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15 Banks Ranked Hardest for Technical Interviews
You have to be a complete math nerd to land an offer at an elite boutique.
I’ve had superdays with three on the list below and got grilled with intense technicals in every one.
Boutiques (Evercore, Moelis, Lazard, PWP, etc) dominate Vault’s “Hardest Interview” rankings every year.
They ask two types of advanced math questions you rarely see at any other bank.
Lucky for you - I wrote down every question I could remember immediately after each superday.
So if your goal is to land a spot at an elite boutique and benefit from that lean deal team experience -
Here’re the two extra categories you need to prep for and lists of real questions I got asked for each.
TABLE OF CONTENTS
I. WHY BOUTIQUES LIKE MATH NERDS
II. CATEGORY 1 - LEVERAGED BUYOUTS (LBOs)
III. CATEGORY 2 - MERGER MODELS
WHY BOUTIQUES LIKE MATH NERDS
Boutiques test your technical ability way more than other banks because of their lean deal teams.
At the boutique I interned at, a typical high-profile deal would be staffed with ~3-4 bankers total.
It’d be 1-2 Analysts / Associates + 1 Vice President / Director + 1 Managing Director.
That same deal might have ~7-8 bankers at a bulge bracket like Goldman because of how big they are.
Therefore analysts at boutiques end up “wearing more hats” & take on more responsibility in each aspect of the deal than analysts at larger banks.
This is why boutiques will hold you to a higher standard from a technical perspective.
CATEGORY 1 - LEVERAGED BUYOUTS (LBOs)
Most kids think the only LBO question they have to prep for is the “Paper LBO”.
What they don’t realize is that there’s a ton of conceptual & mental math questions you have to pass before they’ll ask you the pen & paper stuff.
I relied on the BIWS LBO guide to prep for these.
In my overall study strategy, covering the LBO & Merger Model guides definitely came last.
But my approach was the exact same where I first took notes on the “key rule” section -
Then quizzed myself on the questions in the back over & over until I had every answer memorized.
If you haven’t gotten your hands on the guides yet, here’s a quizlet I found that has the same questions & answers that’re in the back of the LBO guide.
The following questions were the LBO ones I got asked during my superdays.
Here’s how I answered each of them.
Just make sure to walk them through your calculations out loud to show your work in a real interview.
(QUESTION 1)
List 5 traits that would make a company an “ideal” candidate for an LBO.
I first mentioned how the most important factor is price (undervalued when compared to similar companies). But that if the price is right…
(1) Stable Cash Flows to Repay Debt; (2) Low CapEx Needs; (3) Leader in Fragmented Industry Ideal for Add-On Acquisitions; (4) Strong Management Team; (5) Solid Asset Base to Use as Collateral for Debt
(QUESTION 2)
What are the 5 main levers PE firms use to boost IRR in an LBO?
(1) Lower Purchase Price / Multiple; (2) Raise Exit Price / Multiple; (3) Capital Structure / Percent Debt (usually higher percent debt increases return up to certain point); (4) Increase Growth Rate (either organic or through acquisitions); (5) Increase Margins (reduce expenses)
(QUESTION 3)
What IRR do PE firms typically target?
20%
(QUESTION 4)
What are the 3 most common exit strategies for an LBO? Explain each.
I started by listing them saying (1) M&A Deal; (2) IPO; (3) Dividend Recapitalization
Then I explained the detail behind each.
M&A is a simple, clean break where they sell to another company.
An IPO is taking the company public if it’s large enough by selling shares gradually over time.
Dividend recap is when they continually take on additional debt to issue dividends to shareholders to achieve their return. This is generally seen as a last resort.
(QUESTION 5)
What are the 2 main types of debt covenants? Give an example of each.
Maintenance and incurrence covenants.
Maintenance covenants are when you need to meet a specific metric on an ongoing basis. They’re used to make sure a business can continually meet its debt obligations. An example is Total Debt / EBITDA can’t exceed 3x
Incurrence covenants are restrictions on specific actions. For example a company may not be allowed to spend over $100M on capex in a given year or make an acquisition over $2M
(QUESTION 6) IRR MENTAL MATH
Your PE firm buys a $100M EBITDA company for 10x using 60% debt. EBITDA grows to $150M by the end of the 5yr hold, but exit multiple drops to 9x. You repay $250M debt and generate no extra cash during 5yr hold. What’s the IRR?
Approximately 20%.
40% equity (1 - 60%) for a $1B purchase price ($100M x 10x) means $400M initial equity.
Equity value at exit is $1.35B ($150M x 9x) minus debt you still have to repay.
Initial debt was $600M (60% x $1B). You repaid $250M. Means $350M left.
$1.35B - $350M = $1B exit equity.
$1B exit equity divided by initial equity of $400M is 2.5x MoM multiple.
Using general rules of thumb
- Double Money 3yr ~25% IRR
- Double Money 5yr ~ 15% IRR
- Triple Money 3yr ~45% IRR
- Triple Money 5yr ~25% IRR
For 5yr hold, 2.5x MoM is between double and triple money of 15% and 25% IRRs
Therefore IRR must be in 20% range.
*I memorized those “rules of thumb”
(QUESTION 7) PAPER LBO
*They’ll ask you to bring out pen & paper and write down bunch of numbers*
Each Paper LBO follows a similar format.
Here’s the example I used to practice.
CATEGORY 2 - MERGER MODELS
The boutique I interned at only advised publicly traded companies.
That meant EPS & accretion / dilution calculations were a must-know for every potential candidate.
Even after interviews, merger math was a core part of our first few weeks of training.
This is what the merger model guide looks like.
I found a website that lets you download the pdf for free.
Here were the merger math questions I got asked during my superdays.
These had a “follow-up” format where they kept adding extra parts to make it more complex.
(QUESTION 1)
What are the advantages and disadvantages of each purchase method in M&A deals?
The three main purchase methods are Cash, Debt & Stock.
The benefit of cash is that it is usually the cheapest since the foregone interest income is usually minor. It also can lead to a quicker close. The downside is that buyers will no longer have as much flexibility moving forward to use that cash for other purposes.
Debt is typically cheaper than stock but more expensive that cash. Finding lenders can take a while and slow down the process. Using debt can also limit flexibility because it limits your ability to take on additional debt in the future for other purposes.
Stock is usually the most expensive unless the buyer trades at super high multiples. It also dilutes the buyer’s existing shareholders. However, it can allow a buyer to keep more cash available and they may be able to issue stock quicker than they can find debt.
(QUESTION 2)
A company with a P/E multiple of 25x buys another for a P/E multiple of 15x. Will the deal be accretive or dilutive?
Start this answer by saying “You can’t know for sure unless it’s a 100% stock deal.”
If it is a 100% stock deal…
The cost of acquisition is the inverse of the buyer’s P/E multiple which equals 1 / 25 or 4%.
The seller’s yield is that inverse of the purchase P/E multiple which equals 1 / 15 or 6.7%.
Since the seller’s yield is greater than the cost of acquisition, it’ll be accretive.
(QUESTION 3)
For that same deal, let’s say the buyer has 10 shares, a share price of $25 and a net income of $10. The purchase equity value is $150 and the seller’s net income is also $10. Calculate the percent accretion and walk me through the math.
The buyer’s EPS is $10 / 10 = $1.00
Buyer must issue 6 new shares ($150 / $25) so the new share count is 16 (10 + 6)
Combined earnings is $20 ($10 + $10)
Therefore the new EPS is $20 / 16 = $1.25
New EPS of $1.25 divided by Initial EPS of $1.00 = 125% meaning there was 25% accretion
(QUESTION 4)
Now let’s say you used all debt instead to do the deal with an interest rate of 10%. Is the deal still accretive? If so, at what interest rate does it turn dilutive?
Seller’s yield is still 1 / 15 or 6.7%
The cost of acquisition is now different though using debt instead of stock
To calculate the weighted cost of acquisition, you take the interest rate times one minus an assumed tax rate of 40%
10% x (1 - 40%) = 6% which is your new cost of acquisition
6% is still lower than the seller’s yield of 6.7% so the deal is still accretive
To solve for the breakpoint where it turns dilutive, you set 6% equal to Interest Rate x (1 - 40%)
Divide each side by (1 - 40%) to get Interest Rate alone
6% divided by (1 - 40%) = 11.1%
Therefore any interest rate above 11.1% would make the deal dilutive
(QUESTION 5) SYNERGIES
A company has an equity value of $1K and net income of $100. Another company has purchase equity value of $2K and net income of $50. How much do you need in PRE-TAX synergies for an all-stock deal to be accretive?
Cost of acquisition is inverse of buyer’s P/E multiple. P/E = $1K / $100 = 10x. 1 / 10 = 10%
Seller’s yield must be over 10% to be accretive
Seller’s P/E is $2K / $50 = 40x. Seller’s current yield is 1 / 40 = 2.5%
If you add $150 to Seller’s net income (synergies), new Seller P/E is $2K / $200 = 10x
New seller’s yield is 1 / 10 = 10%
Therefore $150 in AFTER-TAX synergies are needed to make deal accretive
Assuming 40% tax rate, means $150 / (1 - 40%) = $250 PRE-TAX synergies needed for accretion
*They won’t always specifically state pre- vs post-tax in question so MAKE SURE to clarify
Cheers 🥂
- Jack