PE long-term attractivity: Is the trodden path "broken"? Quo vadis gen Y?
Tl;dr: is the PE career path still as attractive from a financial point of view as it was 5-10 yrs ago? I would argue that the expected career value for the average new joiner is significantly lower today. This is based on a) longer time required to advance; b) more competition; c) commoditization/salary pressure; d) potentially lower fund performance. Is this something you have been observing as well? And if yes, what are the alternatives?
Lately, I am pondering the attractiveness of the classic path of climbing up the ranks of a private equity firm.
Is PE still as financially attractive from a structural point of view?
Like many of you, I was intrigued by the fascinating job opportunities on the buy-side and made the switch after 2yrs in a BB M&A team to a MM PE shop. Especially the steep learning curve, direct exposure to C-level managers at a young age as well as the opportunity to work as an investor among exceptional colleagues were the determining factors for this move. But today I do not want to talk about the experience or culture part of this career choice. Today, I want to talk about money. Basically what I am wondering: is PE still as financially attractive from a structural point of view as most of us believed when we entered the industry?
While we all know the stories of people who cashed out significantly in private equity in the past, the question remains whether this success is possible (on a prob. weighted and risk-adjusted basis) for young folks joining a shop now. As the big bucks in this game are being earned with carry, the main question for new joiners (from a financial point of view) should be a) how fast can I get a meaningful carry %, and b) how large will the carry pool be in the next 5-20 years. In other words, if you can climb up the ladder in your firm quickly and your firm is doing well, you will be pretty good off.
Many young professionals will have a very different expected value from their career choice
Over the past years, I made several observations which led me to the conclusion, that many young professionals under 30 years will have a very different expected value from their career choice than someone who joined the industry 5+ years ago:
- Most PE organizations grew significantly in the past 5 years. In many cases, the hierarchical structures are now comparable to those of large banks. Structured promotion cycles and larger teams may mean a) a longer time required to get into meaningful carry territory and b) more people to share the pool with.
- While it may have been possible to become a partner within 5-8 years ten or twenty years ago even at large shops, I would argue this is highly unlikely today. This is a common phenomenon in many of the boomer "partnership organizations" (i.e. IBs, law firms, etc.) and this development seems to be also present in many of today's PE firms.
- As the competitiveness within the firm increases, your chance of making it to the top decreases (or becomes dependant on factors other than pure performance). Also, it can impact your general exposure and skill-set acquired along the way.
- Partners at successful firms have no incentive to leave the firm or make room for the next generation. As a result, many shops are very top-heavy.
- With new IB analysts switching to the buy-side in droves each year, the junior position at PE shops becomes more and more commoditized. I know of many PEs which offer lower salaries (base + bonus) than comparable IB positions but are still able to recruit talent. This "salary dilution" can also lead to lower expected salary progression down the road.
- There is enormous pressure in the industry for diverse hires. Investors love it when these hires are promoted.
- With cheap money in the market, multiples being paid are high. Some shops today are underwriting deals for <20% IRR, potentially leading to lower carry pools in the future.
- Some shops have already deviated from the 2/20 model.
- Many funds are chasing the same deals. The plain vanilla LBO firm has a limited edge over its competitors. In general, I would argue that a large part of the industry has exhibited very limited innovation in the past.
Some of these are anecdotal evidence - so please take it with a grain of salt. This is not meant to be comprehensive and clearly also misses arguments for the "bull case". Idea is to give my view of where I believe the PE career path might be directionally heading.
I think it will be difficult for a new joiner today to make $10-20m+ in this job. For this to happen, a lot has to work in your favor (assumption: >20yr tenure, early carry allocation, new fund every 3-5 years with increasing carry share, increasing fun sizes, solid fund performance, etc.).
Which is the most attractive alternative?
If we assume this to be right, the question remains what is the most attractive alternative (again: only from a financial point of view). Can it still be found in finance or was PE one of the last sweet spots within this industry? Is it all about the growth segments like technology, startups today with its more flexible (and still growing) organizations and better promotion prospects? Or is maybe getting into entrepreneurship asap, i.e. taking risks and building up equity in a set of cash-generating businesses as young as possible, the answer?
Anyway, these are some of the thoughts which keep me up during this pandemic. Happy to discuss whether you agree with these observations and what potential alternatives could be.
This is all right. PE was a great wave to ride. You can still catch it, just like you can still ride the IB wave and biglaw wave, but you're a decade plus too late for all of these. The question becomes - what's the next big wave to ride? And that's anyone's guess - if I knew the answer, I wouldn't be working in PE and posting on WSO. But if I were you, I'd try to figure out what that is, and position yourself appropriately. It's a lot like investing - what is your thesis, and how do you profit from that thesis? Of course more reward = more risk, so you need to be prepared to press reset on your career more than once. But that's the same risk Henry Kravis took when he left Bear to start KKR.
The big wave nowadays is high tech and startups.
Yea but we have ostensibly missed that one recently, much like we missed the PE/IB wave by decades
The question is, for many of us in our 20s, what is tomorrow's wave
Green tech
Whether it's on the investor side, or founder side. Not very profitable at the moment, and a lot of the startups out there are def. on the future side of things - but I think 10-20 years down the road, many of these technologies will have become the standard way of life.
More proof that finance is dying -> tech is the present and future (i.e. early employee in a tech company is a more common way to get rich these days/break 8 figures). Automation will also play more and more of a role in many industries in the coming years, and government will likely have to step in once too many people lose their jobs.
You do realize that most startups fail and the equity you receive becomes worthless....
That's a shitty ad hominem, assuming the worst about small business owners. These guys generally run inefficient businesses where they are not maximizing profits and paying as little as possible as extremely savvy owners (e.g., companies with public pressure, PE backed companies, etc.).
Big tech will create more concentrated wealth. Reskilling is not as easy as you think. There's a cultural element, ways of life, entire geographies rooted in places and skills. Trust me, reskilling and education are one of the primary industries I invest in which is why I'm taking the time to argue on the internet (which is just about the dumbest thing anyone can do anyway).
We should also lament about the small grocery store because many family owned businesses are community staples. They bring people together in the community and create a sense of identity and structural support networks. Think about the many neighborhoods of past in New York where this was true, many of them ethnic neighborhoods, that now have been hollowed out of commercial institutions that are supported by community members that are tightly ingrained in said community networks. Now there's a soulless Lululemon and Starbucks on every corner.
If you are not in VC, tech banking or tech focused PE you are behind the curve. If you carve yourself a niche within a vertical in tech and lever up you are going to create wealth.
Other than that option- I have doubts about every other industry.
I think saying the IB/PE wave has passed and that tech/biotech/whatever is the next big thing is a bit too simplistic. Like, within finance there are areas of growth and areas of decline. I would argue that real estate/infrastructure funds are going to be hot for the next few years at least (relative to the market as a whole, real estate funds own very little of the total real estate market in America, less than the same comparison for corporate PE). Private credit also looks like it has more room to grow than private equity. Within investment banking, SPACs, tech and healthcare coverage groups are probably going to do very well in the next few years relative to other groups. Elite boutiques seem to have more room to grow than bulge bracket M&A. The list goes on. Same for tech, certain areas will be super hot for a while and others will decline or stagnate. Point is that you can’t write off an entire industry or say that you’re going to make more wealth in tech than finance just by virtue of being in tech. Plenty of ways to go about building wealth in both industries. Best to go into an industry that you enjoy and are good at. Just my 2 cents.
Could argue that renewable energy / energy transition is a high-upside space for PE, IB, and public market investing to varying degrees:
-PE/VC can provide start up capital for these breakthrough ideas such as hydrogen, carbon capture, alternative fuels, battery storage, etc. Go look at how many “energy transition” funds are being raised these days vs. anything related to traditional oil & gas; it’s not pretty -IB will need to help this growing universe of public and private cos to raise capital, pursue M&A, and ultimately advise on the sell side and buy side for the wave of investments that will come from traditional energy stalwarts looking to take advantage of the ESG theme (already happening with European majors and to some degree CVX, Oxy, and a few midstream players) -Public markets are farther out and require some time but a look at the returns for various clean energy indexes this year and you can see how defensive the industry has been (imagine a world with a somewhat counter cyclical energy sector). This space will only continue to grow as more companies go public; this year alone there have been numerous SPAC mergers with EVs and related infrastructure (charging, batteries) and the pool of companies will grow as capital flees from fossil fuel investments and pours into ESG investments in energy
TL;DR: need to think broader than this “tech or die” mantra. The push to decarbonize will only get louder and there’s going to be significant opportunity to make money along the way. Just one example but I’m sure there are more opportunities to capitalize on a structural shift across industries.
Wow. I am amused with the responses in this thread. Firstly, “tech” is not an industry. That’s a misnomer. Technology is simply a tool and the best companies in every industry will always be using the latest technology, to the end of time. Secondly, the financial industry to be in now, is clearly cryptocurrencies. This is where the innovation and future is. Where traditional finance is a leaky, politically motivated pipe, bitcoin and the surrounding venture bets (CeFi and DeFi protocols, etc) are dynamic engineering breakthroughs that have been and will continue to reshape and disrupt the sunset industry that is traditional finance. You make money when you see a world in which 99% don’t yet see, and then position yourself to capitalise on the opportunity.
EDIT: people read through this thread. It’s a nice example of herd mentality. If you want to “make it” and make your pot of gold, don’t follow the pigs to the slaughter. Don’t look for iterative improvements in sunset industries. Push for the step change. The established industries of today were risky bets of yesteryear.
no PE sucks donky balls when you can just hop on youtube/insta/onlyfans for a quick million a year 2 years in lmao at people still competing for traditional jobs, get on the social train CHOOCHOO its leaving
SB'd. Interesting thread & discussion and something that I think most of us in the industry talk about with colleagues/friends.
Here's my $0.01:
You're right that it's not as attractive as it once was from an ultimate lifetime comp perspective.
No more IB associates regularly making 750k and average PE funds hitting 8-figure carry each year. Folks have said that the "easiest" way to build 8+ figures of wealth is via tech or start-ups - Sure, that's not wrong. PE is crowded, but it still provides an incredible platform to build wealth. Maybe your fund doesn't hit carry or your firm can't raise the "n-th" fund and has to wind-down. Surely your skillset would be valued elsewhere - Maybe you lateral to a PC, maybe you get recruited to work corp-dev in a PubCo and your options comp winds up being a ten-bagger (my goal). The people who go on to achieve these wealth outcomes are the minority, but the mean success rate for somebody in IB/PE/HF/CO is an order of magnitude higher than folks in other industries.
I agree that PE is crowded and the "golden years" are behind us. That said... this is still incredibly lucrative. I made 260k when I was 25 years old. Some people made more, sure (especially on this board), but most people made less. Each year you work in PE (or IB, for that matter) is a step change in your long-term wealth trajectory. Are you going to become a multi millionaire and have fuck-you money? Will you rise and become Partner at your fund? Maybe, but probably not. But you WILL be better off financially than most others. You WILL be comfortable and people WILL envy you. This industry (and this board) really distorts how young folks like us view wealth, and pushes a "money + prestige = success" mantra.
The grass is always greener... where you water it. Nobody ever says the full thing. If you're in PE/IB/HF/CO/VC/Tech/whatever you're miles ahead of the average person. You will be "wealthy", but you wont be 0.01% wealthy - that's not failure. That's success. Keep working and growing and you'll be absolutely fine.
Man it's so true. I didn't even know what PE was when I was in college and here I am stressing about all kinds of things that, I don't know when or how they became important to me. I have no much anxiety about not having $50mm... but why? It's hard to break out of this myopic cycle. I feel like an anorexic girl who looks in the mirror and sees a fat girl staring back.
+100000000 SBs around...
People get soooo caught up on these goddamn internet boards comparing career paths that will more than likely cement individuals into, at a MINIMUM, an upper middle class to top 1% earner standard of living.
Who cares that PE or S&T or AM or whatever has a slightly lower ceiling? The floor for these fields is already 2, 3, 4, 5 times higher than what the average, college-educated full-time white collar worker (talk of even workers in general) will ever hope to make. Traditional engineers (MechE, EE, CivE etc) that go through 4 years of getting their balls BUSTED cap out at ~$150k and some snot nozed kid building CRUD apps or arranging logos gets that in their first job out of college.
Like jesus christ. Don't you guys get tired of asking the same fucking questions all the time? BigTech/Startups vs PE vs Medicine vs Corporate Law vs Consulting vs F500/MM Corp Exec...they are ALL LUCRATIVE. You will not come out of a career in ANY of these industries economically worse off than you came in. Just choose a field amongst those that you're most interested in and have the aptitude for. Hell, screw just limiting yourself to those fields.. money isn't everything, pick what you give a shit about the most and the rest will sort itself out.
So tired of seeing the same micro-optimising of which field will pip out the best probability of bestowing you with the midas touch whilst not lifting a goddamn finger. News flash: it doesn't work that way guys. Any field that has the potential for the kinds of incomes and net worths you all salivate over will require you to grind.
All I'm going to add to this is that wealth is a terribly misplaced idea of success.
Let me get a little bit philosophical here and pontificate for a hot sec. There is no atheism in the odyssey of life – we all worship something. The only thing we can possibly have control over is what we choose to worship, and anything you worship will eat you alive. If you choose to spend life worshipping money to buy and do lavish things, you will spend your whole life feeling poor. Worship your body? You will always feel ugly – by the time you’re planted six feet below the ground, you will have died a million deaths as time and age have had their showing. Be careful worshipping money – is that really an object which you are willing to release your freedom to?
I agree 100p with this statement, but goddamn, as somebody who has both golden handcuffs and gym-induced body dysmorphia I feel like I'm being personally attacked by a thesaurus
Wow this thread got built out kind of fast? Some good stuff here. My quick take as someone who never thought I'd be doing what I do (or where I do it, or how I do it...):
This is overly simplistic, but applies somewhat in both a micro and macro sense. In a macro sense, the golden days of PE when all the easy money was being made was in the 80s, 90s and early 00's. Capital was more scarce than it is today and deals were harder to come by. Lots more variability in returns (lots of zeros, lots of big 4x, 5x, 6x, 7x, etc kind of returns). But on average you were able to buy cheap(er), use more leverage, grow a little/cut costs, and sell high(er), as the market was just less efficient. In the grand arc of history, we probably had a buyers market from 1980-2005 or so, and have kind of been in a sellers market ever since. I'm sure not everyone would agree with that, but it's how it feels to me.
In a micro sense, and not that it is easy (only easier), but if you're early at a firm or start it, and it's successful, chances are you make more money than someone who happens to work at that same firm once it's already successful. I have seen this in my own career when retiring partners at my firm who were utterly below average investors were making huge returns and frankly continue to rake in cash based on the fact that they bought crap companies at 4x a while ago, and selling those same crap companies basically unchanged at 8x, while capturing the lions share of the economics. Nowadays it feels like the path to success in the market is more precision - no zeroes, sell as soon as you get to 2x or 2.5x, don't assume major multiple expansion. Focus on mistake avoidance and realization as soon as practical (don't get too greedy). Again, probably not something everyone agrees on but it's what I've seen in my limited experience.
That being said, if you want an above average career earnings trajectory, PE is a good place to be. It probably now fits into a similar category as other high powered white-collar professionals within the same size/class at the top of the wage-earner pyramid (e.g., bankers, lawyers, etc). So yeah, you won't be Henry Kravis, but you won't be poor, or even middle class either. You'll be in the 1% in PE, but if you want to crack into the Forbes 400 list go found/build something.
onebagger had the best response on here.
The thing I'd add is, people talking about the heyday of banking/PE are essentially looking for low-risk, W2 paying jobs that could give them crazy outsized wealth without a ton of special skills or knowledge and medium to high effort. In general those almost never exist for very long for the main reason that once people realize you can basically just do any version of a day job and make millions of dollars a year, it's going to get crowded out. Kind of a law of averages type of thing.
Tech seems like the next frontier in that one can basically just bet on getting lucky on joining an early stage startup. I think about all the average engineers who started at Snowflake ~5 years ago. They probably got ~$1M in stock options at the beginning, refreshed that a few times over their career and upon Snowflake's IPO probably ended up with equity that was worth an order of magnitude more at exit. That's in addition to making a few hundred thousand in base+bonus each year. So from that perspective, there are still some pockets of tech that can pay that type of money out.
With that being said, for everyone one of those stories, I think of situations like Uber, where employees hired later than 2015 are still underwater on their options. In in the early 2010s, Uber looked like it was going to take over the world. Having a ton of shares priced at $30/share seemed great, hell, even $60 a share and you'd still 5x your money, that stock was easily going to 10x and maybe more. Flash forward to now and ... perhaps one has made some money, but there's a good chance it's nothing that meaningful. And that's a good outcome. Think of all those people at Theranos or the likes that were counting their paper money, only to have it all go to 0. Years of slaving away, taking a 50% paycut vs what they could have been making at a Google or Facebook, chasing the big IPO bump, and to end up with nothing. For every Snowflake you could probably find 100 failed startups (or honestly maybe like 1000).
PE is less likely to make you crazy rich as it used to, but PE still has a significant moat in the sense that, you're acquiring businesses at a scale that is unachievable by the masses. There is a huge capital advantage that others can't touch as well as access to leverage. PE is playing with a somewhat stacked deck to begin with, so even if returns aren't going to be quite as good as they used to, if you're smart, hardworking, and well-connected and can build a team of others who are the same, you'll likely do pretty well. As far as needing to buy tech companies goes...maybe yes and maybe no. There's still a ton of small and medium sized businesses out there that will likely still be good businesses in a decade. Typical PE businesses like Pest Control, HVAC, and other services are in high demand, highly recurring, and essential needs businesses. You could roll up 10 local plumbing businesses, consolidate the backend, raise prices, build a nicer website, combined with 50% leverage on the deal and you could cashflow that thing forever.
If you're ultimately seeking to be worth $100M, you absolutely need to think about how you can ditch your W2 job and do your own thing. There are almost no roles that could make you that type of money without a ton of hardwork, skill/knowledge, and frankly luck.
If you're seeking to be better off than most, look for something you enjoy that is sustainable and be smart about your money. Most finance/banking roles at the mid/senior levels will pay at least in the ~$500k range if not higher. That's a ton of money. Earn that type of money for 15 years, maybe add a couple of better years in there, manage your money well, and you could retire with significant money in the bank, maybe a couple of houses paid off, and for all intents and purposes have most luxuries you could want. You won't have a garage full of supercars, but you could maybe have 1/2, maybe not a watchbox full of Pateks, but maybe 1/2...you get my point.
It all depends on what you want out of life. If you want to be a billionaire, go for it, but don't wish for a job that can get you there just by you showing up to the office each day.
Sure thing. So searchers are generally looking to buy businesses with less than $5.0 million of EBITDA. Major variability in size preferences though. There are people that have been really successful buying businesses with $500k of EBITDA as well.
The key considerations:
With a smaller size, there is inherently more risk in the business. Particularly if there's any level of customer concentration, it's more difficult to absorb a bit of a downturn to the business. Also, when you get to the $500k - $750k of EBITDA range, the business probably relies more heavily on the owner's involvement (as opposed to larger businesses where they're not quite as instrumental to executing on a day-to-day basis and have a team of middle managers).
Smaller deals are much easier to get done, whether you can finance them yourself or raise some outside capital to do it.
The key risk with smaller deals (and really most of these) is that you are generally going to have to put a personal guarantee on the loan you take out to buy it, essentially opening up all of your assets to be potentially exposed if you ultimately default.
The real reason why this asset class is exciting is because of the extremely low multiples that you can pay for the businesses (driven by lack of liquidity for these owners). If you're looking at sub-$1.5 million of EBITDA, you are likely not paying more than 4x that on a valuation basis. Go lower, and you can commonly acquire businesses for 2-3x. If you're able to buy a business for 2-3x, and even grow it at a modest LSD growth rate for 4-5 years and sell it...you've hopefully paid off the debt and paid a relatively nice chunk of change. Alternatively, if you've paid off the debt, you very well can continue to hold on to the business and all the sudden you own the majority (if not all of) a business that's cash-flowing at least $500k and hopefully somewhat higher.
Searchfunder is the best resource for this and has a ton of articles explaining things. The HBR guide to buying a small business is also extremely helpful (it's a book).
The number of searchers each year is growing exponentially, and I think it will only continue to go up. The real challenge will be private equity firms creeping lower and lower from a valuation standpoint, at which point you start competing more with them. Otherwise, they generally aren't going as low as $1M EBITDA, so the competition for these assets is much, much lower than anything else out there.
I'm currently heavily considering going out and conducting a search. Just a daunting task and scary to potentially go without income for some time, and of course, the personal guarantee is similarly scary. But at the end of the day, doing something great with meaningful upside generally requires some risk. This is no different.
Hope that was helpful.