Private Equity: How Many Models and Bottles Can I Really Buy on the Buy Side?

10xleverage's picture
Rank: Gorilla | 520

I was startled to realize over the past Thanksgiving weekend that apparently my 4 years of collective indentured servitude at a bulge-bracket bank and mega-fund was of particular interest to people at WallStreetOasis. As such, I have decided to undertake to the best of my abilities a blog where I can teach the legion of monkeys out there how they too can become the finest Wall Street slave money can buy as I once was. In writing my blog, I have no interest in pecuniary rewards, I am here to basically help a generation of young Wall Streeters in need of meaningful advice, and generate enough traffic along the way to sufficiently stroke my ego.

Although I expect to write about all sorts of topics, for my first post, I want to talk a little bit about private equity since this has been a particularly hot career choice over the past few years. Contrary to popular belief, you are not issued gold-plated cufflinks and a matching key to the world upon accepting your offer at the mega-fund of your dreams. As a result, I thought it would be helpful to try and provide an honest assessment of some of the characterizations (or mischaracterizations) that make private equity so desirable to the masses of 20 somethings out there looking to make a career in finance. Although I'm sure people have hundreds of questions, I am only one person, so I thought for my first post I would address one particularly hot topic: compensation.

$1 million in 2 years, Sorry Kids

The compensation in private equity is in fact, good. Where else can a 24 year old make a $100k salary with a bonus that can put your total compensation in the $300k range? Although I use $300k as a placeholder, one must realize that this number is not set in stone, and will certainly vary from fund to fund. Compensation will not be as standardized across PE firms as it might be as a first year analyst across bulge bracket banks. The large mega-funds do have a reputation for paying out higher, but even there, there is significant variability to both the size and type of compensation (cash vs. equity). One of the most ridiculous things I have ever heard is that you could pull down $1mm in 2 years, sorry kids, but this will not happen to you. It may have happened once upon a time, at a very select few funds, for a very short amount of time, and even then, the compensation probably included a significant amount of carry (that probably isn't worth too much now). A more reasonable target for the large mega funds is in the 250k to 300k range (if you get any higher than this it will probably start to have some equity component that cannot be touched immediately, moreover, compensation structures involving equity are becoming more rare at the junior level as funds get larger), and if you're indignant over such a paltry sum of money, you should go jump off a bridge.

If not Compensation, then What?

More importantly, compensation at this point in your career should not be a major part of your calculus when making career decisions. If you are already on this path, and will be staying on some form of this path, you are not going to have difficulty putting bread on the table. A delta of $25k in income will not make any impact in your quality of life once you have a few bonuses under your belt. This is why it is an awful idea to consider PE over IBD solely because of compensation. The best bankers will make more than the middling PE guy, and vice-versa. In general, people who are good at what they do will make more money. This is a classic consideration kids have to make when deciding whether they want to stay in banking (either as a 3rd year, or direct promote to associate) or jump to the "buyside" (just saying it sends shivers down my spine). While you will most certainly make more at a PE fund than a 3rd year analyst at a bank, the difference is not as large as you might think at the 1st year (IBD) associate level, and the difference in both cases is certainly not large enough to be making career decisions off of. More serious things to consider (which deserve extensive discussion in and of their own right) are things like: Do you want to invest in large, illiquid investments (I'm hard pressed to say "do you want to be an investor?" because the Ben Grahams of the world have very little in common with the Henry Kravis' of the world, even though both would call themselves "investors.")? Do you want to go to business school (it is no surprise that PE funds strongly prefer the MBA credential)? Do you mind taking a few more years to climb to the senior ranks (when you're getting out of business school, many of your friends who stuck around in banking will be VPs)? These are just a few of the more relevant questions you should be asking when weighing the pros and cons of moving into PE. $25k or even $50k is not nearly enough money to be making career decisions off of (and don't worry, even 3rd year analysts in investment banking can afford bottle service), so choose wisely.

In closing my first blog entry, I just want to set a few guidelines. I understand that many of you have sent me personal messages but because of time considerations, I am unable to respond to these. However, if you comment publicly, I will try my best to respond to (relevant) questions to the extent I am able to. Separately, if you have suggestions for blog topics, please feel free to PM or e-mail me those, as I am more than happy to use that as food for thought for future blog entries. Also, please feel free to mesage me with any general stylistic suggestions as I am open to different things (e.g. shorter entries more frequently vs. longer entries less frequently, more irreverent writing style, etc.). Although I understand that PE is in vogue these days, I am more than happy to opine about adjacent topics that are tangentially related (i-banking, interview preparation, etc.). Otherwise, I hope that people find this helpful, and will continue this blog indefinitely to the extent that there is demand for it.

Comments (27)

Dec 7, 2010

Great post, thank you 10x.

Dec 7, 2010

Great first entry 10x. Looking forward to more.

Dec 7, 2010
10xleverage:

Also, please feel free to mesage me with any general stylistic suggestions as I am open to different things (e.g. more irreverent writing style, etc.).

Great first post. +1.

Why do I have a feeling that you added this because of me?

Dec 7, 2010

First of all, thanks for the great post.

I wanted to ask you something.
It's possible to make the jump from MBB consulting to PE, or at least here everybody claims so.

My question is: what size of funds one can expect in that case? Is a MBB consultant at the very best able to get into just a small shop? I'd expect mega funds, with the exception of bain capital for bainies, to be very traditional in their selection, exaclty like you pointed out in your thanksgiving post (GS/MS-->PE-->HBS-->PE).

So if one wanted to eventually end in a megafund is mckinsey a "bad" option? ( in the hypothesis of not being able to land a JPM/MS/GS job, and getting instead into MBB).

Dec 7, 2010

Great first post.

Dec 7, 2010

Great post! Keep 'em coming. Can you describe your first week (or two?) at KKR in the next one? What was the adjustment process like coming from MS M&A?

Dec 7, 2010
everythingsucks:

Great post! Keep 'em coming. Can you describe your first week (or two?) at KKR in the next one? What was the adjustment process like coming from MS M&A?

Yes, I can certainly address the first days working at a megafund but it may not be immediately my next post as I want to make sure my posts are generally applicable to the widest audience. I can assure you though, the Microsoft excel you use at MS is a lot like the Microsoft excel you use at KKR. It is a bit like your first day of school, but then again, starting any new job is a little like your first day at school.

Dec 7, 2010

Solid first post.

@ametista, I know you're asking him not me, and I'm sure he'll have a great answer for you, but I can tell you through my own experience that people who start at MBB can SOMETIMES move directly into megafunds. That said, it's not easy and it's WAY harder then moving from a top group at a BB into a megafund. The MBB -> megafund route is most obvious in the case of Bain Capital, which obviously takes a lot of low level people from Bain, but someone I know well did 2 years at McK and then left for Carlyle directly. He had a summer analyst position at a BB previously, but no non-internship finance experience.

Dec 7, 2010
International Pymp:

Solid first post.

@ametista, I know you're asking him not me, and I'm sure he'll have a great answer for you, but I can tell you through my own experience that people who start at MBB can SOMETIMES move directly into megafunds. That said, it's not easy and it's WAY harder then moving from a top group at a BB into a megafund. The MBB -> megafund route is most obvious in the case of Bain Capital, which obviously takes a lot of low level people from Bain, but someone I know well did 2 years at McK and then left for Carlyle directly. He had a summer analyst position at a BB previously, but no non-internship finance experience.

This is generally correct. I want to avoid going into what you "can" and "cannot do." Very rarely in life will working at BCG hold you down, but like I said in previous posts, it is not the top recruiting ground for the top megafunds. You can trust though that there are certainly people from McKinsey, Bain and BCG at top megafunds, however, it is much more rare. Also, like I have said earlier, you will need to get applicable experience (McKinsey's corporate finance practice for instance) to make yourself more marketable.

Dec 7, 2010

Solid first 10x.

I personally enjoy the longer posts that delve into topics with some heft behind them... thats my vote anyway.

...

Dec 7, 2010

Great post, very informative. Thanks so much, appreciate the insight.

Dec 7, 2010

Excellent post! We all really appreciate it!

Dec 7, 2010

Good post, although you didnt really state anything that hasnt already been said. You should elaborate on the differences that exist between your role as a banker on the sell side and your role as a pe analyst/associate on the buyside. Clearly compensation is not the only driving factor as to why people are drawn to PE. PE offers (again difficult to generalize given the disparity that exists) a greater level of autonomy, responsibility, analytical work that is intellectually stimulating (excluding downloading files from data sites, playing receptionist, etc. at times), access to bright/powerful people in the business world, better work/life balance (PE is project oriented and generally requires less face time as required in client servicing businesses like IB), etc.

Also, you are crazy if you dont think that there are substantial commonalities between the approaches of KKR and Ben Graham's value investor approach. Plenty of PE firms view potential acquisitions with an eye towards a margin of safety and deep discount opportunities. The Intelligent Investor definitely applies to various aspects of how I approach PE investments.

Best of luck with the posts.

Dec 8, 2010

Great post, thanks again.

Out of curiosity, how do headhunters contact you? (I did a search on WSO, didn't find what I was looking for).

For example, it's not like the headhunter has a list of first-year MS M&A kids. How is it that out of no-where, you get an e-mail from a headhunter regarding a PE position?
Should you have a public profile on the internet (Linked-in, etc...)?

Dec 8, 2010
mediocreandnormal:

Great post, thanks again.

Out of curiosity, how do headhunters contact you? (I did a search on WSO, didn't find what I was looking for).

For example, it's not like the headhunter has a list of first-year MS M&A kids. How is it that out of no-where, you get an e-mail from a headhunter regarding a PE position?
Should you have a public profile on the internet (Linked-in, etc...)?

headhunters do have a source of first year MS M&A kids... they're called the second years.

Dec 8, 2010

How do you stay current?

The Journal? Economist? You read the times? The internets?

Dec 8, 2010

Wait so whats the number of models and bottles?

Dec 8, 2010

I thought the 1 million in 2 years was at the post-mba level at the very top (i.e. year 7 out of college, after 2-2-2) mega funds (KKR/Carlyle).

If this is incorrect, what is annual all-in comp at top megafunds post mba?

Dec 8, 2010

Thanks for the post 10x.

Can you offer any insight into what the Partner track would be (as opposed to doing your two years and moving on) and how this may differ at megafunds v. mm shops?

Dec 8, 2010

Thanks for the insight, 10x.

One follow-up question re: the MBA credential: can you elaborate more on how strongly do mega-funds prefer such credentials in hiring/promoting (i.e. people here have cited examples where pre-MBA associates have been promoted to post-MBA positions, but at the risk of making gross generalizations, how often is this done and how do those people fare when it comes to VP/Partner promotions?), and secondly, how the MBA can actually help those who have taken the time and effort to go through it, esp. in the PE context? The 'traditional' 2-2-2 path is well known but I'm just having a hard time buying the 'value-add' of such an expensive degree (in both monetary and economic terms).

Thanks again.

Dec 9, 2010

I'm late to this post but gonna nonetheless ask this question: How do megafund pe firms find their target companies in general? In other words, how and what does the research and analysis entail?

great post by the way, keep em coming

"Kept feeding him dollars 'till it all started to make cents."

Dec 9, 2010

Models bottles yeah yeah yeah. The real question is does moving to the buyside make you feel fly like a g6? That's what I'm lookin fo'

If I had asked people what they wanted, they would have said faster horses - Henry Ford

Dec 12, 2010

Hey man,

Great posts, as someone who works in PE, I can honestly say that your insights on the industry are the most accurate I've seen on this board. There's a lot of bullshit floating around on this forum so it's refreshing to see someone post some real, accurate insights for a change.

One aspect of PE that I've always thought about, especially as I progress beyond the Associate level in PE are the benefits and drawbacks of working for a large, well known fund, ie: a megafund, large pension funds, etc. vs the smaller/mid market PE shops.

Everyone wants to work for the megafunds and the large well known funds, but I think what many younger professionals fail to realize is that while you will make good money at these large funds... you will NEVER make a killing. It's because they are so institutionalized and top-heavy, unless you're a superstar, it is very unlikely you will become a partner.

If you land in a startup shop or a smaller mid market shop on the other hand, where there is a smaller team, you are much more likely to eventually move up and get some meaningful carry. Secondly, there is much more growth at these types of shops, so you the upside is significant. The downside is that you end up at a shop that never really takes off, but I personally think the trade off is worth it.

People shouldn't believe that the megafunds are the end-all, be-all, I think your chances of building meaingful wealth are much greater at the growth/mid market shops.

As someone on the megafund side, what do you think?

Dec 12, 2010

Hey 10x,

Great post. You have mentioned in detail the comp at the associate level at PE but what about the partner level. In an average year how much can the MD / Partner at a top PE fund make ? How does the comp go up after you get your MBA. You mentioned that pre MBA associate makes 250, how much would a post MBA make and how does it increase with the experience.

Thanks

Mar 16, 2011

Haha. Enlightening facts about the financial industry.

Jun 10, 2011
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Jun 30, 2011

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