Private equity firms are investment management companies that acquire private businesses by pooling capital provided from high net worth individuals (HNWI) and institutional investors. As a PE professional, hence you will be involved in activities and decisions that create new businesses, turnaround old, ailing ones, and grow the promising ones with greater vigor. You will be a part of PE teams that buy a stake in a target company or go in for an outright buyout or engage in “leveraged buyouts” (LBO),
You may also be involved in creating and growing Private equity funds by raising money from other investors and larger funds, who want to make more money by acquiring stake in companies that are in need of capital and restructuring, that are already bringing in revenue, and that can be made more profitable. Of course, since you’ll be raising all this money privately, nothing would show up in public exchanges or stock markets.
Since PE is a complex, capital-intensive and leadership dependent business, only the best financial and business brains and groups operate PE businesses. As a professional, hence, you’d always be working with the best employers and the best teams – like those in TPG, Blackstone, The Carlyle Group, Bain Capital, and Kohlberg Kravis Roberts (KKR), SoftBank among others.
You work will get you to interact with not only bankers, consultants, and legal representatives, but also CEOs and top management teams though you may still be at a junior level. You will get to know how businesses work at high levels, and do things that create new businesses and improve old ones. Indeed, PE pays well too – often better and bigger than most other white-collar jobs around. In addition to the basic pay and bonus, PE professionals often receive an incentive known as “carried interest,” which is a direct share in their company’s profits and a substantial part of their earnings. PE professionals in the US get to earn carried interest before they reach the director level. In European and Asia-Pacific firms, however, the carried interest is paid at the Director level and beyond.
Private Equity firms usually hire their Analysts from bulge-bracket investment banks, middle-market banks, and boutique banks. They also consider PE professionals from rival firms, and in rare cases, even undergrads for junior roles in emerging markets. But as a rule, for graduating students or recent graduates with little or no experience, it may be nearly impossible to break into private equity without a specialist, global qualification in PE. That’s the reason students of MBA and MS Finance programs around the world increasingly pursue a high-end global qualification like the CPEP™ simultaneous to their academic coursework.
Since investment banking and PE require similar skills, most big PE firms willingly hire investment bankers with two- or three-years’ experience, as their investment banking experience helps them catch up faster with the tricks and techniques of private equity. Elite PE firms prefer candidates from big investment banks, such as Goldman Sachs and Morgan Stanley. Their expertise in financial modelling, transaction management skills, strategic thinking, industrious nature, and sector knowledge makes investment banking analysts and associates ideal candidates for PE and venture capital industry.
Yes, many PE firms also hire from top-tier management consulting firms, and finance majors from elite business schools like Harvard, Stanford, Wharton, and Booth (United States); HEC, INSEAD, ESSEC, London Business School, Oxford and Cambridge (in Europe). PE firms in the US see more value in hiring MBAs than firms in Europe. In fact, many big PE firms often prefer equity researchers and strategy consultants to investment bankers, and readily hire strategy consultants who have worked in renowned consulting firms like McKinsey, Bain, or BCG.
Corporate lawyers, science PhDs, IB associates with MBAs, and mid-career corporate finance professionals are seen as non-traditional candidates and may find entry into PE difficult unless they are outside the US/UK, in India, Russia, or Central and Eastern Europe; work in a closely related field on transactions (Big 4 valuation/advisory, consulting, direct lending, corporate development); or are aiming for smaller PE funds.
There is no doubt, given the importance of analytical abilities, the biggest PE firms prefer candidates with majors in Finance, Business or Engineering or Physical Sciences. Though a top b-school MBA or an ivy-league MS does make you more appealing for PE recruiters during the initial screening stages, it’s no guarantee for a top PE job. A specialist, global qualification in PE showing your expertise in PE per se adds greatly to the appeal for employers. Indeed, as said earlier, strong professional background in investment banking, strategy consulting, corporate development, or restructuring is what recruiters seek.
PE recruiters typically expect and look at the following very closely about candidates for analyst and associate positions:
People skills and a cool head to handle deal pressure are also among important requirements. Also show your capacity for leadership and entrepreneurship.
For traditional candidates for PE jobs (IB analysts, etc.), there is an on-cycle and an off-cycle recruitment process. The on-cycle process for analysts at big PE and boutique firms runs October-January/March in New York. If you are selected, you will only begin work in August of next year.
The off-cycle process is meant for roles outside New York; roles for anyone who is not working at an investment bank; and roles at smaller firms. Off-cycle takes more time than on-cycle, but you start work immediately. In London, firms start the process in January, not in October, and present “start immediately” and “interview in advance” options.
Tests in the on-cycle process are time-bound and quick. Unlike in on-cycle, tests in off-cycle require more thought and preparation of a real investment thesis. Outside the US and the UK, too, a similar pattern of case studies/modeling tests and interview questions is followed. Headhunters call the shots in the on-cycle process.
PE firms usually assess technical capabilities of working under stress and with unstructured information through case studies and modeling tests. These may be quick, 30 minute tests like creating a simple LBO model, or a more standard 1-3 hour exam, asking applicants to build a real LBO model; or even a take-home test in which applicants may be required to write a detailed strategy or an investment thesis and submit it within a few days or a week.
PE interview questions can also be categorized: Fit (questions relating to PE, the firm, your long-term goals); market/industry (about industries/companies that interest you); technical questions (similar to IB interview questions); and deal/client experiences (how you added value to a deal). Many candidates put too much focus on technical and modeling tests and too little on questions about fit, etc., which are equally important. Firms will test your business sense and “commerciality.”
Associates are the most junior professionals working at private equity firms. Their work consists mainly of research, due diligence, financial modeling, and report writing. One task typically assigned to associates is reviewing and summarizing confidential information memorandums (CIMs), which are documents produced by investment banks that contain information about potential investment opportunities. Associates also assist senior personnel in tasks such as monitoring companies in the firm’s portfolio, sourcing deals, handling transactions, and fielding phone calls from investors.
The vice presidents and principals at a private equity firm supervise associates and assist managing directors and partners in crafting investment strategies and in negotiating deals with target companies. As associates move up to this next level in the private equity firm hierarchy, they are expected to produce ideas for investment opportunities by identifying companies to acquire. Because they are more directly involved in generating investments for the firm, vice presidents and principals usually qualify for a significant percentage of the profits from the fund, or funds, that they are assigned to work on. A primary job responsibility of vice presidents and principals is establishing and maintaining relationships with investment bankers, business consultants, and other financial professionals who can be a source of leads for investment opportunities.
After a few years working as a vice president or principal, private equity professionals can hope to move up to the coveted positions of managing directors or partners. These are the most senior executives at a private equity firm, the people with the responsibility of making final decisions on what companies a fund invests in and on how the investment deal is structured. They are also the firm’s contact people who provide management direction for portfolio companies. Partners, as the primary individuals who actively solicit investors are the lifeblood of a private equity firm, while managing directors are the managers of individual funds and responsible for turning investor dollars into high returns on investment (ROI).
A career in private equity can be highly rewarding, both financially and personally. Private equity managers often take a great deal of satisfaction from successfully guiding their portfolio companies to new high levels of profitability. You can help yourself hit the ground running in the private equity business by arriving as an applicant at a firm with an MBA degree and several years of experience in the banking industry already under your belt.
To elaborate further, we have noted that the largest private equity firms are involved primarily in leveraged buyouts (LBOs). There are some other focus areas that might interest you. These include