Help with PE question - Why do you not invest?
Hi guys,
just to give you a bit of an introduction - I currently work as a MBB consultant at one of larger European offices and would like to break into private equity. Recently I had my first PE interview and would like to discuss one question I received, and the best option to answer that question.
First I was asked whether I invest on financial markets, and after admitting that I do not invest the next question was "Why then do you want to work in private equity"?
My answer was smth in line - I am more interested in having control over companies as part of a pe fund and then trying to find value in operational improvements, then to invest in smth in which I will be only one not so important shareholder. Together with that, I mentioned that I often speak with friends about potential good targets for pe funds, and the rationale behind it.
The interviewer quite liked me at the end, but I would like to polish answer to this question for the future, so please advise me how would you answer this : "Why do you not invest on the financial markets, but would like to switch to PE from consulting?"
Thanks a lot community
Well, why don't you invest?
Following up on above, you don't necessarily have to be a stock picker to participate in the financial markets. In fact, I personally believe that it's foolish of anyone to be picking stocks on their own and expecting to make money unless that's their full-time job. So if any interviewer asked you why you aren't actively picking stocks, then you can give them this kind of answer that you just don't believe that you can casually do better than professionals at hedge funds who devote themselves fully to beating the market.
On the other hand, everyone can and should participate in the financial markets by investing in index funds via Vanguard for example, so there's really no good excuse for not investing unless you're strapped for cash.
possible answer: "I don't want to buy good stocks (and watch them), I want to buy great companies (and possible help run them if your firm is more hands on at managing them)."
Then ramble on about how you want to have a hands on approach with the C-suite and actually influence e.g strategy, operations, and not just voting at an annual shareholder's meeting.
Just say you're saving up for business school
When you say you talk to your friends about PE targets, you better have at least 3 companies that you can talk about in thorough detail...
I would suggest something similar to the following (I am by no means an expert, so feel free to comment your additions/edits):
"I believe that public equity investing is inherently more risky than private equity. In private equity (provided that I work in an LBO/majority recap focused shop), I have direct control over how a company can operate, I will be actively involved in helping to manage the day to day operations/strategic vision of the business, and the two aforementioned pieces endow me with a great sense of security and ownership relating to my investment. However, in the public markets, I can do everything possible to properly value a company and see my capital tank due to a variable out of my control, such as headline or political risk".
Nice story but empirically not true. Absolute return is a less risky structure than PE. PE is a riskier strategy given illiquidity (buying a whole company and as an LP having money tied up in the fund for 6+ years) and financial engineering with leverage.
Takenotes08's answer seems like it makes sense.
This is true- didn't consider the illiquidity/leverage aspect (duh).
Look, you can spin this a million different ways, but the bottom line is that in Private Equity, you are first an foremost an investor and a lot / most PE professionals view having a demonstrated interest in investing as a prerequisite for the job. So either you start investing or at least, educate yourself be in a position to formulate intelligent thoughts about the the market, pricing level, potential opportunities to buy / sell, etc. Saying "I am constantly looking at investing opportunities, but just cannot justify current valuation level, especially given I think there's a high likelihood of a correction in the short / medium term" is a perfectly fine answer.
The interviewer isn't asking why you don't invest in markets... what he's really asking is why you aren't interested in markets (with the assumption being that putting your money where your mouth is is the best proof of interest), especially because your prior work experience doesn't directly reflect an interest in markets
Honestly I would lay down some BS about putting all your money in ETFs instead of individual company stocks due to lack of control etc, and then segue into demonstrating that you actually follow the markets and are knowledgeable about what's going on in various industries
With every interview question, you have to look past the surface level query and determine why they're asking the question and what they're really after
I agree with this. I think if you could show that you actually follow the markets and/or several industries despite not investing in financial markets, then everything's going to be fine.
That being said, having a skin in the game would not hurt. Just spare some money, do some analysis on some companies, and buy their stocks. Sure, you might not be an 'important' shareholder, but you are still an investor and I guess it gives you reasons to actually follow the markets.
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