What is Private Equity?
Private equity firms foster growth in a company and create additional value. They fund acquisitions and operations through a combination of their own investments, bank loans, endowments and pension funds. Once the company has reached its targeted growth, the private equity firm makes an exit and sells its equity. Since the 1980s, the increase of leveraged buyouts (LBOs) permitted significant financing from pe firms. PE firms have a hand in all kinds of transactions across all sectors; check out The New York Times’ This Is Your Life Brought to You by Private Equity, a take on America’s reliance on private equity shops.
The bulk of work in private equity falls under two main functions:
1. Portfolio management and strategy
2. Deal origination
Portfolio management depends on diversifying the private equity portfolio and increasing internal growth metrics.
Deal origination, perceived within the industry as the more interesting role, is the strategy behind acquiring new companies and the interactions with investment bankers and lawyers. This is the part where the deal is negotiated and secured. It’s a competitive landscape, where sourcing deals ensure the raising of funds being deployed and invested. It also involves the deep-level assessment of industry, forecasts and valuation analyses, as well as due diligence in the stated financial metrics.
The Real Secret
One cheerful recruiter recently told us, “If you aren’t on these tracks, don’t bother!” There are five, very specific routes to securing a PE job:
1. Investment banking analyst at a Bulge Bracket or Elite Boutique Bank.
2. After a couple years in corporate development.
3. Straight-out-of-undergrad.*
4. Straight-out-of-MBA.
5. Through the Big Four or Top Three Consulting firms, where you have had enough experience.
*Rare and often takes place through a fast-tracked recruiting process at target finance schools.
Interview Secrets
Great – so you met one of the basic criteria for background experience. But regardless of whether you choose to interview off-cycle or on-cycle, in New York or in London, as an undergrad or as an MBA – the interviews are known as the toughest part of the process.
One recent pe hire informed us: “The interviews were a long, dark tunnel. For me there was a light at the end, but not everyone gets to that light!” Nearly all interviews are run through headhunters (we hear: “Get on their good side or else!”).
The interviews have four components:
1. Background/fit.
2. Market/Industry/Own deal experience.
3. Technical questions.
4. Modeling tests and/or Case Studies.
The first part is simple - a discussion of why you want to do private equity, what about the firm/industry interests you, and your own path to private equity. Don’t be the guy who pauses when reflecting on the “why private equity” question.
Modeling tests are, by far, the toughest part of the interview process. They usually last 2-3 hours, and expect you to construct an LBO in Excel. You should be able to defend your assumptions, speculate about the industry and then, finally, come up with a solid, sound-proof thesis.
How to Win
Does this sound like a lot of work? We thought so too.
If you want to do well – win offers – then:
1. Prepare early – the sooner you know you want to go into private equity, the better positioned you are to affect your pre-private equity career path. Talk to people in the industry – alumni, family friends, and so forth. Just whet your appetite enough to know that you want to do private equity because it interests you, not just because it’s the go-to next step of your 100-strong investment banking analyst class.
2. Know your technicals extremely well. This somewhat ties into step #1, but also reflects that this is one area of the interview in which you cannot fail. Get ahold of internal materials at your firm; practice LBOs (our sources confess they practiced modeling for months before interviews) and have the basic accounting and financial questions down pat.
3. Have an excellent backstory and solid reasons for going into private equity. One awkward anecdote we heard was someone with flawless technical ability who stumbled her way through “Why this firm.” She did not end up with an offer. You should have an enduring interest in investing, different industries and specific deals. Citing salary advancement and career progression isn’t good enough.
4. Be likeable. One interviewee confided that the airport test is particularly important for private equity, i.e. you will be spending ample time in airport lounges, so you better be likeable. This is easy to forget, given the modeling tests and industry knowledge, not to mention the “arrogant banker syndrome” that afflicts some junior members of Wall Street. Don’t forget your manners, your behavioral answers and your perceived ease.
Still interested?
We recommend reading King of Capital: The Remarkable rise, Fall, and Rise Again of Steve Schwarzman and Blackstone and The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything for more insight into investing. If you are interested in a specific industry, read guides on that.
One successful candidate, for example, was intrigued by the multi-billion dollar sports and fitness private equity industry and recommended, Sweat Equity: Inside the New Economy of Mind and Body. Don’t let yourself get scare mongered by various finance forums; panic from others can hinder rather than help you.
And, as always, remember the Murphy’s Law of Accuracy. When working toward the solution, it helps if you know the answers: know your answers to going into private equity.
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