Lesson 10 of 12
Private equity case interview: due diligence framework and worked example
Private equity cases ask whether an investor should buy a company. This lesson gives you a due diligence framework, explains how private equity firms make money, and walks through a full buyout example with real returns math.
Part 1 of 9
What is a private equity case?
A private equity case asks whether an investment firm should buy a company. Private equity firms buy companies, usually with a mix of their own money and borrowed money, work to make them more valuable over a few years, then sell them. The case tests whether this purchase will earn the return the firm needs.
It looks a lot like an M&A case, with one big difference. A company buying another can combine them and capture synergies. A private equity firm usually cannot, so the target has to be a good investment on its own.
The skill being tested
Interviewers want to see you think like an investor: is this a good market, is this a strong company, how will its value grow, and what will the firm earn when it sells? Every piece of analysis should connect back to the return.
Part 2 of 9
How to spot a private equity case
These prompts name an investor as the client. Listen for phrases like these:
- A private equity firm is considering buying
- Our client is an investment fund
- Should the fund invest in this company?
- The target is a leader in commercial cleaning
- What returns could the firm expect?
- Is this industry attractive for investment?
If the buyer is an operating company rather than an investor, it is an M&A case. Not sure which type a prompt is? The first lesson covers how to identify the case type.
Part 3 of 9
The due diligence framework
Four branches. The first two decide whether the company is worth owning. The last two decide whether the deal earns enough.
- Should we invest?
- MarketSize, growth, trends, risks
- CompanyPosition, customers, margins, team
- Value creationGrowth, margins, add-on deals
- Returns and exitPrice, debt, exit value
Returns come from three places
- Growing profit
- Selling at a higher multiple
- Paying down debt
Market and company
Is the market growing, stable, and protected from disruption? Is the company a leader with loyal customers, recurring revenue, and healthy margins? Investors love predictable cash flow, because it supports the debt used to buy the company.
Value creation and returns
How will the firm grow profit while it owns the company: faster sales growth, better margins, or buying smaller competitors? Then work out what the company could sell for later, subtract any remaining debt, and compare the result with what the firm put in.
The returns math you need
The most common measure is MOIC, the multiple on invested capital: money the firm gets back divided by money it put in. If a firm invests $100M and gets back $250M, its MOIC is 2.5x. The firm's equity at exit is the sale price minus any debt still owed. Over five years, 2.5x works out to roughly a 20% annual return, which is a common private equity target.
Test the exit
Returns depend heavily on what the company sells for at the end. Always show what happens if the exit multiple is lower than planned.
Want to see how this structure compares to the others? The frameworks guide covers them side by side.
Part 4 of 9
How to solve it, step by step
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Clarify the investment
Confirm the price, how it will be paid for (equity and debt), the holding period, and the return the fund needs.
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Assess the market
Check size, growth, trends, and risks like new technology or regulation.
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Assess the company
Look at market position, customer loyalty, recurring revenue, margins, and the management team.
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Build the value creation plan
Estimate how much profit can grow through sales growth, margin improvement, or add-on acquisitions.
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Calculate returns and recommend
Estimate exit value, subtract remaining debt, calculate MOIC, test the key assumptions, and recommend.
Part 5 of 9
Worked example: Granite Capital and ClearPath
Try each question on your own before you reveal the answer. Say it out loud if you can, the way you would in an interview.
Case prompt
Your client is Granite Capital, a private equity firm. It is considering buying ClearPath, which provides heating and air conditioning maintenance to commercial buildings, for $300M. Granite's fund needs to earn at least 2.5 times its money within five years. Should Granite invest?
Question 1
How would you structure this problem?
A strong answer confirms the deal terms first: a $300M price, a five-year hold, and a 2.5x target. Then it lays out due diligence for this business:
- Market: how fast is commercial HVAC maintenance growing, how fragmented is it, and is demand steady through economic cycles?
- ClearPath: its share, how many customers renew each year, how much revenue comes from multi-year contracts, and its margins versus peers.
- Value creation: can ClearPath grow faster than the market, improve margins, or buy smaller local competitors?
- Returns: how the deal is financed, what ClearPath could sell for in five years, and the resulting multiple on Granite's money.
A good candidate notes that maintenance contracts tend to be recurring and steady, exactly the kind of cash flow that supports a buyout.
Question 2
Using Exhibit 1, if ClearPath grows revenue 8% a year and raises its EBITDA margin to 17%, what will its EBITDA be in year five?
Exhibit 1: ClearPath snapshot
| Metric | ClearPath today |
|---|---|
| Revenue | $200M |
| EBITDA | $30M (15% margin) |
| Market growth | 5% per year |
| Customer renewal rate | 92% |
| Revenue from multi-year contracts | 70% |
| Purchase price | $300M (10x EBITDA) |
Case data is illustrative.
Year 5 EBITDA: $294M x 17% = about $50M
EBITDA grows from $30M to about $50M. Note what this plan assumes: ClearPath grows 8% a year in a market growing 5%, so it has to win share. A good candidate asks where that extra growth comes from, such as winning new building contracts or buying small local competitors.
Question 3
Granite will fund the $300M price with $150M of its own money and $150M of debt. ClearPath's cash flow will pay down $50M of that debt over five years. If Granite sells ClearPath at 10 times EBITDA, what is its MOIC? What if the exit multiple is only 9 times?
Remaining debt: $150M - $50M = $100M
Equity at exit: $500M - $100M = $400M
MOIC: $400M / $150M = about 2.7x
At 9x: $450M - $100M = $350M, so $350M / $150M = about 2.3x
At a 10x exit, Granite earns about 2.7x its money, above the 2.5x target. But the cushion is thin: if buyers only pay 9x in five years, the return drops to about 2.3x and misses the target.
Notice where the return comes from. Growing EBITDA from $30M to $50M adds $200M of value at a 10x multiple, and paying down debt adds another $50M to Granite's share. The deal does not depend on selling at a higher multiple than Granite paid.
Question 4
The partner walks into the room. What is your recommendation?
"Granite should invest in ClearPath, with close attention to two assumptions.
ClearPath is a strong business: 92% of customers renew each year and 70% of revenue is under multi-year contracts, which gives us steady cash to pay down debt. If it grows revenue 8% a year and lifts its margin to 17%, EBITDA rises from $30M to about $50M. Selling at the same 10x multiple we're paying, with $100M of debt left, returns about 2.7 times our $150M, above our 2.5x target.
The two risks are growth and the exit. ClearPath needs to grow faster than its 5% market, and if exit multiples fall to 9x, our return drops to about 2.3x. Before signing, I'd confirm the growth plan by talking to customers and identifying specific small competitors ClearPath could buy, and I'd push to lower the price if we can't get comfortable with the 8% growth."
Why this works: it gives a clear answer, ties every point to the return, shows exactly which assumptions the deal depends on, and says what to check before signing.
Part 6 of 9
Common mistakes
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Thinking like a corporate buyer
Counting synergies a private equity firm cannot capture.
Instead: judge the company as a standalone investment.
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Forgetting the exit
A great company bought at the wrong price can still be a bad investment.
Instead: always estimate what the firm can sell for and when.
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Ignoring the debt
Borrowed money changes both the risk and the return.
Instead: subtract remaining debt from the exit value to find the firm's equity.
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No sensitivity check
Returns can swing a lot with small changes in growth or exit multiple.
Instead: test the key assumptions and say which ones matter most.
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Skipping the management team
Private equity firms rely on the people running the company.
Instead: ask whether the current team can deliver the plan.
Part 7 of 9
Variations you'll see
The same four branches apply to every version below. What changes is which one carries the most weight.
- Buyout
- The classic form, like the ClearPath example. Returns decide it.
- Market screen
- "Which of these industries should the fund invest in?" Focus on the market branch and compare attractiveness.
- Add-on acquisition
- A company the firm already owns wants to buy a smaller one. This works much like an M&A case.
- Exit decision
- Should the firm sell now or hold longer? Compare the return from selling today with the expected return from waiting.
- Commercial due diligence
- Test one specific claim in the seller's plan, like "the market will grow 10% a year." Often involves market sizing.
Part 8 of 9
Practice what you learned
Reading a framework is not the same as using it under time pressure. Put this lesson to work:
Try a full case
More ways to practice
Part 9 of 9
Frequently asked questions
What is a private equity case interview?
It is a case where the client is an investment firm deciding whether to buy a company. You assess the market and the company, build a plan to grow its value, and estimate the return the firm would earn when it sells.
How do you structure a private equity due diligence case?
Clarify the price, financing, holding period, and target return. Then assess the market, assess the company, estimate how much profit can grow, calculate the exit value and return, and test the key assumptions before recommending.
What is MOIC?
MOIC, or multiple on invested capital, is the money an investor gets back divided by the money it put in. If a firm invests $100M and gets back $250M, its MOIC is 2.5x. Over five years, that is roughly a 20% annual return.
Do I need to know finance for a private equity case?
You need the basics: how to value a company with a multiple, how debt affects the investor's share of the sale price, and how to calculate MOIC. Full financial models are rarely expected in a case interview.
How is a private equity case different from an M&A case?
A corporate buyer in an M&A case can combine the target with its business and capture synergies. A private equity firm usually cannot, so the target must be a good investment on its own, and the firm plans to sell it within a few years.
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