My background: - PE Associate at a Large Cap Megafund - Experience across 2x US Megafunds out of London / Europe. Dabbled briefly in fundamental L/S hedge funds - Target European school with 4.0 GPA equivalent
**Career-related facts: ** - I've always had the interest to do investing even before college. I never did it to "get into finance". - I've always been fascinated by how businesses work, what makes them tick and what makes them great. PE is perfect for that and thats why I'm here today - There are limited materials on PE investing frameworks out there (mostly academic), so one day my mini-ambition is to develop this (both on investment DD + operational value creation) and publish it. I want it to be deeper and more practical than anything I've seen online or at on-site workshops
Other facts: - I've lived and worked internationally across 4 countries. I love all sorts of good food and will go all out to hunt for local gems - My LT goal is ridiculously simple....financial independence + becoming a business coach of sorts - I don't know why but a huge pet peeve of mine is when I realize how many senior professionals have massive capability/knowledge gaps or outright smoke their way around - yet they get away with it because they make money at this point in time. Sure, I "get it", thats their primary objective but comparing it to professions like law / medicine / engineering, they will never see the light of day. Holistically competent, truth seeking senior professionals i know are few and far between
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Hi - totally agree with your "L/S HF vs, PE" views. Let me maybe first be clear on i) my view on how the 2 are different, and ii) why I chose PE in the end.
Differences:
Investment Thesis: in the L/S world, a thesis is a differentiated view ("alpha" / "edge") on the company, not yet priced in but you've found sources of hard evidence to support this view AND have a catalyst (no catalyst = not real thesis to me). In the PE World, a "thesis" really is your view on value creation (how big, how concrete / actionable) - usually everyone has unlimited info to form a realistic view on the quality of the company / industry.
Time Spent on the Job: in the L/S World, majority of your time is spent researching your thesis or keeping up with your portfolio company performance. Much of the work is "intellectual". In PE - lets be real, there's a TON of process work (sometimes >50% of the time) that is a necessary evil to i) get a transaction over the line, ii) manage the company to your satisfaction (e.g. financials reporting standards, act on your value creation plan)
Now to get straight to the point on why I chose PE
In terms of time spent, I like the L/S world's model on spending your time researching the industry/ company. However, What I like about the PE world is the depth of this research. Please don't get me wrong, I have the utmost respect for L/S world and its infinitely harder to be successful there, but if I'm honest there's simply no way they can get as deep as PE because
Unlimited access to management information. I'm not talking about GAAP/IFRS financials, I'm talking about 300 page financial due diligence reports with every KPI you could ask for. You also have access to a dataroom, which you can then work some excel magic to understand the business better
Great access to management without fear of "unfair disclosure" policies like in the public world. You can have day-long Q&A sessions with them and sure they can be dishonest - but it doesn't really benefit them if you actually become the owners of them (so they have more incentive to tell the truth)
Granular support to form a view on the industry / sub-sector from quite literally, an army of people from various backgrounds / sources. For instance, very senior "operating partners" (people we have long-term contracts with to give us the insider industry view - they are former CEOs usually), strategy consultants who spent their whole career in that one sub-sector, other industry employees via expert networks, direct Q&A sessions with company operational staff.....the list goes on
In short, I just find it hard to believe I can go deeper in understanding a company at a L/S HF. Even if I'm at some tiger cub spending 1 year researching 1 public company name....its tough really (but maybe I'm just incompetent!)
In terms of the investment thesis, yet again I really admire the work done and concentric focus on this in the L/S world. However, what I like in the PE world is the ability to take control and change the outcome, simply from the sheer fact that we own the company. Its no secret that the best L/S guys get it right maybe 60% of the time on the thesis - but then what? Sure, you can size and factor-balance a portfolio in a smart way and do great - but then I'm not really so comfortable with having no control of the outcome when I'm wrong in that 40% of the time. Even in the 60% of the time I'm right, how do I know its "all me" and not a false positive? Multiples can make no sense, markets can overreact, a rising tide can lift all boats. In the long run I'm sure the best L/S PMs will showcase their talent, but in short I think it boils down to personality.
On this point, I basically like having influence on my investments rather than forming a hypothesis (which is really what an investment thesis is) and seeing if it works by the sidelines.
Hope its helpful and again, I really do admire and am deeply humbled when I see great guys on both sides of the fence.
Sure. Like all transaction driven jobs, it varies. I’ll also caveat that it’s not so much whether it’s a MF or LMM fund, but it’s more the culture of the place that drives the hours. Smaller deals doesn’t mean less hours.
On a live deal, assuming it’s not an urgent / rush process timeline: - probably mon - thurs you’ll work from 9am-12am (15 hours) - On fri you’ll work less in Europe so probably pack up by 7pm - maybe half day on a Saturday, none on Sunday - if you have an investment committee in that week, you’ll work till 2am or so on 1 or 2 of the weekday nights, OR maybe burn a weekend depending. not always the case but again it depends on who you work with
on non live deal times, most of the work is focused on portfolio company initiatives / monitoring. this kind of depends on the fund’s approach. does your fund involve associates / VPs in the operational improvements? is your fund robust and aggressive in pursuing this? does your fund have a large portfolio team to help drive this? anyway for me I’m fairly involved and it looks like this - maybe Monday - Wednesday it’s 9am-8pm - Thurs-fri it’s 6-7pm - no weekend work except for the occasional emails
in general, I would say you have infinitely much more visibility on your workload so you can make plans in advance.
Thanks a lot for doing this! Two questions from me:
1) There's not a lot of good info out there for comp in PE in London / Europe. To help us benchmark offers from firms and think about career trajectories, could you please break down the salary / total comp for megafunds in Europe for associates / senior associates / principals / MD or Partner.
2) Usually most sources naturally focus on megafund culture / performance in the US. Could you please give us some insights into the London offices / teams? (e.g. KKR, BX, Carlyle, Apollo, Silver Lake, Permira etc.)
Thanks in advance!
1) sure. For Megafunds (everything in GBP before tax) Associates: - market is 90k Base, going up to 100-110k by senior associate year (so around 5-10k increase per year depending) - some funds like APO and H&F are known to pay high (100-120K Starting). but everyone knows they really have the worst hours (IBD style or worse) - bonuses are quite standard. usually 80-120%. aggressive funds might go up to 150% but very rare and for exceptional individuals
VPs: start at 120k, moving up to around 160-180k over 3 years. Bonuses can be from 100-150% typically - Carry really doesn’t mean much at this point although it matters. it’s something like 1-2% of profits (of the fund after LPS make their money, net of management fees). Vesting really depends but it’s usually over 3-5 years and have many clawbacks (eg if the fund doesn’t meet the hurdle, esp if something blows up). - cashing out the carry is even tougher. you are sort of implicitly expected to roll over as co investment into the next fund if you stay till director and want to one day make partner, it just really signals commitment to not jump ship - gross amount of vested carry over 3 years is not life changing, probably 500-800k before tax, depending on the funds performance and some linked performance metrics to your own deals performance - the most aggressive funds have ‘deal by deal’ carry, which is what CVC in Europe has. Very competitive but you live and die by the sword vs the fund’s overall performance - min. 3 years to make director from here in my view. can be longer as director is where it begins thinning out (you really don’t need that many)
Director: 210k-250k base with 100-200% bonus depending - your carry will start to be more ‘real’ in cash terms at this point. once you make Director at a fund it’s very unlikely for you to want to leave because of this - your carry is now probably something like 4-8% of funds profits, amounting anywhere between 500k-1M per year depending on the carry model your firm adopts (deal by deal, fund performance etc)
MD: I have no idea and would love to know. this is where it gets really hazy I feel, because some deal making sourcing machines can be paid differently from those solid execution MDs.
in general, people overestimate how much carry you get in cash terms (which takes a long time plus subject to your funds performance upon realisation). you have to really be committed to the fund to reap its benefits. Once you hit senior VP, you really don’t want to be moving so much anymore
2) sure. - KKR: pre 2015 was known amongst headhunters to be ‘the place with brand but mediocre performance’. I personally think they turned this around with a completely new senior team since then. their prior European fund vintage is a testament to that - APO: worst culture, mostly do FIG deals and juniors are overworked to the bone because of an overly lean deal team. generally a place I think people avoid like a plague unless they are so desperate to have that brand name. I would personally stay miles away - BX: do few deals, but very big deals (refinitive, merlin, clarion etc). very pan European because they do most things out of London, so they don’t really need non European language speakers there. last vintage fund I’ve seen is second quartile performance, but tough to make so much money on super large deals so I think that has to be taken into account. mixed culture reviews I’ve heard - TPG: really not a good European franchise. almost non existent if you ask me. - top megafunds in Europe are actually: CVC, Advent, Cinven. I think most people would agree on the whole if they are in the know - Permira comes close and have built a really solid tech franchise in recent years. But they don’t have as many mega deal profiles as the top 3 dogs (more UMM if you ask me) - Hellman&Friedman: the killers in town with top returns. didn’t put them in top 3 because it’s slightly unfair given they do very few deals and run a highly concentrated fund vs the other guys (who are more like a megafund) - not really megafunds or have a US founding, but I also like the guys at Bain capital, Apax (only the tech team), HG (for their software deals but horrible culture), and EQT
Probably missing a few but these are my top takeaways
To be honest, to get an interview it really doesn’t matter that much if you’re a Bulge bracket (regardless of ANY tier), or boutique.
the headhunting market in Europe doesn’t segment as much as what I’ve understood from my US peers.
What DOES matter though is convincing them to put you in the interviews, and that’s just a combination of - proven deal sheet (closed and not some fluffy fake news) - decent ranking - good testimonies (headhunters know everyone in banking... trust me that they can dig dirt up on you) - come across mature and able to crush technical interviews (qualitative judgement by them)
Not ‘hard’ if you are selective. your goal is probably to be hired out of London if that’s the case.
look for funds with plenty of local offices, because that means that their London office wouldn’t require European languages (unlike blackstone that runs Europe mostly out of London, they then need the language skills).
many decent UMM funds are focused on UK too like bridgepoint. you have a decent chance and Europe is massive anyway so they can always squeeze in a non European language speaker if you make the cut on all other areas!
Well its not just Europe, and its not just 100bn. Its everyone including americans / asians and "as big as possible" is the ideal fund size.
Ardian has a FoF heritage and they are okay in infra too. Really bad at PE and I don't think any of the players I mentioned would take them too seriously. I mean sure, they have a fund and like anyone with a fund they can bid for deal. But they aren't in the same league as any of the above as an investor.
Partners is slightly better, but they are still building their franchise and groping around in the dark to be on the same playing field as the rest. Much better investment approach than Ardian by miles - they have a really rigorous internal investment process (not saying it leads to better outcomes necessarily), but are still trying to create a set investment playbook that works well. Still trying to find their footing, unlike the rest who have already done so.
They used to exploit cheap analysts in the past by paying them ridiculously below market and rotate them between divisions -but I think HR has been trying to improve their corporate image after their glassdoor comments were becoming something of a meme.
1) The funnel is the same in my opinion. It’s roughly the same ‘associates to senior partner’ spots if you’re comparing across megafunds only. mid market then I don’t know... could be anything really and fund structures vary more there. I’m speaking mostly to only large cap funds
2) where did you hear this from? sounds like a very inaccurate blanket statement. Sure, US has more deals but ‘few and far between’ in Europe sounds VERY off. you are talking about a continent with multiple economic superpower countries here.
just look at prequin or any other decent databases just as a rough directional estimate - the ratio is at most 2:1. even then it’s counting a lot of tiny deals 100m that appears at the lowest end of the market (which US is much more liquid in vs Europe).
I admire the US capital markets and the great American dream but somehow I get the sense that some Americans don’t really know what happens in Europe! it’s as if we are a fantasy island to some... I assure you we’re not Narnia in your wardrobe :)
No of course not minority... how would we even then do that?
I’m not sure where you get this info from but I’m sorry it’s grossly inaccurate so forgive me for being direct here. I don’t think you really know what PE MFs do?
I am not claiming that PE guys know operations better than management teams. I’m saying we do TONS of value creation in portfolio companies through multiple levers and resources, none of which is related to what you are describing. we don’t rely on financial engineering like what Elizabeth warren says. it’s just not how the real world in PE is?
For instance, we have dedicated portfolio team that are former executives with decades of real life operating experience. Our deal team MD have severed on multiple boards. when relevant, we take on senior advisors who have been there done that and are heavyweights in their respective industries. we also bring in a swat team of industry specialists to help with specific projects where that type of specificity is needed. we build playbooks for certain sub sectors and repeat it across similar investments.
it’s not some finance guy sitting with his excel making stuff up - which is what you seem to imply.
There are many operational value creation levers that private equity firms literally create libraries of playbooks to roll these out. Some examples you've already mentioned (pricing, new products, new geog) which hits a few revenue levers. But there are also cost levers (e.g. G&A optimization, foot print rationalization) and cashflow levers (e.g. NWC management).
The "what" is not difficult to know once you are in the industry, the "how" becomes very resource and knowledge intensive, and having a track record definitely helps build best practices and conviction.
Execution is everything - and the "how" is so detailed that I set myself the goal (in my intro above) that I'll write a whole publication on it one day.
The Second thing i would say is that you might over-estimate how knowledgeable management is or how "professional" companies are run. If you've worked with companies in your current job, I'm sure you'll come to realize through tasks like building the data room, how inefficient the inside of companies can be. Even among big public companies, its wrong to assume all of them are "well run" just because of size, credentials and legacy.
Whilst management is also knowledgeable about day-to-day operations, surely not all of them are i) "world class" in their capabilities ii) view the business in the same investing lens we do. Just like how there are A-players in finance, there are also A-players to put into businesses. Just because management knows their business / markets well, doesn't mean someone from a PE background can't add value. Don't forget - it isn't just finance monkeys (like me) telling the CEO what to do. We build our playbook over i) past deal track records of having "done it before", ii) Team of in-house operating advisors who are the veterans of the industry, iii) specialist teams of functional experts (e.g. HR, IT, Finance, Digital...) who can advise on specific levers, iv) when necessary, specific consultants for particular projects. The last thing I'll also say is that management spends 24/7 running their business, but we (PE monkeys) spend 24/7 finding good companies and trying to make them better (with an army of supporters)
Its like coordinating a war as a general, rather than telling the CEO how to do his battles. We can't "fight" as well as the CEO in the battlefield, but a general can mobilize and lead. It takes a lot of execution horsepower, not just some slides / analytics.
The operational industry executives and functional experts are all usually sourced through various industry networks like you said, and they are sometimes on a retainer + success fee if they achieve certain portfolio company goals.
There are also in-house ones that are typically on the payroll for longer term engagements.
Regarding getting exposure to new sub-sectors, I would say firstly there’s a lot of cross pollination in learning. Things like functional expertise are quite transferable. Then in terms of ‘getting smart’ in that sub sector, it really isn’t the case where you need 20 years or 20 deals to get there.
That’s kind of why people preach about this so called ‘investing mindset’ - it’s not JUST a finance thing, because a good investor also has a decent understanding of operations. People seem to think being a good investor is dichotomous with having a good understanding of business operations - I don’t think it’s true.
If you look at the top PE MDs who built their track record in certain industries, at some point they have decent knowledge on the industry and have been on multiple boards of various companies in that sector. They also have interacted and spoke with so many ‘true’ industry experts / former CEOs who partner with them, that at some point this boardroom decision making skill within the industry is second nature. I would be surprised if there was a pure finance guru who just buy low and sell high without knowing a thing about the biz ops, especially in this day and age when PE is getting crowded. You just can’t rely on that anymore.
If you think about how some F500 CEOs can move into sometimes completely different industries and still learn an entirely different set of operations and manage the business well - that’s kind of how we would do it as well. A good business sense built over different industries, good investor sense by underwriting several deals, and hands on experience improving different companies goes a really long way in building a baseline level of corporate skill. People overvalue the idea of needing to ‘be’ in an industry for decades just to improve the company
Hey, thanks for the great post.
I noticed that you mentionned how carried interest was different from one fund to another (e.g., some funds have carried per deal, others have carried as a % of the whole fund based on their paygrade).
As someone who had some internship experience in one of those "carried interest per deal" funds, I’ve noticed that it really impacted the way the deal team approached every opportunity (as they said themselves). The team would always focus on the intrinsic value of the companies, even when sometimes they didn’t have any deal for 2+ years — they had a reputation for always bidding a bit low and therefore losing most auctions involving several bidders. They kept speaking about past deals that went bad (20 years+ prior sometimes) and how the deal team had to pay back carried interest into the fund and then got fired. They had a very risk-oriented approach, and phase 1 on a deal was basically trying to identify all drivers of value creation, while phase 2 was always focused on the risks, which meant their phase 2 bids were consistently lower.
I suppose that other funds which have a "fixed" carried % based on their paygrade look at companies differently, at least on the junior level (it’s more like a job you have to do rather than something as entrepreneurial where you take a lot of risks). Maybe taking into account not only the deal itself but also external factors like management fees or a required amount of capital to deploy per year, especially if they haven’t done any deal in the past months/years.
The former fund might decide to pass on a 20% IRR deal to try and get a 25% one the following year, while the latter would rather have 20% this year than no investment at all that year.
1- Would you think that his analysis is correct? In your opinion, how does the way the carried is paid to the deal team impact the decision making process?
2- Which funds have a carried program per deal (you mentionned CVC), and which ones have a carried program per paygrade (you mentionnes the american MFs)? Are their any other firms with a different program than those two mentionned?
3- Which type of firm would you prefer and why?
I’m generally very curious about investing and I find this topic very interesting. In theory, you could know by working in an american MF that if you face a fund with a per-deal carried in phase 2 on a process, you can more easily win the auction by raising slightly your bid (lowering your IRR but at least you win the auction which might be better for you in the end).
Thanks again for the great post.
1) I think you are generally right in that if your compensation in any shape / form is tied to the deal, you would totally care more about the deal from an incentive perspective.
I don’t however think that they really scrutinise IRR and take it as a ‘holier than thou’ metric - they focus more on a fan of outcomes based on upside / base case / downside scenarios and the deal has to be attractive from an OVERALL risk-reward perspective. Not just reward.
Also I don’t think they will pass up a good but lower irr deal just to be conservative. I mean there is an investment horizon in every fund (around 5-7 years) and if you keep passing on deals your compensation from that no deal is exactly 0. Between 0 and ‘possibly some number’, I think most people would opt for the latter.
2) carry interest comps are not that transparent so I won’t pretend I know how all funds calculate this. You can look at heidrick’s comp reports for PE to get a rough sense, but even then I wouldn’t overly rely on that too much because funds tweak this all the time.
What you should think about is that those who compensate purely on deal by deal basis is rare (and aggressive), and usually it’s a formula that mixes both direct deal contribution and overall fund performance.
3) I have a preference for a balance. Like all things in life, I think removing accountability from outcome is a disaster. If you are held responsible for an outcome, you should be somewhat bearing both the risk and reward for it.
On the other hand, I think sharing in group profits does encourage some form of collaboration because you are ‘forced’ to care about other people’s deals and help if you can. This makes people less selfish and self preserving in only caring about their own deals, which I think is good from a partnership model point of view (something like law firms).
Don’t think anyone has a holy grail answer for this but there are other softer elements that drive overall behaviour of the firm apart from comp as well. I think that is equally important (eg risk seeking behaviour, culture set by the top, investment committee practices etc.)