If you’re applying to and interviewing at private-equity-focused firms, you can expect to be asked questions to test your understanding of what it is, how it works, and the role of lawyers in this sector.
This guide has two primary aims: 1) to provide you with the information you need to excel at interviews with a private equity focus and 2) to teach you about private equity in an easy-to-understand manner. Structured through a series of practice interview questions, you’ll gain an understanding of private equity and learn how to articulate your answers to challenging interview questions.
This guide will also be useful if you are beginning a vacation scheme at one of these firms and want to refresh your memory, or if you want to express an interest in private equity at a general interview, and seek to be able to handle possible follow up interview questions.
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For some questions, the points to note will help you to formulate your answer to the interview question, whereas the bonus information is designed to give you additional knowledge about the topic. You wouldn’t be expected to know much of this bonus information, but they may help you to handle follow up questions.
A note on the sample interview answers: these answers should be used as guidance rather than scripted answers. Why? Firstly, the aim of this guide is to teach you about private equity through a series of interview questions, which is why a lot of these answers are far more detailed than you would be expected to give in an interview answer. Second, most points carry across well in text but don’t convey how they should be said in an interview where delivery and tonality is important. Scripted answers are easy to see!
Points to Note: Private equity accounts for a substantial amount of income for some of the top US law firms in London. Their practice areas are often positioned to service the needs of these private equity clients, whether it’s assisting in the fundraising process, driving the deals, or in supporting clients on an advisory basis.
Private Equity Financing Structures
At these firms, as private equity will account for much of your day-to-day work as a lawyer, a recruiter will want to know: Do you have a genuine interest in this area? Will it excite you in the long term? Is your interest enough to keep you working the demanding hours associated with private equity work?
Equally, as a very lucrative sector, private equity is a core strength of some of the largest firms in London. If you do have an interest in private equity and decide to express that in your application or interview, it is important you are able to express why that is the case.
* The investors we are referring to here tend to be institutional investors, which are investors with huge amounts of money to invest, such as insurance companies or pension funds.
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Interview Question: What do you think makes private equity unique and different to other funds? Sample Answer: I think private equity is unique because…
We’re concentrating on buyouts here as, at the firms you’re applying to, these are the kind of investments private equity firms will make. Note, however, that private equity can take different forms and there are a large variety of funds with different strategies and focuses. For example, a venture capital fund will tend to make minority stake investments in small, early stage companies. There are even funds of funds, which are funds that invest in other private equity funds. That way, a private equity investor will have a diversified investment portfolio across multiple funds.
There are also different types of buyouts. If the existing management of a company wants to buy it out with the support of a private equity firm, this is called a management buyout or MBO. If a private equity firm seeks to buy a company and bring in new management, we call this a management buy in or MBI.
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Because of the high amount of debt being used, private equity firms will want to invest in companies with a strong cash flow. They can then use the cash flow of the company to pay off the interest payments. This does come with risks, but it also has the effect of encouraging management to be efficient and have a better handle of their costs – to be able to service the debt payments.
Due to the sums involved, private equity firms may borrow money from a variety of lenders to finance the acquisition. The largest will often be from one or more banks, which is called senior debt. The transaction will be structured in a way that ensures they have priority when it comes to being paid interest. They’ll also often be given security, which gives them the right to repossess assets if the company fails to pay its interest. Junior debt may also be involved, in the form of mezzanine financing or high yield bonds. They are further along the chain when it comes to receiving interest payments and they typically don’t have security over the assets of the company.
A key distinction between typical M&A deals and private equity transactions comes down to what happens after an acquisition takes place. Private equity firms buy companies with the intention to improve them and then sell them again, typically within three to seven years. To be able to improve the companies they buy, it’s important for private equity firms to have influence over the companies they acquire.
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Remember, the pitch of private equity firms is that they have the tools, knowledge and resources to buy companies, improve them, and sell them for a greater return.
Interview Question: How is the success of a private equity fund measured? Sample Answer: The success of a fund is measured by:
You don’t need to worry about the calculation of the internal rate of return as it’s complicated, but note that it’s the most important ranking for a private equity fund. Because it’s based on a period of time, this is why private equity firms seek to generate a return and sell a company quickly.
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The Limited Partnership Agreement will set out how the money is distributed between the general partner and limited partners. Typically, the limited partners receive a minimum rate of return first before the carried interest is paid to the general partner.
As discussed above, rather than receiving money upfront, a general partner draws down on the money from its investors over the course of a fund, making capital calls as and when it is ready.
You might have seen the phrase ‘dry powder’ frequently referenced in the news. For some time now, private equity firms have accumulated record levels of unspent cash (as of December 2019, this hit $2.5tn across all fund types, according to Bain & Co).
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Buyout Firm Advent Taps Ropes & Gray Private Equity Leader As New Top Lawyer
Business Insider decided to take a look at some of the lawyers advising PE firms who insiders consider the future of this clubby corner of the profession.
More money has been flowing into the private markets in search of yield, thanks to historically low interest rates, and PE firms are looking to spend billions in unused investor dollars. PE execs have had to get creative in how to spend it — particularly as competition drives asset prices higher — sometimes settling for minority stakes and other times going down-market, targeting smaller companies.
At the center of it all are teams of legal advisors to help wade through the complexities, fromnegotiating terms to drafting lengthy documentation to memorialize them.
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Feedback from recruiters, lawyers, and PE executives, as well as a review of recent deal announcements to see who was particularly active, led us to eight lawyers to watch in 2020 and beyond.
Of course, many working in Big Law already know the most senior players. Names like Rich Capelouto, who
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