Regrets After Switching From IB to PE?

I know somebody who went from a top LevFin group then landed MF PE. He said he didn’t like the level of competition, and he wanted to just “enjoy his life.” He ended up getting engaged, going to b school (H/S/W) then went back to his old bank but got DCM (he said it was less stress than LevFin). He’s married with kids now.

Only weird thing is that he said he could have gone to his old bank’s DCM group without an MBA, but he just did the MBA just to go to H/S/W.

Now that I have a much better understanding of Finance landscape, I’m constantly thinking about where I want to be or what I enjoy in terms of making Finance as my long-term career. So I think about going back to IB from time to time, not in the sense of money but whether I can do it for 20-30 years. IB seems like a pretty cushy role to be not worrying about taking wrong risks and staying in the loop with big companies and investors. And then I think about all the marketing pitches and realize I do not want to go back. It surely takes a certain personality to be a banker.

I think a lot of the fixation on IB Exit Opps is a function of a Type A personality. Always striving for something bigger or better and IB to PE is just another perceived rung in climbing up the latter. Frankly, I know a lot of people who left really cush jobs because they felt at the time like it was "leveling up" and they'd probably be better off today if they recognized that they had it made where they were. Talking about people going from good IB groups to shuffling around every 2 - 3 years at different lower tier PE shops. Still crushing it in the grand scheme of things but there's something to be said for building tenure within one of the major IB machines.

Frankly, I started in IB and couldn't wait to level down. Gladly took a pay cut in favor of the work/life balance of working for a REPE fund. Still make a handsome chunk of change AND still get home in time to have sex with my wife.

I absolutely regret moving from IB to PE from a comp perspective. There's a lot more variance on the PE side in terms of comp, and I've never been able to make what I was making in IB, relatively speaking.

The economics of PE are starting to wane. Pressure to increase returns remains as it becomes more and more difficult. IB remains one of if not the best risk adjusted careers

I don't make my living in banking being smarter than everyone. I make my living being a pretty good all-rounder. I understand financial concepts, can model decently, am pretty good with clients. The average PE guy is smarter than the average banker (assuming not a crap fund), so it's hard for me to foresee trying to compete more on intelligence while throwing some of my other natural skills that lend itself to banking out the window.

I see to many kids in the industry jumping to PE but have no idea what they are getting them selves involved with. After so many years in the industry I still think there so much fat in IB and PE. I've interviewed so many kids and look they can get all offers not a big deal but only 0.1% of them will even become average/decent investors at best.

I'm an undergrad, but I want to potentially do 3 years instead of 2 so that I may defer PE recruiting a year to get a better feel for banking first.

I moved to a big name MM PE in Asia and I regret it.

First of all, I want to say most IBD exits are not real exits.

You are literally doing the same type of work (useless models with endless revisions, benchmarking, industry landscape, data mining) and dealing with the same type of people (ex-bankers). Be it corp dev, PE, HF, it is still the same group of people.

It is not in a sense of exit like: oh, I moved from consumer IBD to P&G brand manager and now I am managing multi-million marketing budget for SK II / operations manager at FAANG, etc. You would be very lucky even if you get to work in FP&A and deal with non-bankers (because they all prefer hiring ex-big 4 comrades instead of bankers).

If you are lucky, you get the same type of burnt out bankers in your PE/corp dev role as seniors. If not, you just get the same type of people and continue your working style. But now, you lose your BB prestige at a less well known shop.

Your senior hate IBD life himself, but that doesn't mean he hate imposing such life style on others. As long as you are working with people with lack of sense of job security, you will just continue your IB life but in another place.

Private equity returns are at record lows.

if returns are low isnt it affecting comp?

Getting Carry is one thing, actually seeing a real distribution is another...I have peers even at MF who had carry go negative or never saw a non-tax distribution after 7+ years. Choose wisely, especially if you are in a specific vertical

Hi - great question and one that I struggled through myself. I wrote the post below a while back - hopefully this is helpful:

https://www.wallstreetoasis.com/forums/there-and-back-again-a-bankers-t…

Interesting stuff in here, I’m on the older end but clear that the PE recruiting process forces some hard decisions for analysts.

I’ll say the risk adjusted return for comp is likely higher in banking (if you are at a good bank) given receiving carry almost anywhere is a crapshoot and takes a very long time. I disagree that banking is somehow lower stress, that may be true up to the VP level but at that point you begin to have pressure to sell and that can be very weighty too.

If you are a good performer it’s not too hard to go back to banking if you find PE is not for you. It’s worth taking the option early on and decide from there. Careers are not perfectly linear and 2-3 years is nothing in a 30+ year period.

First it depends on firm. Some firms are very ops focused (Bain, Platinum, etc.) and others are not (LGP).

I would say broadly, of course no one at the PE firm from the investment team is implementing anything - BUT - you 100% have to know what operational improvement opportunities there are in the Company, and it is your job to send in the right Porfolio Ops / consultants / and most importantly, hire the right management team to get it done. It is then your job to make sure that EBITDA flows through to the bottom line.

What that translates into is not necessary actual, operational execution capabilities for th PE professional. But you become well versed with how commercial activities actually work (e.g., how logistics works, how raw material sourcing works, negotiating with vendors / customers, talent recruitment / re-organization, etc).

Without actually owning the company, it's nearly impossible for most people on the outside (including bankers) to truly understand how a business actually operates. When I was a banking, I certainly could give the "investment highlights" about how a great a business was - but I certainly couldn't go any deeper than pretty 'big picture' comments into the nuts and bolts of the operation.

PE is gonna go they way of fundamental L/S Equity HFs... surprised more people don't see the writing on the wall.

1. Does Private Equity generate Alpha? - Here is how Eugene Fama, 2013 Economics Nobel Prize winner, would respond:

"We ... emphasize that if private equity managers have skill in choosing good investment projects and bringing them to fruition, the result is a return due to the human capital of the private equity managers. Labor economists would argue that this return goes to the human capital, that is, the managers. Talented private equity managers are the scarce resource here, not investors' capital. As a result, the fees of managers should be set so that private equity investors just get expected returns that compensate them for the high risks of the investments."

"Finally, because the returns to private equity investments have large idiosyncratic random components (in addition to high market sensitivity), a wide range of outcomes is likely purely by chance. It is then predictable that the lucky managers are anointed by investors and the media, and they are flooded with new money from investors, even when past performance is due to luck."

Source: https://famafrench.dimensional.com/questions-answers/qa-public-vs-priva…

2. Historical Performance - "Our analysis suggests that private equity does not seem to offer as attractive a net-of-fee return edge over public market counterparts as it did 15–20 years ago, from either a historical or forward-looking perspective. Institutional interest in private equity has increased despite its mediocre performance in the past decade versus corresponding public markets, and weak evidence on the existence of an illiquidity premium. Although this demand may reflect a (possibly misplaced) conviction in the illiquidity premium, it may also be due to the appeal of the smoothed returns of illiquid assets in general."

Sources: https://www.aqr.com/Insights/Research/White-Papers/Demystifying-Illiqui…, https://www.aqr.com/Insights/Perspectives/The-Illiquidity-Discount

3. Performance Persistence - "The conventional wisdom for investors in private equity funds is to invest in partnerships that have performed well in the past. This is based on the belief that performance in private equity persists across funds of the same partnership ... Post-2000 we find little evidence for persistence in buyout funds, except for the lower-end of the performance distribution"

Sources: https://www.calpers.ca.gov/docs/board-agendas/201511/invest/Workshop02-…, https://pdfs.semanticscholar.org/3c31/135608cf8cbcfbad3c236073729b61827…

4. Ex-Ante choice of top-performing PE Firms - If you are betting on pre-identifying good funds to join, then take a look at David Swensen over at Yale. He has been unable to meaningfully outperform the Cambridge Associates average PE return for the past 20 years. For reference, Yale's 20 year historical return on its leveraged buyout investments is 12.1%, while the 20-year PE industry average return, during the same period, according to Cambridge Associates is ~12.32% (this could be survivorship bias, but still quite embarassing if you ask me). If Swensen cannot outperform the PE index despite probably having access to "top decile managers", then why do you believe you can pick a PE firm that will generate gargantuan returns without it being a statistical artifact?

Yale Returns: https://static1.squarespace.com/static/55db7b87e4b0dca22fba2438/t/5c8b0…

5. Is Private Equity Due Diligence Cognitively Feasible? - Here is an interesting paper than comments on attention and judgement. I am skeptical that the 100+ page CIM/IC materials can be cognitvely processed correctly.

"What do we notice and how does this affect what we learn and come to believe? I present a model of an agent who learns to make forecasts on the basis of readily available information, but is selective as to which information he attends: he chooses whether to attend as a function of current beliefs about whether such information is predictive. If the agent does not attend to some piece of information, it cannot be recalled at a later date. He uses Bayes' rule to update his beliefs given attended-to information, but does not attempt to fill in missing information. The model demonstrates how selective attention may lead the agent to persistently fail to recognize important empirical regularities, make biased forecasts, and hold incorrect beliefs about the statistical relationship between variables. In addition, it identifies factors that make such errors more likely or persistent. "

Source: http://www.dartmouth.edu/~jschwartzstein/papers/SelectiveAttentionMain…

6. Executive Pedigree - "Our findings suggest that the 'best and brightest' do not appear to have a statistically significant edge when it comes to managing public companies. An elite pedigree—the type of pedigree favored by head hunters and corporate boards—is not predictive of superior management. One of the central rationales for Michael Jensen’s campaign (increasing CEO pay by tying it to share price performance) appears, in retrospect, to have little empirical support. These credentials, however, are significantly overrepresented in the CEO biography database. The elite credentials thus benefit the individual, but there is little evidence that these credentials benefit shareholders."

Source: https://verdadcap.com/archive/do-mbas-make-better-ceos , https://verdadcap.com/archive/is-ceo-performance-persistent

Never posted here before but wanted to weigh in. I moved from IB to a lower middle market fund and spent 3 years there. The fund had a great track record and no problem raising money. I generally had a great experience--closed 4 investments, sold a portco, and was promoted to Senior Associate.

I opted to move on to pursue other things. I think the perceptions about PE pay are true for the larger funds, but not true for firms managing less than a few billion dollars. I would have made more money if I stayed in banking, and I think the expectations and job-related stress were both much much higher in PE. My friends that stayed in banking are VPs now and crushing it. That said, I enjoy buying companies a lot more than selling them and would not want to be in a position of pitching sell-side work, so I stand by my decisions.

In PE, I was still working 60 to 80 hours a week. Our team was small, so I worked directly with partners and principals who had very high expectations, a strong feeling that "they had went through it so all Associates should", and no junior/analyst support. Regarding carry, it is important to realize that the carry pool is typically allocated mostly to the senior people and is typically only allocated when a new fund is raised. It does start to add up as you have carry dollars at work across multiple funds, but it would have been a long road for me to see that. I really felt that I would be fighting to earn my place there as long as I was employed, even when on partner track. I have other friends who joined larger funds (but not mega funds), and comparably their pay is much better, hours much better, and culture much better.

I think the buy-side is worthwhile to try: you learn how to evaluate an investment within the context of your firm's particular strategy, raise debt, execute due diligence the correct way, and as you start to move up, you learn more about managing the process and negotiating the documents to close a deal, among other things. I would encourage others to swing for the fences in terms of recruitment, try to get into a larger fund, and really choose a role based on culture (and track record/fund raising ability). About half of the Associates I know from various places decided to move on, and those that stayed seemed to 100% love the work and the team, or at least were careful to message it that way all the time. Sometimes I do look back and wonder if I should have stayed, but I think it is just the perceived prestige factor still having a grip on me.

TLDR :

This website is clearly an echo chamber. PE is not the be-all and end-all unlike every other thread on this topic.

As with anything, form your own conclusions based on primary research, not secondary research.

All jobs suck. Choose the one that sucks least based on your own motivations.

RBC might be better than whatever MM PE firm you're thinking of joining.

I went from BB industry group to MM PE Fund. Pay is definitely lower than if you continued in BB, but it is a bump from the first few years of being an analyst. I'd say a MM PE fund will pay an associate similar to a BB 3rd year analyst / stub year associate, and a senior associate gets paid like a 1st year BB associate, and a VP is paid like a 2nd year BB associate.

MM PE Cash Comp Associate: $200-275k Senior Associate: $275-350k VP $350-450k

While you give up comp, the quality of life is usually much better. There are less firedrills, you are in control of what you do with the deal, less things "pop up" and blow up your weekend last minute, and you get to develop investment thesis' and execute on them rather than working for other people. Plus, there's the potential for carry, which can we worth a few hundred grand to a few million, so if you had those things into comp it can be hire than banking, but of course there's no guarantee and you wont see carry for a few years.