6/12/12

Why Private Equity?

This question pops up in almost every private equity interview. 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 portfolio management, 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:

  • Pay
  • Hours
  • 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.

Original Inquiry

When asked, "Why our Middle Market PE firm over a Bulge Bracket PE firm?", how do you respond?

Especially coming from a bulge bracket where deals average about $1bn or more per deal... has anyone had to answer this in a Middle Market PE interview?

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.

PE Interview Course Here

Comments (12)

6/12/12

If I had asked people what they wanted, they would have said faster horses - Henry Ford

Private Equity Interview Course

6/12/12
happypantsmcgee:

http://www.wallstreetoasis.com/forums/why-do-ppl-c...

Thanks, but that thread is more about why megafund over MM. My question is the opposite.

Also, I am more interested in what is a good answer, rather than what the real reasons are (i.e. slightly better lifestyle, though not always the case.. especially at top MM funds).

And most people in that thread say the work is pretty much identical between MM and megafund at the junior levels..so what can I say to an interviewer that is at least somewhat true and doesn't make me seem lazy.

.. maybe that I see more growth opportunities in the MM companies than megacap corporations..?

6/12/12

cuz you don't want to sweat

6/12/12

More deals in the market = more experience at the junior level, closer interaction with all levels, etc.

CompBanker can probably crush this question.

MM IB -> TMT Corporate Development

Best Response
6/12/12

I've hit a lot on the "real reasons" why someone might choose MM over Large Cap / Megafunds. Some of these also make for good answers (responsibility), while others make for poor answers (less hours). I'll try to take a different approach here.

You're currently at a BB. Try to think of all the reasons you DISLIKE working in such a large organization. Is it a lot of red tape? Do you hate having to report to twenty different bosses in five different groups, none of which talk to each other? How about the size of your deal teams? Do you like having responsibility for a small piece of a large transaction or would you prefer responsibility for a large piece of a small transaction? Try to think of which environment is most appealing to YOU and drive your responses based on that.

Having worked in MM IB / MM PE my entire career, here are a few of my thoughts:

The most important aspect of any job is the people that you work with. Regardless of what work I'm doing, I enjoy it infinitely more alongside people that I respect and have built a relationship with. At a large organization such as a megafund, the large deal teams and structured organizational chart create a different work environment than one would encounter at a MM PE firm. I prefer having a handful of colleagues over hundreds.

Early in your career, particularly in a pre-MBA role, there is tremendous value in learning as much as possible. At large private equity shops, your job function is typical reduced to a small facet within the deal process (for example, I know a person at a megafund who spent two straight years working with a single portfolio company to research and track the chinese transportation market). At smaller PE shops, not only do you get exposure to ALL aspects of transactions, you are given ownership over key tasks and play a meaningful role in the completion of the transaction. This increased exposure will put you leagues ahead of your peers at larger shops.

Similar to point number two, the "exploratory" work in MM PE is significantly less than it is at Megafunds. In MM PE (that don't have a sourcing model), you spend almost 100% of your time pursuing real transactions, and the volume is high. The typical associate can expect to personally review 50 to 100 transactions in their two years. They can expect to complete at least one platform, multiple add-on acquisitions, and potentially multiple sales. Right now, the mega-deal market is really struggling. Few multi-billion dollar LBOs are taking place. When you've got $20 billion of capital to deploy, there are a limited number of targets you can go after. Given the number of megafunds out there and number of associates at each fund, the odds of you getting multiple billion+ dollar deals done is pretty low. Sure, you may do a handful of smaller add-on acquisitions, but if this is the case, shouldn't you have just gone to the MM PE shop to begin with?

Finally, while deals in the MM are unlikely to make the front page of the Wall Street Journal, at the end of the day this has almost no impact on your life, particularly as a junior professional. The coolness factor of being the associate who drafted the funds flow for a multi-billion dollar merger wears off after a few hours. Having three extra 0's on the purchase price doesn't make you smarter or better looking. Your parents and friends aren't going to be impressed (you're likely to be labeled as a douche if you talk about work too much anyways). So unless you are trying to fulfill an inner need, doing larger deals really will not change your life.

And of course, there is the money. I'm guessing that excluding my carried interest, I still make less money than a pre-MBA megafund associate. However, the marginal value of money decreases more rapidly than you would think. I live in a penthouse suite by myself, have every gadget known to man, a fully paid for luxury car, a $30,000+ wardrobe, dine out all the time, take international vacations every quarter and weekend trips around the country month or two, and still manage to save my entire bonus every year. While I've never lived in NYC, which would obviously impact my cost of living, an incremental $100k/year would have zero impact on my standard of living. For those who plan on getting married and having kids they want to sent to private school: By the time you hit your early 30s with a couple of kids in private kindergarten, you'll be pulling in $500k/year in MM PE and will have no problem covering these costs.

The above probably sounds like a rant more than anything else, but there are very real benefits associated with MM PE that I feel are often overlooked. When answering the question of "Why MM PE," try to communicate how the benefits of MM PE are meaningful to you personally. To the extent you can support it with examples of similar experiences you've had in the past, all the better.

CompBanker

6/12/12
CompBanker:

I've hit a lot on the "real reasons" why someone might choose MM over Large Cap / Megafunds. Some of these also make for good answers (responsibility), while others make for poor answers (less hours). I'll try to take a different approach here.

You're currently at a BB. Try to think of all the reasons you DISLIKE working in such a large organization. Is it a lot of red tape? Do you hate having to report to twenty different bosses in five different groups, none of which talk to each other? How about the size of your deal teams? Do you like having responsibility for a small piece of a large transaction or would you prefer responsibility for a large piece of a small transaction? Try to think of which environment is most appealing to YOU and drive your responses based on that.

Having worked in MM IB / MM PE my entire career, here are a few of my thoughts:

The most important aspect of any job is the people that you work with. Regardless of what work I'm doing, I enjoy it infinitely more alongside people that I respect and have built a relationship with. At a large organization such as a megafund, the large deal teams and structured organizational chart create a different work environment than one would encounter at a MM PE firm. I prefer having a handful of colleagues over hundreds.

Early in your career, particularly in a pre-MBA role, there is tremendous value in learning as much as possible. At large private equity shops, your job function is typical reduced to a small facet within the deal process (for example, I know a person at a megafund who spent two straight years working with a single portfolio company to research and track the chinese transportation market). At smaller PE shops, not only do you get exposure to ALL aspects of transactions, you are given ownership over key tasks and play a meaningful role in the completion of the transaction. This increased exposure will put you leagues ahead of your peers at larger shops.

Similar to point number two, the "exploratory" work in MM PE is significantly less than it is at Megafunds. In MM PE (that don't have a sourcing model), you spend almost 100% of your time pursuing real transactions, and the volume is high. The typical associate can expect to personally review 50 to 100 transactions in their two years. They can expect to complete at least one platform, multiple add-on acquisitions, and potentially multiple sales. Right now, the mega-deal market is really struggling. Few multi-billion dollar LBOs are taking place. When you've got $20 billion of capital to deploy, there are a limited number of targets you can go after. Given the number of megafunds out there and number of associates at each fund, the odds of you getting multiple billion+ dollar deals done is pretty low. Sure, you may do a handful of smaller add-on acquisitions, but if this is the case, shouldn't you have just gone to the MM PE shop to begin with?

Finally, while deals in the MM are unlikely to make the front page of the Wall Street Journal, at the end of the day this has almost no impact on your life, particularly as a junior professional. The coolness factor of being the associate who drafted the funds flow for a multi-billion dollar merger wears off after a few hours. Having three extra 0's on the purchase price doesn't make you smarter or better looking. Your parents and friends aren't going to be impressed (you're likely to be labeled as a douche if you talk about work too much anyways). So unless you are trying to fulfill an inner need, doing larger deals really will not change your life.

And of course, there is the money. I'm guessing that excluding my carried interest, I still make less money than a pre-MBA megafund associate. However, the marginal value of money decreases more rapidly than you would think. I live in a penthouse suite by myself, have every gadget known to man, a fully paid for luxury car, a $30,000+ wardrobe, dine out all the time, take international vacations every quarter and weekend trips around the country month or two, and still manage to save my entire bonus every year. While I've never lived in NYC, which would obviously impact my cost of living, an incremental $100k/year would have zero impact on my standard of living. For those who plan on getting married and having kids they want to sent to private school: By the time you hit your early 30s with a couple of kids in private kindergarten, you'll be pulling in $500k/year in MM PE and will have no problem covering these costs.

The above probably sounds like a rant more than anything else, but there are very real benefits associated with MM PE that I feel are often overlooked. When answering the question of "Why MM PE," try to communicate how the benefits of MM PE are meaningful to you personally. To the extent you can support it with examples of similar experiences you've had in the past, all the better.

You have carried interest as a partner I'm assuming? What did you make starting out as an analyst? Did you have to get an MBA before working at the MM PE?

6/12/12
mokey1234:

You have carried interest as a partner I'm assuming? What did you make starting out as an analyst? Did you have to get an MBA before working at the MM PE?

Most PE firms have a "pre-MBA" position, usually titled Analyst or Associate. This position is typically filled by someone coming off of two/three years of banking or consulting. Pay varies widely in the MM, with the smallest MM firms paying low 100s and the largest MM firms paying mid to high 200s. Post-MBAs are usually titled Senior Associate or Vice President and typically have a number of years of PE experience. Pay is meaningfully higher than the pre-MBA position and often includes a small piece of carried interest. Personally, I don't have an MBA, but my position is considered a post-MBA position and the partners have indicated that they would prefer I work my way up to Partner level without one.

CompBanker

6/12/12
CompBanker:
mokey1234:

You have carried interest as a partner I'm assuming? What did you make starting out as an analyst? Did you have to get an MBA before working at the MM PE?

Most PE firms have a "pre-MBA" position, usually titled Analyst or Associate. This position is typically filled by someone coming off of two/three years of banking or consulting. Pay varies widely in the MM, with the smallest MM firms paying low 100s and the largest MM firms paying mid to high 200s. Post-MBAs are usually titled Senior Associate or Vice President and typically have a number of years of PE experience. Pay is meaningfully higher than the pre-MBA position and often includes a small piece of carried interest. Personally, I don't have an MBA, but my position is considered a post-MBA position and the partners have indicated that they would prefer I work my way up to Partner level without one.

Ok thanks. One more thing, have you heard of PE firms hiring directly from undergrad? Especially in the MM. Good or bad thing to go directly to buyside without significant 2 years in IB?

6/13/12
CompBanker:
mokey1234:

You have carried interest as a partner I'm assuming? What did you make starting out as an analyst? Did you have to get an MBA before working at the MM PE?

Most PE firms have a "pre-MBA" position, usually titled Analyst or Associate. This position is typically filled by someone coming off of two/three years of banking or consulting. Pay varies widely in the MM, with the smallest MM firms paying low 100s and the largest MM firms paying mid to high 200s. Post-MBAs are usually titled Senior Associate or Vice President and typically have a number of years of PE experience. Pay is meaningfully higher than the pre-MBA position and often includes a small piece of carried interest. Personally, I don't have an MBA, but my position is considered a post-MBA position and the partners have indicated that they would prefer I work my way up to Partner level without one.

Boss status.
+1 SB

Obsessed is a word the lazy use to describe those who are dedicated.

6/12/12

Compbanker, +1 for you - i'm a miser with my SBs, but everytime advice like this is doled out on the forum, I feel happy to part with one.

Lionwater - any slight variation of the above should blow your interviewer away. Full resonate with what has been said above. To provide another example that supports what Compbanker said above (about the megafund associate he knows spent two years studying the chinese transportation market), I received a resume for a VP level position at our fund from someone who currently goes to HBS and worked at a top-tier megafund (think THLee, Carlyle, Providence) who spent two years evaluating two add-on acquisitions for one portfolio company of the fund and the said person's only real transactional experience was a failed 30+ billion leveraged buyout which collapsed because the firm was unable to raise enough debt financing at attractive terms (gone are the days of cheap covenant light debt deals).

Infact, you could probably use the above as another reason to move to a middle market PE fund (after you've exhausted Compbanker's suggestions). Something maybe along the lines of the probability of getting a deal done at the megafund level being really low these days since current market conditions don't support such deals anymore - you have somehow had first hand experience at your BB either pitching potential port cos/trying to finance transaction for PE megafund clients that wouldn't go through. You'd rather work on smaller deals with a higher probability of execution. All the best.

6/13/12

+1 Comp... Your post pretty much sums up why I decided to go the MM route... I also chose it for the lifestyle, but it just seems like there is the opportunity for more responsibility and rapid development in smaller shop with a leaner structure.

6/13/12
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