Private Equity (PE)

Here’s a simple “Private Equity for Dummies” example…

Imagine that you and your friends went to all your contacts, asked for money, and then decided to become “home flippers” by buying homes, fixing them up, and selling them at higher prices.

You keep some of the profits for yourselves in exchange for operating the business, but you give the majority back to your contacts for providing the bulk of the required money.

That’s what private equity firms do, but on a much larger scale and for companies rather than houses – and with the backing of institutional investors rather than “friends and family.”

The job is part fundraising, part operational management, and part investing.

You can divide private equity firms according to:

1. Stage of Investment – Very early stage? Growth? Mature? Distressed?
2. Target Geography – U.S.? North America? Europe? Asia? Emerging markets?
3. Fund’s Target Sector – Healthcare? Retail? Technology? Sector-agnostic?
4. Value Added by the Firm – Do they focus on operational improvements, add-on acquisitions, restructuring, or something else?
5. Exit Strategy – Do they plan to take portfolio companies public? Or sell them to strategic or financial buyers?

A few of the more common fund types include:

• Venture Capital (VC) Funds – See the description above; they invest in very early-stage companies with high failure rates.
• Growth Equity Funds – They invest in companies that are more mature and looking to scale up their operations or penetrate new markets.
• Leveraged Buyout (LBO) Funds – When most people say, “private equity,” they’re referring to these funds. They acquire 100% of mature companies using debt and equity, and they plan to hold the companies, improve them, and exit in 3-7 years.
• Distressed / Turnaround Funds – They acquire companies that are undergoing difficulties and rescue them – starting with either debt or equity investments.
• Mezzanine Funds – They provide high-yield debt to reasonably mature companies that generally have positive earnings and cash flow, but that need additional risk capital.
• Real Estate Funds – They focus on properties (either equity or debt) and aim to buy, improve, and sell them over time. See: real estate private equity and real estate debt funds.
• Infrastructure Funds – Infrastructure PE funds invest in public infrastructure (e.g., roads, bridges, airports, public transportation, etc.) rather than companies.
• Fund of Funds – A private equity fund of funds invests in other private equity funds and is further removed from individual deals.

Specific private equity firms are often classified into one of the buckets above, but many firms have also expanded into different strategies over the years or started new spin-off firms that make different types of investments.

For more on this topic, please see our coverage of private equity strategies.

If you got the “Why private equity?” question in an interview, you’d probably say that you love investing and operations, and you want to build value for companies over the long term.

But in real life, most people are drawn to private equity because it offers high salaries and compensation, somewhat better hours than investment banking, and more interesting work.

Some people also enjoy the excitement of working on large deals and interacting with “the best and brightest,” as well as understanding company operations in more depth.

Unlike investment banking, exit opportunities are not a major reason to go into private equity because PE itself is viewed as an exit opportunity.

Although there is always some debate about the world’s “best” private equity funds, ten of the world’s biggest private equity funds, according to assets under management (AUM), are as follows:

It’s extremely difficult to get into private equity, and once you’re in, the job is stressful and requires long hours and sacrifices, especially when deals are in their final stages.

But if you perform well, you can advance quickly and earn high salaries, bonuses, and carry (the profit share from investment returns) in the process.

Here’s what a “typical” career progression might look like at a mid-sized-to-large private equity firm based in New York City, including estimates for total compensation (i.e., base salary + annual bonus + “carry” or profit share) in USD:

For more on these topics, please see our articles on the private equity career path, private equity salaries, bonuses, and carried interest and Private Equity Exit Opportunities: How to Check Out of Hotel California.

The two most common entry-level roles in private equity are Analysts and Associates.

Analysts are hired directly out of undergraduate and assist Associates with tasks such as financial modeling, deal analysis, due diligence, sourcing, and portfolio-company monitoring.

Associates usually join after working as Investment Banking Analysts at bulge-bracket or elite-boutique banks.

They do some of the same work as Analysts, but they tend to focus more on driving deals to completion rather than assisting with “tasks of the day” that need to be completed.

At smaller firms, more Associates come from middle-market and even boutique banks; some management consultants and Big 4 and corporate development professionals also get in.

Getting into private equity directly after an MBA is nearly impossible unless you’ve done investment banking or private equity before the MBA.

You could complete the MBA, use it to win a full-time investment banking job, and then recruit for private equity roles, but that’s far more difficult than breaking in pre-MBA from investment banking.

To get into private equity, you’ll need:

1. A sequence of highly relevant work experience, including transactions and financial modeling.
2. Top academic credentials (grades, test scores, and university reputation);
3. A lot of networking and interview preparation;
4. Something “interesting” that makes you appear to be a human rather than a robot;
5. The ability to think critically about companies and investments rather than just “selling” them.
6. A strong cultural fit with the firm – PE firms are much smaller than banks, so “fit” and soft skills are even more important.

For more, see our comprehensive guide on how to get into private equity.

Private equity has become a highly competitive and sought-after field.

Private equity firms want people who are technically proficient and who demonstrate strong “fit” because firms are far smaller, and each team member has far more responsibility than in investment banking.

Banks might have tens of thousands of employees to perform grunt work, but private equity firms have no such armies; they want to hire small teams of the top professionals who can add value from day one.

That’s why many aspiring private equity professionals invest in specialized courses and training to help them get noticed, get hired, and get promoted.

Some of the courses offered by Mergers & Inquisitions and Breaking Into Wall Street that apply to private equity include:

• Investment Banking Interview Guide – Includes a 120-page guide to LBO modeling and 4 practice LBO case studies/modeling tests
• BIWS Premium – This course includes more in-depth LBO case studies and coverage of foundational financial modeling skills
• Advanced Financial Modeling – This features our most advanced LBO model (stub periods, dividend recap, OID, working capital adjustments, etc.) and an open-ended, “take home” private equity case study
• Venture Capital & Growth Equity Modeling – This one is highly relevant for roles investing in earlier-stage companies, where knowledge of cap tables and granular financial models is essential

Completing these courses will help you win interviews and job offers for roles that pay $150K+ and position you for careers in private equity.