Most investment banks have a fairly gruelling interview process that we outline in our interview section. We also are now offering mock interviews for those who do not have friends to practice with.

Each interview goes through a technical question section, usually with some combination of analyst/associate/VP, as well as several behavioral or fit interview rounds. After a 6-8 hour superday, candidates may then be brought to a cocktail reception or meeting with the Group Head as a final test. Afterwards, offers are handed out.

So after such an exacting process, surely investment banks always hire the right person?

No – and in my experience 1/4 hires end up not being great fits for the job. And even one bad apple can have an extremely detrimental effect on team morale.

The reality is that the investment banking interview process, while easily weeding out candidates that do not belong at all, is still not enough of a filtration process sometimes.

A lot of the time, aspiring investment bankers talk a big game but fail to deliver. Elite boutiques tend to have more success around this because their technical interview questions are far more difficult than what you would run into at UBS or Citi. However, impostors still find a way to slip through the cracks because investment banking interview guides can help tackle most questions because investment bankers are too lazy or tired to invest the time in creating their own questions (or find it annoying to do every time once the first batch of interviewees tell their friends or email sell side handbook).

How does an investment bank make sure that the candidate can “hit the ground running”?

A financial modeling test – something that the guides do not teach you.

Financial Modeling Test for Finance

Obviously, banks cannot do this for every hire – it takes too much time to get a laptop with no internet for all the candidates and get them to model away quietly in a room.

However, when processes are more bespoke, a modeling test is a great way to see if candidates can walk the walk.

This means:

Private Equity Interviews

This is very important for private equity firms to know that investment banking analysts have received the full benefit of their two-year analyst programs and understand the technical aspects beyond making pretty slides. There is a lot less room for fluff in private equity – assumptions need to be laid out appropriately and there needs to be a good understanding of returns and what drives them.

Lateral Investment Banking Hires

Modeling tests are especially important for lateral hires pursuing the following moves:

Senior analyst or associate roles

For many banks or groups within banks, hiring a new analyst means that not that much weight is put on them coming in as master modelers. They are going to be put on the grindstone and will sink or swim. Senior analysts and associates are different – they need to come in and assume a leadership position. Junior analysts are not going to respect new hires unless they can do the work that they can do or offer something else. Senior staff expect to be able to rely on the new hires right away.

Elite boutique roles

For elite boutiques, the level of corporate finance knowledge required is much higher – keep in mind that these outfits are advisory only and do not have the benefit of leaning on a balance sheet for capital markets business. Everyone needs to be a contributor from top to bottom.

Of course, the modeling test will not be in isolation. It will generally replace the technical portion of the interview, but there still needs to be senior sign off on the hire from Managing Directors and Executive Directors even if the modeling test is top-notch.

Investment Banking Modeling Test Format

When there is an investment banking financial modeling test it is always announced beforehand. So an email from HR or someone from the business line will advise the candidate to prepare for a modeling test, as well as how long it takes.

1. Short Modeling Test
2. Long Modeling Test
3. Take Home Case Study

Usually, the modeling test will come in three forms, although there certainly is room for variation. It is generally always an LBO, DCF or combination of both unless the group is industry or product specific. The test is usually an LBO, and yes it has to be built from scratch. An added element of difficulty is that investment bankers who have become accustomed to their own FactSet shortcuts, two screens and other set ups are out of luck because usually the interviewers will provide a 2006 laptop with no internet, no custom shortcuts and a weird keyboard.

The short modeling test is 1-2 hours. This is a test of speed, as well as time management. Given the short duration, this cannot be too in depth. Basically, the candidate will have to look at a bunch of financials, build out an LBO and figure out whether or not a financial sponsor should look at buying it. This is bare bones and can be done on one tab – the level of analysis done is basically whether or not the IRR is above 20%.

This is the easiest one to practice and requires the least amount of actual finance knowledge. If a candidate does one every day before the modeling test the actual build takes 30-45 minutes for a full LBO with debt schedule and tax schedule – so 1 or 2 hours is actually plenty of time. The hardest part of this is getting the revolver formula right – so if a revolver is practiced this is cake.

The long modeling test is less mechanical and requires more diligence. This usually ranges from 3-6 hours but can certainly be finished in 2.5 hours if no time is wasted and you are good.

So that candidates cannot get an idea of what the modeling test will include, interviewers will get a public information book/binder (PIB) put together from a year such as 2010. There will be financials, equity research, an investor presentation and possibly some fairness opinions compiled from EDGAR (the SEC website).

As such, the purchase price paid has to align with market and the analysis at the end has to be well reasoned.

The take home case study is the biggest time commitment. It simply does not work when an analyst is being blown up on a big file unless they do not sleep.

This will be a research project where the prospective hire spends a lot of time doing research on the company before putting together a model and slide deck with recommendations.