PE long-term attractivity: Is the trodden path "broken"? Quo vadis gen Y?
Tl;dr: is the PE career path still as attractive from a financial point of view as it was 5-10 yrs ago? I would argue that the expected career value for the average new joiner is significantly lower today. This is based on a) longer time required to advance; b) more competition; c) commoditization/salary pressure; d) potentially lower fund performance. Is this something you have been observing as well? And if yes, what are the alternatives?
Lately, I am pondering the attractiveness of the classic path of climbing up the ranks of a private equity firm.
Is PE still as financially attractive from a structural point of view?
Like many of you, I was intrigued by the fascinating job opportunities on the buy-side and made the switch after 2yrs in a BB M&A team to a MM PE shop. Especially the steep learning curve, direct exposure to C-level managers at a young age as well as the opportunity to work as an investor among exceptional colleagues were the determining factors for this move. But today I do not want to talk about the experience or culture part of this career choice. Today, I want to talk about money. Basically what I am wondering: is PE still as financially attractive from a structural point of view as most of us believed when we entered the industry?
While we all know the stories of people who cashed out significantly in private equity in the past, the question remains whether this success is possible (on a prob. weighted and risk-adjusted basis) for young folks joining a shop now. As the big bucks in this game are being earned with carry, the main question for new joiners (from a financial point of view) should be a) how fast can I get a meaningful carry %, and b) how large will the carry pool be in the next 5-20 years. In other words, if you can climb up the ladder in your firm quickly and your firm is doing well, you will be pretty good off.
Many young professionals will have a very different expected value from their career choice
Over the past years, I made several observations which led me to the conclusion, that many young professionals under 30 years will have a very different expected value from their career choice than someone who joined the industry 5+ years ago:
- Most PE organizations grew significantly in the past 5 years. In many cases, the hierarchical structures are now comparable to those of large banks. Structured promotion cycles and larger teams may mean a) a longer time required to get into meaningful carry territory and b) more people to share the pool with.
- While it may have been possible to become a partner within 5-8 years ten or twenty years ago even at large shops, I would argue this is highly unlikely today. This is a common phenomenon in many of the boomer "partnership organizations" (i.e. IBs, law firms, etc.) and this development seems to be also present in many of today's PE firms.
- As the competitiveness within the firm increases, your chance of making it to the top decreases (or becomes dependant on factors other than pure performance). Also, it can impact your general exposure and skill-set acquired along the way.
- Partners at successful firms have no incentive to leave the firm or make room for the next generation. As a result, many shops are very top-heavy.
- With new IB analysts switching to the buy-side in droves each year, the junior position at PE shops becomes more and more commoditized. I know of many PEs which offer lower salaries (base + bonus) than comparable IB positions but are still able to recruit talent. This "salary dilution" can also lead to lower expected salary progression down the road.
- There is enormous pressure in the industry for diverse hires. Investors love it when these hires are promoted.
- With cheap money in the market, multiples being paid are high. Some shops today are underwriting deals for <20% , potentially leading to lower carry pools in the future.
- Some shops have already deviated from the 2/20 model.
- Many funds are chasing the same deals. The plain vanilla firm has a limited edge over its competitors. In general, I would argue that a large part of the industry has exhibited very limited innovation in the past.
Some of these are anecdotal evidence - so please take it with a grain of salt. This is not meant to be comprehensive and clearly also misses arguments for the "bull case". Idea is to give my view of where I believe the PE career path might be directionally heading.
I think it will be difficult for a new joiner today to make $10-20m+ in this job. For this to happen, a lot has to work in your favor (assumption: >20yr tenure, early carry allocation, new fund every 3-5 years with increasing carry share, increasing fun sizes, solid fund performance, etc.).
Which is the most attractive alternative?
If we assume this to be right, the question remains what is the most attractive alternative (again: only from a financial point of view). Can it still be found in finance or was PE one of the last sweet spots within this industry? Is it all about the growth segments like technology, startups today with its more flexible (and still growing) organizations and better promotion prospects? Or is maybe getting into entrepreneurship asap, i.e. taking risks and building up equity in a set of cash-generating businesses as young as possible, the answer?
Anyway, these are some of the thoughts which keep me up during this pandemic. Happy to discuss whether you agree with these observations and what potential alternatives could be.