Private equity firms control close to a trillion dollars of capital even as you read this page. Though, a majority of PE investment action happens out of funds created by private individual investors or organized institutional/ corporate consortiums pooling capital, a few of PE funding projects are still in the mold of the classic leveraged buyout transactions; or partial stake purchases in public and large private companies. The largest firms in the PE space like Blackstone, KKR and TPG are known for their astounding capabilities of creating and deploying innovative financial tools and strategies to design wealth-creating transactions – many times, a single deal may be worth hundreds of billions of dollars! Indeed, even the “middle market” operators with smaller fund outlays are no less effective.

The Nature Of PE Firms

General partners and Limited partners are the two key parties of a typical PE outfit. While, the General partners are the principals of the firm who build and provide the brains and transaction expertise that PE firms need, the Limited partners are external individuals or companies that pool in the capital to make the fund. Typical Limited partners would include universities (who invest their endowments), insurance companies; Pension Funds and high net worth individuals, among others.

The Job Scenarios In Private Equity

The entry level job in private equity is as an analyst (undergrad) or associate (recent MBA or masters). You would typically be involved in a combination of four activities:

  • spreadsheet analysis of the economics of a potential leveraged buyout,
  • sourcing of new deals through industry research and screening of potential buyout candidates,
  • preparation of materials for a senior partner on a potential investment target or company already subject to investment or
  • coordination of the many diligence and research items required to carry out a transaction. The work is detailed, interesting and demanding. Hours can be long and emotions can get frayed as you adapt to both the circumstances of a deal and the vagaries of those around you. You will get an opportunity to interact with numerous law firms, bankers and consultants as you pull together the work on projects. You will soon become an expert on the debt markets – in particular, the arrangement of syndicated bank loans and high yield bond “take outs” that are used to refinance loans in buyouts. The work can be heady stuff as you will interact directly with CEOs and their management teams often even while you are at a junior level. The experience of how the business world works at a high level can prove invaluable in your future career.

Key Skill Requirements

Key skill requirements for a job as a private equity associate include:

  • Industry / operating knowledge.

    Ideally, you will have an intricate understanding of a specific industry and some operating experience in that industry. Many private equity firms strongly favor individuals who have significant operating experience along the way. The importance of operating and industry knowledge rises over time and can be critical to getting on the partner track and making it to the top.

  • Analytical skills.

    You need basic abilities in developing and analyzing spreadsheets, particularly that rather complex “LBO model” that every firm works with. But much more importantly, you will need to appreciate the business model factors that are exposed in pro forma financial analysis. It is also very important to be able to parlay your financial insight into relevant questions about how a company is doing now in a market and how it could do with specific management initiatives. It will be important to be able to carry out quality research on markets, competition, customers, supply chains etc.

  • People skills.

    Your ability to skillfully manage other people and eventually lead them is critical to your success in any private equity firm. The basics of communication, empathy and understanding are critical in getting teams to work and your work to flow. In addition, strong interpersonal skills will serve you well in the all-important networking phase of finding a private equity position and of later attracting deal flow.

Getting That Great PE Job

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

  1. providing equity to firms that have begun to generate revenue but still require capital to increase growth (growth equity);
  2. providing mezzanine debt - debt that is subordinated to bank debt and generally the last stop in the capital structure before equity;
  3. participating in secondary funds that purchase private equity interests that are traded;
  4. participating in funds that invest in other funds (fund of funds) and
  5. investing in turnaround situations – companies that are troubled or bankrupt and need crisis management. Some private equity firms like Cerberus get involved in every stage of the business: venture capital, growth capital, buyouts, mezzanine investments and turnarounds. Others stay focused on just one area such as middle market buyouts (Riverside is a good example). It is very difficult to break in to private equity coming with a recent undergraduate or MBA degree.

The state of the markets is not helping. The jobs are not plentiful and private equity firms prefer to hire persons with a few years of experience. The typical starting point for a private equity career is a job as an analyst or associate in an investment bank. The best private equity firms tend to hire out of the best banks. The search is on for high quality bankers who have their share of deals worked on (memorialized by a nice group of “lucites” – mementos of deals done). There is also some recruiting out the better management consulting firms.

However, MBA students are recruited into this sector, particularly from the top finance-oriented business schools ( Chicago, Harvard, Stanford, Wharton ) and a smattering of bright undergraduate students find positions each year in private equity. Because few private equity firms are large enough to have a coordinated external recruiting effort, it is worth your while if interested in this area to carry out a self-directed job search. Many firms hire only episodically and recruiting success can be a matter of showing up at the right place at the right time with the right story. We encourage you to try this approach. Follow the time-honored path of networking and using a little shoe leather to make connections with persons that can help you break into this exciting industry. Ideally, your networking activities will take place well before you hit the job market at graduation. You should be looking to meet people in the private equity industry along the way. A few friends can go a long way in finding the job you want.

Good luck as you contemplate a private equity career!

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