My first year as a Private Equity Associate in Large-Cap Private Equity (Long Post)

We hear a lot about Private Equity, so wanted to share my experience covering:

PE Business Model
Spending a career in PE
Rigorous investing process?

With this thread I want to provide an honest summary and review of my experience so far, I genuinely hope this can help others make an informed decision next time anyone is considering a private equity offer.

Let’s get into it -->

1. Private Equity Business Model

Sometimes, the private equity model seems too good to be true. Where else can you find a model where:
(i) you can screw up for years and investors cannot leave you (as capital is locked up), and
(ii) you mark your own portfolio companies until you sell them whenever you want them.

Everyone always talks about the illiquidity premium but I think that the positives of illiquidity are often overlooked. There is a certain comfort of looking at a 20% market pull-back knowing that

(i) you are not going to charge the multiple of your portco (because private market multiples are more stable - big surprise lol), and
(ii) every public target just got 20% cheaper.

That is a true privilege.

2) Promotions / Raising through the Ranks

The saying that “the tough part about private equity is getting in and being willing to push through” is true in my experience. While the work is more complex than banking (more on this later), it is still not rocket science. Especially when working at a Mega-fund, the role of Associates (and in my opinion Vice-Presidents / Principals as well) does not involve taking any risks. You are executing work that the Partner is telling you to do, you are very rarely making an investment call with a positive vs. negative outcome.

Therefore, it is very hard to show brilliance, and many factors that are often hard to control play a role when determining who succeeds and gets promoted.

3) Some thoughts on other private market products: Why would anyone leave private markets?

Basically every large-cap PE shop is now playing a capital aggregation game and the way to win is offering a long list of investment options. Over this past year, I got more exposure to other asset classes like real estate, credit, etc. I was very surprised to understand how most credit funds are now easily getting double-digit net returns with very low st. deviation.

While this is not exactly discovering hot water, I sometimes stop to think why try to pick stocks to beat the market and generate a ~15% return when credit investors can get very close to that with less work and much less risk of capital impairment.

Of course, this situation is a result of the current monetary policy which might revert in future years, but still interesting to think about why we all try to outperform the stock market when just giving up a bit of liquidity (reminder that the above returns mentioned are illiquid compared to stocks) would result in much higher expected returns.

Taking all together, private markets offer:

Have higher expected
Lower capital base risk as lock-ups are longer
Less decision-making risk as you are not calling shots for a long time
Very high pay

Because while the theory is amazing, the day-to-day is all but amazing in my experience. 

4) Work in PE vs banking

I genuinely had a very good time in banking. I loved restructuring and I loved my group. I loved what I was doing so much that I started an Instagram page and then the Pari Passu Newsletter to talk about restructuring. The hours were tough, a lot of the job did not require critical thinking, so I was thinking that buy-side would solve many of those problems.

Despite having amazing exposure given my age, the buy-side did not solve my problems.

This post is honest, and I hope it can show that the grass is not always greener and there are a lot of reasons to reject a Large-Cap Buyout PE offer. So what are the issues with PE? 

5) Rigorous investing process

In my experience, the investing process is all but rigorous and this gets very annoying. While I understand that I am just a naive first-year associate, it seems to be that people think that doing a deal = doing a great deal.

Simply put, people are not intellectually honest. There have been countless times when I have tweaked models in a way that is genuinely stupid so that we could hit the 18%+ IRR that our partner wanted. Imagine spending countless hours to create the most complex model to back-solve to the IRR that we want to show….

One funny episode is that one time we quoted a seller EBITDA higher than what the sell-side had. I guess you can either actually pay a low multiple or increase the EBITDA to make it look like you are paying a low multiple.

By the way, I do not think that any of these will really matter fo large-cap funds performance. Every firm investment committee is very smart and generally good at not overpaying. I was mostly surprised by the lack of intellectual honesty and the amount of pushback against the partner (or anyone else driving the process). 

5b) The issue with killing a deal and the amount of fake work

Let’s see an example to better illustrate the point above.

A new CIM comes through the door, takes me 15 min to go through it and it is very clear that the group will never ever do this deal: the equity check is too small, you would need to believe in a lot of market share gain to make the numbers work, not really in the mandate, etc. This said the partner has some other thoughts and wants us to do work on this opportunity (likely because he has not closed a deal in some time).

The principal / VP knows we will never do this as well but he is too afraid to push back. This makes sense, his job is to run processes so he does not want to seem lazy so we start creating tons of ad-hoc analysis to see if we could actually do this (everyone knows we never will). This is how he delivers value, so he gives me directions.

After a week and 30 hours of work, the Partner finally understands that we will never do this but tells us to put together a few “simple slides” about the opportunity to keep the group updated with what is coming to market. By now, I need to have a working model to run all these analyses that we will never use, but that is the job. Put together a deck which I send out to the group (hint, no one will read all our analyses).

A lot of work was created for a deal we all knew we never going to do. 

6) Hours / intensity and culture

This is a well-known topic. While hours are generally more predictable, the intensity is much higher. There is never really downtime, there is always more to read, more data cuts to do, more changes to make, and more portco work to do after deal sprints are done. In addition, hours are equally if not worse during deal sprints.

Different from banking, you need to put in some thought in what you are producing, and while this seems a strong positive at 11am fresh on a Tuesday, it is not at 2am on a Thursday night on the 3rd deal of the month that we all know is going to get killed. 

7) Figuring things out

When I was in college, I used to think by the time I was a banking analyst, I would have things figured out in terms of what I was trying to do with my career.
I got to banking and I was still very confused.

When I was in banking, I used to think by the time I was a PE associate, I would have things figured out.
I am now at that point and I am still very confused but I am growing progressively comfortable with uncertainty.

People in finance tend to be very detail-oriented and often try to plan things ahead for decades.

The truth is that reality often clashes with expectations and your plans will have to change direction over and over. And that is ok!