Does doing Investment Banking and Private Equity at junior levels actually prepare you to be a good investor?

thefinancekid's picture
Rank: King Kong | 1,258

Most MDs at PE firms and investment professionals at fundamental hedge funds come from an investment banking and PE junior background having to work their way up. But we all know you're just doing a lot of grunt work (running excel models, pitchbooks, creating presentations) - for all the time spent working at the junior level, does it actually make you a better investor when you become a decision maker later on (whether in public or private equities). I mean for all that time, you could be reading investing books, creating investment theses, etc. What do you all think? Is wall street wrong about: experience at junior levels = better investor?

EDIT: I was talking to a guy who recently got recruited to one of the top fundamental hedge funds and he told he had to read a bunch of investing books on his free time to supplement his experience. Is that necessary and a pre-requisite to getting recruited into top l/s shops or to become a successful PE MD?

Comments (29)

Jul 21, 2017

Just taking a guess. But, Learning the market and how to structure a transaction are essential to PE. Only thing it helps on the HF/buyside is to sniff out bullshit (aside from activist). Most of the big investors were traders early on in their careers.

    • 1
Jul 21, 2017

what do you mean by "aside from activist"

Jul 21, 2017

um wat? you are asking if being a junior private equity professional helps you become a private equity investor??

IB doesn't teach you how to invest it teaches you how to think about how companies operate and translate that into a model as well as how processes are run which is obviously essential if you plan on doing private equity investing (quite frankly, extremely useful in HF if you get to see how cap markets function).

As a pe associate, your experiences varies significantly on a fund by fund basis, but you are focused on investing a fund so yeah, the job is kind of all about investing? Sure there is portfolio work, valuation work etc., but as long as your fund has dry powder and is looking to put money to work you are constantly thinking about investing and assessing new opportunities. Not sure what you think you'll be doing as an "investor" if you aren't assessing models (okay you graduate to looking at pdf outputs) reading CIMs and presentations etc...

Jul 21, 2017

well that's reassuring. on WSO, everyone seems to keep shitting on grunt work so it's good to know that you're actually becoming a better investor.

Jul 21, 2017

do you know what running excel models, creating pitchbooks, and creating presentations means? do you even know what "investing" or "finance" means?

when you run excel models, create pitchbooks/presentations you are essentially VALUING a company in some way. determining a company's intrinsic VALUE at a point in time is a relevant factor in determining whether that company can grow and provide a ROI.

    • 1
    • 2
Learn More

9 LBO Modeling Tests, 10+ hours of PE Cases and 2,447+ interview insights across 203 private equity funds. The WSO Private Equity Interview Prep Course has everything you'll ever need to break into the competitive PE industry. Learn more.

Jul 21, 2017

Models are 99% of the time optimistic bullshit. Presentations have nothing to do with valuation.

    • 3
Jul 21, 2017

sure but the fundamental theory behind them is relevant. pitchbooks analyze the quality of a potential investment

Jul 21, 2017

Sell side models are certainly optimistic bullshit - or they're at least treated that way on the buy side. But when you're actually thinking about acquiring a company no one is just throwing a xx% growth rate on revenue and running with it. PE presentations generally lay out an investment thesis. Obviously reformatting a slide 18 times and getting the same "pls reword, don't like" comment on the same sentence 5 times doesn't teach you how to invest, but fundamentally it is teaching you how to think about things from an investing standpoint.

    • 2
Jul 22, 2017

Really depends on what you're asking. If you're referring to the AM/HF space doing ib makes little sense compared to ER. I don't know why people on this site act like ib is the end-all-be-all, probably prestige whores.

    • 1
    • 1
Jul 22, 2017

Worked in AM right out of college and did IB after grad school. AM, in my opinion, was so much more helpful to be a better investor.

Jul 23, 2017

Yeah it gives you industry connects that you can leverage for inside information. Alpha yo.

    • 1
Jul 23, 2017

Drawing and running various models, writing countless power point reports and, especially, when you're doing DD - this helps you look at a company as a business. Helps you become better and more confident to run your own business.

Jul 23, 2017

There's only one thing that good investors have in common: good judgment. Successful investors come from a wide variety of backgrounds, and being a good investment banking analyst has almost no correlation with being a good investor later.

However. As stated above, IB gives someone a unique perspective and experience looking into business models, and it can help someone develop their analytical toolbox. So can management consulting. So can corporate development. So can a lot of things. In the whole scheme of things, IB can be a pretty useful background if you want to be an investor.

But does working in IB make you a good investor? Not a chance. Poor-performing PE firms are filled to the brim with former bankers who thought "hell, how hard could this be?"

    • 5
Jul 23, 2017

Nicely said!

Jul 24, 2017

Yep, here's your answer +1 SB

Best Response
Jul 24, 2017

I can only speak from PE point of view:

  • NOTHING can prepare you for private equity (ok maybe if daddy was the CEO or founder of a business that you grew up in as a kid)
  • Modeling is actually a very small portion of private equity. this is not to say it's not important, note the difference
  • 95% of the bankers have no business in PE as an investor (sure as a LP, but no way as GP)
  • The "transaction" aspect of PE is great but frankly it's the easiest part... the hard part is portfolio management. this will differ from fund to fund. for example some funds are passive investors, they tend to leave the management team alone and let them do their jobs, show up every qtr for board meeting and that's it. on the other spectrum, you have funds like mine - very hands on (no, we are not hand holding or doing mgmt's jobs for them, note the difference) and i find the operating aspect makes us financial investors look like pussies. seeing the day in and day out of an operator makes me appreciate every day that i'm a board level investor and not an operator
    • 6
Jul 24, 2017

Could you elaborate on the last part? It would be very enlightening to hear about what caused shit to hit the fan with your portcos, how the execs cleaned the shit off said fan, and how your fund pitched in (e.g. purchasing TP).

Jul 24, 2017

SBed, good summary

Jul 24, 2017
Whiskey5:

i find the operating aspect makes us financial investors look like pussies. seeing the day in and day out of an operator makes me appreciate every day that i'm a board level investor and not an operator

This. It's comparatively really easy to design a cohesive, thematic strategy for an undermanaged business, and plan out the structural changes that need to take place within an organization. It's entirely another to grind every day, herding morons in order to execute on that strategy.

I'm continually amazed at the efforts people will go to in order to avoid doing the work that they're contractually obligated to do.

    • 2
Jul 24, 2017
Whiskey5:

- 95% of the bankers have no business in PE as an investor (sure as a LP, but no way as GP)
- The "transaction" aspect of PE is great but frankly it's the easiest part... the hard part is portfolio management. this will differ from fund to fund. for example some funds are passive investors, they tend to leave the management team alone and let them do their jobs, show up every qtr for board meeting and that's it. on the other spectrum, you have funds like mine - very hands on (no, we are not hand holding or doing mgmt's jobs for them, note the difference) and i find the operating aspect makes us financial investors look like pussies. seeing the day in and day out of an operator makes me appreciate every day that i'm a board level investor and not an operator

agreed. If someone in IB that is your superior tells you that you will 'develop investing skills' or to 'think like an investor,' simply ask them with all extra time to think like an investor they've had why aren't they successfully working on the buyside?

    • 3
Jul 24, 2017

haha ^

Jul 24, 2017
Comment
    • 1