Buyside vs. Sellside... You might be thinking about it wrong
See a lot of posts about PE vs. IB these days with the seemingly tough PE recruiting market and vanishing carry allocations.
I boomeranged IB -> PE -> IB. It wasn't necessarily due to a lack of seats available to me, but a conscious decision (but I'm not gonna lie, the road ahead beyond VP looked very long and foggy). Obviously I am biased as I have a vested interest in staying in IB for the long haul now and have become a believer (I was not always when I was an Analyst). But the typical buyside supremacy perspective has been well-covered, so I wanted to present a different thought.
What I've realized is that the "buy"side vs. "sell"side framework is not the most helpful way to look at these career arcs. Both trajectories end with selling. Once you get to the senior level, your sole job is to generate revenue.
Bankers generate revenue by winning clients. PE funds generate revenue indirectly by deploying capital and directly by raising funds. All the other things that happen in between are just means to an end.
How many seats at a PE fund that can make direct deployment decisions or play a significant role in fundraising? Now again, how many seats at an IB that can originate clients? In which track can you get to that objective faster with greater certainty?
This is when careers really start. You still have like 15-20+ years to go once you make MD. Everything else is just crossing t's and dotting i's to get there. You're not doing diligence calls and models once this life starts. You just need to know enough to tell someone else how to do them.
My conclusion is that I want to start generating revenue ASAP to control my destiny. If you generate revenue, you can't be fired unless you commit crimes. They can't dock you bonus because you have clients or deals or funds that will move with you. Your market value is quantifiable and there is always another platform that will buy that value. Everything else is commodity and cost center. Rockstar VP with superior knack for writing memos and asking cutting dili q's? Cost center. Up-and-coming Associate that rips through models and CIMs like it's nobody's business? Cost center. Even the Principal who is "almost" revenue generator, but is not? Cost center.
I figured I can get there sooner in an IB setting. The competition is less thoughtful. There are way more deals that you can sell to a whole swath of the capital market vs. the deals that need to hit your buy box AND win. In IB, you get 3-5% of someone else's ENTIRE enterprise value IMMEDIATELY for 4-6 months of work. And MDs get a 25-35% cut of that. In PE, you have no claim to the management fees unless you raised the fund (aka founders) and you get paid 20% carry only on the INCREASE in value OVER A HURDLE over 10 years (so 2% per year only on gains, no claim on purchased value, with very unfavorable time value of money).
Assuming you are equally competent at doing equal size deals, a banker can churn out 3-5 of these a year. The PE equivalent will likely do 1-2 platforms. With PE performance going the way it is, I think that IB has a solid chance of performing better on an absolute basis in the next 10 years and much more certainty on a risk-adjusted basis accounting for seat availability and not needing to be "right" on the market/industry you choose.
Let's hear the rebuttals from the PE diehards :)
Based on previous WSO threads, here's a detailed breakdown of the buyside vs. sellside debate:
Key Points:
Career Trajectories:
Revenue Generation:
Job Security:
Work Dynamics:
Long-Term Outlook:
Conclusion:
Rebuttals from PE Diehards:
This perspective provides a comprehensive view of the buyside vs. sellside debate, highlighting the key differences and considerations for professionals in the finance industry.
Sources: Is the IB vs. PE Debate Shifting Back Towards IB?, PE Funds that Win - and IB that Tries, Let's be honest about PE, Q&A: From State School to IBD to MM PE, There and Back Again - A Banker's Tale
Great read
Everything else is commodity and cost center. Rockstar VP with superior knack for writing memos and asking cutting dili q's? Cost center. Up-and-coming Associate that rips through models and CIMs like it's nobody's business? Cost center. Even the Principal who is "almost" revenue generator, but is not? Cost center.
This is harsh but something anyone who doesn't generate $ or opportunities needs to internalize. Especially on the banking side. It's extremely humbling, at least it was to me when.
Everyone is some combination of smart, hungry and hard working and our skill set is very commoditized. You are really your deal experience and rolodex.
Agree but not totally accurate in PE. It depends on your fund, but at my MF/UMM, Nothing gets past IC without an extraordinary amount of effort from principal and below to craft the investment story. Depending on your firms sourcing model as well, you can be directly “revenue generating” even as an associate…
This is how I used to think when I was Asso/VP in PE. It is nice to think this and certainly the best attitude to continue moving up your career, but there are conversations and attitudes you don't hear behind closed doors of how the founders/senior partners think. Smart guys that put together memos are a commodity at the end of the day and infinitely replaceable.
Let’s be clear. In the vast majority of cases - the real decision that is made rests entirely on the track record and internal capital of the partner who is driving the deal. Great track record / great political capital? Memo can be crayons and it’ll get through. Bad track record? You might as well right the Holy Bible or the Complete works of Shakespeare and still no shot.
excellent IC memos are table stakes - it’s still a commodity product.
there’s only one real asset. Good investment Judgement (poor but only available proxy is track record) and relationships. Oh and the ability to sell. That one is probably important.
I'm really not trying to diminish anyone else's contributions. It's years of hard work under a pressure.
The conversations at senior levels behind closed doors are very different, very unforgiving and frankly often not fair. It's political capital + some from of $ being put next to your name, whether fees generated, capital deployed or returns.
Thanks, please see comments and flip back to me before you leave for the weekend.
Helpful. Please incorporate into memo this weekend for IC meeting Monday :)
This is actually a really great write up and thoughtful way to frame it. It's obvious when you really think about it, but not something that just jumps out to folks when they're looking at these career paths through the lens of someone who just graduated/has only a few YOE.
I originally wrote a long post explaining why your reasoning is somewhat flawed (or maybe not flawed... but not asking the right question?) but it really boils down to this -
The trick on the career point assuming maximizing risk-adjusted earnings is one of the main goals (and to be clear it really shouldn't be...) and assuming you're picking between the general set of white-collar things very smart, insecure, risk-averse overachievers pick from (consulting, banking, PE, hedge fund, lawyer, etc.) is this - you need to have a really, really good understanding of what you are good at and what you are most likely to be top 1% at - and then go do that. The innate skill that is required to get to the top 25% in all of these careers are similar - sufficient smarts, okay people skills, willingness to sacrifice most other parts of life to grind.
However, to get to the top 1% is completely a different story - M&A banker - sales monster. Lawyer - bulldog. Hedge fund - insane risk tolerance. PE - consistent judgement (or appearance thereof). Consultant - inspire deep trust (note - all of these with the exception of maybe the HF requires a very high-level of people skills too though so that's table-stakes).
It's like sports - it's kind of meaningless to sit back and be like hmm would I make more money if I were Michael Phelps, LeBron/Jordan, Tiger Woods, or Messi? If you switched any of those guys around and they tried other sports - they'd be probably above average - but no chance they'd be at the top.
I can guarantee the top 1% audit partner at PwC blows away 80% of bankers/PE partners/consultants/lawyers earnings over a career.
So TLDR - know which 'sport' you are naturally gifted in, and focus there. Also by the way, it just so happens that when things are naturally 'easier' for you, you tend to enjoy it more (or it is less painful), which leads to you doing more of it, which leads to you getting better at it... which leads you to being more likely to be top 1%. #compounding
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Absolutely true, always boggles me when people post asking about IB vs Law vs Medicine vs Tech and whatnot (at least IB and PE are both finance)
How do you think about this for a young person with GE and traditional PE offers? As someone who likes sourcing and the management team interactions from Day One, it seems like a great skill to hone in early on in your career but worried I won’t be able to develop the same level of investment acumen had I begun my career in traditional buyouts
Bump, wondering the same as i want a technical experience
Bump
This is 100% on point and very well said. I like the sport superstars analogy.
Way too many posts asking what’s the best $ risk adjusted career - but that is the wrong question.
What is the best fit for me?
What are my gifts best suited for? What do I like doing day in day out - enough that I can make it decades doing it?
Those are the right questions.
Super helpful post. What would you say is the gift/skill for those that drive to the top 1% at a LO in publics like Capital/wellington/D&C/etc ?
Don’t know that industry super well. And I think that’s part of it. There are very very few of those seats, and I think general awareness of that type of job is pretty low as well (how many 22 year olds even know what Capital Group is?).
I don’t know the intrinsic skills needed - I’m sure it’s something like understanding markets, sounding/being smart, good w/clients etc etc - but also the reality is in most of these jobs (I) being right place right time when the seat opens up is huge and (ii) the ability to cultivate sponsorship from the most senior levels is mandatory (can you get the top guy/girl to want to develop you)
Edit
Yes. Reminds me of a quote that should be top of mind for any person trying to navigate the confusing and overwhelming world of career choices. "If it doesn't make sense for LeBron to be a software engineer, what might it not make sense for you to do?"
Great point. Funny some folks do both medical and law degrees. Just pick your fucking sport dammit!
You are speaking in generalized abstraction that I agree with, but does not address the point of this post.
What I am trying to say is that very similar aptitudes apply to both PE and IB. I am not sure why you are bringing in lawyers and consultants into this.
Both jobs are about sales and judgment. A banker who is constantly pitching ideas that won't work and spending time with clients that won't sell is not a good banker. You have to understand the situational dynamic and how buyers perceive the fundamentals of an asset. This is the same skill that a good PE partner has in ultimately asking "who is the next buyer?" that leads to outsized performance. PE funds that have failed to ask this question have blown up time and time again, just like that IB MD who never hits revenue/league table targets and gets pushed out.
Having actually done HF also, I would agree that the top 1% skill is different there, especially at a pod shop. But, most people underestimate how much the job resembles financial sales in the middle/upper-middle part of the career arc where you are a senior analyst / sub-PM still pitching ideas to the decision maker. Plenty of people get 90% of the way in this career path just being a great storyteller, not necessarily a great risk manager. But agreed, to get to the top you ultimately need a different analytical skillset than what makes for success in IB/PE.
So, my argument here is that IB and PE are basically both the same type of sport. Let's use the metaphor of racquet sports. The general athletic training required to be competent are very similar across tennis, racquetball, pickleball, or squash. There are slight variations and nuances to the application of the core skills - dexterity, hand-eye coordination, technical swing form, court coverage/strategy, understanding of ball rotation, etc. But if you were conscientious about being successful, you would pause to think through where the prize and sponsorship $$$ are at vs. the level of competition and pick an optimal point on the quadrant.
This is what I am saying about PE vs. IB. I am actually arguing that these are 95% the same job. A person who is good at one will be good at the other, so he/she should have a sober reflection on where their skills are best applied. I am not disagreeing with your notion that people should generally pick a direction that they would be talented in - i.e., if you were going to a star software engineer, don't spend your time practicing the cello. But I am specifically challenging the conventional wisdom that PE vs. IB are totally different skills and activities, when they are in reality not. At least that is the contention I have arrived at after having done both and a lot of career conversations with senior level folks in both spaces. The point of this post is to spark some critical thought around this.
this comment of yours is interesting "But agreed, to get to the top you ultimately need a different analytical skillset than what makes for success in IB/PE"
can you elaborate more on the differences between the analytical skillsets for IB/PE vs HF?
This isnt to take away from your post at all but the Top 1% of Audit partners are still only maxxing out at ~2M a year unless you hold a leadership position.
Prior EY CEO Carmine was estimated to only be making 3M a year. The partnership model at B4 leads to a very bloated partner base and earnings are not as high as you think they might be when compared to an MD getting 0.25% of a company's EV.
How do I know this? I spent time in FDD at the B4 and had plenty of convos with partners whose incentive was to overstate their earnings.
Have to disagree. This is just a hygiene factor. Like if someone has poor reasoning skills, they shouldn’t try to be a lawyer (happens more often than you’d think).
After that, it’s luck, specifically, luck in getting the right boss(es). For anyone to progress, opportunities have to be available, performance evaluations etc have to fair. The right boss is probably 99% of what allowed a lot of senior people to be in their seats today (that plus the dramatic growth in the financial services industry in the last few decades), but most people like to attribute it to their own hard work / skill set whatever.
Hard work / right skills / wtv is not enough. It’s easy to say “just play corporate politics” until you’re forced into dead-ends. Luck rolls too. Shitty first job generally means you can’t hold out long enough for the best opportunities as someone with a good boss.
The smartest person I know in financial services, made MD in PE within 10 years of his entire career and is the only senior person I know who will openly admit that it is luck, because his initial PE gig was a hell hole but he spotted an opportunity that his boss didn’t agree with, but let him try it out anyway, and he gained enough leverage over the firm that way.
When I tried to do something similar in my own career, my boss shut it down and wouldn’t let me do it, then had major FOMO when a MF ended up doing the deal.
Where are the intelligent, confident, risk-seeking finance professionals working outside of entrepenurship / startup?
We’re always looking for the grass being greener somewhere else and the truth is it’s all just Brown
I think the conversation about "who makes more" or even considering earnings potential is very dumb because its unlikely the same person can do both very well over a sustained period of time.
If you want to get into "who makes more", I would say the PE guy is building skills that will allow him to buy and hold great businesses over a long period of time with his own capital, which pays exponentially more.
Your point on incentive compensation is a little out of date. At least a few mega funds (maybe all?) clip a 1-2.5% “deal fee” upfront on the capital deployed, which directly accrues to the investment team. This is in addition to carry and the ongoing “management” fees charged to the portco.
I worked at a MF and this is just wrong. You might be confusing independent sponsors or LMM, where it is common practice to charge deal fees which indeed is a significant part of partner economics (though these firms are mostly founders + 2-3 partners max) - along with monitoring fees, carry, and potentially exit fees.
Certain MFs charge PortCo Management Fees as separate from Fund Management Fees that come out of the PortCo’s Adj. EBITDA (which can have PF add backs out the wazoo). This covers Board / Op Partner expenses and maybe a little left over for extra margin for GPs. Not common practice at all for this to be just windfall for deal team investment professionals.
We never saw a single dollar of the deal fee we charged, even my MD had no idea where it ended up. But our founder was a billionaire…..
I'm speaking from experience at APO/BX/KKR. We absolutely generated 1-2.5% upfront fees on capital committed, even on "fee free" coinvest, though this was really implemented over the last ~5 years. We also had significant (50-65%+) margin on portco management fees accrue to the GP.
100% agree and had to recently remind a young analyst friend to stop thinking of PE as the promised land unless they did get a great opportunity. Alot of people don’t get their carry. Alot of carry is worthless.
However, the work in IB is mind numbingly boring and in PE you can at least shove most of the stupid meaningless work off to the sell side. On the rare occasions that I’ve been forced to do market research bcuz no live deal, the deadlines are reasonable because there is no client breathing down my neck, I am the client and I also know that my MD couldn’t care less.
I will also never miss not having to participate in pitches - the more slides you make, the less likely it is that your MD is going to win the deal.
Generally agree again that work nature is mildly more interesting in PE at the Asso/VP levels. But don’t underestimate the amount of process work that happens in PE, just because you don’t see it on the IB side in deal situations (eg, market mapping, random portco requests, internal valuation and return analysis, pipeline/deployment reports, 3rd party engagements, 37th expert call, lender deck, co-investor deck, LPAC materials, case studies, and increasingly "thought leadership" etc).
You are again approaching this with a Asso/VP frame when you mention all the slide work. I hate slide work and will never do them again. However, this is temporary and not the job of an MD, which is ultimately where your career “starts” if you agree with the premise of my post. You also create 100 page memos in PE where the success of the deal likely inversely correlates with the length of the memo. You cannot avoid this stuff no matter where you go in the industry at the midlevel. The goal is to start generating revenue ASAP which frees you up from this crap.
I’m actually from PE… all the annoying work in PE is still >>>> the annoying work in IB. Some of the work actually makes sense in PE and is necessary for DD’s sake, though obviously too much BS gets created. Also no one even has more than 10 expert calls, let alone 37. Expert calls are when you’re a generalist looking into a new space / region, if your investment mandate is industry specific, your experts come from within the firm.
Hey thanks for sharing. For public equities investing (HF, LO), what is the equivalent of being not a cost center any longer? Do you have to be analyst who generates alpha or a CIO/PM who brings in client AUM?
Jumping on airplanes constantly blows. For that alone, sell side was a no go for me long term. Great post though op
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