Private Equity vs. Special Situations: Career Choices in 2024
WSO members: I’d love to get your thoughts on the future of Private Equity (PE) vs. Special Situations (SS), and how that might impact career decisions. Here’s my take:
A lot of large-cap PEs have been expanding their Special Situations teams—think middle of the capital structure, from distressed debt (the old-school plays) to opportunistic credit (think Oaktree, Carlyle) to more hybrid capital strategies (Apollo Hybrid Value, Ares, Sixth Street, BX Tac Ops, Bain). This has been a huge success in terms of AUM growth (most notable being BX Tac Ops), especially as traditional PE strategies have matured and are struggling to keep up with the rapid growth of the past decade. The days of doubling a vintage fund are harder to come by now. SS, on the other hand, still has room to grow, especially with more institutionalization of hybrid capital in the US, Europe catching up, and Asia just starting to figure it out.
Special Situations
Pros
• More AUM growth: The next 10 years could see more expansion in SS than PE. It’s nice to be in a growing strategy, especially within a large PE firm. Most large platforms are now turning their attention to Credit and SS (vs. PE - although still the poster child)
• Compensation: Cash comp in top SS teams can be on par with or even higher (bonus portion) than traditional PE arms.
• Variety of situations: From distressed assets to high-performing businesses, SS covers a wide range, so you get exposure to different technical skillsets.
• People: In Special Situations, most people are there because they genuinely enjoy it. You’ll typically find very sharp, intellectually curious individuals who love learning about new challenges and figuring out complex situations. It attracts people who thrive on variety and problem-solving. In contrast, Private Equity sometimes has a mix—while there are plenty of motivated, passionate people, you also get some who end up there because it’s seen as the “logical” career move. Some are just chasing the prestige without a strong passion for the work.
• Talent pool: The SS field is still somewhat niche, so it can be harder to break into but also harder for others to displace you.
Cons
• Unproven strategy: Still largely unproven with highly volatile returns, often seeing carry pool completely whipped out. Past strategies relied on pure credit distress, which yielded high IRR in best cases, and low MoM given short duration. New hybrid capital strategies are yet to be tested through the cycle
• Cyclical nature: Distressed investing is dependent on the market cycle, so you might go years without finding compelling opportunities, and when it happens, it gets harder to generate outsized returns
• Commoditization risk: Hybrid capital might eventually become another direct lending market, which could lead to lower returns and less ability to generate meaningful carry. It might become a trade-off between scale and performance. Some already went down this path, e.g Carlyle that merged its SS team into Credit
• Jack-of-all-trades risk: In Special Situations, the market is so broad and constantly shifting that it’s hard to specialize (except in rare cases). While this gives you great exposure early in your career, over time, you may just become a master of none. At the more senior level, the real alpha is sourcing networks and relationships. Many deals at Apollo or KKR SS strategies are sourced by the PE team thanks to their strong ties with management teams and advisors. Cross collaboration is pushed to grow AUM and benefit the firm as a whole, but you could argue SS partners are not bringing in the $$$
Private Equity
Pros
• Proven track record: PE has been around for decades and has a track record of success (even if it’s facing challenges now).
• Compensation and carry: While cash comp is similar to SS, the big upside in PE is the carry. Even though PE firms may have average returns, partners who stick around see massive long-term wealth due to larger carry pools.
• Network: PE tends to have stronger, more leveraged relationships with advisors, management teams, etc., which can be useful down the road. PE teams are still the ones that pay most fees to bankers
• Industry expertise: PE firms tend to develop deep operational expertise and sector knowledge over time, which is valuable as you progress in your career.
• Easier to transition: If you want to move from PE to SS or hedge funds later, it’s generally easier than the other way around.
Cons
• Slower growth: PE is a more mature industry, so while you’re still likely to see returns, the explosive growth of the past decade may be behind us.
• People: As described above, likely to be more mixed
• Career progression: Many PE teams are top-heavy, making it harder and taking longer to rise through the ranks compared to previous generations. You’re less likely to see the same level of accelerated growth or fast-track opportunities than in SS.
Of course, not every firm is the same, and there’s a lot of nuance within each space (SS and PE are broad categories).
I’ve tried to stick to the objective points, but it’s worth noting that while the jobs are similar, they do have some fundamental differences (e.g., PE tends to have closer interaction with management teams). Whether that’s a positive or negative really depends on your personality and what you’re looking for in a role.
But I’m curious—what do you all think? If you had to choose, what would you pick if you were starting as an associate today and why?
How many ~$3bn+ 'hybrid' type funds can you name?
How many ~$3bn+ buyout funds can you name?
That should tell you all you need to know about which has more opportunities over the long term. Also for a true "hybrid" capital fund - the skill-set basically allows you to be valuable to PE funds, hybrid funds, and credit oriented special sits funds. The reverse is not true.
I don't understand your point here. Are you saying there are less opportunities in hybrid because there are less 3bn+ funds to work for, compared to PE? But then your second sentence seems to contradict this?
Same, not sure to understand. Not all companies need a preferred equity tranche or expensive hybrid capital in their capital structure, while theoretically all could be acquired by a PE. Private Equity will always be deeper and have more funds
When you look into the broader "special sits" category you need to break it down into a few types - distressed/credit and true hybrid capital.
The true "hybrid" capital funds are very interesting - APO HVF, BX TacOps (before it got cannibalized), and a very small handful of others at scale.
The reason these are interesting is because they rarely do any distressed, in many instances they are effectively doing equities investing albeit in a structured way. And in some cases, they are hiding 'middle-market buyout' mandates in their portfolio because at many of these shops, there are no middle-market buyout funds.
So my original comment was this - the relative supply / demand balance between buyout-only mandate PE and true hybrid special sits is very different. Special Sits / Hybrid comes out on top because the mandate is everything up to and including middle-market buyout with the added flexibility of competing across other deal types. Also there are many, many privately owned / founder-owned companies who do not want to give up 100% control but who are very willing to sell say [50%] for a value-added institutional partner before the "big" exit in a few years.
The problem with traditional PE is that it is extremely commoditized. At the end of the day, there really is no differentiation between the vast, vast majority of MM/UMM PE funds. And the funds that do have differentiation (i.e., scale, brand) - those are AUM machines where there is no upward mobility. The smaller start-up PE funds do have that growth - but they fail and are failing at an extraordinary rate.
From a risk-adjusted career and growth perspective, if you can land a seat at a true hybrid-capital type fund (Apollo, Bain, Warburg) - those are likely very downside protected seats with much better upside optionality that the vast majority of PE seats today and going forward.
Reads a bit like written by a high schooler. ‘Intellectually curious’ as key trait for SS blabla. It’s just a different type of instrument and you’ll be buying shitcos. Unless you’re true distressed loan-to-own one mistake can blow up your entire fund. Not for me personally. Risk/return isn’t there.
Side note BX TO isn’t in a good place from what I hear. The stuff that drove the team’s AUM was Growth etc. and those have mostly all been spun out into separate strategies. So what’s left is people doing preferred instruments. Limited upside for a piece of paper very few owners and management teams want in their structure.
Obviously there are lots of nuances, but if you want to make a point you need to draw a line. It’s just a fact that in PE you got people that are there because it was the next logical career move
And not for special sits? You can just as well argue that SS is just for credit junkies who couldn’t get into PE because they started their career in LevFin and don’t understand growth. I disagree with the premise so ‘where you draw the line’ doesn’t make a difference. It’s also entirely anecdotal so just kind of a useless statement.
Let’s be honest, SS or stapled equity etc are just a capital structuring tool. You’re closer to what a bank does than what an investor does unless you do loan-to-own. In fact many banks offer very similar solutions. It’s just a product with less risk than equity and capped upside, nothing more, nothing less - a useful product, but just a credit product with a bit more risk than a typical bank loan. Let’s not pretend SS is ‘true finance investing across the cap structure across cycles yadayadayada for the masters of the universe’ like the SS boys like to pretend it is, spotting ‘risk adjusted returns arb across a near endless universe of opportunities blablabla’. The reality is that most of it is tainted paper sold to forced buyers and with banks back at the table even less interesting - end of story.
At one of the mentioned MF SS firms, with a good-to-strong PE arm.
Now PE is interesting, don't doubt that at all and not saying one is better, just providing perspectives for you all to consider in making your own decisions.
When you play in SS, depending on your firm you can play all cycles - growth, distressed etc - rn it's the confluence of the $1.5T wall of leveraged loan maturities hitting in 2025-27, market vol driving dislocation across the cap structure, and the structural shift in traditional financing markets post-SVB creating white space for hybrid capital solutions - all while PE dry powder faces deployment challenges. Spoke to some friends in merger-arb funds who think PE began off great and now is turning into a bit of "let's do this too" joke. I think, SS is doing what PE used to do - it's the ability to structure bespoke solutions across the capital structure for companies, depending on what they need - and not what PE firms want to do with the company. Now ofc, as above poster said there are so many nuances and SS funds have known to also be value extractive in rescue financings to random other stuff you name it e.g., operationally-sound but over-levered credits, minority stakes in founder-owned businesses seeking growth capital etc, but overall the white space isn't shrinking. There's a decent (not the best, and certainly not what it used to be) risk-adjusted returns (our mandate is mid-high teens contractual yield plus meaningful equity upside as we try to buy minorities too) while maintaining strong downside protection - given the ShitCo focus, writing down an investment totally to 0 is almost always accounted for but I am personally (and I haven't been in the space that long) yet to see that from any of Ares, Apollo, Oaktree, Sixth Street from their hybrid funds
Then market-side, I personally see traditional PE facing increasing competition from both mega-funds ($100B+ AUM platforms) + newer MM players + growth guys (so you get multiple swings), SS remains a relatively concentrated space dominated by a handful of sophisticated players who can bring both technical expertise and significant capital to bear. You need deep restructuring and bankruptcy expertise, strong relationships with restructuring advisors and workout groups, and the ability to rapidly analyze and execute on complex situations. This creates persistent alpha generation opportunities that are largely uncorrelated with broader market beta. When you combine this with the growing acceptance of hybrid capital solutions by both sponsors and corporate issuers, plus the ongoing evolution of capital structures becoming increasingly complex, the white space for creative structured solutions is getting bigger.
But I see the attractiveness of PE too, and hold appreciation for all colleagues in them
This might be one of the dumbest questions I've seen on this site.
smh what's this sudden focus on special sits across WSO, saw more posts about it this last week than in the last 5 years
Give us your perspectives
People have realized that PE won’t generate many unique career outcomes anymore, and are looking at other options. Whether you think special sits / hybrid value will be an area that can do this or not, it’s undeniable that there are a number of unique platforms quickly aggregating capital
Doesn't it depend on what you personally are interested in? No its kinda fund specific too no? No two buyout funds are the same and no two special sits funds are the same.
True but it’s hard to know what you like straight out of IB. Personally exploring both
Many good points mentioned on this thread, but would say that it's impossible to truly predict which field will be in a stronger place in 10-20 years.
Regardless, if you're an IB analyst or incoming analyst deciding between PE and SS, would say that MS/GS IB -> large-cap / UMM PE is still the path that will provide you the most career optionality 4 years after college.
You can delay the PE vs SS question to when you're already in PE, since it will be much easier to move from large-cap or UMM PE to a SS shop than the other way around. You will also be much better positioned for top corp dev or operating roles in case you're interested in those, since you get a lot more operational exposure in PE compared to SS. You'll be better positioned for growth equity / VC roles as well coming from a PE background.
The equation looks a bit different, however, if you're comparing LMM PE vs MF SS, for example, but you get the point.
So the conclusion here is: if you're unsure and have no preference, going for traditional PE will give you much more career optionality than SS all else equal. The SS industry is still relatively niche compared to traditional buyout PE, and it's impossible so predict the long-term look of both industries.
Putting in hours to learn
TacOps has a very narrow strategy today.
It used to be a catch all for deals that didn’t fit into one of 5 or so buckets at Bx.
Now it’s more of a lost and found for coats left at the bar, e.g. random deals that don’t fit into any of the 48 strategies at Bx and weren’t attractive enough to build into a stand alone strategy/team over the last 15 years (infra, growth, gp stakes, credit). The deals are highly bespoke (ie strategy isn’t very scalable) and usually ones that another team should have killed but decided to pass to TacOps instead. TacOps will then run it to the ends of the earth, because that’s basically their only deal funnel. After that, it will eventually be killed.
They’re basically the puppy euthanizer at the county pound. But their mommy and daddy make them care for and play with the puppy for 6 months before forcing them to put it down.
I find it interesting that “complexity” is resurgent.
if I was to zoom out and play market historian; we see this sort of stuff when the “amend and extend” starts to lose steam and people need to get “creative”, except this time it seems more focussed on the credit / equity side than on the derivative side (I.e. derivatives that cheapen cost of financing by betting on interest rate paths - I.e. Snowball structures etc; perhaps this is the final domino).
the bottom line is unless you have positive PV generating activities on the Asset side of the balance sheet, funkier structures don’t really do anything more than obfuscate the who is bearing what type and what level of risk.
don’t get me wrong, complexity is fun and deals where you arb legal language feels like “alpha”; but you need to zoom out and realise that your source of returns is liquidity provision (capital) and friction reduction (speed of managing complexity).
pumping a ton of capital into this area will drain the relative alpha from these sources.
contrasting this with PE; I also think there’s too much capital there too.
I mean I don’t get why there’s this belief that throwing more capital at the liability & equity side suddenly makes the Asset side more valuable - there needs to be a return to actually making businesses generate more value (i.e. improve efficiency of company’s production).
/rant over
Look, agree - that's why the important part is the hybrid value prop vs. classic distressed special sits. So you are very much putting equity into businesses that may not want a full sale or want to find an institutional partner to do a few steps before that big sale. You are very much betting on the equity upside.
Now with that said, there is real value in the structuring element too because to put it simply, you can shift the returns profile and risk. When done right, you can make it extremely hard to lose money on a deal and hit a preferred return - call it anywhere from 8-13%. You probably give up a little upside but if a fund does their job right and you can set up a bunch of 10-13% preferred deals with a reasonable conversion and/or get penny warrants, basically it becomes very hard to lose money and you will have outsized alpha on your right tail.
Contract this with PE where it is pure levered equity and as everyone is learning - it doesn't take much to zero out levered equity despite what the IC memo says.
The reality of this ‘hybrid’ money is that very few sensible people will take it. It’s hard to deploy it into good businesses. There are a few examples of founders with good businesses who have used it to have 2-3 turns of additional leverage, but it’s not many. So the universe you’re left with is narrow and the quality of company often low for the return you’re getting. It’s seen time and time again.
Agreed that at the end of the day the universe is still pretty small. Most founders and management teams want alignement with shareholders, both on the ups and downs. A few ones are confident enough to take a shot at it, but this is still niche. Also that 8-13% return is very theoretical. You can’t enforce in a clean way like debt so you end up trying to do a gov flip and dilute other shareholders via you pref return + then drag for sale, but not many companies or PE would want to buy you out in a drag situation. On the flip side, this upside is great but given you’re minority and don’t have control, it’s hard to underwrite. At the end of the day, nobody really solved the puzzle yet, it’s just another strategy that adds AUM to those firms
I hate to double dip but it seems this sub-thread is generating some good discussion (which I would love to further prompt!)
I agree with your point there is real value in the structuring side - if you can slice the capital stack into pieces that match investor risk/reward appetites then you should get a return for that, I'd only add you'd need some development in syndication to realise some of that and by then it turns into more of a securitization (e.g. Whole business securitization is having a certain 'moment' right now for good reason; that said it does take longer to pull off those structures, so speed could be a differentiator here).
Also, apologies for using this reply to address some of the issues raised below by other posters, but I would argue (as has also been raised below) that contractual returns are moot if you're dealing with assets that are actually subpar (Gets at exactly the point of 'why' would they take a deal like this in the first place) - the additional capital injected would need to either de-risk operations (basically I can only think of 'bridge-type' liquidity as the only sustainable until whatever cycle driving the issue turns) or allow for a higher unlevered, asset-returns.
I agree that there are definitely some situations which require this capital, but the market tends to oversupply it because it tends to suffer from bullwhip effects, and that this oversupply then ends up saturating the market for a period (i.e. it it cyclical).
Now I think my view is wrong if you end up with a different macro environment than we are all thinking (long-end rates remain elevated / increase at 4-5% & short-end rates normalize around 2-3%) which is like a sort of stable inflationary, 'capital costs more' environment which sees capitulation & acceptance at the corporate level that this is the 'new norm'. Then I think hybrid as is, is sustainable, but I also think at that point you'd be competing with securitzation houses & funky rates derivatives come into play.
Just my further two cents to prompt further conversation, but I do want to say that I'm not as experienced/knowledgeable in this field as some; so I am just speculating here.
I'm curious to understand why BX Tac Opps has not done well recently - is this a foreshadowing of what will happen to other Hybrid Value / SS funds or is this a problem unique to BX? Also how have their returns fared?
As many mentioned, this strategy is fairly new with all the major players only entering the space recently, so it's hard to extrapolate a LT trend like it is with PE (which has gone through at least a few cycles). Feel like Special Situations funds over the long-term have not done well and gone through big boom / bust cycles - like how Carlyle merged their SS fund with their Credit team and how Ares had to relaunch a new ASOF strategy with a new team after their Distressed funds failed. Are there any SS funds that have done well (over the long-term)?
Re why TacOpps hasn't done well lately, it's because the best, most scalable strategies that they invest in eventually get carved out into dedicated funds. The Blackstone mothership is focused entirely on creating shareholder value at the GP-level, which means spinning up more funds, which captures more AUM + mgmt fees.
What dedicated funds came out of BX Tac Opps strategy? BX Tac Opps seems to be doing the same thing its peers are doing - structured / hybrid equity. Are they not seeing enough deal volume in that space?
What does WLB typically look like at the VP level for the MF SS groups? Is it meaningfully better than traditional PE? For context, currently in MM PE and looking to start a family / transition to a Sr. VP / Principal role with better WLB. I think SS is very attractive for many reasons, but just curious what WLB / hours on average look like.
The same as LBO shops or even worse- you’re working on complicated / hairy deals at a higher volume / velocity than even typical buyout shops in leaner teams
would not move for the sake of better wlb
How does this change if you're taking distressed out of the equation? Sure, still lots of process-driven deals with different dynamics, but assuming you're at least dealing with B- companies, not rx situations, is it really that much worse than your run of the mill LBO shop that bids on everything? I get that more complicated transactions will suck DD time, but is it really worse than spending 80% of your time getting to that bullshit "99% conviction" that gets done in PE?
Disagree here - ignore the title, previously was an RX banker with way sweatier hours than my special sits shop. Usually when deals are live, all bets are off ( as they usually are). But lots more time spent thinking and structuring analysis. Comparing it to my friends in regular PE, seems like way less busy work
Just like how each PE shop is different in WLB, so is each Special Situations / Hybrid Value shop
just explaining you shouldn’t ONLY pivot for the hopes of better WLB - maybe there are shops like that but not always the case
Is being at a MF special sits platform like Sixth Street / ASOF / Oaktree Opps provide you with optionality to pivot into traditional PE if you wanted?
bump
bump
If you do control equity deals sure
edit: the funds you listed are more credit oriented in nature maybe w exception of Sixth Street these days - so unlikely. Apollo hybrid value, BX TacOps better
Iusto qui cumque accusantium atque qui iure. Laudantium repellendus ipsum architecto similique non nihil omnis. Autem dolores omnis eligendi provident aliquam qui voluptate. Quisquam dolores neque expedita molestias architecto neque voluptas est. Dolor voluptatem aspernatur delectus debitis. Nobis iste omnis consequatur voluptate laboriosam sed.
Quos et debitis sit. Ab consequatur illum illo facilis eveniet. Sint quia soluta ipsum aut at ducimus et. Autem qui nihil quisquam molestias non.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Quae ut sed consequatur eveniet itaque dolore. Itaque aut in rerum aspernatur omnis est consequatur. Velit porro neque natus at iusto. Quasi sit incidunt voluptatem. Modi beatae deserunt non sed asperiores nemo.
Non doloribus placeat possimus facere. Repellendus beatae laudantium sunt laborum veniam. Et qui voluptatem eum ipsa vero. Consequatur molestiae repellat cum cupiditate voluptas qui.
In accusantium repellendus nostrum voluptatem aut et excepturi. Velit quos ut non. Eum vero iure quas nostrum accusantium ut dignissimos.
Aut ex voluptas commodi ad odio soluta. Quisquam rem omnis libero animi eaque.