Never before has the private equity profession wielded so much power as it does today. The past few years have splendid for the industry making for eye watering readings. Private Equity (PE) global assets under management amounted to $4.1 trillion with over 3,500 existing funds as of January 2020 (PwC Report).
Private Equity industry has proved itself in both bear and bull markets. No surprise they remain investors’ favorite. It also continues to be the choicest profession in high finance. However, finding a position at a private equity firm can turn out to be a tall order. Often, the number of aspirants seeking opportunities outpace the positions available.
To ease your entry to the industry, here are answers to big 5 private equity career dilemmas candidates face.
The 5 Big Questions in Private Equity
Q1. Can I begin my career with a Private Equity Firm right after undergrad?
It is possible. There are many firms in the private equity industry that hire students out of undergrad. They are hired on analyst or sub-associate positions junior to associates. However, very few positions are put open in private equity at this level.
The reason being, a person right out of undergrad would require constant guidance and pointers. They would need to be shown their way around the finance industry. They wouldn’t have an experience of being involved in a real deal transaction, negotiating a non-disclosure, supporting the management team constituting far more experienced and older people, dealing with third parties including consultants, accountants, lawyers, and the likes.
This is because most new hires in the private equity industry come with an investment banking experience. It gives professionals at private equity autonomy to function and handle deals as an analyst either at an investment bank or PE firm wouldn’t usually have.
Thus, a PE associate being hired at Blackstone, for instance, is likely to come with 2-3 years of investment banking or consulting experience. From day 1, they can approach deals judiciously, are acquainted with financial modeling, can contribute with intelligent suggestions, and have broad networks. You would know how debt financing works.
Having laid that background, of some of the top Private Equity firms, such as TPG, KKR, Carlyle and Blackstone; many don’t hire for positions below associate level.
Though skillsets earned in investment banking are transferable, the working modalities in the profession of private equity are much different.
Q2. Should I proceed to Associate path from Analyst at an investment bank instead of opting for a private equity career?
People leave investment banking for many reasons – passion for the private equity industry, tough working hours, rough lifestyle. Committing to move from analyst to associate role is equivalent to adopting a difficult work routine for premium years of your professional life. If that appeals to you, the job role at investment banking can be as rewarding as private equity.
A significant portion even enters investment banking analyst positions with the plan to exit into hedge funds or private equity or venture capitalists’ careers. Some may also opt for higher education at business school.
Whatever you choose, remember it is a turning point of your career. It is a point where you get an opportunity to exit into any finance-related industry. Also, a phase where you place yourself for a long haul in a career.
Q3. Which credentials are important for a career in private equity?
Success in private equity directly pertains to your deal sourcing abilities. Pursuing an MBA can help you broaden your network and improve your odds in the private equity industry. A bunch of highly motivated professionals usually enter the top-notch MBA programs and leave with a valuable high-worth relationship, which in future may be helpful in fundraising or sourcing deals.
Other than MBA, a private equity certification can help you validate your skills at a global level and give you access to a prized alumni network. The Certified Professional in Private Equity offered by the United States Private Equity Council is one such qualification renowned in the business world. CFA is another popular qualification.
Q4. Does a private equity career offer better pay and work-hours than investment banking?
Yes and no. Let’s first clear the scope and definition of better here.
Talking about salary, within private equity, the premiums earned by a partner are definitely better than an MD in investment banking. Also, the carry earned at well-performing funds is unbeatable. Other than that, for junior roles the difference is hardly any. A PE associate would usually earn similar to a first-year associate at an investment bank. However, the pay difference (even at junior level) can be significant between investment banking and private equity professionals, for those working at large PE shops.
The biggest misconception among many beginners is about work hours. It is often said that the private equity industry offers relaxed working hours than investment banking. Yes, to an extent it does. However, it is not as relaxed as in other industries. Comparatively, better hours at private equity means not having to manage your timing per the client. You will have better control over your time management. No unprecedented mega deal discussions that in many cases lead to nothing. Otherwise, from all sides, it is as difficult a job as that of an investment banker.
Q5. How to choose between a private equity and a hedge fund career?
It depends on where your knack and disposition lie. Both private equity and hedge funds offer potentially promising career avenues. They are similar in the sense that professionals at both scrounges for seed funding, and use those funds to make investments with the aim to gain decent returns. However, the similarities end there.
In hedge funds, you don’t get the chance to control your investment, while private equity gives you the scope for the same. As an active investor in private equity firms, you can add value to the business, architect its future, and learn the ins and outs of running a business.
For instance, you buy stocks of Pfizer worth 1million USD. Now, in hedge funds you would just sit back and hope that the management doesn’t mess up. Here your returns will depend on how the company performs, the day-to-day decisions taken by others, and a number of things outside your reach. In private equity, you would take control of Pfizer and take an active part in securing your investment.
Private equity is about investing millions, and turning your dollars into well performing companies. The latter is also one of the reasons, private equity founders come with senior level banking experience, and hedge funds have a variety of backgrounds – from consultants, brokers, bankers, business owners to college dropouts.
If you are passionate about investing and creating business value, a move to PE career can be the right step in the right direction. Transform your curiosity for the private equity industry into a profession by earning a certification in private equity.