Investment question interview

Question 1

How would you spend a million dollars if it were given to you?

Answer 1

The answer to this question is highly personal and depends on the individual’s values and priorities. A thoughtful response might include a mix of saving, investing, charitable giving, and personal enjoyment.

Question 2

If I gave you $X, how would you invest it?

Answer 2

Investment Strategy: Would depend on risk tolerance, investment horizon, market conditions, and personal preferences. Could include a mix of asset classes, industries, or specific investment opportunities.
1. Discuss a few of the investment options available to you
2. State what your investment goal, risk appetite, and time horizon is
3. Compare and contrast the risks, rewards, and time horizons of these options
4. Pick the investment options which best fits these criteria

Question 3

What company would be a good LBO candidate today and why?

Answer 3

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 which fit at least some of the following criteria:
o 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
o Could benefit from a strategic overhaul which would be difficult to execute as a public company
o Is having significant operational difficulties which would require a lot of time, patience, and capital to address
o Has a bad management team or governance structure which a PE firm could improve
o Has a lot of room to grow either organically or via acquisition if backed with enough patient long-term capital

Question 4

Which industry would you invest in and why?

Answer 4

This is another common way to ask the previous 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 is about identifying an industry which 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. If you identify a bad/mediocre industry which is about to improve, you could probably find a lot of undervalued acquisitiontargets in it.
Therefore, look for industries which are experiencing some of the following:
o Acceleration in long-term growth: Driven by new technology, an inflection point in adoption, changing consumer preferences, etc.
o A shift in competitive rivalry: E.g. competitors are beginning to compete on brand, quality, service, technology, etc. instead of price. E.g. a major competitor is exiting the industry.
o A shift in supply chain dynamics: E.g. the industry is consolidating. This could lead to both add-on acquisition opportunities as well as better bargaining power relative to suppliers and customers.
o Barriers to entry increasing: E.g. patents, proprietary technology, brand, minimum efficient scale, etc. are becoming more important
o Threat from substitutes declining: E.g. the products and services the industry provides are becoming more unique and essential to customers.