Abraaj Capital Interview Questions

Q. A private equity firm has tripled its initial investment in five years, estimate the IRR.

If the initial investment tripled in five years, the IRR would be 24.6%.

Since it is very unlikely for you to be handed a calculator to solve this calculation, it is highly recommended that you memorize the most common IRR approximations as shown in the table below:

Q. What are some positive levers to increase the IRR on an LBO?

  • Earlier Receival of Proceeds → Dividend Recapitalization, Sooner than Anticipated Exit, Opted for Cash Interest (as opposed to PIK Interest), Annual Sponsor Consulting Fees
  • Increased FCFs Generation → Achieved through Revenue and EBITDA Growth, Improved Margin Profile
  • Multiple Expansion → Exiting at a Higher Multiple than the Purchase Multiple (i.e. “Buy Low, Sell High”)
  • Q. What are the primary levers in an LBO that drive returns?

  • 1) Deleveraging → Through the process of deleveraging, the value of the equity owned by the private equity firm grows over time as more debt principal is paid down using the cash flows generated by the acquired company.
  • 2) EBITDA Growth → Growth in EBITDA can be achieved by making operational improvements to the business’s margin profile (e.g. cost-cutting, raising prices), implementing new growth strategies to increase revenue, and making accretive add-on acquisitions.
  • 3) Multiple Expansion → Ideally, a financial sponsor hopes to acquire a company at a low entry multiple (“getting in cheap”) and then exit at a higher multiple. The exit multiple can increase from improved investor sentiment in the relevant industry, better economic conditions, and favorable transaction dynamics (e.g. competitive sale process led by strategic buyers). However, most LBO models conservatively assume the firm will exit at the same EV/EBITDA multiple it was purchased at. The reason is that the deal environment in the future is unpredictable and having to rely on multiple expansion to meet the return threshold is considered to be risky.
  • An ideal LBO candidate should have most (or all) of the following characteristics:

  • Steady, Predictable Cash Flow Generation
  • Operates in a Mature Industry with Defensible Market Positioning
  • Business Model with Recurring Revenue Component
  • Strong, Committed Management Team
  • Diversified Revenue Streams with Minimal Cyclicality
  • Low Capex Requirements & Working Capital Needs
  • Currently Undervalued by Market (i.e. Low-Purchase Multiple)
  • Q. What is PIK interest?

    PIK interest (“paid-in-kind”) is a form of non-cash interest, meaning the borrower compensates the lender in the form of additional debt as opposed to cash interest.

    PIK interest typically carries a higher interest rate because it has a higher risk to the investor (i.e. delayed payments result in less certainty of being paid).

    From the perspective of the borrower, opting for PIK conserves cash in the current period and thus represents a non-cash add-back on the CFS.

    However, PIK interest expense is an obligation that accrues towards the debt balance due in the final year and compounds on an annual basis.

    Top 25 Private Equity Interview Questions

    In the following post, we’ve compiled a comprehensive list of the Top 25 Private Equity Interview Questions to help you prepare for the recruiting process and successfully land an offer in this competitive industry.

    Unlike investment banking interviews where you’ll likely get a lot of technical interview questions, private equity interviews will stress the Paper LBO and LBO Modeling Test to confirm you’ve got the technicals down.

    However, you will likely still encounter private equity interview questions in the early rounds of the interview process, and below we’ve listed the 25 questions you should absolutely know the answer to.

    5 Most Common Interview Questions!

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