Private equity firms are investment management companies that acquire private businesses. This is done by pooling capital from institutional investors and high net-worth individuals (HNWI). Total compensation for those working in private equity is high, making it a highly sought-after and competitive career choice.
Because private equity firms expect to employ highly talented individuals in the financial services sector, they typically pay their employees top dollar salaries and offer generous bonuses. Taking into account carried-interest, Private Equity firms are among the highest-paying employers in the financial realm.
How Private Equity Works
Private equity firms seek to buy out and take on significant stakes in companies. Private equity strategies include buying out the founder, cashing out existing investors, providing expansion capital or recapitalization for struggling businesses.
In short, the goals of a private equity company are to buy, grow and hold or flip. Private equity funding can provide a business with a second-wind in terms of ideas, growth, and managerial prospects that the previous owners may not have been able to develop on their own. The down-side to this is that a private equity fund’s ultimate goal is to make the most on returns for investors. This means that business aspects like sentimentality, workforce, role of founders and even the business’s original plans fall to the wayside in the pursuit of profits.
If you are interested in a career in private equity, then read on to discover the different pathways into private equity.
Ways Into Private Equity
If you are young and want to break into private equity, then doing so will require you to plan a pathway to develop the necessary qualifications and skills required.
To begin with, you will need technical skills from the buy-side of investment banking. Financial modelling skills are critical – think discounted cash-flows (DFC). If you have a background in investment banking, you will have been trained in M&A or leveraged financing. The skills required in private equity are similar, so investment banking is a great pathway into private equity.
However, there are numerous other considerations when preparing a long-term strategy for breaking into private equity. If you want to have an edge over the competitive landscape, then you should aim to do multiple internships at private equity firms. While the experience and pay will pale compared to working in investment banking, these internships will give you a chance to build a network within the private equity industry – of which is invaluable when trying to break into buyside.
Now, let’s say you don’t have the necessary background in banking or finance, but you are fixated on landing a job in private equity. You have a few options:
- If you have prior banking experience but you are too senior for entry positions, you can consider joining a private equity firm as a consultant or Operating Partner.
- You can consider joining a PE firm as a post-MBA associate if you have an MBA and/or have relevant experience e.g. internships in investment banking.
- Roles like real estate and commercial real estate brokerage are possibilities if you want to break into real estate private equity
Educational Qualifications and Prerequisites
As private equity firms look to employ the cream of the crop, you should aim to be a top-notch student from a top-notch university.
The following are basic educational requirements for private equity:
Masters In Finance
A masters degree in finance is regarded as the best way to secure an investment or reporting job in private equity. Strong financial fundamentals are important for associate level work, but they need to be combined with more tangible experiences. The same is true for investment banking just as it is for private equity. A masters in finance tells the employers that you have the required specialized knowledge that is required in such a demanding field.
MBA From a Prestigious Institute
As mentioned, private equity firms mostly look to employ the cream of the crop ala the best of the best. If you are not pursuing a masters in finance, then you will need to pursue an MBA. The MBA you obtain must be from a top-notch and recognized institution, otherwise it would likely be disregarded. If this is not a possibility, then you would need to showcase outstanding skills and experience through your internships in private equity.
Chartered Financial Analyst (CFA)
If you consider pursuing a CFA, you would open more doors for other opportunities in finance and banking. These include investment banking, hedge funds, equity research, etc. However, the course itself can be challenging, as you would need four years of full time relevant experience. Upon that, there are three levels to clear, all of which are reasonably difficult.
CAIA, ACA and other Certifications
Additional qualifications will also help bolster your chances of breaking into private equity. Qualifications like Chartered Alternative Investment Analyst (CAIA) and Associate Chartered Accountant (ACA) are not a necessity or in fact common amongst private equity professionals, but they are useful when trying to break into any career in banking or finance.
There are certain skills that must be developed and are non-negotiable when joining any career in banking and finance – private equity included. These skills are:
- Financial Analysis
- Financial Modelling
- Deal Structuring
- Term Sheets
- Due Diligence
- LBO Modelling
If you haven’t had the opportunity to cover any one of these skills in the course of your career thus far, consider online certifications that allow you to learn them at your own pace. These skills are transferable within banking and finance, so you should aim to have them covered ASAP.
Unlike technical skills, your ability to network is more about your own social skills. These therefore should come from your own initiative. You won’t find private equity openings on typical job portals. Private equity firms tend to be small in size, relying on head-hunters and human resource teams to find suitable individuals. Knowing who’s who will ensure that your name is on the list, should an opportunity come up.
Communication skills are vital in any career, especially so in private equity. With all the information that private equity professionals have to deal with, it is important that you develop your communication skills the right way. In private equity, this means being clear, concise and confident. Furthermore, when trying to break into private equity, your chances of getting an interview or opportunity are very much dependent on your networking skills. Once at the gates, your ability to communicate briefly and professionally is what will help determine if you truly are a suitable candidate.
Career Steps in Private Equity
Private Equity Analyst ($100 to $150k)
Analysts work the same tasks as Associates: reviewing potential investments, monitoring portfolios, fundraising and deal sourcing. However, they are likely to complete fewer projects independently and tend to be included at base-level work.
These roles are mostly for students who have just finished their undergrad, and typically last for two to three years before promotion (if your firm promotes analysts), so the age range is roughly 22 – 25.
Private Equity Associate ($150 to $300k)
Associates are responsible for a wide range of aspects when it comes to leading deal processes. They are expected to build entire financial models and coordinate due diligence processes. While the job roles are similar to that of investment banking analysts, private equity associates have more responsibilities and are expected to be more independent.
These roles usually require several years of experience in investment banking or closely related fields, so typical ages are between 24 – 28 years old. Expect two to three years before being promoted to a Senior Associate position.
Private Equity Senior Associate ($250 to $400k)
Senior Associates and Associates are nearly the same in terms of job roles and descriptions. The difference is that the term ‘senior’ refers to a person who has significant experience in their role, where they are expected to have more managerial responsibilities.
The minimum age range of a Senior Associate tends to be between the ages of 26 – 32 years. At the minimum, they are required to have completed 2 years of investment banking or private equity work, followed by another 2 years of working as a private equity associate.
Private Equity Vice President ($350 to $500k)
Vice Presidents are the ‘deal managers’ in private equity. They are expected to lead and mentor others on the team, while working directly with counterparts to ensure that deal process flows smoothly. Being a VP requires soft skills and the ability to talk and present well. It is crucial that communication skills are well honed, as it is the VP’s responsibility to make sure that sellers buy into the terms, and investment committees are convinced on the deal at hand.
The typical age range of a VP in private equity is between 30 – 35 years. You will be required to have spent at least 4 years at associate levels, on top of all prior experiences in related fields. You will probably require another 3 – 4 years to advance to the Principal level.
Private Equity Principal or Director ($450 to $700k)
Principals, also known as ‘Partners-in-training’, typically have a lot of decision making powers to influence deal processes at lower levels. However, they tend to leave the bulk of the work to VP’s and Associates so that they can focus on deal sourcing and fundraising. They also act as mediators between the deal team and MDs / Partners.
Ages of Principals tend to be between 33 – 39 years, as they are required to have significant experience and knowledge in the private equity field. It normally takes another 3 – 4 years before advancing to the level of Managing Director or Partner.
Private Equity Managing Director or Partner ($700k to $2m)
Managing Directors (MDs) or Partners, are at the top of the private equity food chain. They spend most of their time on fundraising, deal origination and fund representation. This means that they are expected to attend public conferences, events and talks to bolster the brand’s name and reputation.
Unlike other roles in the firm, MDs and Partners spend almost all of their time on cultivating relationship. The number crunching and project management is left to lower level roles. The role can be as tough as it is risky. Not only are MDs and Partners in charge of convincing others to invest in new funds, they are also expected to invest their personal wealth into funds to make themselves look trustworthy.
Age ranges are between 36 – 50, although most Partners are only likely to reach this position by their 40s.
As a final consideration, let’s take a look at the pros and cons of working in Private Equity.
- High salaries, bonuses and privileges at all levels, even more so at senior levels, where compensation tends to be more than what investment bankers make
- Work tends to be more interesting and engaging
- Better hours than investment banking, unless you are working on a major deal
- Direct exposure to different companies, industries and management teams, where the experience is invaluable to all aspects of finance and banking should you wish to make a switch
- Small-sized firms means career advancement is more likely to happen in shorter time frames
- The industry is bound to be stable for the long-haul, as technological disruptions are unlikely
- Hours are still considered long and significant travel is required as you advance in your career. The work environment tends to be fast-paced and intense
- Firms tend to be small, so structuring for advancements and job roles can vary greatly, requiring you to be adaptable to your workplace
- It is extremely tough to break into. You can obtain all necessary qualifications and experience, but there is no guarantee of breaking into private equity
- At top levels, you are required to contribute a significant portion of your net worth, which may be a problem if the fund struggles.
To sum it up, positively…
While breaking into private equity is challenging, that doesn’t mean you shouldn’t aim for it. The work is after all interesting and payoffs can be huge. Even if you are unable to land a position in a private equity firm, the skills you develop along the way are transferable and valuable – allowing you to take up other high-end careers in banking and finance.
Go forth and do your very best!