Why Private Equity?
This question pops up in almost every. It's not something that will land you the job, but the wrong answer will get you dinged.
Why Private Equity - as a Career
This section is to shed some light on private equity as a career. For information on answering the interview question "Why private equity?", skip to the next section. For those of you undecided on whether you want to work in private equity or not, here are the typical reasons people find private equity appealing:
- The magic word: carry. It's true that a chosen few make 10-100s of millions through carry in private equity, but this is a reality seen by very few. Here's some insight from @cheese86 that explains carry and when/how to get it.
Carried interest is great, but most funds do not pay carry until after they earn 8-10% annual returns over the life of the fund. In other words, many funds raised in the past few years will probably never reach the carried interest level. Then the salaries (for several years) come only out of the 2% (generally) management fee and with all of the limited partners; the numbers are not as astronomical as you may think. Because, think what else comes out of that 2% (flights to and from meetings, company overhead, secretaries, technological infrastructure, other support employees). If your fund does not hit the carry mark, your comp will resemble that of banking, possibly even less.
- The work itself is another major reason many consider private equity as a career, especially in contrast to investment banking. Here's some thoughts on the matter from @HerSerendipity.
To caveat, I think my PE experience has been different than most, but here are my two cents. I've found the work to be much more interesting. The bigger shops are definitely transaction geared for the junior folk, but the smaller shops will offer a much more hands-on experience (not just 'deal making' but active in operational enhancements, developing relationships with portco management, etc.) It also depends on how the PE shop runs its business; some have clear delineation between origination and, some blur the lines, and some will require people to do both. I've pulled the long hours in both PE and banking -- I've never wanted to kill myself in PE. The long nights were actually interesting and of substance, not just running edits/re-running sensitivities, etc.
- Another difference is responsibility. In private equity (again, opposed to investment banking because that's where most people come from). Here's an impression from @Marcus_Halberstram regarding responsibility in private equity, even at the lowest level.
I don't know what the fuck you guys are talking about. I've worked quite a bit with one mega fund in particular and the amount of responsibility JR team members take on is astounding. Case in point, an associate, principal, and founding partner are leading an acquisition at X top mega fund... associate single-handedly makes the call to up the bid by 10-20% ($1-2B). A year and a half later, I cross paths with the associate again... he's a principal and sitting on the BOD of one of their PortCos. This obviously varies with the degree of BSDness possessed by JR team members and firm culture, but it seems everyone is making blanket statements, and I've personally seen that is just not always the case. Another associate was leading an investment bid with another one of the founding partners... calling some pretty important shots.
- Here are a few more reasons with some wonderful insight into private equity, courtesy of @PEguy2011.
- Hours are better. Not 9-5, but when you've spent three years coming home everyday after 11 pm, working 60-80 hour weeks feels short.
- Culture is much better - not as much "busy" work... meaning making sure a deal is a real deal before spending a significant amount of time on it (vs. in banking, building a model for every damn pitch). Also, when I was in banking, face time was a pain in the ass. I don't think there is any business where you don't have to deal with face time, but I think in PE it is generally more lax.
- Relationship building. In working in PE, you will build relationships with CEOs, CFOs, COOs, directors of corporations, at the target, when/if you hire a third party advisor, and at your portfolio companies. I value this because, when/if I ever decide to leave PE, these are some of my exit opportunities. For example, I worked extremely well with the interim CFO of a target company. After he left and went to another business, he asked me to come on as VP of Finance.
- Working with portfolio companies post close is great. I enjoy taking part in strategy sessions and board meetings and working actively with management teams to improve businesses. This combined with the next bullet are two things I think that really prepare you for anything, whether it's a consulting role in the future or starting your own business.
- Knowledge learned is much more interesting and valuable. Admittedly at the associate level, you're still doing a lot of work an analyst does in banking (models, presentations, memos), but you're also spending more time learning about different businesses, industries and most importantly what makes a business successful.
Even at the senior levels, I don't think bankers generally have a solid grasp of how a business is run. This isn't their fault - they are just the middle man in an M&A deal and don't need to dig as much into the details. In PE, you're literally working hand in hand with management teams to learn everything you can about the business and build a valuation model to come up with the right bid price and investment thesis.
The bottom line is when taking a deal to investment committee, you better damn well know the business inside out, know every potential risk and mitigant, and be able to answer any question the committee asks -- even as an associate -- because if the committee asks the deal lead a question he can't answer, he'll look to you for help. I think this is what I love most about PE... being able to learn about all sorts of different businesses and business models. Now with all of the deals I've worked on, I can go into a meeting with any management team and have an intelligent conversation around how they run their business. The carry, pay, prestige, it's great, but what really keeps me here and continually interested is this.
These are just a few of many reasons people decide to go into private equity. The opportunity, work, and compensation are why this is considered by many the promised land of finance careers (although don't let that fool you into thinking it's the best field for you, that is a deeply personal matter that varies with who you are).
Why Private Equity - Answers to Avoid
Interviewers use this question to gauge why you want to be in private equity. There are right reasons, and there are wrong reasons. Avoid superficial reasons that focus on the following:
- Work-life balance
- Bored of grunt work
Touching on that last point, avoid bashing on your prior work experience. Don't talk bad about excessive hours, too much travelling, or lack of work-life balance. Answering the question like this indicates that you want to be in private equity for the wrong reasons. Additionally, private equity ain't all sunshine and rainbows; they want to know you can stick it out through thick and thin. Rule of thumb: don't ever complain at work or during interviews.
Why Private Equity - How to Answer
First, know to keep it brief. Don't go over 45 seconds; ideally right keep it right around 30 seconds. You just need to give a reason why you want to work in private equity and tie it into your background, all in 3-4 sentences. Here are some reasons you might use:
- You want to learn about businesses beyond the financial aspects.
- You want to work with companies over the long-term to see what makes a great business and to better yourself as an investor.
- You want to learn about the many operations of a company.
- You want to invest in the long-term as you believe it is the investment strategy that delivers the best returns.
Why This Firm?
Many times in addition to asking, "Why private equity?", the interviewer will ask, "Why our firm?" This is where it's critical that you do your research beforehand. What does the firm specialize in? What is their investment strategy? What in your background caters to that firm's specialty/strategy? Make sure you do your due diligence and tailor a specific answer to this question.
When asked, "Why our Middle Market PE firm over a Bulge Bracket PE firm?", how do you respond?
Especially coming from awhere deals average about $1bn or more per deal... has anyone had to answer this in a Middle Market ?
Interested in Private Equity - Here's What You Need to Break In
Private equity is recruiting is ten times more cut-throat than anything you've ever experienced before. If you want to break into private equity, you need to be well-practiced in the technical aspects of the interview. The package is worth well more than the $299 price; the job prospects you set yourself up for are worth far more than $299.