Definition of Private Equity: Private equity firms raise capital from outside investors, called Limited Partners (LP), and then use this capital to buy companies, operate and improve them, and then sell them to realize a return on their investment.
The industry is called “private” equity because the companies that private equity firms invest in are private initially, or become private as a result of the investment.
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.
It’s easiest to explain the differences between investment banking and private equity by comparing them to real estate and some of the job functions there:
You can earn a lot of money if you’re successful in either field, but the ceiling is far higher in private equity for the same reason the ceiling is higher for real estate investors than it is for brokers: if an asset’s price increases by 2x, 5x, or 10x, the investors reap all the gains.
Many people argue that the work in private equity is more interesting and intellectually engaging, that the lifestyle is better, and that it’s a superior long-term career.
Undergraduates often start as investment banking analysts and then use the experience to move into other fields (“exit opportunities”), such as private equity, hedge funds, and corporate development, after a few years.
For more on this topic, see our coverage of investment banking vs private equity.
Both private equity firms and venture capital firms raise capital from outside investors, called Limited Partners (LPs) – pension funds, endowments, insurance firms, and high-net-worth individuals.
Then, both firms invest that capital in private companies or companies that become private and attempt to sell those investments at higher prices in the future.
But beyond these high-level similarities, the industries differ in most other ways, including:
For more details, see our coverage of private equity vs. venture capital.
For detailed coverage of this topic, please see our article on the hedge fund vs private equity comparison.
In short, private equity (PE) firms and hedge funds (HFs) share some similarities: they both raise capital from outside investors, called Limited Partners (LPs), and then invest that capital into companies or other assets, attempt to earn a high return, and then earn a portion of those returns and a management fee on the amount of capital raised.
However, there are some important differences as well:
You can divide private equity firms according to:
A few of the more common fund types include:
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:
|Typical Age Range
|Base Salary + Bonus (USD)
|Time for Promotion to Next Level
|Vice President (VP)
|Director or Principal
|Managing Director (MD) or Partner
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:
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:
Completing these courses will help you win interviews and job offers for roles that pay $150K+ and position you for careers in private equity.
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