IB over PE?

notthehospitalER:

One biggie is that although the jobs are similar at the junior level, they are significantly different in some ways - and people just prefer the work in IB. For example, people may love working on transactions but may not want to actually have to "run" a business, which is a core part of PE.

Another - and you don't hear this too often but many seniors in both IB and PE have said this - on average (ie excluding kravis etc) you are likely to earn more over the course of a career on the sell side than you are on the buy side (of course this depends which bank and PE shop you work at).

Finally, PE isn't necessarily a route to an "easier life" and often the firms that provide this (vs. long term IB) are te same firms where you'll make less money. Goes back to point above - many analysts and students looking to enter te industry seem to have this belief that PE is better pay and better lifestyle, but the reality can be quite different.

At what level does IB start paying more than PE? Assuming you're at a solid firm that pays around "street" on either side.

notthehospitalER:

One biggie is that although the jobs are similar at the junior level, they are significantly different in some ways - and people just prefer the work in IB. For example, people may love working on transactions but may not want to actually have to "run" a business, which is a core part of PE.

Another - and you don't hear this too often but many seniors in both IB and PE have said this - on average (ie excluding kravis etc) you are likely to earn more over the course of a career on the sell side than you are on the buy side (of course this depends which bank and PE shop you work at).

Finally, PE isn't necessarily a route to an "easier life" and often the firms that provide this (vs. long term IB) are te same firms where you'll make less money. Goes back to point above - many analysts and students looking to enter te industry seem to have this belief that PE is better pay and better lifestyle, but the reality can be quite different.

PE firms do not RUN portfolio companies. PE firms MANAGE portfolio companies. Significant difference to be noted.

BankerBanter:

Kind of a follow up question about promotions. How likely is it for both PE and IB, for an analyst who is dedicated and does their work and has no intentions of leaving, to end up as say a MD/Partner?

It is far, far more likely in IB than it is in PE. In PE, staffing is determined by AUM so a fund of a certain size can only support so many partners. So in order to move up, you either need the fund to grow its AUM or for partners to leave. Given the mature (if not declining) nature of the industry and extremely limited turnover at the partner level, it is extremely hard to make it. The big difference vs. banking is that once you make it, it's much easier to stay.

Banking has much, much higher turnover so moving up is less of an issue. Plus, banks are much larger and can be more accommodating to high performer who want to stay long term (by changing group or product. etc).

What happens to the Associates who don't get promoted usually? Do they go back into IB or jump to another PE shop?

Dingdong08:

@mtnmmnn is spot on. Getting to the upper levels of PE is very difficult. The pyramid is small at the top and not growing anymore like it did 10-15+ years ago and people at the top aren't leaving. Annual comp is pretty similar, probably a little less than IB, although I suppose at the MF's (I'm not in that world) it may be higher but there are so, so few of those position. Check how many MD's are at the BB's & EB's and compare that to how many MF's there are and how many people make it to the upper levels of those funds. It's a small fraction. So most people who work in PE don't work at the megafunds and while compensation is good, it's not Gulfstream V good.

As to carry making you "very very rich, very quickly." Not really. For one it completely depends on the fund's performance and secondly it's not quick at all. A fund's life is 7-10 years, you invest for the first 3/4, operate for another 2-5 and harvest for a few years (with overlaps in there). If you've gotten to the point where you're a VP and get carry (maybe earlier at some funds) it's going to be a small piece and you probably won't get an exit until at least 5 years in and the way that funds are set up now there are clawbacks and escrow requirements so you're not going to see and be able to spend that cash until the LP's get back their money (used to be able to pull off deal by deal but that's largely changing). So by the time you can access that cash it could very well be 7 years after the fund was raised, if not more. Maybe you start raising the next fund 3/4 years when the investment period is pretty well over after your first fund's carry and you get a bigger piece, but once again you're 5-10 years from getting that money. There's nothing quick about it. And if the fund doesn't perform really well you're set back 5-10 years. Think about guys who got their first carry in vintage '00-'04 funds who were in the prime exit years during the depths of the recession, or if you got carry in '06-'07 and couldn't get a leveraged deal done for years. Check out Calpers site that shows fund returns. They weren't that great for a few years there at some of the big names. Throw in IRR hurdles and there wasn't a huge amount of carry spread around.

One of my theories for why a lot of partners have stuck around is because they may have previously planned on retiring from their funds in the mid-later 50's but those years coincided with the recession years and they didn't get the carry that they thought so they've stuck around for another fund/cycle.

You also used to be able to throw more fees to the GP/management co but LP's have really squashed those down. There used to be more non 2% fees like acquisition, debt, disposition, "other" portfolio co. managment fees, etc that would go directly to the GP/MC but now that usually offsets the 2% so there's just not as much extra annual cash flying around as there once was. I wouldn't cry for all of the poor PE guys out there, but it's not easy to get filthy rich. You get very, very rich by starting up a PE fund (probably 10+ years ago and more likely 20+ years ago), starting or doing extraordinarily well at a large hedge fund or by starting a company and selling it.

Ugh... I didn't say that once you start getting carry you will become very very rich, very quickly. I said "Once carry kicks in, you can potentially become very very rich, very quickly.". What I meant by "once carry kicks in" is what you describe as "time you can access that cash". I agree that it happens 5-10 years after you actually start getting carry (so if you start getting carry at the VP level you will generally see it kicking in at the junior MD level or so). "Potentially" would imply that not every fund makes it. I will not discuss the definition of "very very rich" but I can tell you that I know a few junior MDs who went from being quite well off to being able to buy stuff that a comparably tenured investment banker could not buy. All courtesy of carry. I guess if you want to have a G6, 10 exotic cars and 5 mansions then you should probably aim higher than making MD at a megafund so if that is how you define very very rich, then I agree with you.

Thank you for the clarification, though. I guess my post may have not been as clearly phrased as I had hoped.

funnyhow:

What happens to the Associates who don't get promoted usually? Do they go back into IB or jump to another PE shop?

Generally they go to a smaller private equity shop. You will see all sorts of exits though, from back to investment banking to start-ups to family offices to corporate development.

Also not getting promoted doesn't condemn you to becoming a failure in the private equity world. Know a guy who didn't make principal, went to a fund that is only slightly smaller / less well known and he made MD there.

buylowsellhighthenbuymore:

What are the pros and cons between choosing to stay on as an associate or moving to pe after a 2 year IB stint?

$ vs. $$

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from what i heard, mega funds are a lot higher.... but i would like to hear feedback from others

But try searching for the 2009 compensation database. I'm pretty sure it has most of the positions you are looking for listed. That being said there wasn't much of a difference between the two industries after entry level IB in terms of total comp.

Correction

IB payed out more last year for senior associates on average according to WSO