PE pay.
• It’s more feasible to get into the industry without working at a top BB or EB bank for two years; they care more about your skills and sector experience than your pedigree.

Drawbacks/Disadvantages:

• It is a small industry if you go by the number of dedicated, independent PE firms, so it can be tricky to find openings and advance.
• It is also specialized , though arguably less so than something like FIG; that said, you can still get pigeonholed if you stay too long and then decide you don’t like it.
• Compensation is lower at the non-PE firms, and even at the dedicated PE firms, the MD/Partner-level compensation has a lower ceiling.
• You’re further removed from real life than you might expect because finance professionals cannot “evaluate” a power plant or water treatment facility in the same way they could inspect an apartment building; you rely on outside specialists for much of this process.
• Although each deal is different, some of the modeling work can become repetitive because you have to look at so many individual contracts and build very granular assumptions.

Overall, infrastructure private equity is a great career option, but it’s a bit less of a “side door” or “back door” than real estate private equity because you do need some relevant deal experience first.

The best part is probably the optionality – if you want higher pay and longer hours, you have options, and if you want a better lifestyle with lower pay, you can also do that.

And with the dismal state of infrastructure in most countries, it’s safe to say that there will always be demand for investment – even if it takes a few broken bridges and toll roads to get there.

Further Reading

You might be interested in:

• The Full Guide to Direct Lending: Industry, Companies & Careers
• Private Equity Salary, Bonus, and Carried Interest Levels: The Full Guide
• The Complete Guide To Commercial Real Estate Market Analysis

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

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42 thoughts on “ Infrastructure Private Equity: The Definitive Guide ”

This article is super helpful – thank you.

I have a slightly technical question regarding the practice model test you have above.

You mention a capacity payment and an energy payment, alongside a heat rate. But I am not sure how this heat rate is used in order to derive a metric that can be used to deliver a revenue component. After doing some searching, some models seem to use a fuel price with a unit of $/Btu instead. And this seems feasible here as I have been able to derive a “Fuel Used (Btu)” line.

So it would be great to get some clarity on the assumptions here.

Many thanks.

Hi Brian. Thanks for writing such articles, I find them really helpful as a beginner. I do have a quite different background than most aiming to head into infrastructure investment banking/PE and thought it would be great if I could have your perspective.

I did my undergrad in Civil Engineering, from one of the top 5 unis in Asia (HKU) and graduated with a 2:1. I have since worked for about three years now, at a leading engineering and consulting firm within the infrastructure sector, in the capacity of both an engineer and a management consultant concurrently. I have worked on some really high profile infrastructure projects worth 3.5 Bill USD and have been involved in management consulting projects that have influenced the infrastructure sector at a national level within Asia. I am really passionate about working within the infrastructure finance space and thus I also ended up taking CFA on the sides. I have passed both Level 1 & 2 of the program with good scores. I am headed to UCL coming fall for their MSc program in Infrastructure Investment & Finance, it’s a specialized program focused specifically on infrastructure and is offered by their faculty of Built Environment which is currently ranked the world’s best department as per QS Subject Rankings.

I do really wanna switch over to the finance side of infrastructure, but I do lack direct work experience in the finance aspect of it. Do you think that my profile is decent to target the big investment banks/funds in London/Asia focused in the infra space? I am specifically interested in advisory or buyside roles. I will be applying for analyst roles in the coming intake and wanted someone’s independent perspective.

Thanks. Yes, I think your profile is good enough since PF/infrastructure is quite specialized and they want people who know the sector really well. Finance is easy to learn if you’re already an engineer – it’s much harder to find people who know the sector and everything that can happen on the ground with infrastructure projects.

Thank you very much for your answer Brian! Really appreciate your perspective.

Hi, thank you for the article, very helpful. Could you please share any insights on how easy it would be to move from renewable energy infra PE to another sector in infra PE? Thanks in advance!

I think it should be doable because you use the same modeling techniques and analysis in all areas of infra PE. It’s just that the numbers and assumptions differ between different asset types. But it’s not like you’re moving from FIG to oil & gas, for example, where everything is different.

This may be the single best resource on the internet for an infrastructure finance overview. I used this to initially break into project finance and now work at an infra-PE fund. The quality on this website always blows me away. Thank you for taking the time and effort to write such high quality guides, this infra one and the many others!

Thanks! Glad to hear it.

I’ve found your article really insightful and was hoping to ask for a bit of advice on breaking into the industry.

I’ve been looking into a PPP investment arm of a construction conglomerate. Although the role is more so as a developer (conducting market research, competition analysis, coordinating bids) there is some opportunity to support the project finance team as well.

Do you feel this is a good opportunity in general to gain industry experience, rather than perhaps in an infra advisory big 4 capacity?

Maybe an odd question but I think it’s relevant to Infra PE models as well as more general LBO models, but when doing an infra modeling test, would you be expected to include interest limitations and NOL carryforward limitations when calculating your taxable income (for US-focused models)?

So, we don’t officially teach infrastructure modeling currently, which means I can’t answer your question definitively, but in the models I’ve gathered, I’ve seen both approaches (factor in these tax elements or ignore them). I think it mostly depends on the model complexity and if you’re doing it at the corporate or asset-level.

Hardly any LBO models, in practice, include the bits around interest deduction limitations because they’re not common constraints with normal leverage levels.

is it possible for the section where you mentioned TV is determined by the perpetuity growth rate or an exit multiple, that for infrastructure assets, i generally see them modelled to the end of concession in which case there isn’t really a terminal value.

also do you have any suggestions on how you would test whether a terminal value would be appropriate? i.e. not too big or smal?

We don’t officially cover infrastructure modeling on this site and do not usually answer technical questions in these articles, so I can’t tell you for sure. The approach you suggested sounds reasonable, but many infra assets do assume a Terminal Value if the asset is expected to last for decades. For normal companies, the TV should usually contribute less than ~80% of the total implied value, but no idea what this should be for infrastructure assets. I assume much less because of the longer holding periods/projections.

Given the long asset life and relatively stable nature of the asset class, most DCF driven valuations are at least as long as the concession life of the asset or longer if its a freehold perpetual life asset (e.g. landlort ports in the UK). For this reason TV usually tends to be a smaller proportion of the PV compared to other asset classes. In terms of methodology, people tend to use both perpertuity and multiple based methodologies. Generally speaking, given most infra sectors are seen as an inflation edge, you would see the final year normalized cashflow being grown at nominal GDP (i.e. real GDP growth + inflation). Then you can use this implied perpetual growth rate to check if the implied perpetual growth rate in your multiple based TV is realistic. If you are running a levered DCF, i.e. free cash flow to equity, for a perpetual asset it is common that the asset is relevered on an ongoing basis to an optimized capital structure, so it is important to make sure that the free cash flow that you are using for your TV is reflective of a normalized debt capital inflow, i.e. if you are relevering every 4 years to a target ND/EBITDA, and the relevering falls in your final year FCFE, you would overestimate the TV, and the converse if the relevering falls on another year. You could avoid that if you relever every year. Regarding assets with concession life, I have seen concession life extension assumptions being included in models, but in that case you would need additional assumptions, as you would effectively be capturing the PV of the spread between the concession rights payment (outflow) and the inflows from the later years. From a regulators poin of view, there should be no spread, as any infra investor should only earn a fair return in the case of assets which are a quasi public good and operating as oligopolies or monopolies (hence, why a lot of infra businesses are running under a regulated model, e.g. RAB based returns). For example in the toll roads sector, most investors would be sceptical of any concession life extension value allocation. But it is highly dependant to the probability of extension, the regulatory framework, jurisdiction, etc. Hope this helps.

Hi Brian – I wanted to enquire what financial modelling foundation would set me up for a Infra PE role. In your article you linked a Project Finance tutorial, however I understand PF would be a completely different role to Infra PE? Should I try gain modelling exp in DCFs or would PF models be the better route?

Project Finance and Infrastructure PE are similar. Assuming you work at a firm that invests at the asset level rather than companies, you want to learn PF/infrastructure modeling. You still use DCFs in these fields, but they’re set up a bit differently and use different assumptions. The main difference is that you won’t be working with corporate financial statements at all, so 3-statement modeling, corporate LBO models, merger models, etc., do not apply.

Brian, this was incredibly thorough and very appreciated, thank you! Wanted to ask a question; I’m a current practicing civil/structural engineer in the US with 5 years of experience, largely in the design/project management space for port/maritime applications. Is there a path to Infra PE with this background? Would an MBA/MSF be a necessary stepping stone? Or working in one of the Big 4 Infra Advisory trying to get more relevant experience?

I think you would need another degree or an actual finance/advisory role to get in. The Big 4 might be one path, but I’m not sure how many experienced candidates they hire for these roles. The MBA/MSF route is safer but also costs more time and money.

Any chance we can get the solution to the case study? Just want to compare with what I’m putting together.

Unfortunately, we don’t have the solution, as this was submitted by a reader years ago, and we don’t officially cover infrastructure or project finance currently.

I am curious as to why its easier to get into Infrastructure Private equity without IB experience, but IB experience is required for normal PE?

It’s because of the specialization and deal/modeling skill set. Infrastructure is very specialized and doesn’t follow the accounting rules that standard corporations do because everything is cash flow-based, and you need to know the nuances of things like customer contracts for individual assets, escalation rates, etc., none of which you learn in most IB groups.

Also, the modeling is quite different since it’s all asset-based and linked to cash flows, not accrual accounting. Therefore, most IB modeling experience won’t carry over that well.

So, all else being equal, they’d prefer someone who knows infrastructure very well to someone with IB experience but in an unrelated group with no exposure to asset-level modeling.

Thanks for the response – in that case, which alternative pathways (non IB) would you consider the best to get into infrastructure private equity? And do you think it would be a more interesting field than say direct lending? (as i think Direct lending / credit investing roles also don’t require IB?)

I don’t think there is one “best” option because people tend to get in from varied backgrounds. There’s a list of possibilities under “The Recruiting Process” here. Anything infrastructure-related works, whether it’s project finance, a normal company, the same sector at a Big firm, etc. It’s hard to compare to direct lending because it depends on what you’re looking for. Direct lending compensation is lower, and you tend to see and close more deals, but you don’t go as in-depth into each one. It’s probably a bit easier to get into direct lending because it doesn’t have “private equity” in the name.

Hi Brian. Thanks for the great article. I was wondering how difficult you think it would be to break into infra PE as an analyst from a tech IB group. Will the difference in coverage group be too large of a hurdle to overcome? Can a bank’s “prestige” override that? Thanks!

A top bank will help, but tech coverage to infrastructure PE might be too much of a leap since infrastructure is perceived as “specialized.” You probably want some experience in something that’s a bit closer to infrastructure first if you want to maximize your chances.

Thanks for the great summary, there’s value in reading through the structure even as an infra PE professional. Would caveat that because of the higher prevalence of auctions due to pricings getting competitive the work-life balance I see is getting worse even on the pension fund end of the scale and so comp is adjusted accordingly. Smaller funds that can avoid competition and do bilaterals pay less and can offer better hours but not always as that highly depends on deal flow vs team size and the number of people on the deal team and the level of detail required in the DD, at least in Europe.

Thanks for adding that.

Brian – great guide, as always. Really appreciate you taking the time to put this together.

I’m a civil engineer by training, with a few years of Big 4 infra advisory experience (Canada and UK).

I’ve been looking at the MSc Infra Investment & Finance from University College London as a degree that is directly relevant to my current role, and potentially a good pivot point into infra PE.

Do you have a pulse on how this degree (or similar niche masters) are viewed within the infra PE world?

For reference: https://www.ucl.ac.uk/prospective-students/graduate/taught-degrees/infrastructure-investment-finance-msc

Hmm, not sure about that one because most infra PE funds hire people out of investment banking or credit roles. If you’ve already had Big 4 infra advisory experience, I’m not sure the degree adds a whole lot because it’s not like you’re an engineering with no other experience making a huge change. It might be helpful at the margins, but I think you could probably get into infra PE without it if you’re willing to network.

Appreciate the detail and comprehensiveness of this post!

One thing – on the definition of project finance, I am used to hearing a much broader definition that includes the entire capital stack of a separate legal entity (the project), all of which have senior claims over the (multiple) parent owners’ equity holders or debtors. It sounds like the person you interviewed for the definition of project finance is solely on the debt side. In renewable energy, for example, project finance refers to the project’s sponsor equity, tax equity, and debt financing.

Yes, that may be true. We tend to refer to equity investing in the sector as “infrastructure private equity” and debt investing as “project finance” for clarity. Otherwise it gets too confusing if both terms potentially refer to the same thing.

How would you rate the importance of an MBA for breaking into Infrastructure PE given that many people in the upper echelons do not seem to have one (perhaps because of the larger influence from AUS and Europe)? If someone was infra PE-adjacent (Fund of Funds), would it be better to simply hustle to build up a network?

Not important. Networking and work experience are far more important.

Hi, I am starting in Equity Research in a company that overlooks Mining, Construction and Energy sectors. My plan is to move into PE or IB after an MBA and I will like to know which of those three sectors will give me the best background to make the jump.

Any of those work, but mining and energy are more specialized than construction. So construction is probably the safest bet for generalist IB/PE roles.

Love your posts. Thank you so much for the guidance you provide!

I will be starting next summer as a corporate banking analyst for a large US bank, covering Renewable Energy companies. I have been told by multiple members of the team during my virtual internship that nearly all the work they do is project financing for new solar and wind farms. Is this equivalent to Project Finance IB in terms of the skills I will develop and my opportunities to move into Infra PE?

Yes, maybe not “equivalent,” but similar.

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PE Interview Case Studies

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PE recruiting is slowly starting ... some of us are in the beginning of interview processes .. one thing that differentiates the interview process at PE / IB is the case study interview...

For those who work at PE shops, or have gone through the process, think it might be useful if you guys could post a few case studies you were asked and some details like timing/how many interviewers/do you present at the end of the case study your conclusions/etc.

is it a McKinsey type of case study where you are given a how many ping pong balls can fit in a 747 to test analysis or more like an investment opportunity idea and you need to calculate back of envelope valuation, and put together a few powerpoint slides with sensitivities etc?

if you guys could post specific examples from interviews you had or took - that would be awesome for us !

please PM me if you do not want to post publicly - interview with mega fund coming up next week - help requested please!!!

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When I was interviewing, case studies were not like the ones given in consulting interviews . Luckily, I never had to do any 'on the spot' tests; i will let someone else speak to that. All my case studies gave me 3 or 4 days to complete.

Generally, they give you an overview: ABC Company has approached [Potential Firm] with the opportunity to invest in Business. They'll give you any basic operating assumptions and other tidbits. I was asked to build a model and write an investment memo that outlines the opportunity, returns, pros/cons of the deal, and investment decision. I did not have to present. I was allowed to use any and all resources available to me (market research, any rate spreads, comps , etc.) Obviously there is an honor code in place which should govern morally whether or not you get help from coworkers, etc.

I never had any "How many golf balls fit into a 747" type questions - it was always more like: "Should we invest in this company or not? And why?"

Typically they will give you:

-CIM/OM, or maybe an abbreviated version such as a short Executive Summary that's around 5-10 pages, describing the company, high-level financials, employees, products, market, etc.

-Sometimes they will give you filings or a more detailed operating model, but this is less common than just receiving a short document as described above.

-Usually they will just ask you to make a short 5-10 slide presentation on whether or not they should invest in the company.

-At mega-funds, it's more common to get "do this on the spot" type tests where you get a few hours to work on your own model and then show them something at the end. Smaller places tend to be more like, "Take a few days to a week to do this, and then present it to us."

Typically you want your presentation to consist of:

-Summary slide - do you invest, or not, and key reasons for/against

-Spend maybe 3-4 slides on valuation of the company, showing output from comps , DCF , and simple LBO model.

-Spend 2-3 slides justifying qualitative factors impacting the company / investment (market, competitors, management team, etc.)

-Conclusion slide re-stating what you did, saying whether or not you'd invest and at what valuation, and giving approximate 3-5 year IRR .

-Lots of people make this way too complicated, which is a waste of time. Focus on the fundamentals and keep all models/valuations simple and get to the point rather than going on for pages about nothing.

-Always make sure you actually MAKE a decision. Don't do a, "Well, we would invest in this company but only if they hit projections..." type thing, just say, "Yes, invest at this price range" and just say you'd need to perform confirmatory DD as is standard with any deal.

-Don't over-crowd slides - have a max of 3 major points and/or diagrams/tables on each one, and use 80/20 if you're in doubt about what's important.

-Above all, make sure you clearly articulate your arguments - simplicity is key. Case studies are just as much about your communication skills as they are about your technical skills.

I would share examples but I don't have any of the PDFs with me at the moment as I'm traveling overseas.

thanks a lot dosk and herserendipity.. much appreciated!

Anyone else? I know others on here are in PE . Mind sharing your experiences?

How many pages of investment memorandum do people generally aim for a 4 hour test? Is there any outline that we should stick to?

also, has anyone done any credit investment case study test?

I had a case study interviewing for the debt fund I work at. We do mezz and mid-market lending (so similar analysis to being the sponsor in an LBO with somewhat different focus points.

My work product was only about 2 pages of memo (bullet points as well eating up space), the model was a much bigger focus. I was also grilled on how I would have structured the deal, how I viewed the covenant package, which tranche I felt had the best relative value, how I built my downside cases, etc.

I was asked a few brain-teasers earlier in the interview process as well.

PE interview case studies? ( Originally Posted: 08/19/2013 )

Where can I get them? Can anyone please send me one? Would really appreciate it!

Would anyone mind sending them to me as well? Much appreciated. Thanks!

Also interested.

another question - can someone please name general resources for PE interview prep? I don't think M&I or WSO have a specific PE guide. Any other ones?

Vault has one...but that's light. there's another by Vault which focuses on PE andhedge fund together. That has good techinical questions (better than the private equity guide) at least.

PE case studies are usually always the same: It's usually a Paper LBO , that you then have to compute on the spot and come up with a yes or no investment decision based on the IRR you calculated.

Matrick: PE case studies are usually always the same: It's usually a Paper LBO , that you then have to compute on the spot and come up with a yes or no investment decision based on the IRR you calculated.

That sounds nothing like any PE case study I've seen.

There are generally two types of case studies (at least what I have come across and what we do):

Short-form: This is where you have a few hours to read and prepare your analysis for a short case study where you will get a bit of information on the company, industry and financials (i.e. 1-2 pager) - you build a quick high-level LBO model and then present your analysis (most of the time, you will have access to Excel but have also seen where you can only use pen & paper) + Q&A in a presentation to interviewers - this takes 1/2 day max in my experience

Long-form: This is where you're given a company name and have a weekend to pull together a short (e.g. 10-page) presentation + LBO model on the opportunity - it generally is a public company so you can pull all the info yourself - deadline end of Sunday with a 1-hour presentation the following week

You can practice for either one by just picking a few companies you have read about in the news as potential buyout candidates or you are interested in and practice building a quick LBO model and do some brainstorming what your investment thesis would consist of and which risk factors / mitigants you can identify. You can also practice high-level industry analysis yourself by picking out a company and think about what you would say about the industry (e.g. overall market size, growth expectations, drivers, competition, positioning, etc.).

You saw these types of case studies for PE interviews for people straight out of undergrad?

No, for Analysts who would have 1-2yrs at a bank or Associates. Sorry but cannot comment on PE case studies for people straight out of undergrad.

I think OP is asking for the latter, judging from another post he made in the IB forum.

I can comment on US MM PE both pre-MBA and post-MBA (but not directly out of undergrad). I've seen or administered the following modeling tests:

1) Paper LBO . Flip over the resume, make up the assumptions on your own, calculate an IRR and ROIC. Very high level. 2) 30 minute "fill in the blanks" LBO . Make high level assumptions and complete the template on site during the interview process. 3) Take home LBO . I was given a CIM and told to prepare an LBO model and email it back. Completely up to me on how to construct and prepare it. 4) Merger model. One hour to merge two companies' financials to create pro forma financial statements and answer questions about the combined entity.

However, this is usually just one component of the interview. General the case study portion of the interview involves reading an offering memorandum and answering questions on the spot. Opportunities / Risks, would I invest, what questions to ask management, etc. Usually PE firms choose either a recent deal or an existing portfolio company to administer these case studies.

CompBanker: 4) Merger model. One hour to merge two companies' financials to create pro forma financial statements and answer questions about the combined entity.

I have to correct myself: I also encountered this for a PE position straight out of undergrad. It was very high level though, and they mostly cared about Goodwill creation.

Also agree on the part in regards to using a recent deal the firm did or a portfolio company. Was the same for me everytime.

Thanks for your help CompBanker. I'm just starting off and have a few PE interviews lined up. Do you have any examples of how to do #1? I'm going through an in-depth LBO tutorial to prep for #2 and #3.

PE Case Interview Expectations ( Originally Posted: 02/18/2018 )

Hey monkeys -

TL;DR - Hour long case interview and looking for guidance on the best way to prepare.

Background I am currently a consultant and have been trying to break into PE . I have an interview later this week that the associate defined as a 'case' interview. My interviewer indicated that we would have a hour for the interview so with that information I am looking for guidance on the best way I can allocate my studying time.

I really like the company and it is my top choice of firms right now but due to my current client obligations I have not been able to focus as much as my time as I would have preferred to. This is not meant to be an excuse as I should have foreseen this but it is what it is at this point and I want to use my limited free time as best as possible.

Question Knowing that this is an hour interview, do any of you have insights on the type of technical questions or 'cases' that may be presented? I am working on full scale LBOs hoping that if I nail that down then I would be able to answer anything higher level but I am aware this may not be fool proof.

Any advice is appreciated.

Best, CoffeeDrivenConsultant

"full scale LBOs" usually take 2-3 hours yours will most likely be a paper lbo or a more general discussion around a hypothetical case / previous investment the fund did

Do you have any perspectives / examples of what the discussion would be like?

it depends. they might give you a case and ask for a quick write up with some quick calculations (not a full lbo model). or it can be part of a discussion during the interview, e.g. we are looking to invest in x - what do you think?

Thanks and.... PE Case Interview Help? ( Originally Posted: 01/15/2014 )

Hi there, longtime lurker, first time poster (yes, this is a new username - my existing handle was just a little too identifying). First off, just want to thank everyone on here for generally amusing and often helpful posts, examples, experiences and tips. Historically I had just visited for pure amusement, but recently have begun using the forum as an information source, and it's been truly indispensable.

So short story - spent a few years doing strategy consulting/ M&A advisory for a boutique, sector-focused firm. Spent most of my time working with private equity firms providing commercial due diligence similar in scope to what Bain might provide (lots of excel, but no heavy financial modeling) Girlfriend graduates from grad school, takes job in new city, and presto! I have a new home.

I took a look at the sponsors in the area, but they are few and far between where I am and had no open associate spots when I was looking. I ended up landing a corporate development style role with a mid-sized industrial firm where I am today. Anyways, along comes a headhunter, asking me if I'd still be interested in an associate spot and here I am.

Got through an interview with a partner (mostly fit/background, a few technicals) and am now on the LBO case! They just gave me a CIM and asked me to do a model and a write up over about 3 days (no other instructions or assumptions). I've sort of wrapped up the model and am looking for some advice, as I am somewhat new to the LBO modeling portion. So if there's anyone out there willing to take a quick look and critique anything and everything, I'd appreciate it.

Specific questions I have: - The partner I interviewed with said I should create an "intermediate level" lbo model - does this seem to fit the bill? I don't have too many bells and whistles on there, fairly simple debt structure (revolver, TLA and TLB), and I cut out the full BS , just took the given depreciation and capex, calced WC as % of revenue, etc. I'd like to add operating cases and some more returns analysis - anything else? - Do my debt characteristics and amounts look about right? I'm not really plugged into the LevFin world so I don't know what the going rates/structures are. - Currently my debt amounts calc off of a multiple of EBITDA , with the sponsor equity as the plug - when you sensitize around entry multiple it just shrinks or grows the amount of equity - is that the right way to do it? Or should I be using more of a target cap structure (e.g.,60% debt, 40% equity) off of the EV? - On the credit statistics, does interest coverage include mandatory amorts? Or is it just pure interest? - Currently I'm kind of lukewarm on the business as an LBO target. The management projections are in there (I'll add operating cases later), which are obviously on the rosy end of the spectrum. It's an industrial distribution business, almost sort of retail, so growth takes a fair bit of capex and working capital to scale up. When it's already a low margin business, it just doesn't have a whole lot debt capacity (in my estimation).

Anyways, any thoughts would be greatly appreciated! Thanks again to the whole community!

Haven't looked that closely at your model, but if they gave you a CIM and 3 days to do it, why not include a balance sheet? I remember doing a balance sheet on 1-hour timed LBO tests

Fair point I suppose. I left it out at the outset because it was somewhat complicated/lengthy, and given the amount of info I have, I would have just ended up doing AR / AP Days, Inventory as % of COGS, etc., which leads you to pretty much the same place as what I did - NWC as a percent of revenue.

Agree with above - do a full three statement model if you have 3 days and aren't in IB . I'm sure you can find the time.

Quickly looking at it, your income statement needs to be driven off assumptions (preferably with multiple scenarios) instead of hardcoded. Some formatting issues. Some of your formulas are overly complicated. For example, your paydown formulas should be a simple -min function instead of the convoluted if statements you have running. Doesn't look like you're discounting your cash flows in your IRR analysis. Haven't really looked at it in-depth though. Look at Macabacus for an example.

stvr - while I appreciate your "I'm sure you can find the time" snark, I'd appreciate EVEN MORE some real insight here. Your offer of vague pointers about "formatting issues" and advice when you "haven't looked at it in-depth" isn't terribly helpful. If you've don't like the formatting or something, please specify so it's, you know, helpful.

As you'll note above, I mentioned that I was planning on putting in operating scenarios, so I'm well aware of that shortcoming. As far as the debt pay down formulas go, take a look at M&I, they have a pretty helpful explanation - just using a Min function is too simple and doesn't work in all cases ( http://bit.ly/K4w81T ).

As far as discounting cash flows in the IRR , I'm not entirely sure I follow. This isn't a DCF . It takes the cash on cash return, then calcs the geometric growth rate needed to achieve that cash on cash return (which is IRR in effect). I'm willing to be told that I'm wrong, but I think that works exactly the way it's supposed to (presuming you' don't have any dividends or anything like that).

I've PM'd you

Agree with above user. I think your projected I/S lines should be driven off growth assumptions, you seem to have it the other way around (i.e. conforming growth numbers to line items growth).

Thanks. Yeah those were just placeholders.

This is probably a stupid question, but I'm just venting now - how big of a sin is it if your B/S doesn't quite tie. I can't seem to figure out why mine isn't. I think part of my problem is that the data in the CIM wasn't quite complete.

So at this point, I'm faced with two unappetizing options: submit a model without a B/S (all the other things correctly accounted for - WC, CapEx, debt schedules, etc.) or send in a model with a fully integrate B/S that doesn't quite tie (think like .1% of assets off)

Wow. I'm just realizing how much I learned over the summer. Before the internship I wouldn't have understood a word of what you said in this post but at this point I almost feel confident enough to give you tips on your model. But I'll leave it up to the Certified Users to help you out.

sent you a revised model

PE Analyst Case Interview ( Originally Posted: 11/04/2008 )

I just got called in for a first round interview with Audax Private Equity. Has anyone been through their interviews and does anyone have any advice? I assume it will be partially case based. Does anyone have any suggestions about case questions in general? I have the vault guide but it is about 400 pages and I have 2 days... Help!

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Bridging private equity’s value creation gap

For the past 40 years or so, private equity (PE) buyout managers largely invested capital in an environment of declining interest rates and escalating asset prices. During that period, they were able to rely on financial leverage, enhanced tax and debt structures, and increasing valuations on high-quality assets to generate outsize returns for investors and create value.

Times have changed , however. Since 2020, the cost of debt has increased and liquidity in debt markets is harder to access given current interest rates, asset valuations, and typical bank borrowing standards. Fund performance has suffered as a result: PE buyout entry multiples declined from 11.9 to 11.0 times EBITDA through the first nine months of 2023. 1 2024 Global Private Markets Review , McKinsey, March 2024.

Even as debt markets begin to bounce back, a new macroeconomic reality is setting in—one that requires more than just financial acumen to drive returns. Buyout managers now need to focus on operational value creation strategies for revenue growth, as well as margin expansion to offset compression of multiples and to deliver desired returns to investors.

Based on our years of research and experience working with a range of private-capital firms across the globe, we have identified two key principles to maximize operational value creation.

First, buyout managers should invest with operational value creation at the forefront . This means that in addition to strategic diligence, they should conduct operational diligence for new assets. Their focus should be on developing a rigorous, bespoke, and integrated approach to assessing top-line and operational efficiency. During the underwriting process, managers can also identify actions that could expand and improve EBITDA margins and growth rates during the holding period, identify the costs involved in this transformation, and create rough timelines to track the assets’ performance. And if they acquire the asset, the manager should: 1) clearly establish the value creation objectives before deal signing, 2) emphasize operational and top-line improvements after closing, and 3) pursue continual improvements in ways of working with portfolio companies. Meanwhile, for existing assets, the manager should ensure that the level of oversight and monitoring is closely aligned with the health of each asset.

Second, everyone should understand and have a hand in improving operations . Within the PE firm, the operating group and deal teams should work together to enable and hold portfolio companies accountable for the execution of the value creation plan. This begins with an explicit focus on “linking talent to value”—ensuring leaders with the right combination of skills and experience are in place and empowered to deliver the plan, improve internal processes, and build organizational capabilities.

In our experience, getting these two principles right can significantly improve PE fund performance. Our initial analysis of more than 100 PE funds with vintages after 2020 indicates that general partners that focus on creating value through asset operations achieve a higher internal rate of return—up to two to three percentage points higher, on average—compared with peers.

The case for operational efficiency

The ongoing macroeconomic uncertainty has made it difficult for buyout managers to achieve historical levels of returns in the PE buyout industry using old ways of value creation. 2 Overall, roughly two-thirds of the total return for buyout deals that were entered in 2010 or later, and exited 2021 or before, can be attributed to market multiple expansion and leverage. See 2024 Global Private Markets Review .   And it’s not going to get any easier anytime soon, for two reasons.

Higher-for-longer rates will trigger financing issues

The US Federal Reserve projects that the federal funds rate will remain around 4.5 percent through 2024, then potentially drop to about 3.0 percent by the end of 2026. 3 “Summary of economic projections,” Federal Reserve Board, December 13, 2023.   Yet, even if rates decline by 200 basis points over the next two years, they will still be higher than they were over the past four years when PE buyout deals were underwritten.

This could create issues with recapitalization or floating interest rate resets for a portfolio company’s standing debt. Consider that the average borrower takes a leveraged loan at an interest coverage ratio of about three times EBIDTA (or 3x). 4 The interest coverage ratio is an indicator of a borrower’s ability to service debt, or potential default risk.   With rising interest expenses and additional profitability headwinds, these coverage ratios could quickly fall below 2x and get close to or trip covenant triggers around 1x. In 2023, for example, the average leveraged loan in the healthcare and software industries was already at less than a 2x interest coverage ratio. 5 James Gelfer and Stephanie Rader, “What’s the worst that could happen? Default and recovery rates in private credit,” Goldman Sachs, April 20, 2023.   To avoid a covenant breach, or (if needed) increasing recapitalization capital available without equity paydown, managers will need to rely on operational efficiency to increase EBITDA.

Valuations are mismatched

If interest rates remain high, the most recent vintage of PE assets is likely to face valuation mismatches at exit, or extended hold periods until value can be realized. Moreover, valuation of PE assets has remained high relative to their public-market equivalents, partly a result of the natural lag in how these assets are marked to market. As the CEO of Harvard University’s endowment explained in Harvard’s 2023 annual report, it will likely take more time for private valuations to fully reflect market conditions due to the continued slowdown in exits and financing rounds. 6 Message from the CEO of Harvard Management Company, September 2023.

Adapting PE’s value creation approach

Operational efficiency isn’t a new concept in the PE world. We’ve previously written  about the strategic shift among firms, increasingly notable since 2018, moving from the historical “buy smart and hold” approach to one of “acquire, align on strategy, and improve operating performance.”

However, the role of operations in creating more value is no longer just a source of competitive advantage but a competitive necessity for managers. Let’s take a closer look at the two principles that can create operational efficiency.

Invest with operational value creation at the forefront

PE fund managers can improve the profitability and exit valuations of assets by having operations-related conversations up front.

Assessing new assets. Prior to acquiring an asset, PE managers typically conduct financial and strategic diligence to refine their understanding of a given market and the asset’s position in that market. They should also undertake operational diligence—if they are not already doing so—to develop a holistic view of the asset to inform their value creation agenda.

Operational diligence involves the detailed assessment of an asset’s operations, including identification of opportunities to improve margins or accelerate organic growth. A well-executed operational-diligence process can reveal or confirm which types of initiatives could generate top-line and efficiency-driven value, the estimated cash flow improvements these initiatives could generate, the approximate timing of any cash flow improvements, and the potential costs of such initiatives.

The results of an operational-diligence process can be advantageous in other ways, too. Managers can use the findings to create a compelling value creation plan, or a detailed memo summarizing the near-term improvement opportunities available in the current profit-and-loss statement, as well as potential opportunities for expansion into adjacencies or new markets. After this step is done, they should determine, in collaboration with their operating-group colleagues, whether they have the appropriate leaders in place to successfully implement the value creation plan.

These results can also help managers resolve any potential issues up front, prior to deal signing, which in turn could increase the likelihood of receiving investment committee approval for the acquisition. Managers also can share the diligence findings with co-investors and financiers to help boost their confidence in the investment and the associated value creation thesis.

It is crucial that managers have in-depth familiarity with company operations, since operational diligence is not just an analytical-sizing exercise. If they perform operational diligence well, they can ensure that the full value creation strategy and performance improvement opportunities are embedded in the annual operating plan and the longer-term three- to five-year plan of the portfolio company’s management team.

Assessing existing assets. When it comes to existing assets, a fundamental question for PE managers is how to continue to improve performance throughout the deal life cycle. Particularly in the current macroeconomic and geopolitical environment, where uncertainty reigns, managers should focus more—and more often—on directly monitoring assets and intervening when required. They can complement this monitoring with routine touchpoints with the CEO, CFO, and chief transformation officer (CTO) of individual assets to get updates on critical initiatives driving the value creation plan, along with ensuring their operating group has full access to each portfolio company’s financials. Few PE managers currently provide this level of transparency into their assets’ performance.

To effectively monitor existing assets, managers can use key performance indicators (KPIs) directly linked to the fund’s investment thesis. For instance, if the fund’s investment thesis is centered on the availability of inventory, they may rigorously track forecasts of supply and demand and order volumes. This way, they can identify and address issues with inventory early on. Some managers pull information directly from the enterprise resource planning systems in their portfolio companies to get full visibility into operations. Others have set up specific “transformation management offices” to support performance improvements in key assets and improve transparency on key initiatives.

We’ve seen managers adopt various approaches with assets that are on track to meet return hurdles. They have frequent discussions with the portfolio company’s management team, perform quarterly credit checks on key suppliers and customers to ensure stability of their extended operations, and do a detailed review of the portfolio company’s operations and financial performance two to three years into the hold period. Managers can therefore confirm whether the management team is delivering on their value creation plans and also identify any new opportunities associated with the well-performing assets.

If existing assets are underperforming or distressed, managers’ prompt interventions to improve operations in the near term, and improve revenue over the medium term, can determine whether they should continue to own the asset or reduce their equity position through a bankruptcy proceeding. One manager implemented a cash management program to monitor and improve the cash flow for an underperforming retail asset of a portfolio company. The approach helped the portfolio company overcome a peak cash flow crisis period, avoid tripping liquidity covenants in an asset-backed loan, and get the time needed for the asset’s long-term performance to improve.

Reassess internal operations and governance

In addition to operational improvements, managers should also assess their own operations and consider shifting to an operating model that encourages increased engagement between their team and the portfolio companies. They should cultivate a stable of trusted, experienced executives within the operating group. They should empower these executives to be equal collaborators with the deal team in determining the value available in the asset to be underwritten, developing an appropriate value creation strategy, and overseeing performance of the portfolio company’s management.

Shift to a ‘just right’ operating model for operating partners. The operating model through which buyout managers engage with portfolio companies should be “just right”—that is, aligned with the fund’s overall strategy, how the fund is structured, and who sets the strategic vision for each individual portfolio company.

There are two types of engagement operating models—consultative and directive. When choosing an operating model, firms should align their hiring and internal capabilities to support their operating norms, how they add value to their portfolio companies, and the desired relationship with the management team (exhibit).

Take the example of a traditional buyout manager that acquires good companies with good management teams. In such a case, the portfolio company’s management team is likely to already have a strategic vision for the asset. These managers may therefore choose a more consultative engagement approach (for instance, providing advice and support to the portfolio company for any board-related issues or other challenges).

For value- or operations-focused funds, the manager may have higher ownership in the strategic vision for the asset, so their initial goal should be to develop a management team that can deliver on a specific investment thesis. In this case, the support required by the portfolio company could be less specialized (for example, the manager helps in hiring the right talent for key functional areas), and more integrative, to ensure a successful end-to-end transformation for the asset. As such, a more directive or oversight-focused engagement operating model may be preferred.

Successful execution of these engagement models requires the operating group to have the right talent mix and experience levels. If the manager implements a “generalist” coverage model, for example, where the focus is on monitoring and overseeing portfolio companies, the operating group will need people with the ability (and experience) to support the management in end-to-end transformations. However, a different type of skill set is required if the manager chooses a “specialist” coverage model, where the focus is on providing functional guidance and expertise (leaving transformations to the portfolio company’s management teams). Larger and more mature operating groups frequently use a mix of both talent pools.

Empower the operating group. In the past, many buyout managers did not have operating teams, so they relied on the management teams in the portfolio companies to fully identify and implement the value creation plan while running the asset’s day-to-day operations. Over time, many top PE funds began to establish internal operating groups  to provide strategic direction, coaching, and support to their portfolio companies. The operating groups, however, tended to take a back seat to deal teams, largely because legacy mindsets and governance structures placed responsibility for the performance of an asset on the deal team. In our view, while the deal team needs to remain responsible and accountable for the deal, certain tasks can be delegated to the operating group.

Some managers give their operating group members seats on portfolio company boards, hiring authority for key executives, and even decision-making rights on certain value creation strategies within the portfolio. For optimal performance, these operating groups should have leaders with prior C-suite responsibility or commensurate accountability within the PE fund and experience executing cross-functional mandates and company transformations. Certain funds with a core commitment to portfolio value creation include the leader of the operating group on the investment committee. Less-experienced members of the operating group can have consultative arrangements or peer-to-peer relationships with key portfolio company leaders.

Since the main KPIs for operating teams are financial, it is critical that their leaders understand a buyout asset’s business model, financing, and general market dynamics. The operating group should also be involved in the deal during the diligence phase, and participate in the development of the value creation thesis as well as the underwriting process. Upon deal close, the operating team should be as empowered as the deal team to serve as stewards of the asset and resolve issues concerning company operations.

Some funds also are hiring CTOs  for their portfolio companies to steer them through large transformations. Similar to the CTO in any organization , they help the organization align on a common vision, translate strategy into concrete initiatives for better performance, and create a system of continuous improvement and growth for the employees. However, when deployed by the PE fund, the CTO also often serves as a bridge between the PE fund and the portfolio company and can serve as a plug-and-play executive to fill short-term gaps in the portfolio company management team. In many instances, the CTO is given signatory, and occasionally broader, functional responsibilities. In addition, their personal incentives can be aligned with the fund’s desired outcomes. For example, funds may tie an element of the CTO’s overall compensation to EBITDA improvement or the success of the transformation.

Bring best-of-breed capabilities to portfolio companies. Buyout managers can bring a range of compelling capabilities to their portfolio companies, especially to smaller and midmarket companies and their internal operating teams. Our conversations with industry stakeholders revealed that buyout managers’ skills can be particularly useful in the following three areas:

• Procurement. Portfolio companies can draw on a buyout manager’s long-established procurement processes, team, and negotiating support. For instance, managers often have prenegotiated rates with suppliers or group purchasing arrangements that portfolio companies can leverage to minimize their own procurement costs and reduce third-party spending.
• Executive talent. They can also capitalize on the diverse and robust network of top talent that buyout managers have likely cultivated over time, including homegrown leaders and ones found through executive search firms (both within and outside the PE industry).
• Partners. Similarly, they can work with the buyout manager’s roster of external experts, business partners, suppliers, and advisers to find the best solutions to their emerging business challenges (for instance, gaining access to offshore resources during a carve-out transaction).

Ongoing macroeconomic uncertainty is creating unprecedented times in the PE buyout industry. Managers should use this as an opportunity to redouble their efforts on creating operational improvements in their existing portfolio, as well as new assets. It won’t be easy to adapt and evolve value creation processes and practices, but managers that succeed have an opportunity to close the gap between the current state of value creation and historical returns and outperform their peers.

Jose Luis Blanco is a senior partner in McKinsey’s New York office, where Matthew Maloney is a partner; William Bundy is a partner in the Washington, DC, office; and Jason Phillips is a senior partner in the London office.

The authors wish to thank Louis Dufau and Bill Leigh for their contributions to this article.

This article was edited by Arshiya Khullar, an editor in McKinsey’s Gurugram office.

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How private equity operating partner roles are changing

• May 13, 2024

Operating teams and partners are transforming to help meet the demands of today’s market

An emerging position in private equity (PE) firms, the operating partner or operating team is designed to help counsel the portfolio company (portco) through the value creation plan — from pre-diligence through exit — that is integral to the original deal thesis. This role traditionally has helped serve multiple purposes from providing strategic insight and advice, to supporting board initiatives or even being on the board itself and, when necessary, stepping in to help portcos execute the value creation plan.

We are seeing an industry shift that is moving the operating partner role to more prominence by relying on their experience to work closely with portco management. The operating partner role now spans the deal life cycle, from diligence through exit and provides support across the value creation levers — growth, cost, and risk. Since 2010, 47% of value creation has come from operations, up from 18% in the 1980s. Meanwhile, financial engineering’s contribution to value creation has fallen to 25% from 51% in the same period. 1 A few causes for this trend are worth highlighting:

• With valuations maintaining record highs, traditional financial or management team improvements (i.e., company restructuring/reorganizing) are having less impact on the value of the company as changes in how the company operates.
• Many industry leaders in dealmaking know that there may be no winding back of the clock to a time when inflation wasn’t a major factor and interest rates were low. They can adapt to the new macro conditions that favor operations.
• With valuations at current levels, fewer deals are taking place, giving a new focus on more substantial transformation of the portcos currently held by the PE firms.
• With high interest rates here to stay, limited partners (LPs), the parties investing in PE firms, aren’t looking for firms to do deals based around traditional financial engineering. Many LPs have increased demand for sophisticated operating teams and are looking for specific capabilities in operations. LPs are demanding both industry and functional knowledge to support current portfolio and future investment.

It is our opinion that these market realities can cause PE firms to rethink how their teams are structured and the way the firms go about creating value at their portcos.

Some firms have met the challenge posed in the market, but many others continue to struggle to develop the kind of operating teams that can create value for their current investors. Based on our discussions in the PE industry, we have identified a few areas where we have seen firms struggle, and how industry leading firms have met those challenges to help thrive in this environment. The new economics of value creation are forcing firms to rethink their operating team strategy — our belief is that you can’t wait and still get ahead.

What are the execution difficulties operating partners and teams face?

In the past, operating teams based their support on the investment thesis and associated playbooks that they could apply generally to portcos after they are acquired. Sometimes these still work, but many firms are finding that the business transformation required to unlock value needs nuance and a level of domain knowledge that traditional managers typically did not have. As such, firms are looking for operating partners with specialist knowledge, be that sector experience or transformational experience (technology, operations structure, etc). For example, many firms are looking for operating team members who can quickly work with a portco, have the experience and knowledge to understand what the issues are, and are able to help deploy targeted responses to each of those problems. Some firms may only need certain specialists’ part of the time, as opposed to bringing on additional headcount in the operation team, which may be limited by their investment prospectus.

Further, some operating personnel have come up in the environment of the last 10 years, with low interest rates and without significant inflation. A different skillset is needed to find success in the current market. Regardless of the source of the talent gap, finding the personnel who have the right experience (or have done the work) can remain a perennial struggle. Industry leaders who manage to find success despite these issues succeed by tying their operating team capabilities directly to the overall deal themes and required capabilities of their firm.

While this can differ from firm to firm, the deals team at times tends to be one of the leading voices on how a value creation plan needs to be executed, but the operating team may find issues with the company on the ground that may not seem as serious to the deal team, causing conflict. As such, it can happen where deals teams and operating teams may not see eye-to-eye on how appropriately one can realize the PE firm’s investment thesis. These types of issues can come about for a variety of reasons, such as a lack of defined role for each team across the investment cycle, a lack of trust among teams, difficulties in determining how much of the portco change came from the operating team’s involvement, or unclear accountability for a portco not reaching its goals. Whatever the cause of the conflicts, industry leading firms succeed by making their culture an open topic in internal discussions and making the changes needed to thrive.

Market conditions are leading even larger PE firms to acquire middle-market companies that may have less experience and sophistication than the larger targets we have previously seen many firms focus on. This can bring its own set of issues. For example, management at the portco level may be less experienced than needed to both see how the business will need to change in the future and to help scale the business following the value creation plan. They may also be focused on the wrong metrics. With interest rates being at their current height, earnings before interest, taxes, depreciation and amortization (EBITDA) is no longer the only data point that matters, with some firms looking beyond EBITDA to cash flow conversion in this market. These types of issues and slowdowns can force the private equity owner to replace the management team, causing additional delays across for the value creation plan. Industry leaders are assessing how appropriately one can work with management early (sometimes even at diligence) to understand how to make management true partners in value creation.

PE funds often have a ceiling built into the origination agreement that limits the total spend on operating functions and value creation plans. This makes right-sizing the PE operating team much more critical and difficult. Further, a focus of the operating team is not to go outside of the deal plan on what needs to be done to the portfolio company. If the changes needed go outside of the plan, then a cost discussion can occur around both what the firm absorbs versus the portco and what kind of value improvement the portco can expect to see as a result. There is no one-size-fits-all answer to any of these questions, but firms can often get bogged down in cost management and miss the bigger-picture opportunities. Industry leaders have a detailed understanding of the personnel and structure that helps make the most sense for their firm and are developing a network of advisors to help fill any remaining gaps.

How are leading PE firms finding success in improving their operating teams?

Focusing on your niche for growth and enhancing it.

It’s almost impossible to be the best at everything. How you build out your team can be directly connected to how you want to generate value. Do you have a sector specialization focus? What about  digital transformation ?  Sustainability ?  Emerging technology ? Investing in your operating team’s niche and being top class in that field can lead to success.

Managing costs at a granular level

Industry leading firms target their spend to produce the highest value. Operating teams will always have a limit built into the fund origination agreement, so every dollar of spend needs to bring return on investment. A complete assessment at the top of the portco, including understanding management’s capabilities, can help avoid costly pitfalls and find the path forward with only the necessary capital outlay. Also, leaders in this space supplement their in-firm skill set by maintaining a pool of external advisors with a breadth of experience in various sectors and technical capabilities that can help assist in keeping costs down.

Building a culture of trust across the firm and into the portco level

Open communications  and alignment between the deals team and the operating team are essential. Additionally, many firms are enhancing their communications by using industry leading technology to build real-time communication among the deal team, operating team and management. Further, bringing the teams together as one from pre-diligence to pre-exit can help both sides get a more complete picture of the potential of any portfolio company.

Collaborate with portco management on value creation opportunities

Management is an invaluable resource for perspectives on operations and opportunities for improvement. Many industry firms see the operating team role as a counselor, guiding management and  the board of directors  toward the end goal and receiving feedback in the process. A functioning collaboration between the firm and portco is essential to unlocking value.

Highlight your operating team’s strengths in the broader market

Whether it's fundraising with prospective LPs or demonstrating your firm’s strengths to future portcos, leading PE firms include the operating team’s capabilities as part of their marketing materials. Both LPs and portcos are looking to collaborate with firms that can help bring their returns to the next level, and you can use the investments you have made in building a world-class operating team to your advantage.

Build a strategy around combining the latest technologies with a subsector focus

Portcos that have found transformative growth use  a combination of the right technologies for their needs and a focus on subsector strategy  that allows them to quickly find opportunities in the market. Further, they plan out a leverage model to help determine where it makes sense to reach out to third parties for assistance.

Where do operating teams go next?

Ten years ago, a sophisticated operating team with knowledge on how technology can transform a portco’s operations was a niche capability. Now, it is table stakes. LPs are looking for teams that can help transform their underlying portcos for the better. They want the teams to produce the kind of high-value businesses that can generate the returns they come to private equity for in the first place. Firms that have built out the kinds of operating teams that can make these changes are already ahead of the game and will likely have a much easier time fundraising than their competitors.

Beyond fundraising, we are seeing more PE firms create individual deal thesis with a greater focus on operating improvements. Some firms have even included as part of their value creation plan an operations transformation built around a combination of strategy, tech and analytics to create value opportunities that may not have been available previously. This shows that industry leading firms have recognized the realities of this market and are treating their operating teams as a strategic differentiator to help enable the returns that their investors expect. Delaying investments in your operating team can put you behind other firms that can see the signs and move quickly. Now is the time to build the capabilities that will help your firm create value into the future.

1: Ted Bililies, “Private Equity Needs A New Talent Strategy,” Mondaq Business Review, October 26, 2023, accessed via Factiva, January 16, 2024.

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• EMI at Work

The Globalization of Chinese Companies: A case study of the Fosun Group – Knowledge of the Chinese Market Has Enabled Significant Investments in Private Equity

The Fosun Group is leading the way for Chinese investments in private equity.

by Faye Zou, MBA ’15

China is currently number 2 in the world in terms of GDP. In the year of 2013, 93 Chinese companies are listed in the Fortune 500 list. According to China’s Ministry of Commerce, Chinese overseas investment totaled $61.6 billion by the end of September 2013 – a 17.4% year-on-year increase. Chinese overseas investment is set to continue to grow at double-digit rates in 2014. 14 Chinese companies in various industries are listed as the largest globalized companies in the world by Forbes. Many familiar names have made the list such as Lenovo (Consumer Electronics), Dalian Wanda (Entertainment and Commercial Real Estate), Huawei (Telecommunications), CNNOC (Oil and Gas), Fosun Group (Conglomerate), Alibaba (Internet), Tencent (Internet) and Baidu (Internet).

The Fosun Group

Fosun Group was founded in 1992 in Shanghai. Its parent company Fosun International (00656.HK) was listed on the Main Board of the Hong Kong Stock Exchange on 16 July 2007.  With a series of acquisition in recent years, the group has demonstrated outstanding investment strategies in diversified industries, leading to 93.37% 1-year return according to Bloomberg Business.  Most recently, Canadian circus firm Cirque du Soleil announced that it has sold a majority stake in itself to a consortium led by private equity firm TPG which included Fosun. Cirque du Soleil President Daniel Lamarre commented, “Fosun’s expertise in China and the Caisse’s homegrown financial strength are a powerful combination that will fuel new growth in our business”.

Today, Fosun has established four business engines comprising “insurance, industrial operations, investment and asset management”. It is dedicated to becoming a world-class investment group underpinned by the twin drivers of “insurance-oriented comprehensive financial capability” and “industrial-rooted global investment capability”. The company’s series of investment actions are analyzed in this article for analysis of its investment strategy, along with the macro-economic condition of the Chinese market.

Investment Philosophy

With regards to its investment philosophy, Fosun has been persistently taking roots in China and investing in China’s growth fundamentals, while grasping investment opportunities evolved from the changing lifestyles of the middle class in China and global economic transformation. It is dedicated to applying the value investing principle to its investment model of “Combining China’s Growth Momentum with Global Resources”, striving to become a China expert with global capacity, with a view to creating value for society and its shareholders.

In practice, Fosun unremittingly builds up its capabilities in identifying and capturing investment opportunities in China, improving the management and enhancing value of the investees, and establishing a multi-channel financing system to access quality capital. With a value chain based on these three core competencies and a group of entrepreneurs endorsing Fosun’s corporate culture, a solid foundation has been laid for the continuous rapid growth of the Group.

While pursuing economic development, Fosun also shares the fruits of its business success with its staff, partners and the community, taking the initiative to contribute to society in return. Meanwhile, Fosun also actively contributes its efforts to improve the business and natural environments of China so as to support the rejuvenation of the Chinese economy and culture.

Investment Strategies

The strategy of Fosun is “To become a world-class investment group underpinned by the twin drivers of insurance-oriented comprehensive financial capability and industrial-rooted global investment capability,” according to Mr. PAN Song, Managing Director of the PE arm from Fosun Group on October 3 rd , 2014 at Cornell University.

“Fosun is on a speedway, with its dual engine on insurance and investment. There are more opportunities for insurance company acquisitions in the next two years,” stated Mr. Guangchang Guo, Chairman of the Fosun Group. “In the future, Fosun is targeting health, happiness, fashion and product as its core business, with the foundation of insurance and real estate, realizing parallel business development in these two areas,” said Mr. Xinjun Liang, CEO of Fosun Group.

In 2014, Fosun invested 15 projects overseas, with a combined investment of $53 billion. Mr. Guo emphasized, “as a professional investment group, we are constantly thinking about three questions: how to continue to innovate at the funding level to source stable, long-term and low cost sources; how to strengthen our investment portfolio, seeking opportunities in varies industries in the global market, improving return on investment; how to balance risk and growth, with the only goal of long-term sustainable growth.

Current Portfolio

Fosun is perhaps the most openly ambitious among Chinese companies that are looking abroad for investment opportunities. From the $765 million Club Med deal to the $725 One Chase Manhattan Plaza in New York acquisition, Fosun focused on its strategy with a growing footprint in the insurance business. (Exhibit 1)

Its current portfolio can be viewed in four categories:

• Insurance (RMB 523.6 Million in profit, 2013): Young’an P&C Insurance, Peak Re , Pramerica-Fosun Life Insurance,  Fosun International Portugal  (Portugal, 1 billion Euro)
• Industrial Investment: Fosun Pharma, Forte, Nanjing Nangang, Hainan Mining
• Strategic Investment:  Club Med  (France, 1.4 billion Euro), Focus Media, Yuyuan, Minsheng Bank
• Asset Management: Fosun Capital, Prudential-Fosun Fund, Fosun Wealth Fund, Star Capital Fund, Fosun Grand Fund

The competitive advantages of Fosun are its knowledge of its local market. With acquisition of valuable brands, Fosun can leverage the mature operation and brand management of the acquisition and grow its market in China. The lack of reputable brands in China, especially in the entertainment and fashion industries due to the short history of open business activities, introduced significant opportunities for synergies with global acquisitions.

As one of the first companies to invest in the global market, risk management and development of operational expertise are the most challenging factors when developing investment strategies. In addition, volatility of China’s economic environment has also directly impacted companies’ core businesses in the country. Actively managing such risks and acquiring talent continue to be the main tasks of globalizing Chinese companies.

Exhibit 1 – Annual Revenue and Profit Attribution

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10 things to know about private equity in healthcare

Private equity's interest in healthcare has boomed in recent years, and it remained a formidable force in the industry in 2023.

Though the number of private equity mergers and acquisitions in healthcare declined slightly from 940 deals in 2022 to about 788 in 2023, private equity firms are still interested in the healthcare sector, according to VMG Health's " M&A Report " for 2024. 

Here are 10 things ASC leaders should know about private equity's role in healthcare:

1. Physicians are not fans of private equity. According to a survey published in JAMA Network Internal Medicine , more than 60% of physicians have a negative opinion of private equity's role in healthcare. Just 10.5% of physicians said they view private equity as positive.

2. It may negatively affect infection rates in hospitals. A study published Dec. 26 in JAMA found that patients at private equity-associated hospitals had 25.4% more hospital-acquired conditions; that number was driven by falls and central line-associated bloodstream infections.

3. They may have an increased risk of bankruptcy. More than 20% of the healthcare bankruptcies in 2023 were by private equity-backed companies, according to a report from the Private Equity Stakeholder Project. 

4. Private equity firms are interested in outpatient care. Outpatient care saw 195 private equity deals in 2023, the most of any healthcare subsector, according to the Private Equity Stakeholder Project.

5. Audax Private Debt was the leading private equity firm in healthcare in 2023. Audax Private Debt, a debt capital partner for middle market companies headquartered in New York City, was the most active North America-based lender in the healthcare sector in 2023, accounting for 58 transactions, according to a report by market research company PitchBook.

6. Despite a decline in activity year over year, private equity's interest in healthcare has risen overall. According to VMG, there were 445 healthcare private equity deals in 2017, compared to 2023's 788 transactions.

7. The ASC industry's largest deal to date was in 2017. Bain Capital acquired Surgery Partners, one of the largest ASC chains in the U.S., for $3 billion, according to the VMG report. 

8. Healthcare leaders intend to up their investments in 2024. A survey of health system leaders found that 61% plan to increase their investments in mergers and acquisitions compared to their activity in 2023.

9. Among physician groups, private equity investors are mostly eyeing dental, ophthalmology and internal medicine practices. Dental, ophthalmology, and internal medicine-focused physician groups saw the most private equity mergers and acquisitions in 2023, with 180, 47 and 46 deals, respectively, according to the VMG report.

10. ASCs remain primarily independent. About 68% of ASCs are independently operated, while the remaining 32% are owned by ASC chains including United Surgical Partners International, SCA Health and AmSurg, according to the VMG report.

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