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Real Estate Private Equity (REPE)

Step-by-Step Guide to Understanding Real Estate Private Equity (REPE)

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What is Real Estate Private Equity?

Real Estate Private Equity (REPE) refers to firms that raise capital to acquire, develop, operate, improve, and sell buildings in order to generate returns for their investors. If you’re familiar with traditional private equity, real estate private equity is the same, but with buildings.

Table of Contents

Real Estate Private Equity (REPE): Career Guide

List of top repe firms, repe fund: corporate structure, real estate private equity investment strategies, repe investing risk profile, repe investment property type, repe firm: transaction size, geographic focus, debt or equity investments, real estate private equity (repe): jobs roles, real estate acquisitions, day in the life of an acquisitions real estate professional , asset management, acquisitions vs. asset management in real estate private equity, career path in real estate private equity (repe), real estate private equity (repe): hierarchy of roles, the principal / managing director: role, promotion path, and salary, real estate private equity (repe) acquisitions associate salary, top repe recruiters (2023 update), real estate private equity interview (repe): what to expect, real estate modeling test, real estate case study, top 10 real estate private equity interview questions (repe), other roles in real estate private equity.

As the “private” in “private equity” suggests, these firms raise capital from private investors and deploy that capital to make investments in real estate. There is little standardization to how real estate private equity firms are structured, but they all generally engage in five key activities:

• Capital raising
• Screening investment opportunities
• Acquiring or developing properties
• Managing properties
• Selling properties

Capital is the lifeblood of any investment firm – without capital to invest, there is no firm. The capital raised by real estate private equity firms comes from Limited Partners (LPs).

LPs generally consist of public pension funds, private pension funds, endowments, insurance companies, fund of funds , and high-net-worth individuals.

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There are many types of firms focused on real estate investment. Here we’re focusing specifically on REPE as opposed to REITs , or a variety of other types of real estate companies, and below is a list of the top real estate private equity firms (Source: perenews.com):

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Like traditional private equity firms, real estate private equity firms raise money from Limited Partners (“LPs”)  – these are private investors (usually pension funds, university endowments, insurance companies, etc.).

As an important fine point, REPEs raise capital for specific “funds” (think individual investment vehicles all run by the same firm). These funds have their own “mandates,” meaning they have specific types of real estate investments they look for.

Another important thing to understand is that REPE funds are “closed-end funds,” meaning that investors expect to get their money back (ideally along with a hefty return on investment ) within a specified time frame – usually within 5-7 years.

This is a contrast to open-end funds raised by Real Estate Investment Management firms such as JP Morgan Asset Management and TA Realty that have no end date and therefore offer more flexibility to the manager.

REPE firms usually specialize to varying degrees around specific characteristics related to their investments:

In cases where the firms themselves are not organized this way, their specific investment funds usually will be.

Many REPE firms organize themselves according to risk profile as their driving investment strategy. They will carve out a portion of the risk/return spectrum and focus on transactions – regardless of property type and geography – that fit the specified risk profile and return targets.

The most high-profile types of real estate private equity fund strategies are called “Opportunistic” or “Value-Add” and refer to higher risk/return types of investments than the more conservative “Core” or “Core-Plus” strategies.  In the image below, you can see the return profile targeted across these different strategies.

This is an effective way for REPE firms to organize themselves because it sets clear expectations for a firm’s investors and allows the manager to diversify risk across geography and property types.

When you hear terms like “opportunity fund” or “targeting core investments,” they are usually referring to risk profiles and return targets.

REPE firms do not often constrain themselves when it comes to property type. In a scenario where they did, a firm would focus exclusively on one property type, hotels, for example, and diversify their investments in other ways within the property type sector.

Many REPE firms organize themselves by transaction size, which is largely informed by the amount of assets under management ( AUM ) but can also be part of a firm’s strategy.

Transaction size relative to AUM has implications on diversification and overhead (how many employees are necessary to close the target number of transactions).

If a firm has a large amount of AUM, it is likely to focus on larger transactions to keep the number of deals necessary to fully deploy its capital to a reasonable size. A firm with a smaller amount of AUM is likely to focus on smaller transactions in order to achieve the desired amount of asset diversity.

If a firm had $500 million of AUM and focused on transactions requiring $25 million of equity, the firm would need to purchase 20 properties to fully deploy its capital. On the other hand, if the same firm with $500 million of AUM focused on transactions requiring only $10 million of equity, the firm would need to purchase 50 properties to fully deploy its capital.

Many REPE firms choose to organize themselves by geographic location. There are a number of benefits from a strategic perspective, such as developing a higher level of expertise in an area and gaining a deeper network. From an operational perspective, it requires fewer offices across the country (or world) and reduces the amount of time employees must spend traveling to visit properties.

However, a constrained geographic focus reduces the level of diversification and the number of potential transactions. Many smaller firms are organized in this way and while larger firms tend to cover more geographies, they do so out of various offices that are geographically focused.

Traditionally, REPE firms are thought to be equity investors. But REPE can also pursue debt investment strategies where they make investments in different parts of the capital structure . Many REPE firms invest in both equity and debt.

As with non-real estate private equity, REPE deals require a team to execute. Below is the breakdown of the roles and job types in real estate private equity.

Real Estate Acquisitions involve the sourcing (senior deal professionals) and execution (junior deal professionals) of real estate transactions.  The day-to-day responsibilities of an acquisitions professional include:

• Sourcing deals
• Conducting market research
• Building financial models
• Analyzing deals
• Writing investment memorandums

Compared to asset management, acquisitions is generally viewed as the more “prestigious” role.

At the junior levels, most time is spent modeling potential acquisitions and writing investment memorandums.

Writing an investment memorandum requires summarizing a financial model , conducting market research, and crafting an investment thesis.

Onsite property tours are also a major part of real estate investing, and at many firms, junior acquisitions professionals can expect to spend a good amount of time traveling to various properties. During the execution phase of a deal, acquisitions professionals will shift their attention to due diligence and supporting the legal team.

The amount of involvement junior professionals have in due diligence and legal varies by firm. There is no typical day in the life as the distribution of time across these activities ebbs and flows with how active the firm is in deploying capital.

At the junior levels, most time as an asset manager is spent executing business plans for the assets you are responsible for – this can vary by property and risk type.

For example, if you are the asset manager for an industrial warehouse, your responsibilities may include speaking with property management to understand how the property is functioning, working to sign new leases to maintain occupancy, touring the asset various times throughout the year and speaking with brokers to understand the market and what the property might sell for today.

If, however, you are the asset manager for a multifamily development opportunity, your responsibilities might include working with your joint venture partner to ensure the property is being constructed on time, hiring a property management team to get the property leased up, and doing research to decide where rents should be set.

In asset management, you would also play a part in sourcing new investment opportunities by helping with due diligence. If a new asset is about to be acquired, asset management may be engaged to review the historical financials and competitive set to see what can be expected in the future, hire a property management team and sign contracts with vendors.

Another big part of asset management is selling properties. Asset management is responsible for working with portfolio management to determine the most opportune time to sell the asset, engaging a brokerage team, creating a disposition memorandum outlining the thesis to sell the property and successfully executing the sale.

In summary, the asset management includes the following responsibilities

• Executing property business plans
• Performing quarterly asset valuations
• Monitoring performance relative to budget
• Working with the acquisitions team to perform due diligence on new acquisitions
• Working with portfolio management to execute the business plan of the asset as it relates to the fund

Some firms combine the Acquisitions and Asset Management roles (called “ cradle-to-grave ”). This is more often the case at smaller firms and has its pros and cons. At firms with a cradle-to-grave structure, junior professionals get exposure to both parts of the business while maintaining the “prestige” of being an acquisitions professional.

Acquisitions is generally viewed as the more “prestigious” role, but Asset Management is where the nuts and bolts of owning real estate are learned.

It is not uncommon for Asset Management to feature more entry-level positions that can be leveraged into an acquisitions role down the road.

The career path within Real Estate Private Equity is similar to that of traditional PE. Just like traditional PE, there is a fairly standard hierarchy, and progression up the ladder is linear:

Where things get more complicated is the point of entry.

• In traditional PE , junior-level professionals are recruited from investment banks and mid-level professionals are recruited from MBA programs or internal promotions.
• In Real Estate PE , junior and mid-level professionals come from varying backgrounds, including investment banking, investment sales brokerage, asset management, and lending.

Large Real Estate Firms: Blackstone, Carlyle, Oaktree, etc.

The largest REPE firms – think Blackstone, Oaktree, Brookfield and Carlyle – have a standardized and predictable path of progression, enabling them to hire entire classes at a time. They also have the resources to formally train junior hires.

If your goal is to work in acquisitions at a large name-brand REPE firm, then your best bet is to secure a job in investment banking first.  Asset management is less competitive, and recruiting often happens directly out of undergrad.

• Acquisitions Recruiting : From investment banks (just like traditional PE).
• Asset management Recruiting: Directly out of college for asset management and lending roles.

Breaking into the Rest: “Traditional” Real Estate Private Equity Firms

Below the top 20 REPE firms, the recruiting process varies widely. Firms usually do not recruit out of college, only hire 1-2 professionals at a time on an “as-needed” basis prefer to recruit through employee networks and only use headhunters sparingly.

Because the recruiting process is much less standardized, many REPE firms look to:

• The investment sales brokerage firms they work with ( Cushman & Wakefield , CBRE , Eastdil , etc…)
• Real estate lenders with good junior training programs
• Larger REPE firms that may have a pool of junior asset management professionals looking to make the jump to acquisitions

The role hierarchy in REPE is similar to traditional private equity, with principals on top and associates on the bottom.

Day to Day Responsibilities

Principals are the most senior members of the investment team, usually reporting up to a Group Head or Chief Investment Officer. Their responsibilities are wide-ranging and include sourcing new transactions, participating in investor meetings, monitoring the asset management acquired properties they sourced, and managing the more junior investment professionals responsible for the due diligence on new investments.

Principals spend much of their time networking – whether that means attending industry conferences or traveling to major cities to get facetime with top brokers and potential partners.

Typical Promotion Path

Principals have a long track record of acquisitions experience. Many are homegrown and rose through the ranks from being junior associates and others lateral from competing REPE firms for a promotion from a Senior Vice President position.

The compensation range for a REPE Managing Director / Principal ranges between $500k – $750k. However, compensation at this level can vary drastically due to a meaningful amount of carried interest , the value of which is dictated by investment performance.

Senior Vice President / Director

Senior Vice President responsibilities are similar to that of Principals but relatively speaking, they spend more of their time executing and managing investments than they do sourcing transactions and interfacing with investors.

They will spend time reviewing investment memos and models and opining on key decisions related to acquired properties. A key delineating factor between Senior Vice Presidents and more junior professionals is their ability to negotiate and navigate the legal aspects involved in real estate investing. In addition, a good amount of time is spent developing a network to source transactions.

Senior Vice Presidents have a track record of acquisition experience. Most are promoted from internal Vice President positions, though they may have spent their time prior to being a Vice President at another REPE firm.

SVP / Director Compensation Range

The compensation range for a REPE SVP/Director ranges between $400k – $600k. As with the MD/Principal role, compensation at this level can vary drastically due to a meaningful amount of comp coming in the form of carry.

Vice President

Vice Presidents are typically the “quarterback” of the deal team who is held responsible for executing new acquisitions. Most of a Vice President’s time is spent managing junior professionals, overseeing the writing of investment memos, refining financial models , and negotiating and reviewing legal documents.

As Vice Presidents progress, they will begin to focus more of their time on developing their network with hopes of beginning to source new transactions.

The path to becoming a Vice President varies – the most straightforward is internal promotion from an Associate or Senior Associate position.

The Vice President level is also a common place for professionals to lateral from different REPE firms.

Lastly, some firms will hire MBA graduates at this level. Post-MBA Vice President positions are hard to come by and often go to graduates who have prior real estate experience.

VP Compensation Range:

The compensation range for a REPE VP ranges between $375k – $475k

Associate / Senior Associate

At most REPE firms, Associates are the more junior professionals, which means they are responsible for the majority of the analytical work.

Associates spend the majority of their time building real estate financial models and writing investment memos for potential acquisitions.

Pulling together the necessary data for these deliverables often requires touring the property and its competitive set (or oftentimes calling properties and secret shopping), digging up market data on REIS (general market data) and/or RCA (historical sales comparables), and reviewing documents provided during due diligence.

The financial model and investment memo are what is presented to investment committees to make the case for an investment. Depending on how the firm is organized, an Associate may also be involved in working with in-house lawyers on purchase and sale agreements (PSAs), loan documents, and joint venture agreements – in most cases, the Vice President on the transaction will lead the legal work.

Another responsibility that varies with firm organization is time spent on asset management. At some firms, an Associate on the acquisitions team would spend no time on asset management. At other firms, an Associate may spend a considerable amount of time on calls with property managers and tracking the monthly financial performance of different investments.

In short, Associates are the analytical horsepower and can expect to build financial models, write investment memos, collect market data, and manage due diligence.

As we’ve already mentioned, the typical entry point for an acquisitions associate at a large REPE is from a bulge bracket investment bank .

Some of the top REPE firms recruit Associates from real estate groups and M&A groups at investment banks.

The recruitment cycle is similar to that of traditional Private Equity, where the process is guarded by headhunters and all of the top firms recruit during a short window in the winter of each year .

For traditional real estate private equity firms, the most common entry point is through real estate asset management at a larger firm or investment sales at a top brokerage firm.

At larger firms, you should expect to be an Associate for 2-3 years, at which point the highest performers might be offered a promotion to Senior Associate or Vice President (again, firm dependent). Oftentimes, you’d be expected to go get an MBA before promotion.

So from start to finish, the path could look like this: 2 years Investment Banking Analyst, followed by 2-3 years Real Estate Private Equity Associate, then 2 years MBA and finally a return to a REPE firm as a Vice President.

At traditional (smaller) REPE firms, the path is similar, but instead of 2 years getting an MBA, the firm might promote you to a Senior Associate position prior to Vice President.

Compensation structure is generally structured similarly to traditional private equity – heavily weighted towards bonus, though compensation within real estate private equity tends to be more highly variable than traditional PE.

At the junior level, base and bonus are all cash , while at mid-to-senior levels, compensation typically includes a carried interest component.

A first-year acquisitions Associate with investment banking experience should expect a base salary in the range of $90,000 – $120,000, depending on location and firm size, and a year-end bonus that is approximately $100% of base pay, bringing the all-in compensation for most first-year acquisitions Associate will range between $160k – $230k.

At many firms, base salary doesn’t often increase meaningfully year-to-year, but bonuses can grow from 100% to as much as 200% in a few short years.

As you go further up their real estate private equity hierarchy, compensation grows similar to traditional PE:

Headhunters serve an important role (depending on who you ask) in the recruitment process. They spend their time locating, interviewing, and assessing the talent on the market. For Real Estate Private Equity firms, headhunters serve as a convenient place to look for the top talent in the industry. It is good practice to meet with all of the top headhunting firms so that you stay in the loop of potential REPE job opportunities. Below is a list of a few prominent headhunting firms active in the REPE space:

• Amity Search
• Glocap Search
• RETS Associates
• Ferguson Partners
• Rhodes Associates
• Crown Advisors
• Terra Search

So, you’ve landed a Real Estate Private Equity interview . If you’re interviewing at one of the larger REPE firms, the process will be similar to traditional private equity. Typically, there are 3 rounds of interviews, although they tend to be less structured than investment banking or traditional private equity.

Regardless of your entry point (undergrad, investment banking, asset management, brokerage, MBA), the interview structure is likely to be more or less the same. But, your entry point will likely inform where your interviewers are likely to push harder and where they might give you some grace. From my experience, the interview experience could differ in the following ways:

• Recent Undergraduates: The expectations on the technical side will be lower, but this does not mean you shouldn’t expect technical questions. Interviewers won’t expect a recent undergraduate to be nearly as technically sound as a former investment banker. Expect emphasis to be placed on how hard you’re willing to work, how hungry you are, and your interest in the real estate industry .
• Former Investment Bankers: The expectations on the technical side will be very high. Interviewers will expect very high performance on modeling tests. Most investment bankers will have spent their time analyzing REITs , which is very different from analyzing individual properties, which is much of the work at most Real Estate Private Equity firms, so interviewers will be more forgiving in this area.
• Asset Management & Brokerage: The expectations on real estate knowledge (the industry in general, opinions on property types, market trends, etc.) will be higher for this group than others, given a background working with individual real estate assets. Interviewers will also have high expectations on the technical side, though not as high as former investment bankers.
• MBAs: In my experience, interviewers are the most skeptical of MBAs. MBAs will be expected to perform highly on both the technical side and real estate knowledge aspect. For MBAs with prior real estate experience, this shouldn’t be a problem, but for MBAs changing industries, this will be a challenge, though not insurmountable.

Round 1: The informational interview

The informational interview is often with a Vice President or junior Principal who has been tasked with pulling together a pool of candidates. This initial interview is all about understanding your experience in real estate, your desire for working at the particular firm, and your long-term goals. You should be prepared to walk through your resume and ask good questions about the role and the firm.

Round 2: The technical interview

The technical interview is usually with an Associate who has been around for a while. A junior professional typically conducts this early technical screen because they are closer to the nuts and bolts of modeling and market analysis than the senior professionals. At this point, you should be prepared to answer technical and industry questions about how to value real estate, the main property types and how they differ from one another, and what type of real estate investments you think are in favor, among a number of other potential questions.

Round 3: Superday interviews

While the first two interviews are often done remotely, the final Superday interview is always conducted in person.

Of course, due to COVID-19, superdays in 2021 will likely all be virtual.

During a Superday , you are likely to interview all senior and mid-level professionals. They will continue to assess your technical capabilities as well as how you’ll fit into the team – at this point, everything is fair game (see the most common interview questions below).

The Superday is likely to conclude with a modeling test and potentially a case study.

The modeling test is often the biggest challenge for many candidates. Poor performance on the modeling test is often enough to derail an otherwise stellar candidate. But with enough preparation, anyone can ace these tests. The most common modeling test is 2-3 hours long, and you can expect to:

• Perform common Excel functions
• Demonstrate knowledge of modeling best practices
• Construct a real estate pro forma based on the provided assumptions
• Build an amortization table
• Build a joint venture waterfall
• Create a returns summary analysis and sensitivity

Some firms expect candidates to complete a case study in addition to the modeling test. Often, case studies are provided after a modeling test as a take-home exercise focused less on technical capability and more on market analysis and communicating an investment thesis. In other cases, the case study will be provided in combination with the modeling test and be conducted at the end of the Superday. A successful case study discusses the following:

• Property overview
• Market analysis and positioning
• Investment highlights
• Investment risks and mitigating factors
• Financial highlights
• Investment recommendation

Because Real Estate Private Equity is viewed as a niche segment of the private equity world, firms are focused on hiring people who have a real interest in the world of real estate.

Because of this, the first and biggest red flag is always “they don’t actually seem interested in real estate” – make sure you know your “why”.

Senior Associates and Vice Presidents are often tasked with asking technical questions, while Senior Vice Presidents and Principals usually try to understand a candidate’s background to identify what their strengths and weaknesses are.

In my experience, my technical capabilities have largely been tested on the modeling test and in-person interviews have tended to lean more towards how you think about real estate, ability to be organized and manage deadlines (closing a deal is project management 101), and my desire to do the job.

To the original point about red flags, you’d be surprised how many people don’t get the job because they simply “didn’t seem like they wanted this job”.

Unlike investment banking interviews , REPE interviews (and private equity interviews more broadly for that matter), tend to focus less on technical finance interview questions and rely on the modeling test and case study to confirm you’ve got the technicals down.

So if you are comfortable with the following 10 questions (and prepared for a modeling test and case study), you’re well on your way to acing your interview.

Why real estate?

The key to answering this question is to make your response personal and not cookie-cutter. With that said, responses almost always touch on real estate being “tangible”. Other ideas to consider are how large the real estate industry is and the expected growth in popularity among investors. From a personal perspective, think about your first time engaging with real estate or the role it plays in your life today.

What are the three ways of valuing real estate assets?

Cap rates, comparables, and replacement cost. Property value = property NOI / market cap rate. Comparable transactions can inform per-unit or per-square-foot valuations as well as current market cap rates. The replacement cost method dictates that you would never purchase a property for more than you could build it new. Each method has its weaknesses, and the three should be used together.

Learn More → Cap Rate Primer

Compare the cap rates and risk profiles for each of the main property types.

From highest cap rate (most risky) to lowest cap rate (least risky) – hotel, retail, office, industrial, multifamily. Hotels generally trade at the highest cap rates because cash flow is driven by nightly stays (extremely short-term leases) and more operationally intensive activities like restaurants and conferences. The creditworthiness of retail tenants is increasingly in question due to trends in e-commerce. The office sector is closely correlated to the broader economy but has longer-term leases. The industrial sector benefits from e-commerce trends, longer-term leases, and simple operations. Multifamily is thought of as the safest asset class because no matter how the economy is performing, people will need a place to live.

Walk through a basic cash flow proforma for a real estate asset.

A: The top line is revenue which will be primarily rental income but might also include other revenue lines and will almost always include deductions for vacancy and leasing incentives like rent abatements and concessions. After revenues, you subtract all operating expenses to get to NOI. After NOI, you subtract any capital expenditures and account for the purchase and sale of a property. This will get you to unlevered cash flow. To get from unlevered to levered cash flow, you subtract financing costs.

Describe the main real estate investment strategies.

There are 4 common real estate investment strategies: core, core-plus, value-add, and opportunistic.

• Core is the least risky and therefore targets the lowest returns. Core investments are typically newer properties in great locations with high occupancy and very creditworthy tenants.
• Core-plus is slightly riskier than core. Core-plus investments are similar to core but may feature minor leasing upside or require small amounts of capital improvements.
• Value-add is what most people think of when they hear “real estate investing”. Value-add investments are riskier deals and risk can come from various places – substantial lease-up, an older property needing meaningful capital improvements, a tertiary location, or poor credit tenants.
• Opportunistic is the riskiest and therefore targets the highest returns. Opportunistic investments include new development or re-development.

If I paid $100M for a building and it has 75% leverage, how much does it need to sell to double my equity?

$125M. With 75% leverage, you would invest $25M of equity and borrow $75M of debt. If you doubled your equity, you’d get $50M ($25M x 2) of cash flow to equity and still need to pay down $75M of debt. $50M of equity + $75M of debt = $125M sale price.

If you had two identical buildings that were in the same condition and right next to each other, what factors would you look at to determine which property is more valuable?

Since the physical attributes, building quality and location are the same, I would focus on the cash flows. First, I would want to understand the amount of cash flow. You can determine this by looking into what average rents are in the buildings and how occupied the buildings are. Despite the same location and quality, the management and leasing of each building could be different leading to differences in rents and occupancy. Second, I would want to understand the riskiness of the cash flows. To assess this, I would look at the rent roll to understand the creditworthiness of tenants and the terms of leases. The formula for value is NOI / cap rate. NOI will be informed by the amount of cash flow. The cap rate will be informed by the riskiness of the cash flows. The property with high cash flow and less risk will be valued higher.

If you purchase a property for $1M at a 7.5% cap rate, have 0% NOI growth throughout the hold period, and exit at the same cap rate after 3 years, what is your IRR?

We know that NOI / cap rate = value. If a property’s NOI and cap rate do not change, then the value also remains the same. Because there is 0% NOI growth and after 3 years, we are selling the property for the same 7.5% cap rate we purchased it for, we will sell the property for $1M, resulting in no terminal value profit. Since there is no terminal value profit, the only profit comes from interim NOI, which is simply $1M x 7.5% and remains constant each year. Because IRR is our annual return, in this case, our IRR equals our cap rate or 7.5%.

If you purchase a property for $1M at a 5.0% cap rate with 60% leverage and a 5.0% fixed cost of debt, what is the cash-on-cash yield?

Cash-on-cash yield = levered cash flow / equity invested and levered cash flow = NOI – cost of debt . 60% leverage implies $600k of debt and $400k of equity invested. A $1M purchase price at a 5.0% cap rate implies $50k of annual NOI. $600k of debt at a 5.0% fixed cost implies $30k annual cost of debt. $50k annual NOI – $30k annual cost of debt = $20k of levered cash flow. $20k levered cash flow / $400k equity invested = 5.0% cash-on-cash yield.

Do you have any questions for me?

This question usually ends an interview. As was highlighted in other parts of this article, the structure and strategy of real estate private equity firms can vary widely. This is your opportunity to gain a better understanding of the firm.

You should ask questions about how roles and responsibilities are structured:

• “Is there a strict delineation between the acquisitions and asset management team?”
• “How much exposure do junior acquisitions professionals get to the legal process of executing a deal?”
• “How much traveling do junior team members do?”

You should ask questions about the firm’s strategy:

• “Does the firm focus on a single risk profile (core, core-plus, value-add, opportunistic) or multiple strategies?”
• “Does the firm only do equity investing or both debt and equity?”
• “Does the firm do any development or only acquisitions?”

If you have the opportunity to speak with the most junior team members, you should try and get a sense for how they are enjoying their experience with the firm.

While acquisitions and asset management are the highest profile roles within real estate private equity, several other roles exist, namely:

• Investor relations
• Portfolio Management

Capital Raising and Investor Relations

Capital Raising(“CR”) & Investor Relations (“IR”), as the titles suggest, involve the all-important responsibilities of raising capital for the firm and managing the communications between the firm and the investors.

Some firms break out the Investor Relations (“IR”) and Capital Raising (“CR”) functions into separate teams while other firms combine them into one role. On the IR side, team members are responsible for managing the existing relationship between the firm and investors, via writing quarterly and annual reports, orchestrating annual investor conferences and quarterly update calls, writing acquisition and disposition notices. Meanwhile, the CR function is responsible for raising capital for the firm’s various funds and investments strategies, and often involves conducting research on and meeting with prospective investors to target.

At the junior levels in the CR/IR function, most of an analyst or associate’s time is spent preparing senior members of the team for meetings with investors, crafting concise messaging regarding investment performance through quarterly reports and update presentations for existing investors and creating pitchbooks for prospective investors.

For investor meetings, a junior person is responsible for creating, preparing and updating the meeting materials and briefing the senior members on their teams for speaking notes. Each day also entails tracking the team’s progress of new capital raised as a fund nears closing or working on marketing materials to prepare for a new fund’s launch.

Accounting and Portfolio Management

The Accounting and Portfolio Management role in REPE involves supporting the CR/IR, acquisitions, and asset management teams. Portfolio Management is often responsible for guiding the acquisitions team to target properties that fit the fund mandate and ensuring the creation of a diversified portfolio.

Specific responsibilities include providing fund performance data for investor reporting and requests (routine and ad-hoc), reviewing quarterly financial statements and investor reports, fund liquidity management (capital calls/distributions and credit facility), maintaining fund-level models, overseeing fund administrators and database management (asset-level reporting),

The day-to-day largely depends on if the firm is fundraising and/or deploying capital. For example, when a firm is fundraising, more time is spent supporting the investor relations team and providing firm performance data to share with potential clients.

Supporting the acquisitions and asset management team follows a more stable monthly and quarterly cadence. Monthly responsibilities include reviewing property management reports and maintaining a database management system to report asset-level performance to the firm.

Quarterly responsibilities relate more to financial reporting and investor updates. Generally, firms update their investors quarterly with updated fair market values. The portfolio management team manages the fair market value process.

Many firms outsource their fund accounting process to a fund administrator. The fund administrator prepares investor contributions and distributions at the direction of the portfolio management team, management fee calculations, and quarterly financial statements, all of which are reviewed by the accounting and portfolio management team.

• Google+
• Real Estate Investment Firms
• Real Estate Investment Trust (REIT)
• REIT Valuation Methods
• Net Operating Income (NOI)

I am preparing for the 2nd round interview for REPE, and this contents is extremely helpful!

Glad to hear it, thanks for letting us know!

If cap rates double over a period of 5 years, is there an approximate IRR?

Hi, Russ, It depends, but you need more info: Do you mean that NOI is doubling over 5 years, which would mean the property went up in value, or that the cap rate itself is doubling, which means the property would go down in value, assuming NOI does not increase? …  Read more »

What would the IRR be for each scenario?

Again, it depends on what the actual scenario is; IRR will differ based on the cap rate itself, how exactly the NOI grows, and so forth. You’ll have to specify a precise scenario in order to answer the question.

What if cap rates double from 5% to 10% and valuation remains unchanged?

So, yes, if cap rates doubled and valuation remained unchanged from start to finish, it would imply that the NOI had doubled as well over the same time.

If you purchase a property at a 5 cap and NOI remains constant, if you sell it in year 5 at a 10 cap, you will achieve an IRR of -6.35%

Yes, assuming a constant NOI and a doubling from 5 to 10%, that is correct, regardless of the amount of the NOI. But only if NOI does not change, and only if valuation does change (Russ’s final reply specified that valuation did not change).

How do you get an IRR of -6.35%?

Hi, Isaac, Assume an NOI of 100 per year for 5 years (does not change). Say you purchase at 5% cap rate (100/5% = 2000 purchase price), and sell at 10% (100/10% = 1000 sale price) at the end of year 5. You also earn 100 per year for 5 …  Read more »

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Top 20 Real Estate Private Equity Interview Questions & Answers

Master your responses to Real Estate Private Equity related interview questions with our example questions and answers. Boost your chances of landing the job by learning how to effectively communicate your Real Estate Private Equity capabilities.

Venturing into the world of Real Estate Private Equity (REPE) means stepping into a niche where financial acumen meets property markets, and every deal hinges on your ability to analyze, forecast, and capitalize on potential investment opportunities. As an aspirant for a role in this prestigious sector, you must convince prospective employers that you have the expertise to drive high-stakes decisions and generate substantial returns.

Preparing for an interview in REPE involves not just a thorough understanding of real estate and finance but also a readiness to tackle complex scenario-based questions that test your strategic thinking. In this article, we’ll delve into some of the key interview questions that candidates might face when interviewing for a position within Real Estate Private Equity, providing insights and strategies to help you craft compelling responses that demonstrate your depth of knowledge and investment prowess.

Common Real Estate Private Equity Interview Questions

1. how do you evaluate the potential of a new real estate market for private equity investment.

Understanding the socio-economic context and growth trajectories of regions is crucial in real estate private equity. It’s not just about the numbers but also about what makes a property valuable. Analytical acumen and an instinct for future trends are key when dissecting a market beyond surface-level indicators. Delving into factors that drive long-term value and stability is what sets apart a savvy investor.

When responding to this question, start by outlining a structured approach to market analysis, which might include historical data review, demographic trends, economic indicators, and industry forecasts. Discuss how you would incorporate quantitative data with qualitative insights, such as regulatory changes or upcoming infrastructure projects. It’s also effective to mention any proprietary models or frameworks you use to assess market viability. If you have past experiences where you successfully identified and capitalized on emerging markets, sharing a concise case study can demonstrate your practical application of these principles.

Example: “ In evaluating the potential of a new real estate market for private equity investment, I begin by conducting a thorough analysis of historical performance metrics, including cap rates, rental yield trends, and vacancy rates. I then overlay demographic and economic indicators such as population growth, employment rates, and income levels to assess the underlying demand drivers. It’s crucial to understand the local supply dynamics, including development pipelines and zoning regulations, to gauge future market saturation and competition.

I complement this quantitative analysis with qualitative insights, such as the impact of upcoming infrastructure projects, changes in urban planning policies, or shifts in consumer preferences. For instance, a new transit line can significantly enhance property values and rental demand in previously less accessible areas. I also utilize advanced econometric models to forecast future market trends and identify potential risks and rewards. A recent success involved leveraging these methods to pinpoint an undervalued market with strong growth prospects due to a burgeoning tech industry, resulting in a timely and profitable investment for our firm.”

2. Describe your approach to conducting due diligence on a property before acquisition.

A meticulous approach to due diligence is vital in real estate private equity. It’s about more than just assessing viability and potential ROI; it’s about identifying risks that could affect profitability. Candidates should demonstrate a systematic, detail-oriented approach to evaluating investment opportunities.

When responding to this question, you should outline a step-by-step process that includes reviewing financial documents such as profit and loss statements, rent rolls, and tax assessments; conducting market analysis to understand the property’s position in the current and future market; performing physical inspections to assess the condition and identify any needed repairs or maintenance; and evaluating legal compliance with zoning laws, titles, and any potential liabilities. It’s essential to convey that your approach is thorough, risk-averse, and grounded in a sound understanding of real estate economics and law, demonstrating your ability to protect and grow the firm’s investments.

Example: “ In conducting due diligence for a property acquisition, my initial focus is on a meticulous financial analysis. I scrutinize the last few years of profit and loss statements to assess the asset’s operating performance, ensuring that the NOI aligns with market benchmarks. Rent rolls are examined to evaluate tenant quality and lease expiration profiles, which are critical for understanding income stability and potential rollover risks. Additionally, I review tax assessments to ensure there are no outstanding liabilities that could affect the property’s net cash flow.

Concurrently, I conduct a comprehensive market analysis, considering macroeconomic indicators and local market dynamics to forecast the property’s performance. This includes analyzing supply and demand, rental rate trends, and occupancy levels in the submarket, which helps in understanding the asset’s competitive positioning. A physical inspection of the property is crucial to identify deferred maintenance or capital improvement needs that could impact the valuation or future cash flows. Lastly, I ensure legal due diligence is thorough, reviewing zoning compliance, title searches, and any encumbrances or easements that could impose on the property’s operation or value. This holistic approach ensures that we mitigate risks and secure investments that align with our strategic objectives.”

3. What factors drive your decision-making process when considering asset disposal in a portfolio?

Deciding to dispose of an asset in real estate private equity is a significant strategic move. It requires balancing financial metrics, market conditions, and investment horizons with the fund’s goals. The intricate dance between investor expectations and market fluidity is crucial for timing disposals to maximize returns and mitigate risks.

When responding, one should articulate a multi-faceted approach that begins with quantitative analysis, such as IRR targets, equity multiples, and hold period optimization. Then, layer in qualitative considerations like market growth potential, asset quality, and alignment with the fund’s investment thesis. It’s essential to communicate a structured yet adaptable process that takes into account both micro and macroeconomic factors as well as stakeholder interests. Demonstrating an understanding of the fund’s lifecycle and how asset disposal fits into the larger picture of portfolio management will show depth and sophistication in your decision-making process.

Example: “ When considering asset disposal, the primary quantitative factor is whether the disposal aligns with our targeted internal rate of return (IRR) and equity multiple objectives. This involves a thorough analysis of the asset’s financial performance and projections, ensuring that the timing of the disposal maximizes returns and corresponds with optimal hold period strategies. Additionally, we consider the cost of capital and the reinvestment opportunities available, aiming to recycle capital into higher-yielding investments when appropriate.

On the qualitative side, it’s crucial to assess the market cycle, identifying whether the asset is in a market with growth potential that could warrant a longer hold or if market dynamics suggest a peak valuation conducive to selling. The asset’s quality and how it aligns with our fund’s investment thesis are also top considerations. For instance, if an asset no longer fits the strategic direction of the fund due to shifts in market trends or fund objectives, disposal might be the prudent course of action. Finally, stakeholder interests, including investor expectations and fund lifecycle considerations, play a pivotal role in the decision-making process, ensuring that each disposal decision supports the overarching goals of the fund and its investors.”

4. Outline a strategy for capital raising that targets both institutional and high-net-worth investors.

Crafting a tailored approach to attract different investor segments is essential in real estate private equity. Institutional and high-net-worth individuals have diverse expectations and risk appetites. It’s important to resonate with each group’s unique motivations while balancing the need for large-scale funding.

When responding, it’s crucial to articulate a dual-faceted strategy that addresses both audiences. For institutional investors, emphasize leveraging industry relationships, presenting data-driven market analysis, and showcasing past successful projects that underline the fund’s credibility. For high-net-worth individuals, focus on the personalized approach, highlighting the exclusive opportunities, the direct impact their investment can make, and the potential for bespoke investment terms. Articulating how you would maintain transparent communication and offer thorough due diligence to both groups will demonstrate your comprehensive understanding of investor relations.

Example: “ To effectively raise capital from institutional investors, the strategy should center on demonstrating a robust track record and providing a granular level of detail in market analysis and projections. Institutional investors typically have a mandate to fulfill and look for opportunities that offer a strong alignment with their investment criteria. By presenting a comprehensive portfolio of past successful projects, we can establish credibility. Additionally, institutional investors require extensive due diligence, so providing in-depth information on the underwriting process, risk management strategies, and exit scenarios is essential. This can be supplemented with data-driven insights into market trends and potential growth areas, which will help in showcasing the fund’s strategic edge.

Conversely, when targeting high-net-worth individuals, the approach would be more personalized. It is crucial to emphasize the unique opportunities that our fund offers, such as access to off-market deals or early investment stages that are typically reserved for institutional players. By highlighting the potential for customized investment terms and the direct impact of their investment, we can appeal to their desire for exclusivity and control. For both high-net-worth and institutional investors, maintaining a transparent line of communication is key. This includes regular updates on fund performance, market conditions, and any shifts in strategy. Providing a clear and concise reporting framework will help build trust and reinforce the fund’s commitment to accountability and transparency.”

5. Illustrate how you would structure a waterfall distribution model for limited partners in a fund.

Proficiency in financial modeling is critical when discussing the waterfall distribution model in real estate private equity. This complex method of allocating returns aligns the interests of general and limited partners. Candidates must demonstrate their understanding of priority return sequences and manage investor expectations effectively.

When responding to this question, begin by outlining the basic tiers of a typical waterfall structure—such as return of capital, preferred return, catch-up, and carried interest. Then, delve into the specifics, like the rates of return you would offer at each tier and the conditions that trigger the transition from one tier to another. Use clear language and, if possible, reference past experience where you’ve successfully implemented or managed such a structure. Demonstrate your strategic approach to aligning interests and ensuring fairness in profit distribution, emphasizing your commitment to transparency and fiduciary responsibility.

Example: “ In structuring a waterfall distribution model for limited partners, I would start by establishing a clear return of capital tier. This ensures that all initial capital contributions are returned to the limited partners before any profits are distributed. Following this, I would implement a preferred return tier, typically set at an 8% hurdle rate, which aligns with industry standards and compensates limited partners for the opportunity cost of their investment.

Once the preferred return is met, the next tier would be the catch-up phase, designed to allocate profits to the general partner until the profit split reaches the agreed-upon ratio, often 80/20 or 70/30 in favor of limited partners. This structure incentivizes the general partner to surpass the preferred return threshold, as they would receive a larger share of profits beyond this point. Finally, any remaining profits would be distributed according to the carried interest agreement, which typically sees the general partner receiving 20% of additional profits, further aligning the interests of both parties. Throughout this process, it’s crucial to maintain transparency and to have clear, contractual definitions of each tier to uphold fiduciary responsibility and ensure the alignment of interests between the general partner and limited partners.”

6. In what ways have you optimized operational efficiencies within properties to enhance value?

Maximizing the value of real estate properties hinges on understanding operational intricacies. Candidates should showcase their ability to scrutinize processes, identify improvement areas, and implement strategic changes that enhance profitability.

When responding, candidates should outline specific strategies they’ve employed, such as renegotiating vendor contracts, implementing new technologies for property management, or redesigning services to enhance tenant satisfaction and retention. It’s important to provide concrete examples that demonstrate a thoughtful approach to cost-reduction and revenue-enhancement, and to explain the thought process behind these decisions, including any analysis or data that guided them.

Example: “ In optimizing operational efficiencies, I’ve focused on the strategic renegotiation of vendor contracts and the integration of smart technology systems. By conducting a thorough market analysis, I identified opportunities to renegotiate contracts with key vendors, leading to a reduction in operating expenses without compromising service quality. This not only improved net operating income but also strengthened relationships with vendors who were willing to provide more favorable terms in exchange for longer-term contracts.

Furthermore, I spearheaded the adoption of advanced property management software that streamlined maintenance requests, tenant communication, and energy management. The implementation of these systems reduced manual workload, allowing on-site management to focus on tenant engagement and satisfaction. This tech-forward approach not only decreased operational costs but also enhanced the tenant experience, contributing to higher retention rates and reducing vacancy-related revenue loss. The combination of these initiatives resulted in a measurable increase in property value, as reflected in both improved cash flows and capitalization rates.”

7. Provide an example of a complex deal you structured and the challenges you faced during execution.

Orchestrating sophisticated transactions in real estate private equity requires a multifaceted skill set. Candidates are tested on their experience with complex financial arrangements, regulatory hurdles, and stakeholder negotiations. The ability to structure deals, solve problems, and manage risks is under scrutiny.

When responding, candidates should outline the deal’s context, emphasizing the complexities involved, such as capital stack, investment thesis, market conditions, and regulatory constraints. They should then detail the specific challenges encountered and how they navigated these obstacles, showcasing their strategic thinking, negotiation skills, and resilience. The response should conclude with the outcome, reflecting on any lessons learned and the overall impact on their portfolio or company.

Example: “ In structuring a multifaceted urban redevelopment project, we were faced with a capital stack that included senior debt, mezzanine financing, and multiple equity investors, each with distinct terms and priorities. The investment thesis hinged on a value-add strategy, capitalizing on zoning changes to increase the rentable square footage and implementing significant property improvements to attract a higher-paying tenant mix.

The primary challenges stemmed from aligning the interests of diverse stakeholders, navigating the intricacies of urban planning regulations, and mitigating construction risk in a volatile market. Through meticulous due diligence and leveraging our relationships with local authorities, we secured the necessary permits and entitlements. We also structured waterfall provisions in the equity agreements to address the disparate risk profiles and return expectations of our investors. Furthermore, we negotiated a flexible draw schedule with our mezzanine lender to accommodate potential construction delays.

The deal concluded with a successful stabilization of the asset, yielding an IRR that exceeded initial projections. This experience underscored the importance of adaptive financial engineering and stakeholder management in complex real estate private equity transactions.”

8. Detail your experience with regulatory compliance issues in cross-border real estate transactions.

Meticulous attention to detail and a robust understanding of various legal frameworks are essential when dealing with cross-border transactions in real estate private equity. Candidates must demonstrate their ability to navigate international laws and regulations efficiently to mitigate risks and ensure smooth transaction processes.

When responding to this question, it’s essential to articulate specific instances where you’ve successfully managed compliance challenges. Share examples that demonstrate your expertise in conducting due diligence, interpreting complex legal documents, and coordinating with international teams to adhere to all relevant laws and regulations. Highlight any strategies you’ve implemented to stay informed about regulatory updates and how you’ve ensured that cross-border transactions are executed in compliance with all necessary legal standards.

Example: “ In navigating cross-border real estate transactions, I’ve encountered a range of regulatory compliance issues, particularly in the areas of due diligence and fund structuring to meet the legal requirements of multiple jurisdictions. A notable experience involved a transaction between the US and Germany, where I led the due diligence process, ensuring adherence to both the Foreign Investment in Real Property Tax Act (FIRPTA) in the US and the German Investment Code (KAGB). This required a comprehensive understanding of tax implications, entity structuring, and the nuances of foreign investment regulations.

To mitigate risks and ensure compliance, I developed a strategy that involved close collaboration with local legal experts and tax advisors, which facilitated the interpretation of complex legal frameworks and the identification of any potential compliance red flags. Additionally, I implemented a compliance monitoring system that provided real-time updates on regulatory changes, allowing us to proactively adjust our investment structures and strategies. This approach not only ensured that the transaction met all legal standards but also optimized the tax efficiency of the investment, ultimately enhancing investor returns.”

9. What metrics do you prioritize when evaluating the performance of a real estate private equity fund?

Prioritizing the right metrics is crucial for assessing a real estate private equity fund’s performance. Candidates should exhibit analytical skills, familiarity with industry standards, and the ability to balance risk and reward in investment decisions.

When responding, it’s important to demonstrate your grasp of industry-specific metrics such as Internal Rate of Return (IRR), Equity Multiple, Cash on Cash Return, Net Asset Value (NAV), and the Debt-Service Coverage Ratio (DSCR). Explain how you use these metrics to paint a comprehensive picture of a fund’s performance, taking into account both short-term profitability and long-term value creation. Articulate clearly how you prioritize or weigh these metrics based on the fund’s strategy and objectives, and how they align with the interests of investors.

Example: “ When evaluating a real estate private equity fund, I prioritize metrics that provide a holistic view of both the current performance and the projected long-term value. Internal Rate of Return (IRR) is at the forefront, as it reflects the fund’s efficiency in generating returns over the investment horizon, taking into account the time value of money. However, IRR must be balanced with the Equity Multiple, which gives a clear picture of the total cash returned to investors relative to the equity invested. This is crucial for understanding the scale of returns in absolute terms.

In conjunction with these, I assess the Cash on Cash Return to gauge the fund’s ability to generate cash flow from operations, which is a key indicator of the asset’s current income-producing potential. Net Asset Value (NAV) provides insight into the fund’s underlying asset value, which is essential for assessing the long-term appreciation potential. Lastly, the Debt-Service Coverage Ratio (DSCR) is critical for understanding the fund’s risk profile, as it measures the ability to cover debt obligations, which is particularly important in a leveraged investment structure. Each metric is weighted according to the fund’s strategy—whether it’s value-add, opportunistic, or core/core-plus—and investor risk appetite, ensuring alignment with the overall investment objectives.”

10. How do you mitigate risks associated with environmental concerns in property investments?

Foresight and expertise in environmental due diligence are critical in real estate private equity. Candidates must understand environmental regulations and implement strategies to protect investments from potential liabilities.

When responding, highlight your experience with environmental due diligence processes, such as Phase I and Phase II Environmental Site Assessments. Discuss how you stay informed about relevant environmental laws and regulations and how you collaborate with experts, like environmental consultants, to evaluate risks. Emphasize your strategic approach to managing these risks, whether through insurance, contractual protections, or incorporating sustainability practices into property management. Demonstrate your understanding that mitigating environmental risks is not just about avoiding financial loss, but also about ensuring long-term investment viability and contributing positively to the community and environment.

Example: “ Mitigating environmental risks begins with a thorough due diligence process, incorporating a Phase I Environmental Site Assessment to identify potential contamination or environmental liabilities. If any issues are flagged, a Phase II Assessment follows, with soil, groundwater, and building materials testing to quantify risks. Staying abreast of environmental regulations is crucial; I ensure compliance with federal, state, and local environmental laws, which not only protects the investment but also aligns with responsible stewardship practices.

In managing identified risks, I engage with specialized environmental consultants to devise remediation strategies when necessary, and I incorporate environmental indemnities and warranties into purchase agreements to safeguard against unforeseen liabilities. Additionally, I advocate for the integration of sustainability practices in property management to enhance asset value and marketability while minimizing the property’s environmental footprint. This strategic approach not only mitigates immediate risks but also positions the investment for long-term resilience and compliance with evolving environmental standards.”

11. Share a time when you successfully negotiated a joint venture agreement in the real estate sector.

Forging successful joint ventures in real estate private equity involves aligning interests and maximizing returns. Candidates should demonstrate their experience in establishing partnerships that are lucrative, stable, and synergistic.

When responding, be specific about the context of the deal, the challenges faced, and how you addressed them. Outline the strategies you used to find common ground and how you structured the agreement to benefit all parties. Demonstrate your analytical skills by discussing the financial modeling and due diligence performed, and highlight your interpersonal skills by explaining how you built rapport and trust with the other party. It’s essential to convey that your negotiation skills are backed by a deep understanding of the market and a commitment to fostering strong, profitable partnerships.

Example: “ In a recent joint venture, I spearheaded negotiations for a mixed-use development project in a burgeoning urban area. The complexity of the deal stemmed from aligning our investment strategy, which prioritized long-term capital appreciation, with our partner’s focus on immediate cash flow generation. Through meticulous financial modeling, I demonstrated the viability of a phased development approach that could satisfy both objectives. This involved a detailed revenue projection for the retail spaces, which would provide early cash flow, alongside a longer-term forecast for the residential units that were expected to appreciate in value due to the area’s development trajectory.

To build trust and find common ground, I conducted thorough due diligence, which included market analysis, zoning regulations, and demographic studies to substantiate our projections. By presenting data-driven insights, I was able to persuade our partner that the proposed structure would not only meet their cash flow requirements but also enhance the overall profitability of the venture. The agreement was structured to include performance milestones tied to the financial goals of both parties, ensuring a balanced distribution of risks and rewards. This successful negotiation was a testament to the importance of preparation, clear communication, and the ability to synthesize complex information into a compelling investment narrative.”

12. Walk me through your method for projecting cash flows and calculating net present values for potential acquisitions.

Accurately assessing the profitability of property acquisitions is the crux of real estate private equity. Candidates must show their ability to project cash flows, calculate net present values, and anticipate scenarios affecting investment performance.

When responding, outline your approach by highlighting key components such as market research, rental income projections, expense estimations, financing assumptions, and exit strategy. Be clear on how you incorporate variables like occupancy rates, inflation, interest rates, and capital expenditures into your model. Discuss how you discount future cash flows to arrive at the net present value, referencing the discount rate you choose and why. Showcasing your attention to detail, ability to manage complex calculations, and your understanding of market trends will demonstrate your expertise and value to the team.

Example: “ In projecting cash flows for potential acquisitions, I start by conducting thorough market research to establish realistic rental income projections, taking into account local occupancy rates, comparable lease rates, and historical data trends. I then estimate operating expenses, including property management, maintenance, taxes, and insurance, while incorporating anticipated inflation rates. For financing assumptions, I analyze current market interest rates, loan-to-value ratios, and debt coverage service ratios to structure the optimal capital stack.

Capital expenditures are forecasted based on the property’s condition and the strategic long-term hold period, ensuring we account for both routine and major maintenance that could impact the asset’s performance. The exit strategy is crafted by evaluating market cycles, potential capital appreciation, and the projected hold period, which informs the terminal value calculation.

To calculate the net present value, I discount future cash flows using a discount rate that reflects the risk profile of the investment, often derived from the weighted average cost of capital or adjusted for real estate-specific risk premiums. This rate is pivotal as it aligns the investment’s risk with expected returns, ensuring that we are making informed decisions that aim to maximize investor value while mitigating financial exposure.”

13. How do you balance diversification and focus in a real estate investment portfolio?

A strategic approach to portfolio construction is tested in real estate private equity. Candidates should understand how diversification across property types and locations can protect against market volatility while recognizing the potential dilution of expertise and gains.

When responding, articulate your strategy for diversification, such as investing in various real estate sectors like residential, commercial, and industrial, and across different markets to hedge against localized economic downturns. Then pivot to focus, explaining how specializing in certain types of real estate or regions can lead to a deeper understanding of those markets, potentially resulting in better investment decisions. Provide examples from past experiences where your balanced approach has led to successful outcomes, showing that you can navigate the equilibrium between spreading risk and capitalizing on concentrated knowledge.

Example: “ Balancing diversification and focus within a real estate investment portfolio requires a strategic approach that mitigates risk while maximizing returns. Diversification is achieved by allocating investments across various property types and geographic locations. This spreads exposure and reduces the impact of sector-specific or regional economic downturns. For instance, during times when the residential market may be underperforming, a well-diversified portfolio that includes commercial and industrial assets can provide stability and continued income streams.

Conversely, maintaining a degree of focus allows for the cultivation of specialized expertise and the ability to recognize unique opportunities that others may overlook. By concentrating on particular niches within the real estate market, such as multifamily properties in high-growth urban areas, one can leverage in-depth knowledge to achieve above-market returns. A successful example of this balanced approach is the strategic investment in a portfolio that combines stable, income-generating Class B office spaces in emerging markets with targeted development projects in established markets, which can offer significant value-add potential. This blend of diversification and focus has consistently resulted in resilient performance across various market cycles.”

14. Which emerging trends in real estate are most likely to impact private equity strategies, and why?

Anticipating and capitalizing on trends in the real estate market is a key skill for private equity professionals. Candidates should demonstrate their ability to analyze and articulate the impacts of emerging trends on investment strategies.

When responding to this question, focus on specific trends that have tangible implications for private equity, such as shifts towards sustainable development, the rise of smart home technology, or changes in urbanization patterns. Explain how these trends could affect asset valuation, investment appetites, and portfolio diversification. Offer insights into how you would adjust investment strategies in response to these trends and back up your reasoning with evidence or examples from recent market developments. This not only shows your analytical skills but also your proactive approach to portfolio management.

Example: “ The shift towards sustainable development is a significant trend impacting real estate private equity strategies. As environmental concerns become more pronounced, there’s a growing demand for green buildings and eco-friendly infrastructure. This trend is not just driven by regulatory pressures, but also by tenant and investor preferences, which are increasingly skewed towards sustainability. Consequently, assets that adhere to environmental standards, such as LEED certification, are likely to see enhanced valuation and lower operating costs due to energy efficiency. In response, a private equity strategy should prioritize investments in properties with strong sustainability profiles or those that offer potential for green retrofitting, thereby aligning with the ESG criteria that are becoming essential for attracting institutional capital.

Another trend is the evolution of smart home technology and its integration into residential and commercial real estate. This technology is rapidly becoming a differentiator in the market, as properties equipped with smart systems offer enhanced security, convenience, and energy efficiency, which can translate into higher rental premiums and occupancy rates. From a private equity perspective, this necessitates a strategy that not only values these technological enhancements in underwriting but also actively seeks to invest in properties that can support or are already equipped with such innovations. By doing so, private equity firms can ensure their portfolios remain attractive and competitive, capitalizing on the operational efficiencies and tenant demand driven by smart technology adoption.”

15. Tell us about a particularly challenging tenant issue you’ve resolved while managing a property.

Handling difficult tenant issues is a test of interpersonal skills and the ability to maintain an asset’s value. Candidates should reflect on their conflict resolution skills, legal knowledge, and commitment to preserving the property’s reputation and income stream.

When responding, provide a structured account of the situation, the actions taken, and the outcome. Emphasize your thought process and the rationale behind your decisions. Highlight your communication skills, the steps you took to understand the tenant’s perspective, and how you balanced firmness with empathy. Mention any creative solutions you implemented and how you managed to safeguard the property’s interests while resolving the issue amicably. This response will demonstrate your hands-on experience and capability in property management within the high-stakes environment of real estate private equity.

Example: “ In one instance, we faced a situation where a commercial tenant in a high-value property was consistently late on rent payments, which began to affect our cash flow projections and investor returns. Recognizing the potential impact on our asset’s performance, I initiated a dialogue with the tenant to understand the root cause. It turned out they were experiencing temporary cash flow issues due to a delayed receivable from a major client.

Balancing the need for maintaining strict contractual obligations with a strategic long-term perspective, I proposed a temporary rent deferral plan, allowing the tenant to pay a reduced rent for three months, followed by a catch-up schedule aligned with their expected cash inflows. This solution required negotiating with our investors and explaining how this approach minimized vacancy risks and potential leasing downtime costs, which could have been more detrimental to the asset’s income stream.

The outcome was favorable; the tenant’s financial situation stabilized, they fulfilled the catch-up plan, and our relationship was strengthened, leading to a lease extension at market rates. This resolution maintained property income, avoided the costs associated with tenant turnover, and preserved investor confidence in our asset management capabilities.”

16. Assess the role of technology in enhancing the value of real estate assets under management.

Leveraging technology is becoming increasingly important in real estate private equity. Candidates should understand how advanced analytics and IoT can transform property management and investment strategies to drive growth and investor returns.

When responding, candidates should articulate how they’ve utilized technology to enhance asset value, perhaps referencing specific platforms for property management, energy efficiency tech that reduces costs, or data analytics tools that have informed investment decisions. They should convey a clear vision of how they integrate technological solutions with traditional real estate acumen to optimize portfolio performance and stay ahead in a competitive market.

Example: “ Technology plays a pivotal role in enhancing the value of real estate assets by streamlining operations, improving tenant experiences, and providing data-driven insights for strategic decision-making. For instance, the integration of advanced property management platforms has enabled more efficient management of assets by automating tasks such as rent collection, maintenance requests, and tenant communication. This not only reduces operational costs but also elevates the tenant experience, contributing to higher retention rates and ultimately boosting the asset’s value.

On the sustainability front, incorporating energy-efficient technologies like smart HVAC systems and LED lighting has been key in reducing utility expenses, which not only enhances net operating income but also aligns with the growing investor and tenant demand for environmentally responsible properties. Moreover, leveraging big data analytics and AI has been instrumental in optimizing investment decisions, enabling the identification of undervalued assets and the prediction of market trends. By harnessing these technologies, I’ve been able to enhance asset performance, mitigate risk, and ensure that the portfolio remains competitive in an ever-evolving market landscape.”

17. What is your track record in securing debt financing for real estate deals, and what obstacles did you overcome?

Successfully securing debt financing showcases a candidate’s understanding of financial markets and their ability to navigate the world of lenders. Overcoming obstacles in obtaining loans reflects problem-solving skills and resilience.

When responding, it’s crucial to detail specific deals where you’ve successfully secured financing, emphasizing the scale and complexity of these transactions. Discuss the strategies employed to negotiate favorable terms, the challenges faced, such as economic downturns or regulatory changes, and how you addressed these issues. Quantify your achievements when possible, and explain the impact of your actions on the overall success of the deals. Your answer should showcase your expertise, resourcefulness, and tenacity in overcoming financing hurdles.

Example: “ In securing debt financing for real estate deals, I’ve navigated through a variety of market conditions and successfully closed transactions ranging from mid-size multifamily acquisitions to large-scale commercial developments. One notable example was a $50 million acquisition of a distressed asset in a secondary market, where traditional lenders were hesitant due to perceived risks and a cooling market climate. By leveraging my relationships with niche debt funds and articulating the upside potential through a detailed turnaround strategy, I was able to secure a favorable non-recourse loan at 75% LTV with a competitive interest rate.

Another challenge I overcame was during a period of regulatory tightening, where a high-profile, mixed-use development project faced increased scrutiny. The key was a thorough due diligence process and presenting a robust risk mitigation plan to lenders. This involved stress-testing the financial models under various economic scenarios and ensuring compliance with the latest regulatory requirements. The approach not only satisfied the lenders’ risk assessment criteria but also resulted in securing a lower interest rate, demonstrating the project’s solid fundamentals and my ability to navigate complex regulatory landscapes. The successful negotiation of these terms had a direct impact on enhancing the project’s IRR and equity multiples for our investors.”

18. Elaborate on a situation where you had to adapt your investment strategy due to macroeconomic changes.

Flexibility and analytical skills are essential when external economic factors impact real estate investments. Candidates must demonstrate their ability to interpret macroeconomic indicators and adjust investment strategies swiftly.

When responding, it’s crucial to outline a specific instance that exemplifies your strategic agility. Start by briefly describing the macroeconomic change that occurred, then detail how you identified the potential impact on your investments. Discuss the steps you took to reassess the situation, consult with your team or experts if relevant, and the rationale behind the adjustments you made to your strategy. Conclude with the outcome, emphasizing any positive results or lessons learned from the experience to underscore your capacity to navigate the fluid landscape of real estate private equity effectively.

Example: “ In the wake of the COVID-19 pandemic, the macroeconomic landscape shifted dramatically, with interest rates plummeting and uncertainty permeating the market. Recognizing the potential long-term impact on commercial real estate, particularly in the office and retail sectors, we were prompted to reassess our portfolio’s exposure to these segments. With remote work trends accelerating and retail foot traffic declining, we anticipated a significant valuation adjustment and potential income disruptions.

We swiftly convened with our analysts and adjusted our strategy to reduce exposure to high-risk assets, while simultaneously identifying opportunities in industrial real estate and multifamily units, which were poised to benefit from the e-commerce boom and housing shortages. We reallocated funds, focusing on properties with strong fundamentals in growth markets, and enhanced our asset management efforts to preserve value in existing investments. This pivot not only insulated our portfolio from the worst of the downturn but also positioned us to capitalize on emerging trends, resulting in outperformance relative to our initial projections for the period.”

19. When analyzing a distressed asset, what key indicators suggest turnaround potential?

Discerning a distressed asset’s potential for recovery is paramount in real estate private equity. Candidates should exhibit their analytical acumen, understanding of market trends, and strategic thinking in financial forecasting.

When responding, focus on explaining your approach to analyzing factors such as the asset’s location, underlying market demand, and the potential for rent growth or cost reduction. Discuss how you would evaluate the quality of the existing tenant base, the terms of current leases, and the physical condition of the property. Mention any specific financial metrics you would scrutinize, like the capitalization rate or cash flow analysis. Be sure to articulate how these indicators, in combination with your knowledge of broader economic conditions and real estate cycles, would inform your assessment of the asset’s turnaround potential.

Example: “ In analyzing a distressed asset, the first indicator of turnaround potential I scrutinize is the location, which is fundamental in real estate. A prime location with strong underlying market demand signifies a resilient potential for value appreciation. Even if an asset is currently underperforming, a strategic location in a market with barriers to entry can suggest a high turnaround potential, assuming there is evidence of economic growth, job creation, and population inflows in the area.

Next, I assess the asset’s operational inefficiencies, focusing on the potential for rent growth or cost reduction. This involves a deep dive into the quality of the existing tenant base and the terms of current leases. Are there below-market rents due to poor management that can be adjusted? I also evaluate the physical condition of the property, estimating the capital required for improvements and the ROI on such investments. Financial metrics like the capitalization rate are analyzed in the context of the local market to determine if there is a mispricing opportunity. Cash flow analysis is critical; I look for properties with the ability to generate positive cash flows post-restructuring. These factors, combined with a macroeconomic perspective on real estate cycles, guide my assessment of whether the distressed asset is a turnaround candidate with a viable path to value creation.”

20. Reflect on a past investment that underperformed expectations and how you handled it.

Managing investments through market fluctuations and challenges reveals an investor’s strategic acumen and resilience. Candidates should discuss how they handle setbacks, analyze issues, and communicate corrective actions to stakeholders.

When responding to this question, a candidate should detail a specific example, focusing on the context that led to the underperformance. It’s important to articulate the analysis conducted to identify the root causes and the steps taken to address the situation. This reflection should demonstrate a balance between taking responsibility and understanding external factors. Moreover, the candidate should highlight any positive takeaways or strategic adjustments made post-analysis to illustrate growth and the ability to turn challenges into opportunities for future investments.

Example: “ Reflecting on a past investment, there was a multifamily asset in an emerging market that underperformed due to a confluence of unforeseen economic shifts and overestimation of rental growth rates. Upon identifying the underperformance, a comprehensive review was conducted, examining market trends, operational efficiencies, and the initial underwriting assumptions. It became apparent that the economic downturn had a more profound impact on local employment rates than anticipated, which in turn affected the rental market.

In response, we implemented a strategic asset management plan that included renegotiating terms with vendors, enhancing tenant retention programs, and adjusting marketing strategies to align with the current market conditions. Additionally, we revisited our underwriting models to incorporate more conservative growth rates and stress-tested scenarios for future investments. This experience underscored the importance of agility in asset management and reinforced the value of having robust risk mitigation strategies in place. The lessons learned from this investment have been instrumental in refining our due diligence process and have contributed to the success of subsequent investments.”

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Private Equity Interviews 101: How to Win Offers

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Private equity interviews can be challenging, but for most candidates, winning interviews is much tougher than succeeding in those interviews.

You do not need to be a math genius or a gifted speaker; you just need to understand the recruiting process and basic arithmetic.

Still, there is more to PE interviews than “2 + 2 = 4,” so let’s take a detailed look at the process:

How to Network and Win Private Equity Interviews

The Private Equity recruiting process differs dramatically depending on your current job and location.

Here are the two extremes:

• Investment Banking Analyst at a Bulge Bracket or Elite Boutique in New York: The process will be highly structured, and interviews will finish at warp speed. In some ways, your bank, group, and academic background matter more than your skill set or deal experience. This one is known as the “on-cycle” process.
• Non-Banker in Another Part of the U.S. or World: The process will be far less structured, it may extend over many months, and your skill set and deal/client experience will matter a lot more. This one is known as the “off-cycle” process.

If you’re in between these categories, the process will also be in between these extremes.

For example, if you’re at a smaller bank in NY, you may complete some on-cycle interviews, but you will almost certainly also go through the off-cycle process at smaller firms.

If you’re in London, there will also be a mix of on-cycle and off-cycle processes, but they tend to start later and move more slowly than the ones in NY.

We have covered PE recruiting previously ( overall process and what to expect in the on-cycle process ), so I am not going to repeat everything here.

Interviews in both on-cycle and off-cycle processes test similar topics , but the importance of each topic varies.

The timing of interviews and start dates, assuming you win offers, also differs.

The Overall Private Equity Interview Process

Regardless of whether you recruit in on-cycle or off-cycle processes, or a combination of both, almost all PE interviews have the following characteristics in common:

• Multiple Rounds: You’ll almost always go through at least 2-3 rounds of interviews (and sometimes many more!) where you speak with junior to senior professionals at the firm.
• Topics Tested: You’ll have to answer fit/background questions, technical questions, deal/client experience questions, questions about the firm’s strategies and portfolio, market/industry questions, and complete case studies and modeling tests.

The differences are as follows:

• Timing and Time Frame: If you’re at a BB/EB bank in NY, and you interview with mega-funds, the process starts and finishes within several months of your start date at the bank (!), and it moves up earlier each year. Interviews at the largest firms start and finish in 24-48 hours, with upper-middle-market and middle-market firms beginning after that.

By contrast, interviews start later at smaller PE firms, and the entire process may last for several weeks up to several months.

• Importance of Topics Tested: At large funds and in the on-cycle process, you need to complete modeling tests quickly and accurately and spin your pitches and early-stage deals into sounding like real deals; at smaller funds and in off-cycle interviews, the reasoning behind your case studies/modeling tests and your real experience with clients and deals matter more.

Firm-specific knowledge and fitting your investment recommendations to the firm’s strategies are also more important.

• Start Date: You interview far in advance if you complete the on-cycle process, and if you win an offer, you might start 1.5 – 2.0 years later. With the off-cycle process, you start right away or soon after you win the offer.

Private Equity Interview Topics

There is not necessarily a correlation between the stage of interviews and the topics that will come up.

You could easily get technical questions early on, and you’ll receive fit/background and deal experience questions throughout the process.

Case studies and modeling tests tend to come up later in the process because PE firms don’t want to spend time administering them until you’ve proven yourself in previous rounds.

However, there are exceptions even to that rule: For example, many funds in London start the process with modeling tests because there’s no point interviewing if you can’t model.

Here’s what to expect on each major topic:

Fit/Background Questions: “Why Private Equity?”

The usual questions about “ Why private equity ,” your story , your strengths/weaknesses , and ability to work in a team will come up, and you need answers for them.

We have covered these in previous articles, so I’ve linked to them above rather than repeating the tips here.

Since on-cycle recruiting takes place at warp speed, you’ll have to draw on your internship experience to come up with stories for these questions, and you’ll have to act as if PE was your goal all along.

By contrast, if you’re interviewing for off-cycle roles, you can use more of your current work experience to answer these questions.

While these questions will always come up, they tend to be less important than in IB interviews because:

• In on-cycle processes, it’s tough to differentiate yourself – everyone else also did multiple finance internships and just started their IB roles.
• They care more about your deal experience, whether real or exaggerated, in both types of interviews.

Technical Questions For PE

The topics here are similar to the ones in IB interviews: Accounting, equity value and enterprise value , valuation/DCF, merger models, and LBO models.

If you’re in banking, you should know these topics like the back of your hand.

And if you’re not in banking, you need to learn these topics ASAP because firms will not be forgiving.

There are a few differences compared with banking interviews:

• Technical questions tend to be framed in the context of your deal experience – instead of asking generic questions about the WACC formula , they might ask how you calculated it in one specific deal.
• More critical thinking is required. Instead of asking you to walk through the financial statements when Depreciation changes, they might describe companies with different business models and ask how the financial statements and valuation would differ.
• They focus more on LBO models, quick IRR math , and your ability to judge deals quickly.

Most interviewers use technical questions to weed out candidates , so poor technical knowledge will hurt your chances, but exceptional knowledge won’t necessarily get you an offer.

Talking About Deal/Client Experience

This category is huge, and it presents different challenges depending on your background.

If you’re an Analyst at a large bank in New York, and you’re going through on-cycle recruiting, the key challenge will be spinning your pitches and early-stage deals into sounding like actual deals.

If you’re at a smaller bank, and you’re going through off-cycle recruiting, the key challenge will be demonstrating your ability to lead, manage, and close deals .

And if you’re not in investment banking, the key challenge will be spinning your experience into sounding like IB-style deals.

Regardless of your category, you’ll need to know the numbers for each deal or project you present, and you’ll need a strong “investor’s view” of each one.

That’s quite a bit to memorize, so you should plan to present, at most, 2-3 deals or projects.

You can create an outline for each one with these points:

• The company’s industry, approximate revenue/EBITDA, and multiples (or, for non-deals, estimated costs and benefits).
• Whether or not you would invest in the company’s equity/debt or acquire it (or, for non-deals, whether or not you’d pursue the project).
• The qualitative and quantitative factors that support your view.
• The key risk factors and how you might mitigate them.

If you just started working, pick 1-2 of your pitches and pretend that they have progressed beyond pitches into early-stage deals.

Use Capital IQ or Internet research to generate potential buyers or investors, and use the company-provided pitch materials to come up with your projections for the potential stumbling blocks in the transaction.

For your investment recommendation, imagine that each deal is a potential LBO, and build a quick, simple model to determine the rough numbers, such as the IRR in the baseline and downside cases.

For the risk factors, reverse each model assumption (such as the company’s revenue growth and margins) and explain why your numbers might be wrong.

If you’re in the second or third categories above – you need to show evidence of managing/closing deals or evidence of working on IB-style deals – you should still follow these steps.

But you need to highlight your unique contributions to each deal, such as a mistake you found, a suggestion you made that helped move the financing forward, or a buyer you thought of that ended up making an offer for the seller.

If you’re coming in with non-IB experience, such as internal consulting , still use the same framework but point out how each project you worked on was like a deal.

You had to win buy-in from different parties, get information from groups at the company, and justify your proposals by pointing to the numbers and qualitative factors and addressing the risk factors.

Firm Knowledge

Understanding the firm’s investment strategies, portfolio, and exits is very important at smaller firms and in off-cycle processes, and less important in on-cycle interviews at mega-funds.

If you have Capital IQ access, use it to look up the firm.

If not, go to the firm’s website and do extensive Google searches to find the information.

Finding this information should not be difficult, but the tricky point is that firms won’t necessarily evaluate your knowledge by directly asking about it.

Instead, if they give you a take-home case study, they might judge your responses based on how well your investment thesis lines up with theirs.

For example, if the firm makes offline retailers more efficient via cost cuts and store divestitures, you should not present an investment thesis based on overseas expansion or roll-ups of smaller stores.

If they ask for an investor’s view of one of your deals, they might judge your answer based on your ability to frame the deal from their point of view.

For example, if the firm completes roll-ups in fragmented industries, you should not look at a standard M&A deal you worked on and say that you’d acquire the company because the IRR is between XX% and YY% in all scenarios.

Instead, you should point out that with several roll-ups, the IRR would be between XX% and YY%, and even in a downside case without these roll-ups, the IRR would still be at least ZZ%, so you’d pursue the deal.

Market/Industry

In theory, private equity firms should care about your ability to find promising markets or industries.

In practice, open-ended questions such as “Which industry would you invest in?” are unlikely to come up in traditional PE interviews.

If they do come up, they’ll be in response to your deal discussions, and the interviewer will ask you to explain the upsides and downsides of your company’s industry.

These questions are more likely in growth equity and venture capital interviews, so you shouldn’t spend too much time on them if your goal is traditional PE (for more on these fields, see our coverage of venture capital interview questions and the venture capital case study ).

And even if you are interviewing for growth equity or VC roles, you can save time by linking your industry recommendations to your deal experience.

Case Studies and Modeling Tests

You will almost always have to complete a case study or modeling test in PE interviews, but the types of tests span a wide range.

Here are the six most common ones, ranked by rough frequency:

Type #1: “Mental” Paper LBO

This one is closer to an extended technical question than a traditional case study.

To answer these questions, you need to know how to approximate IRR, and you need practice doing the mental math.

The interviewer might ask something like, “A PE firm acquires a $150 EBITDA company for a 10x multiple using 60% Debt. The company’s EBITDA increases to $200 by Year 3, $225 by Year 4, and $250 by Year 5, and it pays off all its Debt by Year 3.

The PE firm sells its stake evenly over Years 3 – 5 at a 10x EBITDA multiple. What’s the approximate IRR?”

Here, the Purchase Enterprise Value is $1.5 billion, and the PE firm contributes 40% * $1.5 billion = $600 million of Investor Equity.

The “average” amount of proceeds is $225 * 10 = $2,250, and the “average” Exit Year is Year 4 (no need to do the full math – think about the numbers – and all the Debt is gone).

So, the PE firm earns $2,250 / $600 = 3.75x over 4 years. Earning 3x in 3 years is a ~45% IRR, so we’d expect the IRR of a 3.75x multiple in 4 years to be a bit less than that.

To approximate a 4x scenario, we could take 300%, divide by 4 years, and multiply by ~55% to account for compounding.

That’s ~41%, and the actual IRR should be a bit lower because it’s a 3.75x multiple rather than a 4.00x multiple.

In Excel, the IRR is just under 40%.

Type #2: Written Paper LBO

The idea is similar, but the numbers are more involved because you can write them down, and you might have 30 minutes to come up with an answer.

You can get a full example of a paper LBO test, including the detailed solutions, here .

You can also check out our simple LBO model tutorial to understand the ropes.

With these case studies, you need to start with the end in mind (i.e., what multiple do you need for an IRR of XX%) and round heavily so you can do the math.

Type #3: 1-3-Hour On-Site or Emailed LBO Model

These case studies are the most common in on-cycle interviews because PE firms want to finish quickly.

And the best way to do that is to give all the candidates the same partially-completed template and ask them to finish it.

You may have to build the model from scratch, but it’s not that likely because doing so defeats the purpose of this test: efficiency.

You’ll almost always receive several pages of instructions and an Excel file, and you’ll have to answer a few questions at the end.

The complexity varies; if it’s a 1-hour test, you probably won’t even build a full 3-statement model .

They might also ask you to use a cash-free debt-free basis or a working capital adjustment to tweak the Sources & Uses slightly.

If it is a 3-hour test, a 3-statement model is more likely (the other parts of the model will be simpler in this case).

Here’s a free example of a timed LBO modeling test ; we have many other examples in the IB Interview Guide and Core Financial Modeling course .

IB Interview Guide

Land investment banking offers with 578+ pages of detailed tutorials, templates and sample answers, quizzes, and 17 Excel-based case studies.

Type #4: Take-Home LBO Model and Presentation

These case studies are open-ended, and in most cases, you will not get a template to complete.

The most common prompts are:

• Build a model and make an investment recommendation for Portfolio Company X, Former Portfolio Company Y, or Potential Portfolio Company Z.
• Pick any company you’re interested in, build a model, and make an investment recommendation.

With these case studies, you must fit your recommendation to the firm’s strategy rather than building a needlessly complex model.

You might have 3-7 days to complete this type of case study and present your findings.

You might be tempted to use that time to build a complex LBO model, but that’s a mistake for three reasons:

• The smaller firms that give open-ended case studies tend not to use that much financial engineering.
• No one will have time to review or appreciate your work.
• Your time would be better spent on industry research and coming up with a sold investment thesis, risk factors, and mitigants.

If you want an example of an open-ended exam like this, see our private equity case study article and follow the video walkthrough or article text.

Your model could be shorter, and your presentation could certainly be shorter, but this is a good example of what to target if you have more time/resources.

Type #5: 3-Statement/Growth Equity Model

At operationally-focused PE firms, growth equity firms, and PE firms in emerging markets such as Brazil , 3-statement projection modeling tests are more common.

The Atlassian case study is a good example of this one, but I would change a few parts of it (we ignored Equity Value vs. Enterprise Value for simplicity, but that was a poor decision).

Also, you’ll never have to answer as many detailed questions as we did in that example.

If you think about it, a 3-statement model is just an LBO model without debt repayment – and the returns are based on multiple expansion, EBITDA growth, and cash generation rather than debt paydown .

You can easily practice these case studies by picking companies you’re interested in, downloading their statements, projecting them, and calculating the IRR and multiples.

Type #6: Consulting-Style Case Study

Finally, at some operationally-focused PE firms, you could also get management consulting-style case studies, where the goal is to advise a company on an expansion strategy, a cost-cutting initiative, or pricing for a new product.

We do not teach this type of case study, so check out consulting-related sites for examples and exercises.

And keep in mind that this one is only relevant at certain types of firms; you’re highly unlikely to receive a consulting-style case study in standard PE interviews.

A Final Word On Case Studies

I’ve devoted a lot of space to case studies, but they are not as important as you might think.

In on-cycle processes, they tend to be a “check the checkbox” item: Interviewers use them to verify that you can model, but you won’t stand out by using fancy Excel tricks.

Arguably, they matter more in off-cycle interviews since you can present unique ideas more easily and demonstrate your communication skills in the process .

What NOT to Worry About In PE Interviews

The topics above may seem overwhelming, so it’s worth pointing out what you do not need to know for interviews.

First, skip super-complex models.

As a specific example, the LBO models on Macabacus are overkill; they’re way too complicated for interviews or even the job itself.

You should aim for Excel files with 100-300 rows, not 1,000+ rows, and skip points like circular references unless they specifically ask for them (for more, see our tutorial on how to remove circular references in Excel )

Next, skip brain teasers; if an interviewer asks them, you should drop discussions with the firm.

Finally, you don’t need to know about the history of the private equity industry or much about PE fund economics beyond the basics.

Your time is better spent learning about a firm’s specific strategy and portfolio.

PE Interview X-Factor(s)

Besides the topics above, competitive tension can make a huge difference in interviews.

If you tell Firm X that you’ve already received an offer from Firm Y, Firm X will immediately become far more likely to give you an offer as well.

Even at the networking stage, competitive tension helps because you always want to tell recruiters that you’re also speaking with Similar Firms A, B, and C.

Also, leverage your group alumni and the 2 nd and 3 rd -year Analysts.

You can read endless articles online about interview prep, but nothing beats real-life conversations with others who have been through the process.

These alumni and older Analysts will also have example case studies they completed, and they can explain how to spin your deal experience effectively.

PE Interview Preparation

The #1 mistake in PE interviews is to focus excessively on modeling tests and technical questions and neglect your deal discussions.

You can avoid this, or at least resist the temptation, by turning your deals into case studies.

If you follow my advice to create simplified LBO models for your deals, you can combine the two topics and get modeling practice while you’re preparing your “investor’s views.”

If you’re working full-time in banking, use your downtime in between tasks to do this , outline your story , and review technical questions.

If you only have 10-15-minute intervals of downtime, break case studies into smaller chunks and aim to finish a specific part in each period.

Finally, start preparing before your full-time job begins .

You’ll have far more time before you start working, and you should use that time to tip the odds in your favor.

The Ugly Truth About PE Interviews

You can read articles like this one, memorize PE interview guides, and get help from dozens of bank/group alumni, but much of the process is still outside of your control.

For example, if you’re in a group like ECM or DCM , it will be tough to win on-cycle interviews at large firms and convert them into offers no matter what you do.

If the mega-funds decide to kick off recruiting one day after you start your full-time job in August, and you’re not prepared, too bad.

If you went to a non-target school and earned a 3.5 GPA, you’ll be at a disadvantage next to candidates from Princeton with 3.9 GPAs no matter what you do.

So, start early and prepare as much as you can… but if you don’t receive an offer, don’t assume it’s because you made a major mistake.

So You Get An Offer: What Next?

If you do receive an offer, you could accept it on the spot, or, if you’re speaking with other firms, you could shop it around and use it to win offers elsewhere.

If you’re not in active discussions with other firms, you’re crazy if you do not accept the offer right away.

If You Get No Offer: What Next?

If you don’t get an offer, follow up with your interviewers, ask for feedback, and ask for referrals to other firms that might be hiring.

If you did reasonably well but came up short in a few areas, you could easily get referrals elsewhere .

If you did not receive an offer because of something that you cannot fix, such as your undergraduate GPA or your previous work experience, you might have to consider other options, such as a Master’s, MBA, or another job first.

But if it was something fixable, you could take another pass at recruiting or keep networking with smaller firms.

To PE Or Not to PE?

That is the question.

And the answer is that if you have the right background, you understand the process, and you start preparing far in advance, you can get into the industry and win a private equity career .

And if not, there are other options, even if you’re an older candidate .

You may not reach the promised land, but at least you can blame it on someone else.

Additional Reading

You might be interested in:

• The Search Fund Internship: Perfect Pathway into Investment Banking and Private Equity Roles?
• Private Equity Analyst Roles: The Best Way to Skip Investment Banking?

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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49 thoughts on “ Private Equity Interviews 101: How to Win Offers ”

Brian, What about personality tests? What is their importance in the overall hiring process eg if you get them as the last stage?

They’re not that important, and even if you do get them, you can’t really “prepare” in any reasonable way (barring a brain transplant to replace your personality and make it more suitable for the firm). It’s also highly unusual to get one in the final stage – a firm doing that is probably just paranoid that you are secretly a serial killer and they want to rule out that possibility.

Hey- for the Fromageries Bel case study, can’t quite make sense of the Tier 4 management incentive returns, what’s the calculation for each tier? Would think it’s Tier 2 less tier 1 * tier 1 marginal profit

Tier 4 is based on a percentage of all profits *above* a 2.5x equity multiple. Each tier below it is based on a percentage of profits between specific multiples, which correspond to specific EUR proceeds amounts.

I have an accounting background (CPA & several years removed from school) and a small amount of finance experience through internships. I’m interviewing for a PE analyst position and managed to get through the first round of interviews. The firm itself doesnt just hire guys with a few years of banking, their team is very diverse with some backgrounds similar to mine.

The first round interview was a mix of technical questions plus a lot about myself and my experience. No behavioral questions. The first round was with an associate for 30 minutes, the second round is an hour with a partner. I managed to answer a lot of the questions about LBO models and what types of companies are good LBO candidates. Thanks to your website for that.

Any advice for a second round interview for a guy like me who doesnt have deal making experience or much experience in finance? Will the subsequent interviews after the first round be more technical-based questions? Or do they lean more on technical questions in round 1 to weed out candidates?

They will usually become more fit-based if they’ve already asked a lot of technical questions in earlier rounds. I would focus on your story and answers to the Why PE / Why This Firm / Are you sure you want to switch?-type questions.

Is it likely too difficult to access the on-cycle process from the CLT office of an In-Between-a-Bank that it would make more sense to focus one’s energy on the MM/LMM? Is the new era of Zoom making geography/distance less of a factor or is the perceived prestige of NY still an obstacle?

Location is somewhat less of a factor now, but it still matters, and working from home will not continue indefinitely into the future. It will be very difficult to participate in on-cycle recruiting at the mega-funds if you’re working in Charlotte at Wells Fargo if that’s your question, but plenty of MM funds are realistic.

What are some of the larger funds that you would consider realistic?

There are dozens of funds out there (it’s not like bulge bracket banks or mega-fund PE firms where there’s only a defined set of 5-10), so I can’t really give you a specific answer. My recommendation would be to look up people who worked at WF on LinkedIn and see the types of funds they are now working at.

I remember I saw a video of yours (might have been YouTube) where you explained the PE process. You talked about do pe firms really add value and then you went over how when a pe firm buys a company, they do a little “trick” where they create a shell company to acquire the target so the debt isn’t on the pe firms books. I’ve been looking all over for this video. Do you know which video I’m referring to?

Yes, that is no longer in video form. It’s still in the written LBO guide but the video from the old course was removed because it was way too long and boring for a video and was better explained in text.

Hi Brian, can you elaborate more on ‘Understanding the firm’s investment strategies, portfolio, and exits’ when you talk about smaller firm and off-cycle processes, simliar point came up under *Type 5*: you must fit your recommendation to the firm’s strategy rather than building a needlessly complex model. What exactly should I pay attention on? I felt funds I checked their investment strategy descirption are pretty broad, and they invest in various type of deals, say even in one industry, they do different purchase range. Also, when talking about growth equity, you mentioned you can practice case by picking companies you’re interested in, downloading their statements, projecting them. What if they are not public companies, how can I get those information? Are you recommending only those companies with 20F available? Or can you just elaborate more on how can I follow your instruction? Thanks

All you can do is go off their website and possibly a Capital IQ description if you have access. See if they focus on growth, leverage for mature companies, operational improvements, or add-on acquisitions and pick something that fits one of those.

You can pick public companies for growth equity or find a public company that is similar to a private one the firm has.

Hey Brian! I have an interview with a family office for a private equity analyst position. The firm is small and not much about it online. I haven’t had much time to prepare as it was not an interview I was expecting. What would you say the most important elements to focus on are for the interview considering the time constraint? I am an undergrad, third year, second internship. (first internship was for a large construction/developer as project coordinator, not finance based)

Focus on your story, the firm’s portfolio companies and strategies, and a few investment ideas you have for specific sectors. Technical questions are fine, but you probably won’t have much time to prepare at the last minute.

How would PE interviews / Technical questions look like for straight out of undergrad PE role look like

e.g Blackstone internships, Goldman Merchant Banking internships etc

Similar to IB ones, with a focus on LBOs?

Largely the same, but less emphasis on deal experience and deal-related questions at the undergraduate level. They may ask slightly more questions on LBOs, but at the undergrad level, they assume you know very little, so questions will span a wide range of topics.

Have you written or seen similar articles on PE operating partner interviews?

No, sorry. There’s hardly any information on that level of interview online because you can’t really make an interview guide or other product to prepare for it, and most people at that level would need 1-on-1 coaching more than a guide. My guess is that they will focus almost exclusively on your past experience turning around and growing businesses and assess how well you can do it for their portfolio companies. They’re not going to give you LBO modeling tests or case studies.

“Next, skip brain teasers; if an interviewer asks them, you should drop discussions with the firm”

Could you please elaborate on this? Almost every IB interview includes brain teasers so I am wondering why a PE interview shouldn’t?

Brain teasers are not that common in IB interviews in most regions unless you count any math/accounting/finance question as a brain teaser. They are far more common in S&T, quant fund, and prop trading interviews.

The point of this statement is that it’s OK if an occasional brain teaser comes up, but if the interviewer asks you brain teasers for 30 minutes, which have exactly 0% correlation to the real work in PE, you should leave because it’s a sign that the people working at the firm are idiots who don’t know how to conduct proper interviews or test candidates.

This is helpful. I find myself at a fix, I do not think I have had the right exposure, although in a BB I support teams with standard materials in a particular industry group in M&A. However I have interviews with a top global PE next month. Any guidance on how should I prepare for it ?

Thanks in advance

Follow everything in this article… practice spinning/discussing your deals… practice LBO questions and simple case studies.

Brian – thank you for your concise and candid remarks. do you have any insights or advice for someone with 5yrs of BB ECM & DCM experience now at a top full-time MBA program looking to break in?

It’s going to be very difficult if you just have capital markets experience and you’re already in business school. You should probably move to an M&A or strong industry team at a large bank (BB or EB) after business school and then go into private equity from there. It’s tough, but still easier than trying to move into PE directly out of an MBA program with only capital markets experience.

My next interview will highly likely involve a statement/growth equity modeling case. I tried to find the Atlassian Case interview but i am unable to open the link.

Would it be possible to share an example case or more information on that topic?

Many thanks,

The Atlassian case study is all we have. I don’t know why you can’t open the files, but I just tried and they seemed to work. Maybe try again or use a different browser.

Hi M&I team,

I have an opportunity to interview for an Analyst level opening at a boutique PE fund. This is a shop that has just started operations so I am directly communicating with the Partner. I doubt they have any structured recruitment process at this stage of their existence. He asked me to send some written work (memos and spreadsheets) on any public listed co that demonstrates my understanding of investing (basic balance sheet analysis, ratio analysis, valuation multiples).

So I am just wondering what to do? Should I work on projections and prepare a DCF model or do something simpler? I’d really appreciate your guidance on this.

Thanks again for the amazing work you’ll have been doing!

Yes, just create simple projections, a simple valuation/DCF, and maybe a simple LBO model since it is a PE fund that intends to buy and sell companies.

Could you provide some advice for preparing interviews for principal investing role ?

Thank you in advance Laura

We don’t really focus on that, but the articles on private equity and funds of funds on this site might be helpful.

Just wanted to say thank you! After reading everything on this site including all the CV and interview material I have managed to transition from a second year engineering undergrad with no prior experience/spring weeks/insight days, into an intern at Aviva Investors (UK buy side) within the space of one year.

The information you have posted is invaluable and “breaking in” is definitely doable with the right mindset and appetite for rejections!

Thanks again.

Thanks! Congrats on your internship offer.

Hi Brian/Nicole – Im an Economics student from the UK in 3rd year out of a 4 year course at a semi-target college, with 2 finance internships done up until now(not FO). I plan on doing a Msc Finance when I finish and eventually break into IB or Sales/Trading (I know I still haven’t decided which one I really want more). Through a family friend I have an offer to do a short internship this summer in NY in a post-trade regulatory commission. As this isn’t actually sitting at a trading desk experience, or anything related to IB should I decide to go down that road, would this add genuine value to my CV ? How are internships in regulatory commissions looked at for students looking to break into sales/trading? Surely even having any NY Finance experience on the CV will add more substance over here in London when going for internships compared to the majority of UK students who don’t? Appreciate any advice on this matter, Thanks!

I don’t think it would help much because you already have 2 non-FO internships, and a regulatory internship would be yet another non-FO internship. If it’s your best option, you can take it, but you would be better off getting something closer to a real front-office role.

Hey Brian. I am graduating after this semester going into Management consulting (Deliote, AT Kearny, Accenture)but I’m hoping to make a switch into either IB or PE after a couple years. I have one search fund internship which was enough to get me a few 1st and second round ib/pe FT interviews but no offers.My plan is to get into the best online MSF program I can and switch into Finance once I’m done. Do you think, given how close I was to getting in my 1st try, a high GPA from a reputable MSF and good experience in consulting will be enough or should I try to somehow get an IB internship before I apply?

I think you will probably need another internship just before the MSF starts or while it is in progress, not necessarily in IB, but something closer to it. Otherwise you’ll get a lot of questions about why you went from the search fund to consulting.

Thanks. As far as my story is concerned, is it better to do another finance internship before consulting so it’s search fund->ib->consulting->MSF (or MBA not sure)? I only ask because I may be able to get on some m&a projects with the consulting firm and my story could be when exposed to those deals, I realized how big my passion for finance was and that’s when I decided to get my MSF and switch to IB.

No, I think that would make less sense because then you would have to explain why you went from IB to consulting… and are now trying to go back to IB. Saying that you got exposed to M&A deals during the consulting experience would be a better story (and you would still ideally pair it with a transaction-related internship before/during the MSF).

Got it, thanks!

Probably missing something here, but for the first example, where does the 300% and 55% come from?

300% = 4x multiple. If compounding did not exist, we could just say 300% / 4 = 75% annual return. Because of compounding, however, the actual return does not need to be 75% per year in order for us to earn 300% by the end of 4 years. Instead, it can be a fair amount less than that, and we’ll still end up with 300% at the end.

To estimate the impact of compounding, you can multiply this 300% / 4 figure by a “compounding factor,” which varies based on the multiple and time period, but which is around 55% for a 4x return over a standard holding period.

Do you mind explaining how you can estimate a “compounding factor” such as with the 55% here?

There’s no easy-to-calculate-using-mental-math way to get this for all scenarios, but you can memorize quick rules of thumb (based on actual numbers and looking at the ratios) for 3 and 5-year periods and extrapolate from there. I don’t really think it’s worth doing that in-depth, though, because you just have to be roughly correct with these answers.

Do you think you will do a hedge fund interview guide similar to the one you have here?

Potentially, yes, but it’s much harder to give general guidelines for HF interviews because they’re completely dependent on your investment pitches. Also, interest in HFs has declined over the years (we no longer receive as many questions about them).

On that mental paper LBO question, how is the company able to pay off 900 of debt by year 3? It sounds like proceeds from the sale will have to be used in order to fully pay off the debt because EBITDA alone only adds up to 525, and that’s assuming there’s no interest.

Favorable working capital… NOLs… asset sales… the Konami code or other cheat codes. The point is not the numbers but the thought process.

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Questions to ask During a Real Estate Private Equity Interview

One of the more common questions I get from students is: “what questions should I ask at the end of a real estate private equity interview?” Right off the bat, that question implies there is a set list of best-to-ask real estate private equity interview questions at the end of each round. But if there really were such a list, then my students probably wouldn’t keep asking me for it – it’d be easy to research. In fact, you probably have, and have run into the same list of questions as nearly everyone else.

The Generic Questions

Below are the questions you’ve probably seen before . There’s nothing wrong with these questions, they’re just boilerplate. Everybody knows about them, so they aren’t quite memorable. And if you ask the same questions as everybody else, you’re not increasing your odds of standing apart from the crowd.

• Could you walk me through the day-to-day of your job?
• What is your favorite part of the job?
• Could you tell me about a deal you recently worked on?
• What do you think sets your firm apart from its competition?
• Could you share your thoughts on the market?
• What do you think about this particular transaction?

It’s fair if you ask one or two of these, especially if they are relevant to a particularly engaging bit of your interview. But just be aware that they’re a bit of a hedged bet. The probability of striking a home run “oh that’s a great question” is diminished.

So how can you stand out?

In a vacuum, the advice above leaves you no better off. You still aren’t sure what questions to ask at the end of an interview. That’s predominantly because the best questions to ask depend entirely on your interviewer and the course of your conversation.

To negotiate around this “case-by-case” caveat, you should focus instead on the things you want to learn – rather than the specifics of the question itself. This advice is similar to the archetype advice shared in an earlier post, but reversed. You’re giving the interviewer the opportunity to pitch themselves and their firm. 

The goal is to remember their pitches, and rework them into your subsequent rounds with the same firm. For instance, say you’re asked in another interview why you like their firm in particular. Well, you can list off the pitch bullets you received from your last interviewer. The less generic you sound, the better your odds of nailing that interview question . Thus, the more firm-specific intel you can gather, the better.

Guidelines for Insightful End-of-Interview Questions

The goal is to convey a deeper understanding about the firm. Interviews are more than real estate private equity case studies and technical questions. The firm wants to know you’re genuinely interested in their unique culture. 

During an REPE interview process, you will interview multiple people. You will aim to learn more about the company with each interview. Here are my guidelines that will help you learn firm-specific details in each interview, with the end goal of reworking that knowledge into your next interview at the same firm (and possibly other firms):

• Ask the interviewer about a specific instance where they were provided an opportunity to push themselves beyond their limits. Then, in your next interview, you can say “I like this fund because it emphasizes growth at the junior levels. For instance, so-and-so was allowed to run point on this process early on as an Analyst.”
• Figure out the cultural elements that the senior leadership emphasizes most. Is the dress code all white dress shirts and conservative attire? Are people loud and congenial, or reserved and pensive?
• Are there instances where your interviewer has advocated a contrarian strategy, and how did it go / is it going?
• What parts of the business do they get their hands on? Do they get a broad array of experiences, or are they narrowly focused on a particular task?
• And outside of their own experience, are other peoples’ functions strictly defined (investments people only invest, PM people only manage, and so forth)?
• How do they feel about their opportunities for growth? If they’re junior, have they had the chance to manage anything meaningful? At which point does “hand-holding” stop and they’re afforded more autonomy on their processes?

Every minute of an interview is precious. You must demonstrate passion, curiosity, hard work – and all other virtuous elements of a job candidate. That’s a lot to pack into a thirty-minute window. 

Asking questions of your interviewer is a great way to treat your interviews like active conversations rather than a passive, one-way Q&A routine. Further, recycling the knowledge you learn allows you to efficiently demonstrate your thoughtfulness and ability to diligence an unknown entity – one of the core job skills in REPE investing.

Learn With Leveraged Breakdowns

Preparing for real estate private equity interviews isn’t easy. You must excel both technically and behaviorally. And beyond that, there’s always a material element of chance that you cannot hedge away through preparation. That said, there is always room for improvement . Leveraged Breakdowns offers real estate private equity case studies and technical guides that help level the playing field when competing for a position as an outsider.

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• Private Equity Interview Questions and Answers

40 common private equity interview questions.  Examples include technical, transactional, behavioral, and logical tests with sample answers

Christy currently works as a senior associate for EdR Trust, a publicly traded multi-family  REIT . Prior to joining EdR Trust, Christy works for CBRE in investment property sales. Before completing her  MBA  and breaking into finance, Christy founded and education startup in which she actively pursued for seven years and works as an internal auditor for the U.S. Department of State and CIA.

Christy has a Bachelor of Arts from the University of Maryland and a Master of Business Administrations from the University of London.

Prior to becoming our CEO & Founder at Wall Street Oasis, Patrick spent three years as a Private Equity  Associate for Tailwind Capital  in New York and two years as an Investment Banking Analyst at Rothschild.

Patrick has an  MBA  in Entrepreneurial Management from The Wharton School and a BA in Economics from Williams College.

​101 PE Interview Questions and Answers

Common first private equity interview questions, 15 common private equity technical questions, 8 firm-specific hard technical questions, private equity case interview analysis, private equity deal experience, 5 most common pe behavioral/fit questions, 5 firm-specific behavioral/fit questions, 5 logical puzzles - interview brain teasers, free lbo modeling test, full wso pe prep guide & additional resources, list of private equity firms.

Private Equity (PE) is often considered by professionals to be one of the most challenging sectors to break into within the finance industry. Vast amounts of talent from a variety of past professional experiences (investment banking, asset management, etc.) apply to private equity firms, seeing them as the golden exit opportunity due to generally better pay and (usually) better hours.

The competitive interview process is therefore designed to rigorously filter out potential candidates, with less than 1% of candidates receiving job offers.

Consequently, answering the technical, transactional, behavioral, and logical questions confidently and consistently is key to converting an interview into an offer.

The following free WSO PE interview guide is a comprehensive tool designed to cover every single aspect of the interview process, guiding you from the beginning to the end, therefore drastically improving your odds of landing your dream job.

This guide features a total of 40 of the most common technical, transactional, behavioral, and logical questions, along with proven sample answers that private equity professionals ask candidates during the hiring process. 

We have also added dedicated sections on discussing previous deal experiences and featured a free LBO modeling test (video solution + modeling file) at the end of the guide to perfect your modeling skills! It is a great place to start your preparation before investing in our more comprehensive Private Equity Interview Course .

This resource includes 13 firm-specific questions from leading private equity firms (Blackstone Group, Kohlberg Kravis Roberts (KKR), etc.) and also proven sample answers to them .

This interview guide consists of 11 sections , each focused on different phases of the interview process.

There are no excuses for not perfecting what is in your control. Irrespective of the firm, the position, or your region, you can be sure these two questions will be asked as they're a standard in the industry.

Anticipating both of these questions beforehand, crafting a compelling narrative around them, and selling yourself on it will make you stand out from amongst the pool of potential candidates.

Walk me through your background/resume

Dial-in a cohesive 90-second resume walkthrough that focuses on the positive and motivating reasons behind every shift (school to job, job to better job, most recent job to grad school).

There are two facets to answering this question immaculately. First, know your story and tell it like a master bard. When they ask you about yourself, they're judging whether they would want to work long hours with you. These questions hold serious weight; use them to make yourself a desirable coworker.

Second, have a few backup stories in mind. Stories that effectively portray you as a good teammate, a problem-solver, a go-getter. Have these stories ready and use them to answer whatever the interviewer asks you. Make sure your resume aligns with these. Tell them confidently and with clarity and relevance, and you'll be putting yourself in good territory.

Why private equity?

Given the variety of professional backgrounds that candidates come from, WSO has created a dedicated page to answer this question. WSO's "Why Private Equity?" page covers 9 sample answers tailored for students and professionals looking to break into private equity.

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Technical questions are a critical component of almost every private equity recruiting process. Therefore, your interviewers will expect detailed and accurate responses to commonly asked technical questions, and your answers must demonstrate in-depth knowledge and expertise of the topic at hand. 

The following section features 15 common PE interview questions, as determined by the WSO Company database and the Harvard Business School Venture Capital & Private Equity club members. A sample answer has been provided for every question.

At the end of these 15 questions, we also have provided you with eight exclusive firm-specific technical questions to kickstart your mock interview training.

WSO Pro Tip:

The 15 technical questions covered below are exclusive to the private equity industry. However, PE interviews often overlap with investment banking interviews as general finance/accounting questions can also be asked. To check out an additional 30 technical questions with sample answers, check out WSO’s free 101 Investment Banking Interview Questions and Answers page .

1. Tell me why each of the financial statements by themselves is inadequate for evaluating a company?

Sample Answer: Income Statement:

The income statement alone won't tell you whether a company generates enough cash to stay afloat or whether it is solvent. You need the balance sheet to tell you whether the company can meet its future liabilities, and you need the cash flow statement to ensure it is generating enough cash to fund its operations and growth.

Balance Sheet:

The balance sheet alone won't tell you whether the company is profitable because it is only a snapshot on a particular date. For example, a company with few liabilities and many valuable assets could actually be losing a lot of money every year.

Cash Flow Statement:

The cash flow statement won't tell you whether a company is solvent because it could have massive long-term liabilities which dwarf its cash-generating capabilities.

The cash flow statement won’t tell you whether the company’s ongoing operations are actually profitable because cash flows in any given period could look strong or weak due to timing rather than the underlying strength of the company’s business.

2. What might cause two companies with identical statements to be valued differently?

Sample Answer: The financial statements do a decent job of painting a picture of a company's historical performance, but they do not essentially tell us all that we need to know about its future performance. Since the value of a company depends primarily on its expected future performance, the financial statements are insufficient.

Examples of important things financial statements don't tell us are:

• The future growth of the industry in which the company operates
• The company's competitive position including market share, relationships, patents, etc.
• The reputation and capabilities of the company’s management team
• The quality of the company’s future strategy

3. Why do private equity firms use leverage?

Sample Answer: PE returns are calculated based on the return on their invested equity. Using leverage to do deals allows you to use less equity which means the ultimate returns are larger in comparison to the amount of equity initially invested. Another way to look at it is that the cost of leverage (debt) is lower than the cost of equity because equity is generally priced to an IRR of 20%+, whereas the annual interest expense on debt is usually below 10%.

Yet another way to look at it is that using a lot of debt makes the return on equity much more volatile and much riskier because the debt must be repaid before the equity gets any return. The high returns on PE equity may be seen as the fair return associated with the extra risk associated with high leverage.

This question can also be asked as “How does leverage increase PE returns?”

4. How would you successfully close a deal if you and the seller disagree on the price of an asset due to different projections of its future operating performance?

Sample Answer: The classic PE solution to this common problem is called an "Earn-out." This solution is often used because sellers are more optimistic about the future performance of a business than PE investors are willing to underwrite. In such cases, either party may propose that the sellers are paid a portion of the total acquisition price up-front, while a portion is held back (frequently in an escrow account) until the business' actual future performance is determined. 

If the business performs as the seller expects, the seller is paid the remainder of the purchase price, which may sometimes run to months or years after the deal's close. Conversely, if the business under-performs compared to the seller's expectations, then the buyer keeps some or all of the earn-out money. This type of structure is a common way of bridging valuation gaps between buyers and sellers.

5. How would you calculate the change in Net Working Capital (NWC)?

Sample Answer: The classic formula for NWC is current assets (excluding cash) less current liabilities. For a lot of businesses, it is sufficient to define NWC as:

NWC = Accounts Receivable + Inventory – Accounts Payable

Change in NWC is simply the difference between NWC in the current period less NWC during the previous period.

6. How would you roughly estimate the available debt capacity for an LBO?

Sample Answer: Debt capacity for an LBO is typically constrained by three primary ratios,

• Total leverage ratio, 
• Interest coverage ratio, and
• Minimum equity ratio.  

Any one of these ratios could be the governing constraint for a particular deal. For example, to estimate debt capacity for an LBO, you could take the lowest of the three under each of those ratios.

Total Leverage Ratio: The most common method for estimating this ratio is (Total Debt / LTM EBITDA). During normal times, Maximum Debt = ~5.0x(LTM EBITDA). During hot debt markets, this ratio can go up to ~6.0x, and during cold debt markets, it can fall to ~4.0x.

This ratio can also be higher or lower based on the nature of the target's business. Highly cyclical or risky businesses with few tangible assets are on the lower end of the range, while stable businesses with a lot of tangible assets (which can be liquidated to repay debt holders in the event of default) are on the higher end of the range.

Interest Coverage Ratio: The most common method for estimating this ratio is (LTM EBIT / Annual Interest Expense). The floor for this ratio is usually around 1.5x. Therefore, the maximum debt this ratio will allow is roughly calculated as:

Maximum debt = LTM*EBIT / 1.5 (Blended Interest Rate)

The blended interest rate depends on prevailing interest rates and how the overall LBO debt package is structured, but roughly 8-9% is a safe assumption.

Minimum Equity Ratio: Long gone are the days when PE firms could routinely buy targets for 5–10% Equity and 90–95% debt as a percentage of the total acquisition price. These days lenders demand that about 20–30% of the total acquisition price be equity. As such, you could estimate:

Maximum Debt = 0.75 * (Total Acquisition price)

7. What constitutes a good LBO target?

Sample Answer: The truth is that there have been many good deals done with targets that failed most of the criteria in the section. The key is price. Almost any target would make a good buyout candidate at a low enough price. Is there any company you wouldn't buy for a dollar? I caveat my answers to questions like these by asserting that "deals which check all the boxes are usually very expensive" and "all problems may be overcome with a price."

8. Which industry would you invest in, and why?

Sample Answer: This is another common way to ask the same question about how attractive an industry is. The trick to this question is that it's not simply about identifying a good industry but rather about identifying an industry that is improving. If an industry is already high-growth and profitable, the valuations of acquisition targets are also likely sky-high.

Investing is about buying undervalued assets rather than simply good assets. For example, if you identify a bad/mediocre industry that is about to improve, you could probably find a lot of undervalued acquisition targets in it. Therefore, look for industries that are experiencing some of the following:

• Acceleration in long-term growth driven by new technology, an inflection point in adoption, changing consumer preferences, etc.
• A shift in competitive rivalry may arise when competitors are beginning to compete on brand, quality, service, technology, etc., instead of price. For example, when a major competitor is exiting the industry.
• A shift in supply chain dynamics due to consolidation in the industry. This could lead to both add-on acquisition opportunities as well as better bargaining power relative to suppliers and customers.
• Barriers to entry are increasing due to patents, proprietary technology, brand, minimum efficient scale, etc., becoming more important.
• Threat from substitutes declining. The industry's products and services are becoming unique and essential to customers.

9. What are some common methods PE firms use to increase portfolio company value?

Sample Answer: How much value PE firms actually add is an open question, but the following methods are frequently mentioned:

• Recruit better management and board members
• Provide more aligned management incentives (usually via stock option pool)
• Identify and finance new organic growth opportunities (new geographies, new product lines, adjacent market verticals, etc.)
• Find, finance, and execute add-on acquisitions
• Foster stronger relationships with key customers, suppliers, and Wall Street
• Support investment in better IT systems, financial reporting, and control, research & development, etc.

10. What company would constitute a good LBO candidate today, and why?

Sample Answer: You always want to have one or two good pitches in your back pocket in case you get asked this question. Before selecting a candidate, refer back to the sections on the common attributes of LBO candidates and how PE firms make money. Try to find candidates that fit at least some of the following criteria:

• Has a lot of stable and predictable free cash flow to pay down debt relative to how much you would have to pay to acquire it. A free cash flow yield (FCF / purchase price) of 10%+ is a solid benchmark.
• Could benefit from a strategic overhaul which would be difficult to execute under current ownership.
• Is having significant operational difficulties which would require a lot of time, patience, and capital to address.
• Has a bad management team or governance structure that a PE firm could improve.
• Has a lot of room to grow either organically or via acquisition if backed with enough patient long-term capital.

11. In addition to TEV / EBITDA, what are some common multiples used in the industry?

Sample Answer: TEV / EBIT

• EBIT is a better metric than EBITDA when comparing companies with different levels of D&A, which EBITDA doesn't capture. Different levels of D&A are commonly found in companies that have different levels of capital intensity (i.e., different levels of capital investment into PP&E).

Price / Earnings (aka P/E Ratio)

• This metric typically equals the market value (market capitalization) of the equity of a publicly-traded company over its LTM Net Income. This is the most common valuation multiple for publicly traded stocks. Keep in mind that this metric applies only to the equity value of the company rather than its TEV. This is because net income belongs to a company's equity holders since debt holders are paid interest before any money flows to equity holders.

TEV / Revenue

• This metric is used for companies that aren’t profitable or have highly cyclical levels of profitability (such as commodity businesses).

There are many other useful multiples, but the above should cover you in the vast majority of interview situations.

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12. What are some pros and cons of multiples?

Sample Answer: Pros:

• Multiples are a quick way to gauge the relative value of companies of different sizes. They scale in a way that makes it possible to glean valuation information about a company from the valuation of other companies, which can be both larger and smaller.
• Multiples are less volatile and less prone to assumption-driven swings than bottoms-up valuation methodologies such as the Discounted Cash Flow.
• If the market's valuation of the comps is wrong, then the valuation of your target will be equally wrong.
• No single comp is a perfect proxy for a different target company. Finding enough solid comps to average out the idiosyncratic differences can be difficult.

13. What are some pros and cons of LBO modeling?

• LBO models are built from the ground up and do not depend as much on trusting the wisdom of the public markets (which can be very wrong).
• LBO models can capture the value of optimizing a company's capital structure (often by using more debt than the public market is comfortable with).
• LBO models can capture the value of operational improvements private owners could enable that would otherwise be difficult for a public company to execute.
• LBO modeling requires making many uncertain assumptions about a company's operating and financial performance at least 3-5 years into the future.
• LBO modeling requires access to more data and entails a lot more work than valuations based on comparable multiples, precedent transactions, or market values.

14. What are some pros and cons of market value?

• Market value is always up-to-date and is instantly available for public companies.
• It is determined by the individual decisions of a large and diversified investor base, so it reflects the collective work and judgment of many people.
• The market can be wrong, sometimes by a lot, and if it weren't, then hedge funds and other public market investors would rarely beat the market.

15. What are some different types of debt covenants, and what are they used for?

Sample Answer: Debt covenants are contractual agreements between lenders and borrowers (such as companies that have been bought via an LBO) that give lenders specific rights to help protect their investment.

Maintenance covenants:

Require the borrower to maintain a specific equity cushion or debt service coverage cushion to maintain their ability to repay its debt. 

Incurrence covenants:

Prevent the borrower from taking specific actions which could be detrimental to existing lenders, such as taking on more debt or paying out cash dividends to equity holders.

Strict covenants can make the investment much riskier to a PE investor because a default on a covenant can result in the loss of the entire equity investment even if the portfolio company remains solvent.

Having a detailed understanding of the answers to the 15 technical questions above is going to give you a competitive edge over the applicant pool. However, to achieve full technical mastery, it is critical that you expect technical questions that are specific to different private equity firms.

The following section features eight exclusive questions asked that actual interviewers asked candidates at some of the world's biggest private equity firms.

Did you know?

The following questions have been taken from WSO’s company database , which is sourced from the detailed experiences of more than 30,000 candidates with PE interviews. The WSO PE Interview Course includes access to over 2,447 questions across 203 private equity funds (no other resource comes close).

The Blackstone Group Technical Questions

Sample Answer: Calculate the enterprise value (EV) by discounting the projected unlevered free cash flows and terminal value to net present value. Calculate the equity value by subtracting net debt from EV.

Sample Answer: An average secondary fund can expect to perform with an IRR of around 13% and a MOIC of approximately 1.5x.

Sample Answer: A SaaS company can be valued with multiples focusing on Sales and looking at User Growth.

Kohlberg Kravis Roberts (KKR) Technicals

Sample Answer: Some metrics which are important to analyze are:

• Cash on cash
• Equity multiple 

Ares Management Interviews

Sample Answer: Factors that may cause different valuations are:

• Tenant credit quality,
• Lease term length
• Strength of leasing
• Cap structure of the building

Sample Answer: NOI / Cap rate = Purchase price

Bain Capital Technical Interviews

Sample Answer: Sample drivers may include:

• Patient number
• Healthcare quality 
• Economy state

Sample Answer: Revenue: Coffee/person, people/day, cost of coffee, any add-on pastries Cost: Variable (cups, straws, water, coffee beans, etc.), fixed (rent, electricity), quasi-fixed (headcount)  

This was originally posted by @TheKing”. This post has been edited and formatted.

In the large majority of your interviews, you will get asked to walk through a case study. So what is a case study?

While it varies from firm to firm, here’s what it generally will look like.

• You get a copy of a CIM (Confidential Information Memorandum), usually from an old sell-side process. 
• In my interview process, I ended up creating a two-page memo that more or less condensed the critical parts of the CIM, analyzed the pros/cons of the business, and included a SWOT analysis.
• So how do you ace this aspect of the interview? Remember, you're trying to determine whether or not the target company is a good candidate for a leveraged buyout.

Factors to Consider in the PE Case Interview

Below, the OP reviews the factors that you should consider when completing your private equity case study in interviews.

Historical and Projected Growth and Profitability:

Ensure that the company will be able to handle the additional debt brought on through an LBO while also providing for a strong return on investment through growth in revenue and profitability.

Diversity of Customers & Products of Target Company:

A company might have strong financials at first glance, but you’ll want to make sure they aren’t overly concentrated in one product area or with one customer. If there is any notable concentration, it had better be able to prove that it’s got sticky customer relationships, so to speak.

Differentiating Factors of The Business:

This ties in with profitability and customers/products. Does the target company have specific technology or processes that will enable them to continue to grow and maintain margins going forward, or are they susceptible to margin erosion as competition increases?

Industry Focus for the Target Business:

Is the company in a growing industry? How will it handle potential economic turmoil? How well is the target positioned in its industry? Is it a leader?

Strength of Management for Target Company:

What's the management team like? Is it a founder-owned business? Has the team been together a long time? How built out is the team? The strength of the management team is fundamental, and it plays a vital role in the middle market. Oftentimes, you'll look at companies with fragile management teams or owners looking to cash out and take a smaller role in the company going forward. These cases allow a PE firm to add value by placing solid professionals into management roles.

Exit Potential and IRR for Target Company:

A company can be an absolute cash cow, but you'll need to be able to exit the investment at some point over a reasonable time frame (generally five years) in order to generate a suitable return on investment for your investors. So you'll want to have some ideas as to where eligible buyers might come from.

Closing Questions:

Now, reading a CIM will get you pretty far. You'll learn a great deal about the target company, its growth prospects, its industries, and its alleged upside potential. But, the CIM is a sales document . So, while you can glean a ton of helpful information from a careful read-through of a CIM, you'll also want to have something of a skeptical eye. Invariably, you'll have questions and concerns that you'd like to raise with management in the next round of the sell-side process.

Here are a few examples of questions you might ask.

• What is the biggest challenge your company faces?
• Who are the most important members of your team, and why?
• What are your company’s pain points, and how can we help to address them?

This is a great time to develop specific questions based upon issues you uncovered in your read-through of the CIM.

This was originally posted by @Candor, a private equity associate. This post has been edited and formatted.

• I will say that the three biggest areas to focus on are, first and foremost, the deals on your resume, secondly understanding everything there is to know about an LBO (on a theoretical and conceptual level), and third, being able to walk through paper LBOs/case studies.
• In some of my interviews, we got REALLY granular into my deal experience, and it was good that I had prepped so thoroughly. So, you have to know everything about them.
• Preparation is crucial since deal experience makes up roughly a third of the interview process. Read about your deal and understand every facet of it  in order to best prepare yourself for when the questions inevitably come.
• Read websites/articles about your deal and take notes. Read initiating coverage reports on the two companies involved in one of your deals. Read comprehensive research reports on the sub-industry that the companies are from.

This video from our PE Interview Course highlights why and how you should be prepared to walk through your prior deal experience.

Fit or "behavioral" questions are used to assess whether you have the right attitude, work ethic, personality, and values to fit in with a PE firm's culture. Most PE firms take fit extremely seriously because most firms usually have only a handful of investment professionals who must collaborate over long hours and under tight deadlines.

This section walks you through 5 of the most common types of fit questions and suggests approaches for answering them. The suggested strategies and sample answers are meant to be illustrative. Always remember, you need to adapt your answers to be true to yourself and your own words.

1. What do you believe makes a good private equity associate?

The interviewer is trying to assess whether you really understand the job you are interviewing for. Your goal should be to answer the question and subtly make your case for why you would be good at it. It would be best to tailor your answer to each particular firm instead of giving one standard response.

For example, suppose a firm like TA or Summit requires a lot of proactive sourcing work from associates. In that case, you need to mention that and describe what makes someone good at sourcing (positive attitude, a lot of energy, curiosity, and gregariousness, ability to handle rejection, creativity, etc.). If a firm requires associates to engage with portfolio companies and help with operations deeply, you need to mention the requisite consulting toolkit.

Sample Answer: The role of an associate can vary a lot from deal to deal, but I understand there are some common elements. For example, associates may be called on to develop investment themes, triage incoming deals, support deal diligence, and execution, and engage with portfolio companies at various points in the deal process. In addition, some common tasks that Associates are expected to perform are reading incoming CIMs, building LBO models, doing trading multiples analysis, competitive position analysis, and industry growth forecasting.

2. What do you do for fun? / What are some of your hobbies? / Tell me a bit about yourself outside of work?

A question like this is a clear sign that the interviewer wants you to go off your resume and reveal a few of your interests and personality. The interviewer is trying to gauge whether they are a well-balanced person who would fit in with the firm on a personal level and be fun to be around for long stretches of time.

Put the CV away and talk about the things that make you fun and interesting. This is your opportunity to connect with your interviewer and demonstrate your likability in addition to your professional competence. So pick something interesting, and don't be afraid to get a little personal (this question practically begs you to get a little personal).

You probably want to avoid highly controversial topics, but you have more leeway here than most candidates realize. Sports, hobbies, talents, funny situations, unusual life stories, exciting achievements, outside passions, etc., are all fair game here. The most important advice is: be interesting. Be a real-life person that your interviewer will remember.

3. Do you consider yourself a risk-taker? / What are some risks you have taken in the past, and what did you learn from them?

Your attitude toward risk is important in a PE context. PE firms look for people who take the responsibility of managing other people's money very seriously but who are willing to take prudent risks to generate returns. Your interviewer is looking for a willingness to take risks tempered by a careful and reasoned approach to balancing risks with rewards.

There are a couple of common ways to approach answering this type of question: You could tell a story where you took a well-calculated risk, and it paid off, or you could tell a story about a bad risk you took and how it taught you to be more careful. In either scenario, you want to affirm your belief that some risk is required for success but that you're the type of person who measures twice before cutting once.

4. What other opportunities are you considering?

This question is tricky because, as always, you want to be honest, but you don't want to necessarily reveal your entire hand or have to answer even more awkward questions like "what is your first choice if you had your pick." It is usually best to try and keep your answer to such questions vague in hopes that the interviewer will drop the subject, and frequently they do.

Suppose you are interviewing with some direct competitors and don't want to go into details. In that case, you can say something like, "I’m involved with some other processes, but I’m not under any time pressure, and I’m most excited about seeing where the process with [interviewing firm] leads first.”

In the rare case that your interviewer presses you to reveal names, try to reveal a couple that you suspect the firm will respect but won’t feel like they’ll definitely lose you if you get a competing offer. You can then try to give one or two credible reasons why you are most interested in the firm you are interviewing.

PE firms hate it when their offers get turned down, so you’re less likely to get an offer if the firm doesn’t think it has a great chance to sign you.

5. “Tell me about a time that….”

There are countless variations of this question, from “Tell me about a time you acted with integrity” to “Tell me about a time that you had difficulty dealing with coworkers.” It is key to have a well-rehearsed response for each of them and a general guideline to follow.

Ideally, you can develop 6-8 stories that cover the 30-40 basic questions, with slight modifications. DO NOT wing it. For every possible question, map out the story using the SOAR framework.

Address the Situation (10-15 seconds), Obstacle (10-15s), Action (60-75s), and Result (15-30s). Stories for these questions should span 1.5 to 2 minutes and focus on what’s important.

Knowing the culture of each private equity firm before walking into an interview is key to clicking with the interviewer and walking out with an offer.

The following section features five exclusive questions that interviewers ask in the world’s biggest private equity firms during interviews. This aims to help you jumpstart your training for the respective private equity firms you are interviewing for.

The following questions have been taken from WSO’s company database, which is sourced from detailed PE interviews experiences of more than 30,000 people.

WSO Company Database

Gain Access to Exclusive Data on Compensation, Interviews, and Employee Reviews.

Kohlberg Kravis Roberts (KKR) Behavioral Question

1. What is your biggest failure/mistake/regret? Why? What did you learn from it?

Honest self-reflection is a hallmark of good PE investors. Everybody makes mistakes. What matters is your ability to admit them and learn from them. Your interviewer wants to see that you’re not afraid to own your mistakes and that you’re able to prevent them from recurring.

Much like the weaknesses question, you need to pick a real mistake, but not one so big that it will disqualify you. If you’ve ever missed a deadline, messed up some analysis, damaged a relationship, been suspended from school, or let a big opportunity pass you by, you’re probably on safe ground to answer this question. Don’t be afraid to own it.  On the other hand, if you’ve been arrested or fired or exhibited serious character flaws, you’re playing with fire. Ditto if you’ve ever actually been accused of lighting a squirrel on fire (you know who you are). Sometimes discretion is the better part of valor. Choose which mistake to disclose wisely.

Whatever mistake you choose to discuss, do so without equivocation and in a way that makes clear you take total responsibility. Then, spend the second half of your answer discussing what you learned from your mistake and how you made sure it wouldn’t happen again.

The Blackstone Group Behavioral Assessment

2. Why are you interested in Blackstone?

The interviewer wants to make sure that you are truly serious about their firm and that there is likely to be a good fit between you and the firm. Your goal should be to demonstrate your clear interest by showing you’ve spent time researching the firm and have specific reasons to be interested in it.

Before you go into an interview, dig up some of the basic information about it:

• Its origin, age, fund size, office locations, industry focus, investment criteria, etc.
• Bios of some of it investment professionals, especially those likely to interview you
• Existing and past deals/portfolio companies
• How they describe themselves / how they see themselves / what makes their investment process or culture unique

Great resources for learning the above include:

• The firm’s website is first and foremost. It frequently has an “about the firm” section, IP bios, investment criteria, existing portfolio, and past deal examples or case studies
• CapIQ and other similar data providers also frequently have some of the above data
• Google the company’s name for news articles, especially press releases on new investments and exits
• Search for WSO threads about the company and read the WSO database entries on the company
• If you have friends who work there or have worked there - they can, of course, be a great resource

Bain Capital Fit Question

3. What would your friends/roommate/previous manager say about you?

When faced with this question, some candidates find it difficult to praise themselves and fail to highlight their best qualities. Other candidates go overboard and describe themselves in absurdly glowing terms. Remember that a PE firm is looking for confidence mixed with some humility. The sweet spot for this question is to describe yourself in a few reasonable positive terms that you hope are present in you or that others see in you.

You don’t need to feel pressured to balance positives with negatives with this question unless explicitly asked to list weaknesses. Look at this question as an opportunity to sell yourself to the interviewer. In order to drive the point home, feel free to bring up stories or examples about some praise you have received.

Warburg Pincus LLC Behavioral Interview

4. What are your long-term career goals? / Where do you see yourself in 5 years?

The interviewer is trying to make sure that you see PE as a meaningful phase of your career and that you have reasonable expectations for what the role you’re interviewing can offer you.

PE requires a lot of hard work and dedication; it is not a job for someone to try out on a whim. PE firms spend a lot of time interviewing candidates and making their decisions very carefully. They don’t want to hire someone who might not be fully committed.

You do not need to pretend to know with certainty that you will be in PE for the rest of your life, but it helps if you think PE at least factors prominently in your future. On the other hand, it’s also important to have reasonable expectations. If you’re sure that you’re going to go from a new associate to a full partner in five years, you might end up disappointed by a relatively long climb up the ladder. Be honest if you’re not 100% sure you will definitely stay in PE.

That’s not a deal-breaker, especially at firms with pre-MBA associate programs which don’t necessarily give offers to all “graduating” associates for partner-track positions. It helps, however, if your alternate plans include options that will be enhanced by your PE experience because then the PE firm remains comfortable that you will remain committed to your work for the duration of your employment.

For example, a PE firm would be more likely to hire someone whose career alternatives include public markets investing, entrepreneurship, or general management than they are to hire someone whose real dream is to be an engineer, or doctor, or journalist.

Apollo Global Management Fit Questions

5. Tell me about a time you had to convince someone significantly out-ranking you to do something they did not want to do. What was your thought process? What was the outcome? How could you be sure it was the best option at the time?

This question is obviously a personal one, and the answer will vary for different candidates based on their previous experiences. We recommend being open about your thought process with the interviewer rather than making the common mistake of emphasizing more upon the final outcome.

Remember, the interviewer aims to evaluate you as a person here and understand your typical thought process to assess how you will fit into the firm, make sure to therefore be open and focus on what you were thinking at the time of the incident.

Logical puzzles, brainteasers, and riddles are an important part of the interview process as they allow the interviewer to determine your critical thinking abilities. 

For this section of the interview, interviewers aren’t focused on whether you get the correct answers or not. Instead, they are interested in your thought process while solving the riddles you are presented with.

Given this, it is vital to walk your interviewer through your thinking as you progress through the riddle, who may even probe you with questions to assist you. Giving them a rundown of your thoughts and occasionally asking if you’re headed in the right direction demonstrates your capabilities to reflect and approach a problem with composure.

However, it is still extremely useful to anticipate these logical puzzles beforehand to avoid being put on the spot and caught off guard in the interview. The following section has five commonly asked logical puzzles that you can prepare for beforehand to impress your interviewer.

1. What is the sum of the integers between 0 and 100 (inclusive of 0 and 100)?

Answer: The trick to solving questions like this is making pairs that add up to something that is easy to count. In this case, 0 + 100 = 100, 1 + 99 = 100, 2 + 98 = 100, 3 + 97 = 100, etc. There are 50 such pairs because there are 50 numbers between 0 and 49 (including zero). 50 times 100 is 5,000. Don’t forget the final 50 which didn’t get paired up and you get 5,000 + 50 = 5,050.

2. How would you isolate exactly three gallons of water if you are standing in a river with a 5 gallon and a 2-gallon jug?

Answer: Fill the 5-gallon jug to the top and pour water out of it into the 2-gallon jug until the 2-gallon jug is full. You will have exactly 3 gallons of water in the 5-gallon jug.

3. You have ten black marbles, ten white marbles, and two buckets.I am going to select one bucket at random and pull out one marble from it at random. How would you fill each bucket with marbles to maximize the odds that I select a white marble?

Answer: Put one white marble in one bucket and put the other 19 marbles in the other bucket. The bucket with the lone white marble will be chosen 50% of the time. When the other bucket is selected, the odds that white marble is pulled are still nearly 50%. By allocating marbles this way, you make the overall odds of a white marble being selected is nearly 75%.

4. A car drives from point A to point B at 60 MPH. It then returns from point B to point A at 30MPH. What is the average speed of the total round trip?

Answer: A lot of people say 45mph, which is wrong. Average speed equals total distance over total time. In this case, let’s assume the distance between A and B is 60 miles. The first leg of the journey takes one hour, and the return trip takes 2 hours. The total distance traveled is 120 miles and the total time the trip takes is 3 hours. Therefore, the average speed of the round trip is 120 miles / 3 hours = 40mph.

5. You drop a 10x10 Rubik’s Cube into a bucket of paint. How many individual cubes have paint on them?

Answer: The key is to gather that cubes on the edge of any one of the six faces have a side on two faces (3 faces for corner cubes), so you can’t simply calculate the number of cubes on one face and multiply that by the number of faces. The most perceptive way to find the solution is to calculate the number of individual cubes in a 10x10x10 Rubik’s cube and then subtract the number of all internal cubes with no facings on the outside.

There are 10*10*10 total individual cubes. On the inside of a 10x10x10 cube, there is an 8x8x8 cube with no outside facings. The 8x8x8 cube contains 512 individual cubes. Therefore, there are 1,000 – 512 = 488 cubes on the Rubik’s cube’s outside with paint on them.

LBO Modeling Test

Download the FREE LBO Modeling Test now to make sure you are ready for buyside interviews and to test your LBO knowledge.

Many of the sample answers in the guide above were taken from WSO’s very own PE Interview Prep Course , which features:

• 9 realistic LBO modeling tests (3 tiers of difficulty)
• 2,447 questions across 203 private equity funds
• 200+ pages of detailed interview and industry insight

Think about it - if this page can set you miles ahead of the competition, imagine what our complete course can do for you.

The WSO PE Interview Prep Course will walk you step-by-step through the interview process and place you in the most advantageous position to land the job.

Additional WSO Resources:

The following additional resources are recommended by WSO for taking a look at:

• Private Equity Resume Template - Official WSO CV Example
• Free WSO Resources
• My Private Equity Recruiting Process
• From Private Equity Associate To VP In Private Equity
• Random Things I Wished I Knew About PE
• WSO Financial Dictionary

The following are some of the biggest of the 1200+ private equity firms WSO has data on in its company database:

• Kohlberg Kravis Roberts & Co. (KKR) | KKR Overview | KKR Site
• Bain Capital | Bain Capital Overview | Bain Capital Site
• Carlyle Group | Carlyle Group Overview | Carlyle Group Site
• TPG Capital | TPG Capital Overview | TPG Capital Site
• Warburg Pincus | Warburg Pincus Overview | Warburg Pincus Site
• Audax Group | Audax Group Overview | Audax Group Site
• Partners Group | Partners Group Overview  | Partners Group Site
• Summit Partners | Summit Partners Overview | Summit Partners Site
• TA Associates | TA Associates Overview | TA Associates Site
• J. C. Flowers & Co. | J. C. Flowers & Co. Overview | J. C. Flowers & Co. Site
• Providence Equity | Providence Equity Overview | Providence Equity Site
• Silver Lake | Silver Lake Overview | Silver Lake Site

Additional interview resources

To learn more about interviews and the questions asked, please check out the additional interview resources below:

• Investment Banking Interview Questions and Answers
• Equity Research Interview Questions and Answers
• Finance Interview Questions and Answers
• Accounting Interview Questions and Answers

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Paper LBO Example: Full Tutorial for Private Equity Interviews

In this tutorial, you’ll learn how to complete a “paper LBO” test in a private equity interview and how to approximate the IRR in a leveraged buyout using pencil and paper.

• Tutorial Summary
• Files & Resources
• Premium Course

Paper LBO Definition: In a “paper LBO” test, a private equity firm describes the leveraged buyout of a company and asks you to approximate the IRR or money-on-money multiple in the deal without using Excel or a calculator .

Key Tips for Paper LBO Tests

Paper LBOs are not true “financial modeling tests” in the same way that other Excel-based exercises are; they’re more like extended mental math questions.

To succeed with paper LBO tests, you must round and simplify the numbers as much as possible so you can finish the calculations within the time limit (often 30 minutes or less).

It’s also important to start with the end in mind so you can check yourself along the way.

For example, if the PE firm is targeting a 25% IRR over 5 years, you should know that it corresponds to a 3x multiple of the initial Investor Equity (see: our tutorial on how to calculate IRR manually ).

Core Financial Modeling

Learn accounting, 3-statement modeling, valuation/DCF analysis, M&A and merger models, and LBOs and leveraged buyout models with 10+ global case studies.

If you finish most of the exercise and you can tell that the deal will generate nothing close to a 3x multiple, you can immediately reject it.

It’s best to simplify the transaction assumptions as well, which means “ignore the transaction and financing fees” and “assume all deals are cash-free, debt-free” (i.e., that the target company’s Cash and Debt immediately go to 0 after the deal closes).

Finally, you may assume that the Debt issued to fund the leveraged buyout stays the same or that 100% of the company’s Free Cash Flow is used to repay the Debt principal.

More complicated assumptions, such as “cash flow sweeps,” make it too difficult to track the numbers and calculate everything with pencil and paper.

Paper LBO Example: Real Case Study

Click here to get the case study prompt for this exercise .

In short, the PE firm is acquiring a company for 10x EBITDA and using 6x Debt to fund the deal.

They provide numbers for the company’s revenue, EBITDA, cash flow line items, and the details of the Debt funding, such as the interest rates and principal repayments.

The PE firm is targeting a 20% IRR over 5 years, so we have to complete this paper LBO and recommend or reject the deal based on this target.

You can click here to get the full solutions to this exercise , but we’ll present the highlights below:

Paper LBO, Step 1 – Determine the End Goal

You should know that a 20% IRR over 5 years is approximately a 2.5x multiple of invested capital because a 2x multiple is a ~15% IRR over 5 years, and a 3x multiple is a ~25% IRR.

The case document gives us the company’s initial EBITDA of $250 million.

Since the company spends 60% of Revenue on COGS and 15% on SG&A, its EBITDA Margin equals 1 – 60% – 15% = 25%.

So, the company’s Revenue is $250 / 25% = $1,000.

A 10x purchase multiple means a Purchase Enterprise Value of $2,500, and the deal is funded with 6x Debt and 4x Equity, so the Investor Equity is $2,500 * 40% = $1,000.

Therefore, this deal must generate $1,000 * 2.5x = $2,500 in Equity Proceeds to be viable.

We need to determine the Year 5 EBITDA and the Year 5 Debt to see if that happens.

Paper LBO, Step 2 – Project Revenue and EBITDA

The case document gives us the initial numbers:

To project the Revenue figures, we can use approximations. For example:

• $1,000 * 5% –> This is easy; it’s an increase of $50.
• $1,050 * 7.5% –> This is halfway between $52.5 and $105, so we can round it to $80.

Once we have all the Revenue figures, we can use a similar strategy for EBITDA.

For example, if we know the Year 1 Revenue is $1,050 and the EBITDA Margin is 24%, we can approximate the Year 1 EBITDA like this:

$1,050 * 24% –> $1,050 is a bit higher than $1,000, and 24% is a bit lower than 25%, so we can say the EBITDA is still $250.

After completing these steps, we arrive at these estimates for Revenue and EBITDA:

Paper LBO, Step 3 – Calculate the Annual Free Cash Flow

In the context of this simplified “model,” we can define Free Cash Flow like this:

Free Cash Flow = EBITDA – Interest – Taxes +/– Change in Working Capital – CapEx – Purchases of Intangibles.

CapEx, Purchases of Intangibles, and the Change in Working Capital are all simple percentages of Revenue, so we can group them together:

FCF = EBITDA – Interest – Taxes – “Other Items.”

CapEx = –8% of Revenue, Intangible Purchases = –4%, and Change in WC = +2%.

The first two are negative, and the Change in WC is positive, so “Other Items” represents negative 10% of Revenue.

To calculate the Taxes and Interest, we need the Taxable Income first.

Taxable Income = EBIT – Interest, and EBIT = EBITDA – D&A.

The D&A is simple, but the Interest changes each year as the company repays Debt.

So, let’s start with the D&A: it’s 5% of Revenue, so we can multiply each of the “Other Items” above by 50% to estimate it.

The Interest Expense is the toughest part because the company repays its Term Loan balance over time, and many of the numbers are interdependent:

Interest: Depends on the Debt balance, but the Debt balance depends on FCF.

FCF: Depends on the Interest and Taxes.

Taxes: Depends on the Interest.

We have to complete this process iteratively , starting with the Interest in Year 1.

The initial Term Loan is $1,000, or $250 * 4, and the initial Senior Notes are $500, or $250 * 2, so the initial Interest Expense is $1,000 * 5% + $500 * 10% = $100:

The Term Loans have 2% annual principal repayments, which might seem complicated at first.

But since the company’s FCF is higher than 2% * $1000 = $20 per year, we can combine the mandatory and optional repayments and assume that 100% of the company’s FCF is used to repay Debt principal.

The Senior Notes stay the same at $500 per year, so only the Term Loan balance changes.

Once we have the Year 1 numbers, we can continue to Year 2, where Interest = 5% * $975 + 10% * $500.

We round all the Interest numbers to units of 5 or 10 to simplify the math.

The company’s FCF never changes by a huge amount, so we use figures such as $25, $30, and $35 in each period.

We also round all the Tax numbers to ones that end in 5 or 0, as shown below:

Once we have the numbers for Years 1 and 2, we go through the same process for each of the following years.

It’s impossible to track all these numbers in your head, so it’s essential to write down the whole schedule on paper.

The finished “ Debt Schedule ” looks like this:

Paper LBO, Step 4 – Calculate the Exit Proceeds

To finish, we need to calculate the Exit Enterprise Value, Exit Equity Value, money-on-money multiple, and IRR.

We know the Year 5 EBITDA is approximately $300 and the Year 5 Exit Multiple is 12x (from the case document):

$300 * 12 = $300 * 10 + $300 * 2 = $3,600 for the Exit Enterprise Value ($3.6 billion).

We have no information on the Cash balance, but we know it has NOT changed because all the company’s FCF was used to repay the Term Loan .

Since the remaining Debt in Year 5 is $1,360, the Exit Equity Value = $3,600 – $1,360 = $2,240; we can round this to $2,200 or $2,300.

This range produces a multiple of 2.2x to 2.3x because $2,200 / $1,000 = 2.2x and $2,300 / $1,000 = 2.3x.

To get a 20% IRR over 5 years, we need a 2.5x multiple on the $1,000 of Investor Equity.

Therefore, this deal is not viable .

The exact IRR here is probably between 15% and 20%, so it’s not a bad outcome – but it’s also below what the PE firm was targeting.

The “Paper LBO” in Excel Format

If you want to “see” this paper LBO in Excel format, click here to download the Excel recreation , which has the exact numbers rather than approximations.

Note that it’s completely pointless to build this model in Excel because the purpose of a paper LBO test is to finish it using pencil and paper and mental math.

If you use Excel, you might as well try a full-blown LBO modeling test that takes 2-3 hours to complete.

How Important is the Paper LBO in Private Equity Interviews?

Some private equity firms like to administer paper LBO tests, but you’re more likely to get real Excel-based modeling tests and case studies.

So, if you’re going through the private equity interview process , it’s worth practicing a few paper LBO tests, but don’t go through dozens of exercises or spend days on them.

You should spend that time improving your story, reviewing and discussing your deal experience, and practicing real LBO modeling tests.

Paper LBOs, when they do come up, tend to occur in earlier rounds of interviews and are mostly used to eliminate candidates.

You’re never going to win a private equity job offer because you ace a paper LBO test.

But if you perform poorly, you could easily lose a job offer.

About Brian DeChesare

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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