The Private Equity Career Path: How to Get into PE

At the beginning of 2020, McKinsey estimates that globally, private equity firms had over $4.1 trillion of assets under management.

Firms like BlackRock, Carlyle, and KKR are never far from the discussion when mega deals are happening these days, making them an attractive destination for graduates and professionals that are often already working in investment banking.

In this article we, at DealRoom, look at careers in private equity in some detail, discussing the industry at large, how you get your foot in the door, where you might fit in, what your routine might look like, and how you’ll progress.

Undoubtedly, you’ll note some similarities with investment banking career, but may find that the specifics of a career in private equity appeal more to you. 

The investors in private equity funds are typically pension funds, insurance funds, HNWIs, and even some other private equity funds.

Some private equity companies, among them Blackstone, Carlyle, and Apollo Global Management, have listed their shares on public indices meaning that even retailers can now invest in private equity.

How private equity firms work

Private equity firms are essentially funds founded by individuals or teams - almost always with at least some experience in investment banking - that have enough knowledge, experience and (this part is important) reputation, within the investment community that they decide to begin investing in companies that can provide above-market returns.

We note the importance of reputation, because everything in private equity hinges on reputation - if investors don’t have it, they’ll find it extremely hard to raise the funds necessary to buy companies.

Having said that, a trend has emerged over the past decade of extremely well-paid bankers leaving blue chip banks and having enough cash to begin their own PE funds.

Before beginning a PE firm, their founders are likely to have gained good knowledge of opportunities that they want to tap (e.g., an underinvested market, a market which is highly fragmented, one where they have good contacts in management, etc.).

This kind of edge will be required to make the fund a success.

From here, with sufficient cash, the private equity firm begins investing in attractive opportunities based on the strategy that it has set.

They usually bring new management on board in companies that are willing to work with the PE firm to deliver on its strategy, which is likely to include one of:

• Operational improvements
• Debt restructuring
• Asset investment/divestment

Over time, if successful, these measures will see the company’s EBITDA improve, allowing the private equity firm to sell the business at a higher amount than it was originally purchased for.

With a good bolt-on acquisition strategy, it’s not unusual for PE acquisitions to sell at double digit multiples to the price that they were acquired for, within just a few years.

Read also

Guide to Private Equity Deals and Process

What do private equity specialists do?

In short, private equity specialists concern themselves with three things:

1. Raising more funds for the private equity fund;
2. Analyzing future potential deals;
3. Analyzing the performance of past deals (i.e. the fund portfolio).

In the case of raising more funds for the private equity (PE) fund, the intention is generally to put together investment memorandums for funding rounds.

These will outline the strategy of the private equity firm, its management experience, how its latest funds have performed, and what kind of returns the investors can expect to achieve.

Analyzing future potential deals is exactly as it sounds: the PE firm will either be approached by company owners looking to sell some or all of a company, or it will make its own approach to companies having analyzed a particular market.

Of course, there will be ongoing analysis of individual markets to keep abreast of where opportunities are likely to be.

The performance of past deals is usually carried out with colleagues (i.e. PE managers) that set budgets and investment targets for companies that the PE fund has already acquired.

On occasion, this will also involve the portfolio company’s management team, who can provide feedback on how the company’s operations are progressing (or otherwise).

Overview of roles at a private equity firm

1. Analyst

The private equity analyst was traditionally hired directly from college, but competition from places now means that many will already have served at least an internship at an investment bank.

They are essentially junior associates - less experienced members of the team that are expected to work on deal origination, contribute to investment theses, conduct industry analysis, and help with the fund’s fundraising process.

Depending on their aptitude, they may also be involved in complex financial modeling and aspects of the due diligence process, such as interviewing the stakeholders of a portfolio company.

2. Associate

The associate is a move up in seniority from the analyst, and that’s reflected in the breadth and depth of their responsibilities.

Associates, either alone or in small teams, can take deals from origination to closing. They will be expected to wear a lot of hats at once - client-facing, financial modeling, deal origination and closing - essentially making them project managers for the private equity fund.

The jump between analyst and associate is significant, with similar attrition rates at the analyst level as in investment banks, as private equity firms look to establish who has the chops for complex deal making.

3. Senior Associate

The senior associate has all of the same responsibilities as an associate, perhaps with some extra perks - often around bonuses and carry.

The difference between the two usually arises because of time spent at the company, potential to move to VP level, and some other KPIs being hit. It’s also common for companies to require employees to obtain MBAs before they reach the senior associate level.

4. Vice President (VP)

‍By the time you’ve reached the VP level, you’re already an accomplished player in private equity. Essentially, you could start a fund on your own (and many end up doing so).

A typical VP will have dozens, and in some cases, hundreds, of closed deals under their belt. At this stage, their role is to bring their expertise to larger deals, deals that are about to close but have hit a hitch, and contribute strategic insights to portfolio companies held by the private equity company.

Communication and interpersonal skills are of paramount importance for a VP. He or she has the responsibility of fundraising -  talking to potential investors about why they should invest in the PE firm’s latest fund above all the others - and what returns they can expect for doing so. 

Managing Director (MD) or Partner: The Managing Director (MD) or Partner of a private equity company is its figurehead. Fundraising usually depends to a large extent on their reputation in the market.

At this stage, there is almost no technical work to be done. The MD spends all of his or her time addressing LP’s concerns and selling the benefits of the latest fund to them. This also comes with a significant amount of discussions around ‘we didn’t hit targets this year because…’

By the time that a private equity analyst reaches MD, the thinking goes that they will have earned enough to put some of their own cash in a fund, showing investors that they’ve got ‘skin in the game’.- his or her success is very much the success of the fund overall.

Why work in private equity?

The fact that private equity draws so many investment bankers from their six-figure salaries suggests there must be something highly attractive about a career working with a general partner.

And indeed, there are several benefits to working in private equity:

• Salaries in private equity (see below) are comparable to those in investment banking, and the consensus is that there’s also a better work-life balance.
• A career in private equity promises a stimulating career that offers a mixture of fundraising, investing, and financial and operational management.
• The typically flatter hierarchy that exists at private equity firms means that you’ll be involved in decision making from day one in your career in private equity.

What skills and education do you need for private equity?

The prestige now associated with private equity - particularly at the top end where companies like BlackRock, KKR, and Blackstone operate - means that their positions are vastly oversubscribed.

This means that the quality of applicants is high, and it also usually means that they can hire from the cream of the crop.

By far the most common applicants come through one of the following routes:

• Professionals coming directly from other private equity companies.
• Investment banking analysts (top tier and boutique investment banks).
• Trained accountants from Big 4 accounting firms and their ilk.
• Undergraduates and postgraduates from quantitative backgrounds.
• MBAs with some finance industry experience.

If you don’t fall within one of these categories, the odds of you being hired, particularly at a large private equity firm, increase significantly.

However, all is not lost. Follow the advice outlined in ‘How to Get a Job in Private Equity’ and you’ll increase your chances of being hired.

If you’re looking to enter the private equity industry coming from a non-finance-related background, consider the following:

• Make contacts within the industry. Talk to PE funds and let them know that you’re looking for a role. Show them that you’re addressing the gaps that exist in your resume with courses, learning, practice, etc.
• Take courses: Ideally, do a private equity related course at a prestigious university. But if this isn’t open to you, consider many of the excellent online courses that cost just a few thousands dollars at the upper end (link to article) but can pay back in the medium term.
• Publish: This is an unorthodox approach, but it cannot hurt someone who’s determined enough to enter the industry. One way of showing people you’ve got the smarts is through publishing insightful articles. Note - they have to be insightful and well-written, or you’ll end up doing more damage than if you hadn’t written them in the first place.

Traits and characteristics required for a career in private equity

As mentioned in a previous article on careers in investment banking, the banking industry tends to be dominated by certain personality types, even after blue chip investment banks have made belated moves to diversify their workforce.

Given that it draws so many of its employees from investment banking, you might expect top private equity firms to have the same culture.

But in very general terms, the consensus is that the culture is quite different.

Private equity firms are typically looking for people that tick the following boxes:

• Ability to construct high-quality financial models, industry analysis, and investment memorandums (for the fundraising process).
• Willingness to work long hours
• Exceptional analytical skills and ability to assess companies’ commercial potential (up to management level, you’ll mostly be working on deal origination).
• Interested in business and operations, and looking at companies from a long-term perspective, rather than just from a buy-and-flip perspective.
• Creative people, who have the ability to see synergies, value-creating opportunities, and ‘quick wins’ in operations, when looking at companies from the outside.
• Banking experience is a highly prized asset in private equity. Without it, most candidates face an upward struggle to find a role within the industry.
• Critical thinking: At the investment thesis stage, PE firms tend to brainstorm which companies and industries to look at. This demands thinking about issues at the micro- and macro-economic levels from a critical and analytic perspective.

How to get a job in private equity

How to get a job in PE and even how to get into private equity without banking experience? Let's dive into the topic and see if it is even possible.

As mentioned above, the emphasis in hiring at private equity firms is usually in experience rather than pure educational background.

But that means that it tends to be more difficult rather than easier to get a foot in the door at a private equity firm. For one thing, there are fewer hires in private equity than investment banking.

Also, many private equity managers will hire from their old investment bank alumni network.

Hence, the strength of the competition at most private equity firms means that you’ve got to differentiate yourself in ways that show your value to the fund. Make it as easy as possible for them to hire you ahead of the others.

The following points will all add value to your job hunt in private equity:

• Understand the individual company’s strategy: How does the PE fund aim to create value? Is it through consolidation? Operational improvements? Secular trends? Understand this, and know where these opportunities are for them. For example, the retirement of the Baby Boom generation will see over 2 million companies be bequeathed or sold in the next decade. Does this fit with the PE fund’s strategy? If so, show them how.
• Provide Valuable Insight: Closely aligned to the above, show insight. They don’t want to hire somebody fresh, who they’ll have to handhold. If they’re acquiring small SaaS startups, show them that you know how to market SaaS, where the value is, what customer churn is, how to reduce it, why Salesforce is currently so acquisitive and more. Be the smartest person in the room.
• Show Continued Learning: Whether you’ve graduated from college and you’re looking for work, or you’re looking to join as an experienced hire, it always pays to show that you’re continuing with self development. Perhaps you’re taking a course (insert link to M&A Science Academy), teaching yourself coding, or working on your financial modeling. Whatever it is, let them know that you're good now, and you’re going to be even better.
• Leverage Past Experience: This one is quite obvious and might even be considered interview practice 101. But it’s remarkable how many people don’t join the dots, particularly when looking for a career in an area slightly removed from their own. If you’ve worked in the food and beverages industry, and the PE fund has made some acquisitions there - or better still, is looking out for some - let them know your experience in the industry gives you a lead over the other candidates that they’re speaking to.
• Improve Your Financial Modeling: There’s no getting away from it. You’ll have some degree of financial modeling to do, wherever you enter a private equity firm. It’s the bread and butter here. Bear in mind that you’ll be up against some investment bankers in the hiring process, so you won’t necessarily be expected to be better than them in this area. You will, however, have to show that you’re comfortable. Become as competent as possible in this realm to maximize your chances of being hired.

Read also:

Career path in mergers and acquisitions

Private equity salary

Salaries at private equity firms, like investment banks, depend on the size of the private equity firm.

The salaries at the high end of private equity can be astronomical. In the middle market, considerably less so.

The figures below provide some detail on what you can expect in terms of salaries in different roles in private equity.

Carry (or ‘carried interest), like bonuses in investment banking depends on the performance of the private equity firm.

It refers to the percentage of profits generated by the private equity firm’s portfolio companies that the employees receive above their management fees.

So, in addition to management fees of 2%, private equity firms will typically take 20-25% of profits (the carried interest) before returning the remainder to their investors. So the typical private equity compensation in PE firms are:

• Private equity associate salary: $150-$300K
• Private equity senior associate salary: $250-400K
• Private equity Vice president (VP) salary: $350-$500K
• Private equity director or principal salary: $500-800K

And do women have less in total than men in private equity firms? The answer is on the image below. Overall women get less than men. Especially on top level positions.

And what about bonuses in private equity? How much can PE specialist get per position?

How are private equity bonuses calculated?

The salary structure at most PE Funds means that bonuses are a large part of the benefits received.

Each PE Fund will calculate its bonus fund differently, but this is usually a high proportion of the base salary (somewhere between 100% and 150% in a good year for the fund).

Typically, factors used to calculate the bonus include:

• Fund performance
• Group performance
• Personal KPIs (e.g. end of year review scores)

How do private equity salaries vary by region?

At the top end of the market, there tends to be less variation in salaries than in other industries. If the story of private equity over the past two decades teaches us anything, it’s that capital - and by extension, human capital - is global now.

The best talent now tends to find its way to the top, wherever it happens to be located. With 16,500 employees in its ranks, BlackRock has a talent pool spread across the globe and can’t afford to have huge payment differences between offices.

Where the big differences occur are in the percentages - and particularly in bonuses.

When a fund is closed for example, and the managers take their percentage off the top, it follows that the nominal fee paid out to managers will be higher when the fund is larger.

So, a $2 billion fund started in the United States will pay higher bonuses than a $250 million fund in Latin America (for example). 

Typical day of someone working in private equity

What most private equity professionals indicate is that the typical day involves varying degrees of internal meetings, calls and analysis.

This will include:

• Preparation of materials for an investor meeting (to raise funds)
• Analysis of a particular market (e.g. ‘should we invest in the dairy market?’)
• Analysis of the performance of a company and/or the performance of a fund 
• Investment committee meeting (typically once a month, where the company’s investment committee discusses the merits of potential deals).
• Calls with company owners (Often family members that own private companies that appear attractive to the private equity firm).
• Strategy meetings (‘is our strategy working and if not, what needs to change?’)

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Finally, Is private equity a good career?

As we mentioned at the outset, a career in private equity is quite similar to one in investment banking, with the main difference being that you’re investing for yourself (or rather, the private equity firm that you work for) instead of a third party.

That extra ‘skin in the game’ may appeal to some.

It certainly gives you incentive to ensure the deal works long-term, as there are likely to be long-term incentives for good portfolio performance.

On this basis, private equity is an excellent career.

Similar to investment banking, it tends to provide more opportunities to be creative (creating investment theses for companies or industries) and to dip your feet in management far more than investment banking, with most private equity team members having some say in how portfolio companies’ operations are run.

Thus, if you like the idea of investment banking with a slightly broader scope of responsibilities, private equity could be for you.

Conclusion

Careers in private equity offer an excellent alternative to investment banking, with the caveat that investment banking is the most common route in.

Unlike investment banking, where the bankers play the role of intermediaries, roles in private equity will involve getting your hands dirty in the company’s operations, ensuring that the investment makes a positive return for the fund and its investors.

Combine this stimulating environment with the ability to earn a serious salary on top of a decent work-life balance, and it’s little wonder why roles in private equity are always in such high demand.