I've read a few posts on PE and found that it mainly involves searching for capital for new funds. There is also a considerable amount of time spent doing actual things related to the operations of the businesses and managing those businesses.
On the other hand, banking involves real-time market related work where senior bankers are active advising some of the largest companies and transactions. Bankers are economics drivers.
Is PE really better than banking at the senior level? How about even for a guy like Frank Quattrone or Micheal Klein who are more boutique with a specialty on advisory?
UPDATE: I would like to clear lifestyle differences, compensation (although there's some stuff out there on that), ability to challenge, prestige, interesting work, etc. What's better between PE and IBD long-term?
IBD and PE are two fundamentally different businesses that happens to have (some) overlapping skill-sets at the junior level, and that's about it. At a senior-level, it's as much consulting / operational as it is finance - e.g. forming a thesis regarding an industry or an investment (which extends far beyond a company's historical financial performance).
If you're a "deal guy" - you're very likely to see more transactions as a banker than as a PE partner. Your role will be that of an adviser and not that of a principal. Therefore, the compensation model is also very different. In banking, a top-tier MD at a GS / MS / JPM can net anywhere between $1-3mm / yr (a lot of that will deferred stock w/ lock-ups and clawback provisions). Your "at-risk" principal is $0 - you don't need to invest anything to generate that income.
PE is a completely different model. As a partner, your job is to discern good investments from mediocre ones (which includes finding the right industry, the right company, the right management team, the right timing, and the right price). All partners also contribute some degree of personal capital into the fund - so they're investing their own money as well (admittedly, once you cross a certain threshold, the majority of the capital you are investing is going to be that of institutional investors). Based on a 1.5% / 20% model... you're generated a stable "management fee" stream of income as well as a performance based payout that can be significant.
Let's do some quick math - a firm does a $500mm acquisition - let's say 5 years later, EBITDA grows 50% and you get some multiple expansion (timing / lucky) - that company is now worth $1bn. At acquisition, you only put up $200mm of equity + $300 debt, and by the time you exit you've paid down $200mm of that debt. So now the math is $200mm equity at entry - $900mm of equity on exit. You just generated $700mm of equity value for your LPs. Take 20% of that - $140mm goes directly to the partners. For a fund / deal of this size, you're probably looking at a firm with 5-7 partners. If you're the lead partner - you will also be entitled to outsize carry... you can do that math on that. So from an 'economics' perspective... a senior PE partner and a MD are (generally) not going to be on the same level. Goes back to the original point - completely different businesses.
To be fair, you're describing at 4.5x deal which almost never happens these days.
4.5x deals never happens these days...? Forget about headlines regarding megafunds. There are a lot of middle-market players that are killing it and have these types of deals (information just isnt made public). I work for a large mm fund and we just had a deal that made 6x our money...
Echoing the above comment I think this paints an overly optimistic picture for PE and a much more conservative one for IB. Though not as volatile, IB comp still varies a lot at the senior level. We have partners clearing low 8 figures a year and partners clearing low 7 figures a year. In general, PE cash compensation at senior levels is lower on an annual basis, but you can receive massive payouts through carry at the end of the fund's life. The above carry scenario is possible, but keep in mind during the recession there were also people whose carry blew up and received nothing. Yes, there were bankers who also got 0 bonus, but that's one year. Imagine getting paid nothing for carry you'd been waiting 5-7 years for. In general, returns are shrinking, so don't enter the field expecting 9 figure payouts. This is not a popular opinion on these forums, but comp is roughly comparable at the senior level. There are outliers in both industries.
Don't expect to be schwarzman or kravis. Those times are long gone and most of the people entering PE as associates will not make it to partner. Go into whichever field is more interesting for you and whichever field you think you'll do better in.
LOL this guys has no idea what he's talking about. Go talk to midlevel and senior guys at the top performing large MM PE funds in this current market and see how much carry is flowing through. VPs at these type of funds are pulling in 7 figures and senior partners are buying beach houses and yachts...
There are very, very few IBD 'partners' clearing 8 figures. The only individuals who are doing that are (a) guys who started their own advisory firm and are therefore de facto owners of the business anyway, or (b) partners at Goldman and maybe a few Vice-Chairman level positions at JPM / MS - but even then, the vast, vast majority of MD's are not clearing $4mm a year.
4.5x deals don't really happen in the mega-space anymore, but they do happen in the upper MM / MM space where the deals are a bit more growth / platform oriented and you're not paying premiums on public take-privates. Still, the norm at a few of the upper MM firms I'm thinking about is 2.5 - 3x - for the top quartile funds.
At the end of the day, IBD is a sales / marketing oriented job. PE is a deal / investing oriented job. There's going to be some overlap, but one who is good at one does is not necessarily good at the other.
That's an interesting way to put it. Whose responsibility does negotiating terms fall on? I would say that is pretty deal heavy versus marketing/sales.
Well yes, if we're speaking strictly about BB firms, then 8 figures is extremely rare and limited to a few rainmakers at top groups. It's not common, but much more feasible at EB's where group structure is more lean.
Negotiating terms of a deal is actually quite related to marketing/sales oriented in my opinion. I would add though that the advisory side feels distinct from sales/marketing and is actually really cool. One of our MD's is the go-to guy for the CEO of one of the largest companies in the world whenever he wants advice. Must feel great.
Look - it's investing versus deal making. In investment banking you are a trusted financial advisor. So if a client wants to raise debt or equity, or if they are considering inorganic expansion, you will be their advisor. If a client needs something - really anything - you will be responsible for making them happy.
In private equity, you are not an advisor. You are an investor. You are seeking out great investment opportunities. It is very diligence focused. Some people find this to be a more intellectually rewarding exercise because you are not beholden to a client and are able to develop your own thoughts about an investment opportunity.
It really just depends on what floats you boat. There are also obviously conversations around compensation and lifestyle that factor into the conversation as well. In terms of compensation, it is just plain true that you can make more money in private equity. While associate pay may be neck and neck, the ceiling in PE is significantly higher.
But the career risk in PE is much higher. Many PE shops kick out pre-mba associates after two years. Even if they make post-mba associates after b school, the chance of moving up the ladder is still small. Some PE associates would bounce around different funds at the associate level. Many end up in corporate development.
PE associates tend to do less number of deals than IB associates. Some PE associates do not get to close any deal in two years. This would put them at severe career disadvantage when they get kicked out after those two years.
When you say "career risk" though, keep in mind that someone who has worked at a top tier bank and a PE shop and has gone to an elite business school is not exactly going to have a ton of trouble finding a job. I wouldn't consider leaving banking for PE an overly "risky" move.
corporate finance advisory = diligence on firm-specific opportunities?
Also, when you say lifestyle, what do you mean? From what I've gathered, the hours in PE are simply just more flexible, not really better. As an example, you'd be home at 12am going over some management cases or flying around the country will also require devoted time.
Seems like a classical case of the blind leading the blind here. My experience is that a lot of MDs and partners are hesitant to share their total compensation. A so-called rainmaker clearing 8 figures hardly even talks to analysts, let alone share his total earnings over the last year. Unless his dad is an MD, I highly doubt 'IB-hopeful' has a solid grasp on what managing directors at the bank he hopes to get a job at are clearing.
I am a third year associate in a field comparable to investment banking. I am rather close to a few partners at my firm with whom I regularly go for a game of squash or have drinks with. None of them -ever- mentioned or even hinted at what they make on an annual basis. You can do your calculations and come up with an estimate, but partnerships are often structured in a peculiar way (this much I have been told). I can imagine that megafund partners have the upper hand here, but I am completely in the dark about total compensation at these levels, and so are most of you.
Comparable but not actually IB? Not sure what you're talking about but IB culture is very much comp focused. It doesn't take being in the inner-circle to know pretty much what everyone in your office makes.
Agreed. People don't directly tell you to your face their own comp, but everyone ends up finding out anyway. Gossip is the office life blood, and compensation is probably the favorite topic. There's a VP in the inner-circle of my group who is very privy to comp in our group. Somehow every time I end up working with him, the conversation ends up getting steered by him toward comp. It's been very informative...
If that is true, then why are there always myriads of people arguing on these boards on how much you make as an MD / Partner with numbers that are extremely far apart from each other? I can hardly consider 'a friend of a friend heard this from his MD' a reliable indicator. My experience is that compensation is often overblown, even between close friends.
Go to the NYC ACRIS/Property records website and search their names. You'll realize that a lot of the MDs WSO glorifies are just upper middle class residents of the city (if they even own property in manhattan). The MDs I've worked under (GS/MS/JPM/EB) live in apartments in the 1-2 million dollar range, while group heads/partners live in apartments in the 3-5 million dollar range (60% + financed through mortgage).
If only 5-10 guys are MD's at firms with lots of VP's & Associates we should spend more time discussing differences in comp/lifestyle/responsibility at the VP level as the vast majority of people in these respective fields top out at that level?
Essentially, if you have a risk averse personality, IB is much more suitable than PE.
Hey guys. Chill with the MS. We try to be helpful and provide as honest advice as possible based on actual experience in investment banking and/or private equity. If you don't like it, tough. There are great things about banking. Also some unattractive ones. When people ask us to highlight both on a long-term basis, that is what we do. If you stayed in banking, that is great. The fact that some people leave because of attractive qualities in PE isn't an existential threat to your ego...unless you let it be.
If we receive MS every time there's some honesty, then you can take your advice from some high shcool shit who masquerades around as an investment banker on here.
Sorry if we hurt your delicate little feelings.
SB'd you to balance out the MS :D
Really interesting thread. Would you fellow monkeys say that long-term, IBD is a more secure career path than PE?
Can anyone else comment on lifestyle, role, interest, or other uppers to either field?
All of the above has been beaten to death on WSO
I hear pro baseball pays pretty well, you guys should try and do that. Do you like baseball? Do you have arms? Have you ever watched the natural? I'd avoid pro golf though, top guys make a ton but the lower tier is stuck playing golf for a living for mid 6 figure pay, pretty risky career.
Most people from my undergrad class six or 7 years ago that did banking plus PE after analyst stint are now either in lesser pe funds (than the fund they were at immediately after ib analyst) or completely out of finance all together strangely. Obviously the ones that managed to move up at good PE shops are crushing it and making more than those of us that chose to stay in banking, but they are rare to be honest and super high calibre people. I would actually bet that the group of us that stayed in banking after analyst on average have more money since we're all either senior associates or vps in ib now. Many of us also have pretty decent lifestyles relatively since we can always just dump all the work on analysts (sorry analysts) and new associates..
Not sure why people are arguing though, both jobs have their pros and cons depending on personality.
I'll give you a long term perspective. I started about fifteen years ago in what was back then considered as a top tier firm and group, and out of a group of about fifty analysts, this is what happened.
about 20% are bankers. Of those 20%, about half are MDs, and the other half are Ds/SVPs trying to get made up. And again, I'd say half are at tier one firms, and the remainder at tier two firms.
about 30% are in the investment management industry. Ranging from reasonably high quality to special situations funds, to start up funds, to vanilla mutual funds, to family offices. I'd say one guy has done really well and the rest have had middling careers.
many people went to private equity, including tier one firms. very few stayed on. There is one industry vertical head at a tier 1 firm who has done extremely well. The rest are all either working for no-name firms or are struggling to make partner in the present environment.
about 25% are in corporates, and almost all have done very well, ranging from the CEO of a small consumer products company to the COO (and previously CFO) of a PE backed SAAS company to some VP level roles at larger companies. It has been more career rewarding than financially rewarding to date, although in many roles, there is a lot of upside
about 10% have gone to work for family businesses, reflecting the demographic of the class. Some of these individuals are very rich indeed, but that's different
the rest are a mixed bag (consulting, the clergy, etc.)
From a financial reward perspective, the guy who did really well at his HF and the one PE guy are probably at the top. Other than that, its the bankers and particularly the ones who have made MD that have done very well. I'd say the people at the corporates will catch up after a while.
Bottom line - PE is a shrinking industry and while there are a few people for whom its very lucrative, its not an easy path, and even for top candidates in or out of banking, its a long, hard road to be successful and / or make real money.
Also, how well you do in your job is more important than what job you do. The banker making 8 figures a year consistently is pretty much as rare as the PE guy with real carry who has a serious exit, and both will do pretty well. The middling MD making 1.5mm a year does not really have an equivalent elsewhere though.
I found the guy up the page talking about a 4.5x exit to be absolutely ludicrous. In my experience, for everyone so lucky to be the partner on that trade, there are five people thrown off the island. And even the partner on that trade has to share most of his economics with his founders who started out in the eighties.
Awesome post, SB-ed!
Not to pivot too far from the topic but of those in banking, do you have a perspective on whether those in product (M&A, lev fin, etc) did better or worse than those in coverage? I've heard that being an M&A banker could be tough in the long run since there's not as much industry expertise developed. Thanks!
Completely agree. People start out assuming that they will follow the optimal career path and end up as an Megafund partner. The people competing with you for these jobs are not morons. Your analyst peers for the most part are equally intelligent, competent, and hungry.
Hey asswipes,
I made a billion dollar net worth and started out in commercial paper. How about trying what you're good at and you like doing instead of some weird perceived risk/return calculation about the future?
Very strange, in my opinion. Frankly, if I thought private equity (or banking or whatever) was the place to be, I would do what I could to shit all over that industry so there would be less competition for my spot (either currently or prospectively).
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