They hire the cream and also compensate them well. In fact, they have the highest-paid employees in the financial world. A career in Private Equity firms often leaves even seasoned investment bankers feeling like pikers. Such is the sum of money private equity deals with.
Do you love building value for companies, excel at deal management, and are into long-term relationship building? You can make a wager at the big daddy of financial world – Private Equity.
Here’s an overview of private equity industry and a guide to carving a career in the field.
Working of private equity firms: An insider view
Private Equity firms garner funds from high-net worth individuals and big institutional investors. The funds are then reinvested in private companies, leveraged buyouts, and sometimes in partial stake purchases in public companies.
A private equity firm is termed General Partner (GP) and its investors (who commit capital for investment) are called Limited Partners (LPs).
GPs commit LPs’ capital in public and private companies, manage their portfolios of investments and alongside plan exits from their investments with sizable returns. Private Equity firms aka GPs may manage one or multiple funds, each of which makes 10 to 12 investments. Each fund is usually dedicated to a certain category of companies, for instance, startups, healthcare, and so on.
Among the private equity titans that have risen to the top include The Blackstone Group, The Carlyle Group, TPG Capital, General Atlantic, and others. There are also small, highly specialized boutique firms that handle small sums to fund deals.
Private Equity professionals often grab headlines for their large acquisitions. What do these in private equity jobs get in return?
How private equity firms make money?
Private equity professionals bring money moguls on the table and raise several capital pools. Each of the pool becomes a separate fund, which is tied with investments (companies carefully selected by Private Equity Fund managers) for 3 to 7 years. The companies invested in may include startups or those that were publicly traded but have gotten delisted now.
Private Equity firms raise money through two main mediums – fees and profits.
· In fees, PE firms receive a timely management fee from their investors (LPs), which usually is about 2% of the total finance received by the companies.
· Further on, for each capital fund that private equity managers handle, they receive a percentage of yearly profits along with the share of profits gained by selling companies or taking it public. This typically ranges from 20% to 25%.
· Other than charging investors and profits earned from exit deals, PE firms also generate money from their portfolios. The firm may charge a transaction fee of about 1% (of deal amount) from the companies they invest in. Other than that, monitoring, consulting and advisory fee may be charged during the life of an investment.
Private equity career paths
PE firms tend to be smaller in terms of staff, which directly precipitates to high competition in the industry.
Landing a position in private equity is difficult due to the limited number of job slots and intense competition for each of them. Once in, PE firms offer a clear career trajectory – from junior to senior level roles.
PE is a popular exit option for investment bankers, who make a shift to this industry after a few years stint in investment banking. Getting in is tough and it surely isn’t an overnight feat.
Typically, professionals (2nd year or full-time analysts from Investment Banks) starting out in an MBA program are hired for Private Equity Jobs in the capacity of (pre-MBA) Associates. Post-completion of their MBA, they progress to senior level positions.
Some firms may also hire Analysts in junior-most positions who usually are first year analysts from investment banks or consulting services with exceptional skillsets and credentials. The career projection in PE typically looks as shown below.
- Senior Associate
- Vice President
- Director or Partner
The rate of career progression from associate level to partner, requires cultivation of a strong network.
Industry valued credentials validated by a third party can seriously rake up your prospects for promotion in private equity as well as venture capital. To prove your expertise, you can opt for designations including Chartered Private Equity Professional (CPEPTM) offered by the United States Private Equity Council (USPEC); or Chartered Alternative Investment Analyst by CAIA.
Skills you will need
You must know:
· Accounting and valuation (essential)
· Financial modeling (essential)
· Deal experience (desired)
· Know-how of sourcing, executing and managing deals (desired)
· Relationship with investment banks (desired)
· Ability to recruit competent management for portfolio companies (desired)
Your work responsibilities
Work in private equity jobs majorly centers on striking deals and relationship building, along with research and financial modeling. The former however forms a large and important part of the job responsibilities (especially for senior professionals). In the industry, you will perform following functions:
· Sourcing deals
· Conducting company due diligence
· Forecasting valuation, making financial projections, developing upside/downside scenarios and calculating rate of return
· Drafting presentations
· Close and coordinate deals
· Meeting investment bankers to receive debt financing (for senior professionals)
· Interview company management
· Eventually preparing company for sale (typically after 3-5 years holding)
A private equity career can be highly rewarding – financially as well as intellectually. You will learn a great deal from the industry and hone your social skills during your tenure as you engage with a wide range of clients – from high-net worth individuals and institutional investors to financially stressed companies.
Hit the ground running with right credentials under your belt! If you have a few years of experience in banking industry or you are just beginning an MBA program, an industry-recognized certification in private equity can land you your dream job.