An LP Perspective on Private Equity

First, a bit about me. I started my career in restructuring investment banking for a few years before moving into a secondaries role at a well-known private capital solutions provider. Moved internally from secondaries to FoF investing, and here are some insights on how my firm looks at private equity as an asset class.

There is, and will continue to be, compression in the return profile of mega and large cap buyout. Blue-chip funds like Blackstone, KKR, Apollo, and Ares are increasingly transitioning into asset managers. As publicly traded companies, their primary goal is to increase their AUM, which is not limited to their private equity strategies. Now, by no means does that make it a bad place to start a career as a junior, but if you are looking for true alpha, it will be difficult to bet on these type of firms. For some allocators, like pension funds, these are great places to park money as these firms are approaching the "too big to fail" category. That said, there are a few firms in this category that we are excited about as an LP for the next PE cycle. I would highlight Advent, New Mountain, Arcline, and many of the technology-oriented funds (Thoma Bravo in particular) as standouts.

In my personal opinion, if I were trying to make a career in private equity, I would look to join a sub-$10 billion fund that has the momentum and capacity to keep pushing fundraising. From a junior talent perspective, this ensures great compensation while opening up opprotunities for upward mobility. Some firms with the potential to capitalize on the next private equity wave, in my opinion, are KPS, STG, and Cortec.

By no means are the handful of firms I've highlighted here an exhaustive list of PE firms that will have great returns. These are merely examples of firms that are approaching the markets in a way that will generate alpha, in my opinion. For juniors looking to make a career in private equity, I would encourage you to do real research on the goals of the firm you're joining. You may be entangled in what firms are seen as "prestigious" today, but the world changes quickly, particularly on Wall Street. Where's Drexel, Bear Sterns, and Lehman today? The best investors in this space today have been here for 15+ years, and the world is a very different place than it was back then.

Another thing I'll note. People on this site bucket funds on a "ranking" or "prestige" scale, while in reality, most firms you're comparing are doing vastly, vastly different things. As someone who sits around and analyzes different PE firms and their strategies all day, the recent thread comparing Apollo and H&F made me laugh out loud. The investment strategies are about as different as you can get on the mega/large cap buyout space. As a junior wanting to break into the industry, you should try to understand what type of investing these firms really do. What is the target profile of the companies they look for? How much debt do they put on a company? What are their main value creation levers? Apollo and H&F will almost never compete for the same asset. And the great thing is, these firms publish a lot of this information in their annual reports and presentations! Pension funds also publish a lot of information about their GPs online, so actually take the time to read through these to understand what these firms actually do.