Why is PE the end goal?
From what I’ve seen, the ‘path’ is normally IB (2-3 years) —> MBA —> PE.
From my research, pay and hours in PE is very similar to IB, in most ‘levels’ of the org.
Why do people make the switch?
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Pay generally worse at the lower levels of PE with potential to be exponentially higher at the upper levels.
People generally switch because the work is more "interesting" despite being similar hours at the junior level, and because the long term comp potential at PE partner level is far above an IB MD. Obviously there are a lot of assumptions in that statement for similar background and performance, but that's the thesis. You don't see many billionaire investment bankers but you do see a number of PE execs (yes, outlier cases of course).
Trade off is the ranks narrow in the middle within PE a lot more (obviously depends on fund, size etc.) - compared to more overall slots for VPs / Directors at a bank vs. Principal slots in PE.
I do think net net it is more 'interesting' - even if the tasks are largely similar.
PE comp is way more stable as well. Lower in 2021, sure, but probably comfortably higher this year
Carry = $$$
How does that work if you only did a 2 year associate stint on a fund with a 10 year life? Do you even get carry allocated to you at that level?
There are significant differences between being an investor and capital deployer v a client service sellside banker. Thinking like an investor is significantly more interesting, challenging, and ultimately you’re in control of your process and time (obviously not at the junior levels, but that function is within your firm, rather than being external to you from the client).
As others have pointed out, there is also a significant cap in senior comp. This didn’t used to be the case. Pre 08, rainmaking bankers used to pull in huge paydays. But due to changes in the banking sector and shareholder input etc, MD comp has come way down and advisory has become more commoditized and ultimately less profitable. — especially at BBS. EBs change this calculus somewhat, but are still competing in the same landscape. 8 figures was not at all uncommon for MDs pre 08, but is almost never seen these days.
Meanwhile, alternatives assets - and PE assets in particular - have exploded, Fund sizes have grown, etc. Private credit has also been a boon for larger funds. This has made PE relatively more profitable on a platform level, and because even the public megafunds have different stakeholders, they can still pay significant comp (mostly in carry) to senior folks. Part of this is basically the most profitable functions of pre 08 investment banks (eg prop trading and risky private lending) basically being transitioned to the large buyside shops due to largely regulatory and risk management changes.
As a result of these shifts, the prestige and allure of remaining in banking has tanked relative to the buyside, and there has been an outflow of senior and top tier talent from the sellside. This has created a vicious circle where banking has become the domain of people who couldn’t make it to the buyside — again, which did not always exist. Due to all of this, it has become increasingly “cool” to go to the buyside, and we all know us finance guys follow whatever path is coolest. PE has predominated over other investment approaches for a variety of reasons (high (paper) returns during low rate period; aum growth; stability of fund structure and thus comp; number of seats; work that is more accessible to people with junior IB backgrounds, etc).
Before I became so fervent about Private Equity, I thoroughly considered all my other career options: hedge funds and VC. Hedge funds definitely offered potential for “the bling,” but as much as I would love to “arb” things, the lack of indubitable financial security and threat of independent decision making quickly scared me off. Venture Capital seemed quite trendy and even maybe fun, but the mere thought of working with fat, stinky, hippie techies that would come into my pristine office in “Free Kevin” t-shirts and cargo shorts (ugh) only to sully my Knoll desk with their dirty Tevas nearly made me barf all over my keyboard (I know the bubble has burst, but it’s still a scary thought). PE was the obvious choice.
I dream about PE firms like young boys dream about sports teams. KKR, BX, Warburg Pincus…swoon (if they only had trading cards. [sidenote: there should be BSD trading cards for those like Milken and Merriwhether]). In my spare moments (aggregate ½ hour a week), I plan out every detail of what I will do when I’m working in PE with the care that a girl plans out the details her wedding. Which Jermyn Street tailor will I commission? Where will I summer? And most importantly, how exactly will I respond to people when they ask me what I do. “Oh me? I work at a little PE shop,” I’ll say. I’ll proudly enunciate the P and the E and then arrogantly draw out “shhhoop,” smacking my lips smugly with the release of final phoneme, “pph.” Their faces will light up with amazement and envy, and I will beam condescendingly. Life will be grand. Then, eventually, after several years of “rolling hard,” I’ll settle down. My mansion in Danbury will be tastelessly opulent, my wife sufficiently medicated, and my children far out of sight and mind at Andover or Exeter or Groton.
Gold.
lmfao
Bravo.
You really had me in the first half NGL, well done!
I think a lot of it boils down to a simple comfort with the idea of being a buyer rather than a seller. Silly as that is.
First role for many that they get meaningful equity ownership. This is the only real way to make outsized income in America.
Can you elaborate? Would this not be included as part of total compensation?
Thanks for the response (and everyone else).
Yes if you can find other roles that give you hundreds of thousands of dollars in annual equity / profits interests taxed at long term capital gains rate then those roles would be very attractive too. Typically it takes many years longer to find these roles in industry.
because herd mentality is everywhere and finance bros are no exception
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