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How to get a job in private equity

The barbarians at the gate
  • Private equity jobs are some of the most desirable in finance.
  • Private equity funds invest in large companies that are not yet listed on public markets.
  • Senior private equity professionals are paid salaries, bonuses and carried interest –a proportion of the profits made when an investment is sold. Carried interest can be huge.
  • Competition for private equity jobs is intense.

What do private equity jobs involve?

Private equity is a vast industry covering a range of investment firms from global companies like Blackstone, KKR, and The Carlyle Group to hundreds of smaller players that specialize by geography or sector such as Vitruvian Partners, Sovereign Capital, or Bridgepoint. The biggest firms tend to operate beyond just private equity and invest in asset classes like real estate and credit as well. 

Fundamentally, private equity firms, also known as general partners (GPs), raise money or equity from investors, which are known as limited partners (LPs). These limited partners include big pension funds, or the offices of wealthy families or individuals. The private equity firms invest the money they raise in buying private (unlisted) companies. Private equity firms then operate these companies along with the existing management team, known as a management buyout. 

How do private equity firms make their money? Having acquired a company, they (ideally) improve the way it operates before either floating it via the stock market or selling it to another private equity firm or a big corporation. At this point (the exit), they return the limited partners’ original investment, plus the additional return they’ve made, after keeping some of the extra for themselves. This extra is paid to senior staff as carried interest, which receives favorable tax treatment. 

Private equity firms also make money by maximizing the amount of debt (or leverage) on a deal. Leveraged buy-outs (LBOs) are deals where a private equity firm targets mature and stable companies using a little of the private equity firm’s own cash (or equity) and a lot of money they’ve borrowed from other sources, including bank loans. 

A good way of understanding how PE firm make money using the right proportion of debt and equity is to compare what they do to what happens when you buy a house. In a market where house prices are rising, the more debt a homeowner can borrow, the greater the return they can make when they sell the house. For example, you may buy a $300k house with $30k equity and $270k debt. If you sell the house for $600k, once you’ve paid the $270k of debt back to the bank, the remaining $330k of equity is yours. It’s the same with PE firms and the companies they buy. The more debt a private equity firm can borrow, the greater the leverage and (in theory), the bigger the return. 

However, this only works out when your income meets the monthly mortgage payments. It’s the same with private equity: the revenues generated by the business will need to service the debt. In a world of rising interest rates, servicing that debt is becoming increasingly challenging.  

Why do people want to work in private equity?

Private equity (PE) jobs are highly desirable. This is partly because unlike investment bankers people in private equity are actually doing the deals and investing in companies rather than just advising on deals. Job security in private equity is also typically much higher than in a bank, and as you become more senior you are paid carried interest – which can be extremely lucrative. 

How do you get a job in private equity?

Historically, most private equity firms like to recruit junior talent from investment banks. This is because banking juniors have completed a two-year training program and have a good grounding in the fundamental aspects of financial modelling, pricing companies, and mergers and acquisitions (M&A). In recent years, though many private equity firms have started to hire and train recent graduates of their own.  For example, big funds like Blackstone now run their own training programs but getting a place can be hard. Blackstone has around 400 applicants for each of its 160 or so open graduate opportunities. 

For this reason, a first job in an investment bank is still the best launchpad for a private equity career. “Graduates wanting a career in private equity must get into an investment bank and get into the right team,” says McManus. Working in M&A or leveraged finance secures the best chance of getting on the shortlist for a job in private equity.  

Another way into private equity is by training in transactions services with a Big Four accountancy firm or by doing private equity commercial due diligence in a strategy consultancy. 

What are the jobs you do private equity?

Working in private equity is all about analyzing good business investments, and then beating the competition to acquiring an asset. This might be through direct negotiation with a company that a PE firm has identified as a good target to purchase, or through a formal auction process run by an investment bank that’s selling a business to a group of competing buyers. 

There are similarities to working in private equity and to working in M&A (and this is why junior M&A bankers often move into private equity). However, as we noted above, when you’re working in the M&A division of a bank you’ll just be advising on the deal. As the advisor, you’ll provide advice on deals and financing. As the private equity professional, you’ll be the one instructing the bank and the person actually doing the deal. 

Both jobs can involve an intense workload. But when a deal is live, it’s the M&A bankers that pick up most of the slack. “If anyone will be working all weekend, it will be the M&A advisor, not the private equity person,” says Gail McManus, founder of Private Equity Recruitment. “You’re calling the shots and the advisers are doing the delivery.” 

Private equity firms have job titles that are similar to those in banks. At the bottom of their hierarchy are the analysts and associates, and this is where you’ll usually start. Analysts and associates own the models. That means they’ll be able to see the cashflows and analyze what needs to be done to make a business perform better. Owning the models provides an essential grounding for taking more senior roles in private equity. You’ll soon be able to identify what makes a good target firm for your private equity firm to invest in.  

As you become more senior, you will have more responsibility for running deals and working with senior executives at the firms you’ve invested in. “If you work for a big global firm which work on the multibillion complex leveraged buyouts, you’ll look after a tiny part of a big deal. But if you’re working for a mid-market firm with a £1bn fund, then you’ll be more involved,” says McManus. 

Some big U.S. firms expect associates to complete an MBA after a couple of years, but broadly speaking, if you’re a good fit then you can forge a very successful career at a single private equity firm. 

Associates typically have five years’ industry experience and you’ll spend another couple of years as a senior associate before making it to director or principal. If you want to make it to managing director or principal, it will take a minimum of 10 to 15 years.  

Fund investment jobs and venture capital jobs

As well as working as a deal professional in a private equity firm, you can also work for an LP as a fund investor. Here you’ll work for a pension fund or the family office of a wealthy individual and decide where to invest. These roles are a lot less competitive and more suited to people with analytical minds who aren’t necessarily extroverts or highly competitive. LPs are increasingly investing alongside the funds they invest in on big deals. For example, in February 2021, Bill Gates’ family investment vehicle Cascade Investment, teamed up with private equity firms and pension funds to acquire Signature Aviation, a UK aviation services company. 

You could also consider a career in venture capital (VC), a growing area of the market. Unlike big LBO houses which seek ownership of already mature large companies, venture capital funds take smaller stakes in companies and help them reach their potential. VCs are big investors in technology where start-ups are looking to disrupt established players across industry groups. They also invest in companies pursuing zero carbon emissions as environment, social and governance factors play a prominent role in investment decisions. To enter a venture capital fund, you’ll still need a solid grounding at an investment bank, but more likely working in a specialist sector team such as technology, media and telecommunications. 

Which skills will you need for a career in private equity?

Private equity firms recruit from investment banks, so candidates will already have a basic grounding in finance, reading balance sheets and understanding how companies are valued. Strong analytical skills are essential. But private equity firms are also looking for ultimate all-rounders: people with insightful thinking and the ability to build relationships. 

“Private equity professionals need to be confident and persuasive but also hard-edged when it comes to negotiating. They sell with their eyes and mouths and buy with their brains,” says McManus. Private equity funds are looking for “Action Man or Action Woman,” says McManus. You need to make things happen, to be “ultra-competitive, not let things stand in your way.” You need relationship skills as well: “It’s all about winning the deal.” 

Alongside this, you’ll need to be interested in how businesses work, rather than simply sitting behind a desk and looking at numbers, although there is an element of that as well. 

When assessing candidates for a career in private equity, McManus asks the coffee shop question. “If you’re thinking of buying a coffee shop, what’s the first thing you’d do?” If your answer is you’d go and visit your local shop to see if the toilets are clean, how many people there are, how many staff are on a shift and whether they look happy, then a career in private equity is probably for you. If your instinct is to go and find an analyst report on the subject, then you’re probably better off working at an investment bank. 

If you want to work in private equity, it’s important to speak up and have an opinion on a particular deal. Being a private equity professional means being able to argue for or against a particular investment opportunity or sector, so a passion for understanding the inner workings of business is essential. 

What’s the pay like in private equity?

When it comes to salaries and bonuses, private equity firms usually pay slightly below or on a par with investment banks – and like banks, salaries and bonuses vary significantly depending on the firm in question. The real money is not in the annual compensation, but in carried interest, which usually goes to professionals from around principal upwards (although some firms pay carried interest earlier). 

“Carry” is derived from the profits that are made on the LP’s original investment and is typically 20% of the returns (once a predetermined hurdle rate has been met). For example, if an LP invests $1bn and the private equity firm’s carry might be $200m, which it then distributes to the deal team. In this way, working in private equity can be very, very lucrative (especially as carried interest is typically taxed as a capital gain). – But carry is only paid when deals are exited, so you’ll typically need to wait around five years. 

Our compensation guidance below does not cover carried interest, which varies wildly between seniority, experience, and the size of the private equity firm in question (measured in AUM, usually).

 

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AUTHORDavid Rothnie Insider Comment
  • Pr
    PrivateEquityBro
    21 December 2023

    The path to a career in private equity is becoming ever more challenging. With investment banks, a primary feeder for PE roles, downsizing, there's a noticeable decline in the pool of candidates with the ideal background. This trend implies a narrower gateway into PE, where experience in investment banking is often a prerequisite.


    I feel that the old time like I documented here [https://privateequitybro.com/networking-your-bridge-to-opportunities] are part of the past now...at least until the economy gets back on track, which will possibly tale 2-3 years.

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