Career Guide – Private Equity

In Investment Management by Gaurav SharmaUpdated On:

1. What is Private Equity?

Private equity is an alternative investment asset class where funds are invested in non-listed private companies. Sometimes PE firms also invest in publicly listed companies with the intention of taking them private. This is the key differentiator that separates private equity firms from regular investors and funds investing in publicly listed securities.

Most PE funds are structured as partnerships with the PE firm acting as the general partner (GP) which manages the investments, and investors acting as limited partners (LP) who only provide the funds. Each such fund is usually targeted at a specific industry or is designed to use a specific strategy to generate returns. The fund invests the money initially and then exits the investment at an opportune time, hopefully generating sizeable returns for all investors in the process.

2. Types of PE funds

2.1. Leveraged Buyout Funds

LBO funds use a combination of a lot of debt and a bit of equity to acquire mature and stable companies. They generate returns by cutting costs and increasing revenues and exiting the investment at a much higher value. The best examples would be KKR, Carlyle, Blackstone etc.

2.2. Venture Capital

VC firms usually invest in companies which are quite young and still in their high, early growth phase. Such investments carry more risk but also offer more rewards as even one success can pay off for a dozen failures. Example include Sequoia capital, Accel etc.

2.3. Growth Funds

These funds invest in mature businesses that have some untapped potential and generate returns by relying on superior management or strategic acquisitions without the use of excessive debt like in LBOs.

3. Private Equity Job Description

Private equity analysts and associates spend the majority of the time looking at prospective investment targets or portfolio companies. Rather than looking at what the top brass does, lets stick to what you would be expected to do in your first few years:

3.1. Screening

Reviewing and screening potential investment targets is the first part of the job. Analysts and associates look at the financials of a company, its management structure and strength, business opportunities, growth potential, market dynamics, competitive landscape and other such factors which are likely to impact a company’s future prospects.

Even though analysts and associates do most of the grunt work, they are not the ones making the actual decisions. In fact, given the sizeable investment for each of these deals, decisions are taken at the very top level. Analysts and associates mostly just assist the decision-makers with whatever number crunching or other assistance that is needed.

What makes this PE analysis different from what an investment banking or equity research analyst does is that the PE firm’s investment is likely to change the business strategy and capital structure of the target firm as they will become a majority shareholder.

3.2. Execution

Once the investment committee has decided to go ahead with an investment opportunity, associates help with the execution of the transaction. This means performing thorough due diligence including looking at key personnel or even suppliers etc. Associates also assist in deal structuring and finalizing the terms of the investment.

Executing a PE transaction requires liaising with dozens of external experts including auditors, lawyers, industry experts, sponsors, investment banks, consultants and so on.

3.3. Monitoring

The third component of your job as a PE associate is monitoring and managing the investment portfolio companies of the firm. This may include things like quarterly valuations, monitoring material developments in the industry or portfolio companies, preparing detailed analysis for management, seeking out M&A, divestitures or other opportunities, recommending corporate actions to the management of the portfolio companies and so on.

As should be evident, the work involved is significantly more strategic than what an equity research analyst would look at. This is because PE firms usually have enough leverage to determine the direction that the portfolio companies should take.

The general management work also involves the creation and updating of marketing materials like memorandums, investor presentations, fact sheets etc.

4. Skills and Qualifications

Prior IB or related experience – To put it bluntly, it is difficult to get into Private Equity without some kind of prior experience in investment banking, hedge funds, leveraged finance, credit analysis, DCM or any other such role. The reason for this is that the work involved is generally a step above from those roles. Furthermore, PE is generally considered a good exit option for IB and other analysts. This means that PE firms have the choice of analysts and associates to pick from.

This also means that the biggest names in private equity can easily choose to only look at the top performing and brightest associates from the top investment banks. One way to get around this constraint is by aiming for smaller PE funds which are likely to be more open to hiring from a broader pool of analysts.

Deal experience – PE firms also insist on recruits having relevant deal experience in the industries that they cover. From their perspective, it follows that the new hire will be able to hit the ground running and would not require handholding or a lot of training. PE firms are usually much smaller and don’t have the time to groom their recruits like any large bank would. They are laser focused on their portfolio companies and on generating a return for themselves as well as their clients.

Business acumen and superior judgement – While most banking roles require some level of financial modelling and analytical skills, PE additionally requires a very strategic mindset and the ability to look at a business from the CEOs perspective. Private equity firms succeed by drastically improving the operational efficiency and profitability of their portfolio companies. As you can imagine, this requires a very high level of understanding of that business and industry.

Long term focus – Private equity investments usually last for many years. It’s not a transactional business like M&A or ECM etc. This means that the firm has to invest a lot of time into their portfolio companies and treating them as long-term investments rather than fire and forget investments.

Similarly, the rewards for these deals can also take a long time to materialize. These rewards are distributed in the form of carry/ carried interest and junior analysts are almost never eligible for it. So you have to rise through the ranks and stick with the same firm for a decade or more to really see substantial amount of cash roll in.

Top academics – Private equity firms are very picky about the universities that they hire from and the academics of the recruits. Keep in mind we are not just talking about direct university hires here, even when hiring laterally academics still play a part. This is just the reality which is a result of the aspirational nature of a private equity job which has greatly skewed the supply and demand of candidates in favor of employers.

Entrepreneurial experience – While all of the above-mentioned skills are typically asked for, sometimes just being a very successful entrepreneur can be enough. At the end of the day, you are looking at the overall business prospects of a company and if you have demonstrated that ability by successfully setting up a company of your own in that industry, then that can often be good enough.

Private equity firms often have a pool of experienced industry veterans who help them to turn around their portfolio companies.

5. How to get into PE

Private equity has some of the lowest ratios of hires to applicants in the financial services industry. It is not uncommon to have 250+ applicants applying to a single role. And many of these applicants are already analysts or associates at bulge bracket investment banks, hedge funds, asset management firms or even consulting firms.

I am not trying to discourage potential applicants but rather drive home the point that private equity is not an entry level role but rather something that bankers aspire to because of the better quality of work and potentially higher compensation at the senior levels. Treat it as a promotion that you should aspire towards.

A private equity CV must focus on three main parts:

5.1. Deals and Experience

The most important section of your CV is going to list out the very best deals that you have successfully executed in any capacity during your career. The objective here is twofold. Firstly, you must demonstrate your experience and the fact that you have the necessary skills to hit the ground running. Secondly, you want to steer the interview towards a discussion about these deals which is something you probably can talk about and discuss at length.

In case the role for a specific sector like TMT or FIG etc., you should tailor your CV for those industries. Private equity firms usually love big brand names so keep that in mind and make sure those brands pop out. Don’t forget to include any internships with big-name banks.

5.2. Academics

If you only have a few years of experience while you are applying to a private equity role, then your academics will still be considered relevant. Your goal here is to demonstrate that you are not only an overachiever but also a consistent performer. These words might seem like generic fluff to the uninitiated, but consistent performance is a very key attribute that the recruiters would be looking for. Being brilliant some of the time is usually not enough at this level. You have to demonstrate that you have consistently hit the mark throughout your life.

If you had any significant scholarships or any investment club membership, then it might help to include those details. PE firms prefer candidates from Ivy League or Oxbridge and equivalent but that alone is not enough and should instead be considered as a minimum requirement.

Some PE specific courses and certifications can also help you build up your skillet and get some CV boosts. Here are the best ones:

Best Private Equity Courses (2023)

5.3. Core Skills and “Fit”

When it comes to core skills, modelling (including LBOs), finance and accounting know-how, business acumen, presence of mind, etc. will be relevant. There are plenty of online courses which can teach you some of these skills, but only to supplement your on-the-job experience.

Another important aspect in private equity is the cultural fit. While cultural fitment is important for any role, it becomes an especially important consideration in private equity. The reason for this is that private equity professionals tend to stick around for a very long while given how the compensation is linked to the long-term performance of their investments. Private equity setups are usually much smaller than even a modest sized banking set up and therefore cultural compatibility is taken rather seriously.

If you need help with your CV for Private Equity, here are some resources to help you out:

Best Resume Writing & Review Services for Investment Banking & Finance (2023)

6. Private Equity Compensation

Private equity analysts can expect to earn around USD 150K which includes a variable component equaling roughly one-third that amount. Associates can easily expect to double that. However, like always, these numbers are highly dependent on the type and size of the fund that you’re working for and the location.

That being said, the salary or even the bonus is not the reason you’re really joining a private equity firm for. Carry or carried interest is a percentage of the return that private equity funds generate which is paid out to its key employees. This amount can easily run into the hundreds of millions per year which only has to be divided amongst a small team (and now you know why they are so picky while hiring). But don’t really expect to get this as an analyst or even an associate. It is usually only shared at the VP level and above although it might be possible for senior associates to get a small share in some shops.

No one can tell you exactly what this number will be as it is completely dependent upon the fund’s performance. But you can probably now appreciate the sort of numbers that we are talking about here.

7. What does a typical day in PE look like?

A normal day for a private equity analyst/ associate starts at around 8 AM. If there is a deal going on, then the majority of time would be spent working on the specifics of the deal. This is not only restricted to number crunching, but it also involves a lot of meeting and liaising with lawyers, consultants, bankers, the management team of the target firm and seniors within the PE firm.

Other than that, analysts also spend time looking at prospective investment opportunities. This involves some elemental analysis which would form basis of further research.

Some travel might also be expected as the analyst/ associate has to thoroughly understand the business of the company and perform due diligence which includes looking at the operations of the company.

7.1. Work Hours

The hours in private equity are considerably better than investment banking. However, that might not be an ideal benchmark given the unhealthy number of hours that investment banking analysts spend at their desks. You would usually spend around 10 to 14 hours at the office for a weekly average of around 60-70 hours.

Rather than just looking at the number of hours though, it might also help to look at things qualitatively. If you’re just staring at a screen and crunching numbers all day, then you’re probably not going to have a great time at work. Thankfully, private equity allows some respite from this as you would also be spending a lot of time interacting with portfolio companies, investors and dozens of other stakeholders that I have mentioned previously in this article.

8. Private Equity Career Path and Progression

Private equity is usually considered a destination rather than a starting point by most banking professionals. Therefore, exit options are available but usually not availed. If you do want to move, you would have the option of choosing from many banking roles at senior levels and even roles in large corporates, if that is what you desire.

However, a great many private equity analysts and associates decide to stick around in order to benefit from the carry. Things begin to really look up as you move from associate to AD and director level positions. Not only is your fixed compensation increasing, but you also become eligible for the carry and begin to really see some serious returns.

In terms of job responsibilities, things tend to become more strategic as you rise through the ranks. You will focus more on managing the fund which includes strategic decision-making, deal negotiation, investor relations and fundraising.

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About the Author

Gaurav Sharma

Gaurav (LinkedIn) started his finance career as an intern in Citi’s Institutional Clients Group in 2009, eventually ending up as an Associate Director at Standard Chartered Bank’s Corporate & Institutional Banking division a few years later. By 2016, he was an independent consultant helping FinTech start-ups in London with product development and launch. Gaurav also helps banks with their digital banking initiatives and advises PE & VC firms with investments in the financial services and FinTech sectors. Gaurav writes on topics ranging from EU banking regulations and tradional finance to Blockchain startups and the future of banking itself! He has an Engineering degree in Computer Science and an MBA with a double major in Finance and Marketing. He is also a Certified Financial Risk Manager.