Why it's not a bad time to go into PE "the good ol days aren't over"
Fund sizes continue to rapidly increase and while returns are compressing, dollar gain and AUM per head is increasing and so net comp to you as a GP is up. Yes it's unlikely to found a fund today and become the next Schwarzman since the industry is too mature but for 99.9% of us who want to be a partner at a good fund and retire, it's never been better. I don't care if IRRs are 15% as long as i'm deploying huge checks and doubling my money. Comp has never been higher, fund raising never better. The yield compression in all sectors helped PE and with rates rising you'll see some slowdown of inflows but this still remains one of the best sectors of investment for trillions in dry powder LPs have been nursing. LPs have basically been unable to create in house PE since in the US they are legally unable to pay market comp and in Canada/Europe it's politically unpalatable. Only Asian/Middle Eastern funds can and they have trouble capturing share in the US market and can just do co-invests anyway. Fantastic industry and great time to be in it. Your bosses may yearn for the easy 3x days in the 90s but ultimately check sizes and fund sizes were tiny. I'd take a 2x on a 1bn check any day over a 3x on a 100m check.
I think this is basically right. Even harder to make fuck you money in PE these days but for there’s enough structural support in place that the industry will exist and expand and pay well for a while.
The problem now is that it’s less clear cut whether it’s the best next step after IBD vs. staying on the sellside or doing something else. The potential for outsize comp is just less likely and on a risk adjusted basis, you’re likely to come out ahead in banking solely on base/bonus. Since PE firms don’t have the public visibility / big company PR machine, the lifestyle perks banks are trying to implement aren’t likely to make their way over either, so the lifestyle is arguably worse in some cases. The work itself can be more interesting and it’s a lot more gratifying to sell a portco than close a deal, but on the flip side there’s way less minutia you care about in banking and you’re more focused on the big picture strategy and markets.
I see you haven't had the good fortune of working for my MDs
do you think it's possible to make fuck you money in PE areas that aren't as mature yet, such as mid to late stage biopharma?
What kind of a question is this? Of course dude…
You can still make 'fuck you' money in industrials/ [insert other boring] industry if you're smart enough
Another point I think bringing up for analysts considering PE is opportunities - I personally want to go a top MBA (Stanford/HBS), and think that joining a top MF gives me a better chance of doing so.
Versus working in banking for 2 more years at a mid-tier BB with an okay brand name won’t really give me that option.
Also I know that PE isn’t necessarily better than banking, but the past few weeks have been absolutely brutal for me with unrealistic client requests creating crazy amounts of work in extremely short periods of time. At least in PE you have slightly more control over what gets done when. And looking to buy companies seems way more interesting that constantly outputting pages for clients and random bullshit decks that never result in anything/barely get looked at.
Don't worry you'll be outputting pages and random bullshit decks for partners that will barely look at it
Assuming less formatting BS… right?
Is your goal an MBA or do you have something you want to do following the mba that you couldn’t do before. Curious as it’s not the first time I’ve heard someone wanna do pe for the purpose of going to hbs/gsb
Not OP but I picked an UMM w/ great placement vs. a MF group more aligned with my career goals but tougher bschool placement because the UMM would get me into HBS / GSB (which worked out). So you kind of have to sometimes pick a tradeoff. Sometimes not though.
I plan to pick my PE firm based on HBS and GSB placement and ik many others that are too. Getting an MBA is just overhated on this forum and many people want to get one.
No reason other than wanting to go to a particular school. My parents really emphasized how great bschool was when I was growing up (they met there, all their closest friends are from bschool) and how it was a great was to take 2 years off and reset your mental about work/pivot to something else. I also went to a small college and didn’t have the most amazing experience, so the thought of spending 2 more years with smart/like minded people sound great to me.
Also, I feel like all I’ve been worrying about it achieving things on paper (i.e. landing great BB/PE roles) to prove to myself/others I can do it, but then afterwards I think I would like to own my own business/go do something I am more interested in.
We are reaching peak PE, not yet but in a few years. It’s always darkest before the dawn…
I'm kind of curious, but how much would rising rates affect PE? Wouldn't debt getting more expensive make it harder to generate alpha and also maybe create more "winners curse" scenarios where there are fewer viable targets with more capital trying to outbid each other for them? I don't work in PE directly, but the consulting I do often supports them, so that's why I'm kind of curious how, assuming higher rates relative to last decade are now the norm, these fed hikes would affect the industry as a whole.
Yes it does lower returns but 200-300bps of increased interest expense doesn't necessarily move the needle as much as you would think
Lmao when I said this, I got MS piled on me
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Leverage doesn't generate alpha, it just enhances it if it exists in the first place, so debt being more expensive doesn't really change that side of things. In fact, I think it may be easier for PE funds to outperform public markets in a high rate environment (much easier to do so when the benchmark isn't 25%+).
I tend to agree with OP. There are significant tailwinds for alternative investment strategies such as PE. If anything, I think we might just see a shift from growth, which has been the most successful style over the past decade, to more emphasis on value investing.
Leverage does generate alpha if there is enough debt paydown to consummate an IRR that exceeds the market.
Higher rates reduce FCF
Higher rates increase WACC
However you want to look at it, higher rates are going to lead to lower valuations all else being equal (lower exit multiples) and less opportunity to financial engineer (via less FCF for interim debt paydown)
What happens when IRRs drift down to 11-12%? Entire fee structure and liquidity premium is thrown into question. Definitely still will have some good seats but will comp be what it is today on avg? Hours worked isn’t going down materially. So the ratio is not great. Esp with likes of Cathie Wood’s vehicles disrupting the private markets, would’nt be surprised if LBO funds are also attacked similarly. But at very least VC / growht equity is also seeing falling returns
maybe you have answers for this but these are some of the things I’d question
? Completely theoretical because that’s not where returns are and there are many scenarios in which it might happen where the funds still easily earn their fee - it’s about outperformance of the market at any particular time, not about some set level of returns at any moment in time
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