Private Equity

Overview
If you find a job in a private equity fund you will be envy of many of your friends, even if they work in the world's top investment banks. Private equity funds don't employ many people and the few they do can earn stupendous amounts of money. While bankers live in fear of redundancies, senior private equity professionals also come as close as you can get in the financial services industry to having a job for life.

The bad news is that you will be very lucky to find work in a private equity fund immediately after you leave university. Most funds only employ junior staff with a minimum of two years' experience in investment banking, accountancy, or strategy consulting. Moreover, juniors rarely benefit from the job security that makes the industry so alluring for senior staff: they are usually employed on two year contracts, after which most of them are expected to find a job elsewhere; a mere10% of top performers are typically invited to stay on.

Like the capital markets function of investment banks, private equity funds exist to raise money for companies in search of extra cash. But while investment banks' capital markets divisions do this by selling companies' stocks or bonds on the equity or debt markets, private equity funds offer money to companies in return for a stake in their ownership. As a result, they become co-owners, or even sole owners, of the companies they invest in.

Private equity funds have a reputation for investing in companies going through difficult times. In the ideal situation they aim to improve the performance of the company, before selling their stake at a profit some three to six years later. This may be done either through an initial public offering (IPO) of the company's shares or through a sale to a private buyer. Sometimes private equity companies engage in the unpopular practice of asset stripping, or breaking a company up and selling its assets to make a profit. The money invested by private equity funds is frequently used for management buyouts (MBOs), where a company, or a division of a company, is bought by its managers. Alternatively, it may be used for a management buy-in (MBI), where managers from outside take over a company.

The terms 'venture capital' and 'private equity' are often used interchangeably but, strictly speaking, venture capital refers to the provision of funds for new and developing businesses, while private equity is more usually associated with MBOs and MBIs.

The Jobs

Jobs in private equity funds are typically divided into distinct areas, including: number crunching; appraising and executing deals; originating deals; and support roles such as marketing and finance.

The number crunchers are the junior staff that is typically brought in on short two year contracts. The sole purpose of number crunchers is to look at the accounts of the companies the fund is thinking of investing in, and building financial models calculating how much they are worth. The marketing director at one private equity group, said: 'We want people to come in and number crunch models related to our transactions. They are not involved in any other areas of the business, like marketing or transacting deals.' In the past, European private equity funds usually used outside companies to do the number crunching work for them. But as they have grown, they are increasingly hiring people to do it in-house.

Once the number crunchers have worked out how much a company is worth, a new set of people appraise whether the company is worth investing in at the asking price, and whether the fund is likely to be able to sell its investment in the company at a profit in the future. If price is right and a future profit looks likely, they will then help 'execute' the deal, doing everything required to ensure it takes place. This can involve anything from arranging the right legal documentation to negotiating the right price. The people who are involved in execution and appraisal are more senior than the number crunchers, and are known as 'principals'. Originators are at the top of the private equity tree. They are usually the fund's partners, who stand to make the most money if one of the fund's investments is sold at a profit. Originators oversee the deal while it is being done. They are also responsible for originating deals, or finding new companies for the fund to invest in. In pursuit of deals, they build strong relationships with company senior managers and advisors, and often spend a lot of time traveling.

The business of private equity doesn't come to an end once a deal has been done. The principals and partners in private equity funds also play a role in nurturing the company they have invested in. This can involve taking a position on the company board and steering a strategy that will lead to higher profitability, and increase the value of the fund's stake. When a fund sells its stake, it typically keeps 20% of any profits made above an agreed baseline. The remainder is returned to investors.

Other roles in private equity are peripheral to the business of selecting companies to invest in and executing deals. One of the most important is investor relations, which involves communicating with investors and raising money for future funds. Investors in private equity funds include pension funds, wealthy individuals, and insurance companies. Private equity funds typically have a lifetime of only ten years, at the end of which all investments are sold on.

Skills

The world of private equity funds is so competitive, that if you are to be successful in finding work there you will need to exemplary academic credentials and a flawless record of work with a top investment bank, strategy consultancy, or accountancy firm. For junior number crunching positions, a strong financial background is necessary. For more senior roles, it is also helps if you can build a strong rapport with company executives and you have some experience of strategy and the day-to-day requirements of running a business.

Pay

Salaries in private equity funds vary widely, but it doesn't particularly matter as they are largely immaterial. People who work in private equity funds make most of their money from carried interest, or 'carry'. This is the profit that is made when investments are sold on, 20% of which goes to the fund and is divided between partners and principals and people responsible for investor relations. As large funds typically employ no more than 30 senior staff and funds can make total profits of $1.5 billion or more, it is easy to see why annual salaries become large irrelevant after a while. Unfortunately number crunching junior staff doesn't usually share in the carried interest.. Junior staff moving from investment banking into private equity may receive a cut in pay.

Print Resources available in the CDO

bschooljobs.com Flash Cards - investment banking interview preparation flashcards.

Confessions of a Venture Capitalist

Directory of Venture Capital & Private Equity Firms Domestic and International

Done Deals: Venture Capitalists Tell Their Stories

Galante's Venture Capital & Private Equity Directory provides in depth profiles of over 1,700 venture capital, mezzanine, and buyout firms. Available in hard copy and CD.

Harvard Business School Career Guide: Finance - career opportunities, company profiles, position descriptions and recruiting process.

Hedge Me

Nelson's Directory of Investment Managers - profiles of over 2,600 organizations involved in investment management.

Plunkett's Financial Services Industry Almanac - information on leading firms in Investments, Insurance, Banking and Finanical Information.

So You Want to be an Investment Banker - insider's guide to landing a job on Wall Street.

The VC Way

WetFeet Guides

Thedeal.com

Investor Dealers Digest

Institutional Investor

WetFeet

Vault.com

Bloomberg Terminal

Wall Street Journal

Venture Wire www.venturewire.com
Venture Capital Journal www.privateequityweek.com/
The Deal www.thedeal.com/
Private Equity Analyst www.assetnews.com/products/news/pea.htm
Venture Economics www.ventureeconomics.com/
Private Equity Week www.privateequityweek.com/
VC Buzz www.velocitycap.com/VC%20Buzz%20-%20October%2017%202000.htm
Buyouts www.buyoutsnewsletter.com/
San Jose Mercury www.siliconvalley.com/
The VC (comic strip) www.thevc.com/
Venture Reporter www.venturereporter.net/
Venture One www.ventureone.com
European VC www.evcj.com/
Asian Venture Capital Journal www.asiaventure.com/
IPO Monitor www.ipomonitor.com Associations:
National Venture Capital Association www.nvca.org (includes model deal documents)
British Venture Capital Association www.bvca.co.uk/
European Venture Capital Association www.evca.com/
Small Business Investment Companies www.nasbic.org
Venture Capital Institute www.vcinstitute.org/ Statistics and Analysis:
PriceWaterhouse Money Tree Survey www.pwcmoneytree.com/
PIPE Ttransactions www.placementtracker.com Various Resource Links:
Private Equity Clearinghouse www.privateequity.com/
Calendar of Events www.privateequity.com/calendar/calendar_join.cfm
VC Firm Directory I www.nvca.com/members.html
VC Firm Directory I www.vfinance.com/ventcap.htm
Garage.com www.garage.com

The Elevator.com www.thelevator.com/
NVST.com Investor Network www.nvst.com/
Capital Growth Network www.capitalgrowth.com/
Venture Capital Report (UK) www.vcr1978.com/

Private Equity Career Preparation Timeline

Private equity opportunities, especially at the internship level, are intensely competitive. You must keep up with the markets as school is generally not a good excuse. The opportunities for both full-time and part-time can be few, but not impossible to find.  Most PE firms want an investment banking background, so an internship in investment banking is sometimes a good way to get a PE firm interested in you. Networking is key.  This is a skill that is critical in this field.  If you are not successful in landing a PE summer internship, you should not feel discouraged. Several graduates who have successfully received full-time PE offers pursued various types of internships that provided them with the analytical and personal skills that helped make them receive their final offer.  Remember to think in terms of what value you can bring to that firms’ decision making process.  Is it an industry expertise, contact network, capital structure experience, modeling skills, strategic analysis or something else?