Is Private Equity Worth It?

I always knew I wanted to do shit with money. I didn't know what that meant exactly as a kid. Then I learned what investing was.When I was young I didn't have any idea what distinctions existed within that world (asset class, strategy, and the like), and I certainly didn't come from a background that correlates strongly with the industry.

When I got to school and began soaking up career information, it became clear that banking provides a rigorous and respected foundational experience with basic skills that translate well to investing roles as well as strong recruiting opportunities. I was interested in banking solely for those points. As I began the job, I realized the network of peers would be of equal value; the diaspora as we all left the analyst program would yield me people I could tap for advice, deals, jobs, recommendations, and similar stuff as my career unfolded.

Private markets are much more attractive to me than the public markets. I chose private equity because:

• I prefer to see my investments perform over time without exogenous factors beyond my control -- if I was in the public markets, I may be completely correct about the quarterly performance of a company, but other market participants or even events beyond my control like a liquidity crisis, a short squeeze performed between two other investors I have nothing to do with, or a proxy war fought between hostile parties with different strategic visions for the company's future could push the stock in a different direction than I want, even though I am right about earnings rising or falling or whatever
• I enjoy being able to be a majority owner where I can rely on formal power to steer strategy -- in the public markets, I can't, the best I can hope to do is initiate board change through collaborative conversations with the company or hostile actions like a proxy, tender, or other activist campaign
• I enjoy the complexity of deal structure -- in the public markets, I can only be a buyer or a seller, as opposed to being able to choose not just what asset I want to invest in but the exact format (leveraged buyout, growth equity, structured equity, hybrid equity and debt investment, direct loan, or whatever) that I think will maximize my return relative to the risk assumed
• I believe there are greater inefficiencies in the private markets -- there is no central clearing exchange where everyone can see the price being paid for an asset, meaning I don't have to compete against the complete universe of possibly interested parties; I can find assets being transacted upon with a variety of reasons, deal timeframes, and counterparties that own them; those dislocations create opportunity

Separately, I have found that I think differently than many senior decision-makers in the industry do because I have had very different life experiences than are common for people with the educational and professional pedigree required to progress in the field. That difference in thought pattern makes me look at the same opportunities through a different lens. It also lets me identify different opportunities that other people didn't see.

Banking is an attractive career option for people who have a lower risk tolerance. Obviously if a sell-side process yields a lower transaction value, the bank receives lower fees and the MD receives lower compensation, but that's very different than structuring a deal, managing an asset, and having to secure an exit.

Neither is better than the other. Some people lik pineapples on pizza; others don't. You have to know yourself. If you'd be bored out of your mind advising on deals over and over, getting to a senior role in banking where you simply sell people over and over on your ability to do a deal for them would make you really unfulfilled and frustrated. If you'd be stressed and uncomfortable trying to choose how to deploy capital, private equity would make you miserable.

One thing I've seen is that as the private equity industry has matured, a lot of the opportunity at the top has evaporated. Some of the megafunds have gone public, so their compensation pool has narrowed. All the megafunds have launched numerous strategies in an attempt to diversify fee streams, and with that, have correspondingly hired hundreds of new employees; this add mouths trying to feed at the trough. Lastly, there's crowding at the top. Once you make partner, you're gonna practice for two decades: it finally got good for you.

All in all, there are a lot of factors that have colluded in more recent years to make banking more similar in how financially attractive it is at the senior level. So a lot of guys recognize that they can just keep doing what they're doing in banking and get to more or less the same point as their private equity counterpart.

The overall point is that to progress at the senior level, you have to be pretty invested in the thing you're doing. Since the two fields require a different mindset, different types of people tend to gravitate to and perform strongly in those respective paths.