This question is testing your investment philosophy. The typical investment philosophy that is often preferred by investment bankers and private equity investors is deep value plays on companies with a sustainable competitive advantage trading at relatively undervalued multiples,similar to Warren Buffet’s style of investing.
A great book to read is The Intelligent Investor by Warren Buffet, and it is considered required reading for anybody looking to invest seriously.Some traits of a good investment include:
●Low relative valuation (multiples) compared to similar companies in the industry○Even if the multiple is higher, as long as you can explain the drivers behind that and how there is additional value to be had, then your argument still remains sound
●Experienced management team
●Dominant and unique position in industry○Market leader○Cost leader
●Defensible and sustainable competitive advantages○A “moat” to prevent new entrants, such as patented technology, first mover advantage in an economies of scale business, network effect
●Strong historical and projected revenue growth○Double digits would be considered high growth, but depends on industry
●Robust and stable EBITDA margins ○Low EBITDA margins means more operating leverage, wherein a small % change in revenue could cause a large % change in EBITDA, therefore increasing risk
●Low capex requirements
●Healthy capital structure with not too much debt
●Favourable regulatory environment
Keep in mind that in a hedge fund interview, you should tailor your investment style to the style of the hedge fund, whether that be long-only, long-short, macro, event-driven, etc.