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% IRR, 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 LBO 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.
This is all right. PE was a great wave to ride. You can still catch it, just like you can still ride the IB wave and biglaw wave, but you're a decade plus too late for all of these. The question becomes - what's the next big wave to ride? And that's anyone's guess - if I knew the answer, I wouldn't be working in PE and posting on WSO. But if I were you, I'd try to figure out what that is, and position yourself appropriately. It's a lot like investing - what is your thesis, and how do you profit from that thesis? Of course more reward = more risk, so you need to be prepared to press reset on your career more than once. But that's the same risk Henry Kravis took when he left Bear to start KKR.
The big wave nowadays is high tech and startups.
Yea but we have ostensibly missed that one recently, much like we missed the PE/IB wave by decades
The question is, for many of us in our 20s, what is tomorrow's wave
Which means the last train has left 7-8 years ago. GL hopping on it now.
Green tech
Whether it's on the investor side, or founder side. Not very profitable at the moment, and a lot of the startups out there are def. on the future side of things - but I think 10-20 years down the road, many of these technologies will have become the standard way of life.
Can you be more specific?
I don't think it's controversial that green tech will be the standard way of life in the future. The question is, how profitable will it be? Energy is a commodity so that puts price pressure. There is most likely money to be made but how/where? People were alway skeptical tech companies could make money and then they did, so the question is in what way will green tech make money?
What do people think of the EdTech space? And VCs/PEs that focus on that space?
Feel free to PM
I think vistria in chi does
More proof that finance is dying -> tech is the present and future (i.e. early employee in a tech company is a more common way to get rich these days/break 8 figures). Automation will also play more and more of a role in many industries in the coming years, and government will likely have to step in once too many people lose their jobs.
Where are the numbers that suggest that we are experiencing breakneck automation? Productivity in all western nations sluggish at best. If anything, a lack of automation would be a greater issue than automation itself.
1) I never said that we are currently experiencing “breakneck automation”. 2) Here is an estimate that states we’ll lose 1/3 of jobs to automation in the next decade (albeit primarily low-wage jobs): https://www.weforum.org/agenda/2020/09/short-history-jobs-automation/
You do realize that most startups fail and the equity you receive becomes worthless....
That’s not the point or my argument. I’m saying that as of now, it’s more common proportionally to get rich via tech vs high finance. In comparison, how many people have to leave IB/PE because there is no spot for them as time passes, or otherwise can’t get “rich” because it’s too crowded/competitive?
The Amazon effect, large scale warehouses, and advancements in last mile delivery have actually created more jobs than those that have been lost in the retail industry. Small businesses will continue to die down, but the employees that use to work for small businesses will make more somewhere else. Personally I don't give a shit that the owner of a small shop or small community store got owned by walmart or amazon. That owner probably wans;t given their employees a 401k, health benefits, etc.
Why should we cry about the small grocery store going out of business when wholefoods comes in? I personally think that this idea of universal basic income and massive job losses are overdone. We need retraining, however big tech will create more wealth and more new jobs that it takes away.
That's a shitty ad hominem, assuming the worst about small business owners. These guys generally run inefficient businesses where they are not maximizing profits and paying as little as possible as extremely savvy owners (e.g., companies with public pressure, PE backed companies, etc.).
Big tech will create more concentrated wealth. Reskilling is not as easy as you think. There's a cultural element, ways of life, entire geographies rooted in places and skills. Trust me, reskilling and education are one of the primary industries I invest in which is why I'm taking the time to argue on the internet (which is just about the dumbest thing anyone can do anyway).
We should also lament about the small grocery store because many family owned businesses are community staples. They bring people together in the community and create a sense of identity and structural support networks. Think about the many neighborhoods of past in New York where this was true, many of them ethnic neighborhoods, that now have been hollowed out of commercial institutions that are supported by community members that are tightly ingrained in said community networks. Now there's a soulless Lululemon and Starbucks on every corner.
I think tech will have a position across every industry in the future. Finance may change form but it is not going anywhere. There's a reason tech companies need to raise Series A - F now.. They operate at a loss (generally) while they scale
If you are not in VC, tech banking or tech focused PE you are behind the curve. If you carve yourself a niche within a vertical in tech and lever up you are going to create wealth.
Other than that option- I have doubts about every other industry.
Well said
Disagree as the importance of tech grows in each sub sector generic tech expertise isn’t enough and you need domain expertise. Case in point we have hc tech experts in the hc group, ecomm in consumer, fintech in fig etc
randomly joining tmt can hedge bets but domain expertise is key
Thanks for the shoutout, although I did leave IB to start a company over 8 years ago...so??
You were significantly ahead of the curve and I can only assume you can run rings around anyone that talks about tech
Lots of ppl still creating wealth in the "old economy" - RE / SMB - just not at rapid paces.
Even healthcare?
I think saying the IB/PE wave has passed and that tech/biotech/whatever is the next big thing is a bit too simplistic. Like, within finance there are areas of growth and areas of decline. I would argue that real estate/infrastructure funds are going to be hot for the next few years at least (relative to the market as a whole, real estate funds own very little of the total real estate market in America, less than the same comparison for corporate PE). Private credit also looks like it has more room to grow than private equity. Within investment banking, SPACs, tech and healthcare coverage groups are probably going to do very well in the next few years relative to other groups. Elite boutiques seem to have more room to grow than bulge bracket M&A. The list goes on. Same for tech, certain areas will be super hot for a while and others will decline or stagnate. Point is that you can’t write off an entire industry or say that you’re going to make more wealth in tech than finance just by virtue of being in tech. Plenty of ways to go about building wealth in both industries. Best to go into an industry that you enjoy and are good at. Just my 2 cents.
Aren't EBs struggling right now? Not exactly a lot of tailwinds going on if all you do is M&A advisory. They're all competing for the same, portion of the pie.
BBs will always have financing fees to fall upon and many have improved YoY given financing activities.
This.
Quant finance is growing gangbusters at the moment.
This was true before COVID, but is not true now-- from what I've seen, the factor guys specifically have seen insane outflows, and the higher brand name quant guys are also struggling.
Could argue that renewable energy / energy transition is a high-upside space for PE, IB, and public market investing to varying degrees:
-PE/VC can provide start up capital for these breakthrough ideas such as hydrogen, carbon capture, alternative fuels, battery storage, etc. Go look at how many “energy transition” funds are being raised these days vs. anything related to traditional oil & gas; it’s not pretty -IB will need to help this growing universe of public and private cos to raise capital, pursue M&A, and ultimately advise on the sell side and buy side for the wave of investments that will come from traditional energy stalwarts looking to take advantage of the ESG theme (already happening with European majors and to some degree CVX, Oxy, and a few midstream players) -Public markets are farther out and require some time but a look at the returns for various clean energy indexes this year and you can see how defensive the industry has been (imagine a world with a somewhat counter cyclical energy sector). This space will only continue to grow as more companies go public; this year alone there have been numerous SPAC mergers with EVs and related infrastructure (charging, batteries) and the pool of companies will grow as capital flees from fossil fuel investments and pours into ESG investments in energy
TL;DR: need to think broader than this “tech or die” mantra. The push to decarbonize will only get louder and there’s going to be significant opportunity to make money along the way. Just one example but I’m sure there are more opportunities to capitalize on a structural shift across industries.
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I don't know what the future beholds. That's why I'm in PE.
It's a great place to be relative to others.
A the end of the day, I think a lot of people need to realize that there are a ton of ways to rip down cash and that IB/PE is a great place to be if you are willing to work hard.
Wow. I am amused with the responses in this thread. Firstly, “tech” is not an industry. That’s a misnomer. Technology is simply a tool and the best companies in every industry will always be using the latest technology, to the end of time. Secondly, the financial industry to be in now, is clearly cryptocurrencies. This is where the innovation and future is. Where traditional finance is a leaky, politically motivated pipe, bitcoin and the surrounding venture bets (CeFi and DeFi protocols, etc) are dynamic engineering breakthroughs that have been and will continue to reshape and disrupt the sunset industry that is traditional finance. You make money when you see a world in which 99% don’t yet see, and then position yourself to capitalise on the opportunity.
EDIT: people read through this thread. It’s a nice example of herd mentality. If you want to “make it” and make your pot of gold, don’t follow the pigs to the slaughter. Don’t look for iterative improvements in sunset industries. Push for the step change. The established industries of today were risky bets of yesteryear.
Thanks! I think you mentioned a valid point and I think it's interesting you brought up crypto. Do you have insights into making this move from PE?
The way I frame this whole issue is the following: how likely will it be for one of us to climb to the 1-10% cohort of the finance industry in a reasonable amount of time? Is it likely to be on Stephen Schwarzman level within the next 20 years? I would argue it is nearly impossible, even within the next 30-40 years (assuming limited innovation in PE and seeing all the "blocked roads" at most funds).
On the other hand, joining a newly created space like bitcoin / crypto and being one of the first to acquire significant knowledge and experience could potentially place you in a (globally) leading position within a 20y time frame.
Heya Levered_Monkey, I get where you're coming from. And thanks for the great topic post! It sounds like you're not just satisfied with an upper middle class lifestyle IB/PE could supply you with and you want a shake for that opportunity to climb the summit of success, so to speak. If that's what you're feeling/thinking, then your intuition is probably sending you a message. Your greater ambitions and risk-seeking could be misaligning with the datapoints you're collecting from your observations of the world you currently surround yourself in, from online social spaces or in the brick and mortar (i.e. the noise). There's always expected risk (adjusted returns) involved but that's part of the game, right? I had these feelings in the past and they'd wax and wane but always came back stronger and became unbearable to the point I made changes.
Crypto is just a great example for step changes in wealth accumulation because it's pertinent to finance, this forum and will change the industry landscape. With respect to entering into the space, if you're in IB/PE or the like then you've got some marketable skills. These newborn, high growth, boom bust industries could likely benefit from those skills. You also probably understand how to reach out, network and build relationships. I'd start from there.
How would you describe the sector that contains Google, Amazon, Microsoft, Apple, etc.?
Well yes and pens and paper are tools and every company in every industry uses paper and pens and that doesn't make every company an office supplies company. But there still is an office supplies industry. You're conflating the producers of technology with its consumers.
Just because a company is a buyer/user of technology does not make it a tech company. But there are companies that exist for the sole purpose of developing and monetizing technology. In the biz, we call that the tech sector.
It’s really not conflating anything with anything. And I don’t mean to sound like a dick, but “if you don’t get it, I’m sorry but I don’t have time to try to convince you”. I leaked enough alpha in my initial post and there’s no need to do anymore to those who aren’t actually replying to engage with an open ear. Again, prob reading this at a bad time because I’m about to get in a nap.
There are three types of companies in this world.
1.) Companies that are technology companies.
2.) Companies that are becoming technology companies.
and
3.) Companies that are being disrupted by technology companies.
Crypto is the pinnacle of "herd mentality". Name one crypto use case that justifies the billions of dollars put into the space. In-game items? What is the TAM for that? The tech is cool, creates very little value.
no PE sucks donky balls when you can just hop on youtube/insta/onlyfans for a quick million a year 2 years in lmao at people still competing for traditional jobs, get on the social train CHOOCHOO its leaving
SB'd. Interesting thread & discussion and something that I think most of us in the industry talk about with colleagues/friends.
Here's my $0.01:
You're right that it's not as attractive as it once was from an ultimate lifetime comp perspective.
No more IB associates regularly making 750k and average PE funds hitting 8-figure carry each year. Folks have said that the "easiest" way to build 8+ figures of wealth is via tech or start-ups - Sure, that's not wrong. PE is crowded, but it still provides an incredible platform to build wealth. Maybe your fund doesn't hit carry or your firm can't raise the "n-th" fund and has to wind-down. Surely your skillset would be valued elsewhere - Maybe you lateral to a PC, maybe you get recruited to work corp-dev in a PubCo and your options comp winds up being a ten-bagger (my goal). The people who go on to achieve these wealth outcomes are the minority, but the mean success rate for somebody in IB/PE/HF/CO is an order of magnitude higher than folks in other industries.
I agree that PE is crowded and the "golden years" are behind us. That said... this is still incredibly lucrative. I made 260k when I was 25 years old. Some people made more, sure (especially on this board), but most people made less. Each year you work in PE (or IB, for that matter) is a step change in your long-term wealth trajectory. Are you going to become a multi millionaire and have fuck-you money? Will you rise and become Partner at your fund? Maybe, but probably not. But you WILL be better off financially than most others. You WILL be comfortable and people WILL envy you. This industry (and this board) really distorts how young folks like us view wealth, and pushes a "money + prestige = success" mantra.
The grass is always greener... where you water it. Nobody ever says the full thing. If you're in PE/IB/HF/CO/VC/Tech/whatever you're miles ahead of the average person. You will be "wealthy", but you wont be 0.01% wealthy - that's not failure. That's success. Keep working and growing and you'll be absolutely fine.
Thanks for that response. Seems like you are farther down the road and have a clear vision for your next step (corp dev at PC) - would you mind elaborating on this plan?
Regarding your last point: I agree with you but the idea in this discussion is not to compare yourself vs. the average guy (even though this might be helpful in real life) but rather to maximize the potential which an under 30 guy/girl in PE has today.
I wouldn't call it a clear vision - More of a goal: I'd like to move to a Corp Dev role, but not at a PC. We are way too hands-on with our PCs, I don't want to work for "us" haha. Goal is to transition towards a type of role that allows for more Work/Life quality. I'm semi-actively recruiting for a few of these right now and one thing I hadn't appreciated was the potential options comp. and the upside there. Some of these companies are earlier stage which is obviously higher risk, but the low-base for the value of the equity comp is somewhat enticing, if my DD on their growth prospects comes back okay. These types of roles are pretty high risk though, and I am a pretty risk averse motherfucker, so we'll see what I actually wind up doing.
Upon reflection, my semi-rambling comment was more addressed to junior folks who may be lurking this thread and concerned about PE/IB/HF/etc. not being lucrative or good enough or whatever. I still think that it's hard to do better than the seats we're in though, even if Carry/Promotes never happens. It's a phenomenal platform to put yourself in a strong position to achieve the type of wealth you're talking about. Other folks have said "tech this", "startup that", but IMO we only ever hear about the unicorn candidates on the tech side (IE, the software eng. at google or the developer at Apple - the guys who beat out 5,000 other applicants), and the unicorn companies on the start-up side. On a risk-adjusted basis, I think IB/PE is still top of the list for earning potential. You could even lateral from the IB/PE 2/2 path and enter a manager type of role for one of those unicorns.
Good points all around. Another thing that people miss when they talk about tech comp is the progression and promotion schedule. Sure, SWEs at any FANG might start at $160K or whatever, but the promotion schedule is so slow and yearly raises are generally consistent with the rest of America's BigCorps. I have friends that are SWEs at these companies and they have yet to get promoted to another level 6 years in. Obviously the comp is great relative to other industries and the options are nice (assuming share prices keep rising), but you don't get the same step function progression that you do in finance.
Agreed.
Anecdotally, one of my better friends is in a similar space and know several SWEs in the FAANMG (or whatever shitty acronym you wanna use for "giant tech monopolists") group. These guys are 7, 8 years in and making about what I did in my 1st year as a PE assoc.
Not trying to make this a pissing contest or dick measuring event, just another anecdotal data point to consider. I know for a fact there are other SWE guys 7/8 years in who make close to double that, but there are also Director-level PE guys who are 8/9 years in who make more than double what I do now. It's all relative.
Man it's so true. I didn't even know what PE was when I was in college and here I am stressing about all kinds of things that, I don't know when or how they became important to me. I have no much anxiety about not having $50mm... but why? It's hard to break out of this myopic cycle. I feel like an anorexic girl who looks in the mirror and sees a fat girl staring back.
What was your path to PE if you don’t mind me asking? Did you go for IB out of school, despite not knowing about PE?
+100000000 SBs around...
People get soooo caught up on these goddamn internet boards comparing career paths that will more than likely cement individuals into, at a MINIMUM, an upper middle class to top 1% earner standard of living.
Who cares that PE or S&T or AM or whatever has a slightly lower ceiling? The floor for these fields is already 2, 3, 4, 5 times higher than what the average, college-educated full-time white collar worker (talk of even workers in general) will ever hope to make. Traditional engineers (MechE, EE, CivE etc) that go through 4 years of getting their balls BUSTED cap out at ~$150k and some snot nozed kid building CRUD apps or arranging logos gets that in their first job out of college.
Like jesus christ. Don't you guys get tired of asking the same fucking questions all the time? BigTech/Startups vs PE vs Medicine vs Corporate Law vs Consulting vs F500/MM Corp Exec...they are ALL LUCRATIVE. You will not come out of a career in ANY of these industries economically worse off than you came in. Just choose a field amongst those that you're most interested in and have the aptitude for. Hell, screw just limiting yourself to those fields.. money isn't everything, pick what you give a shit about the most and the rest will sort itself out.
So tired of seeing the same micro-optimising of which field will pip out the best probability of bestowing you with the midas touch whilst not lifting a goddamn finger. News flash: it doesn't work that way guys. Any field that has the potential for the kinds of incomes and net worths you all salivate over will require you to grind.
This 100% - could not have said it better myself. I know lots of kids on here are dreaming of having a private jet and multiple mansions around the world at age 40 (I was the same at 18-21) - that could happen, and finance is certainly one of the best fields to make that happen, but in reality the odds are very much against you.
However what Finance does almost guarantee is to give you a very comfortable upper middle-class lifestyle. Here's a sample of myself and my peers (all aged 30-35) -
1. Myself - work in PE, make $250-300k a year in a HCOL city. No wife or kids. Own my own apartment and have $100k+ saved in the bank
2. Ex-colleague in IB, now a director making $500k+ also in the same city. He has a wife and kids, nice house etc.
3. Ex-colleague from IB, got burned out and works in corporate development for a F500. Makes $150k in LCOL area, working 9-5 most days. Wife and one kid on the way - as house prices are cheap there he actually has the biggest place out of all of us.
I realize this is only a sample of 3, but I'd say this is probably a fair representation of your average people from IB/PE backgrounds at age 30. Now these salaries might not get you a private jet or your own yacht, but at the same time to be earning these salaries by age 30 is better than 99% of the US population. Even my colleague #3 making $150k is doing very well - outside of finance/tech, there are very few jobs paying $150k for a regular 9-5 at his age.
Plus I myself was making $150-200k at age 27, and I was a late starter to finance - so you could easily be a 24-25 year old earning that. Making $200k as a young single guy effectively removes money from being a factor - you want to go on a safari to Africa or a 5-star retreat in Fiji? Just book it. Want to buy a new BMW/Porsche or get a Rolex? Go for it. Note I'm not necessarily recommending these actions - but just pointing out that in your 20s (provided you don't have a family) there isn't that much practical difference to your lifestyle between $200k vs $1m. You pretty much have the freedom to do what you want and go wherever you want.
While your point about fiscal security holds true, good luck booking a safari to Africa/5-star retreat when the vacation policies at most of these institutions are draconian as fuck.
General question: are there people here on this forum who observed the same trends in PE and made a career move bc of it (either within finance, a new industry, or to entrepreneurship)? Would be interested to hear more about your experiences
Yes—COVID accelerated that transition, but I’d been looking to exit PE after doing it for 5 years. I left a few months ago to take a roll in an interesting company in the insurance sector. Not a start up, but offered equity and very incentivized pay despite the base being a bit of a cut.
I think PE is broken to the extent that there are myriad firms in the generalist MM/LMM space that show little differentiation amongst their strategies, both from a fund structure and actual target acquisition and growth approach. The value proposition to LPs becomes less enticing when the management fees don’t justify a return that is less or on par with public markets, and on top of that, the product offered by each fund is relatively indistinguishable.
For the LPs who would traditionally have invested in these types of PE funds, I believe they are starting to realize that by acting independently and directly investing, they can incur higher returns by invoking more of the “fund-less sponsor/search fund” model. I effectively ended up in my current role through this route. Family offices have been taking advantage of the fund-less sponsor approach for some time, and I think other investors are realizing they can too by joining forces. I don’t think the LMM/MM fund model is very sustainable, and I expect many firms in the space to wind down, particularly after Covid.
I always enjoyed my work at previous groups, as I was at a stage where I was pretty hands on with all aspects of the portcos I oversaw. I’m effectively doing the same work now, but all my attention is focused on one company, and I can no longer tell people “I work in private equity,” which I would’ve cared about a few years ago. There’s definitely new work that’s boring and unrewarding, and I really miss working on deals—although hopeful our acquisition strategy will bring that back—but I feel like the experience is more holistic from a company growth perspective, and ultimately should place me on track to do direct investing myself one day, as I’ve found that’s what excites me the most. There was a time PE, outside of MFs, could afford that experience, but I think that is starting to change, or at least can be found elsewhere.
Did you start a search fund? Mind if I PM you?
Yes, I spent 5 years plus in mid-market buyout and made the transition into an LP role at a pension fund. Unfortunately I didn't get to see carry at the PE firm I joined (despite the previous funds being strong performers) and I have observed friends that spent 10 years plus still waiting for carry payday. The trade off just didn't seem worth it to me given so much of the discretionary effort is in exchange for the carry payday (as other jobs pay fairly well base + bonus).
I agree with many of the reasons others have pointed out as to why PE may not be as lucrative as it used to be. Some additional considerations are:
+SB
I know even MF colleagues that endured zero to even negative carry performance...no good
All I'm going to add to this is that wealth is a terribly misplaced idea of success.
Let me get a little bit philosophical here and pontificate for a hot sec. There is no atheism in the odyssey of life – we all worship something. The only thing we can possibly have control over is what we choose to worship, and anything you worship will eat you alive. If you choose to spend life worshipping money to buy and do lavish things, you will spend your whole life feeling poor. Worship your body? You will always feel ugly – by the time you’re planted six feet below the ground, you will have died a million deaths as time and age have had their showing. Be careful worshipping money – is that really an object which you are willing to release your freedom to?
I agree 100p with this statement, but goddamn, as somebody who has both golden handcuffs and gym-induced body dysmorphia I feel like I'm being personally attacked by a thesaurus
Fully agree! So the question remains what do you worship?:)
From my point of view, and realizing that this might sound like a simplistic justification to some, I still believe that accumulating sufficient capital at a reasonably young age puts you in a position to chose your "god" - and ideally also to renounce mammon until its too late.
Why do you have to bring my body into this?
I too am very smart and have read David Foster Wallace.
The PE industry's future depends on its returns relative to public equities, IMO. If they continue to lag public markets (which would be my guess given that the industry is now paying avg. entry multiples of 11-12x), then the trend of massive flows into private equity will likely reverse and the industry will be a less attractive place to work.
Two things to add/comment on:
1. I think there will always be a space for VC/Growth Equity to help micro companies build to the market place.
2. I think that as data transparency continues through Data analytics and measuring. You will see public companies become more efficient and returns fall in line with PE.
I think your first point is arguable given poor returns in aggregate for venture capital. Not sure what exactly you mean on the second one? I think public companies are likely ahead of PE-owned companies in terms of measuring and analyzing data, given greater size/financial resources.
"Attractivity"......
Attractiveness??
Wow this thread got built out kind of fast? Some good stuff here. My quick take as someone who never thought I'd be doing what I do (or where I do it, or how I do it...):
This is overly simplistic, but applies somewhat in both a micro and macro sense. In a macro sense, the golden days of PE when all the easy money was being made was in the 80s, 90s and early 00's. Capital was more scarce than it is today and deals were harder to come by. Lots more variability in returns (lots of zeros, lots of big 4x, 5x, 6x, 7x, etc kind of returns). But on average you were able to buy cheap(er), use more leverage, grow a little/cut costs, and sell high(er), as the market was just less efficient. In the grand arc of history, we probably had a buyers market from 1980-2005 or so, and have kind of been in a sellers market ever since. I'm sure not everyone would agree with that, but it's how it feels to me.
In a micro sense, and not that it is easy (only easier), but if you're early at a firm or start it, and it's successful, chances are you make more money than someone who happens to work at that same firm once it's already successful. I have seen this in my own career when retiring partners at my firm who were utterly below average investors were making huge returns and frankly continue to rake in cash based on the fact that they bought crap companies at 4x a while ago, and selling those same crap companies basically unchanged at 8x, while capturing the lions share of the economics. Nowadays it feels like the path to success in the market is more precision - no zeroes, sell as soon as you get to 2x or 2.5x, don't assume major multiple expansion. Focus on mistake avoidance and realization as soon as practical (don't get too greedy). Again, probably not something everyone agrees on but it's what I've seen in my limited experience.
That being said, if you want an above average career earnings trajectory, PE is a good place to be. It probably now fits into a similar category as other high powered white-collar professionals within the same size/class at the top of the wage-earner pyramid (e.g., bankers, lawyers, etc). So yeah, you won't be Henry Kravis, but you won't be poor, or even middle class either. You'll be in the 1% in PE, but if you want to crack into the Forbes 400 list go found/build something.
Great post. Your first two points remind me of one of my favourite finance movies, Margin Call.
Jeremy Irons: "There are three ways to make a living in this business. Be first, be smarter, or cheat. Now I don't cheat. And although I like to think we have some pretty smart people in this room.. it sure is a helluva lot easier to just be first."
Clips on youtube at: /watch?v=ag14Ao_xO4c
Gonna re-watch this movie tonight if I ever free up from the grind today.
onebagger had the best response on here.
The thing I'd add is, people talking about the heyday of banking/PE are essentially looking for low-risk, W2 paying jobs that could give them crazy outsized wealth without a ton of special skills or knowledge and medium to high effort. In general those almost never exist for very long for the main reason that once people realize you can basically just do any version of a day job and make millions of dollars a year, it's going to get crowded out. Kind of a law of averages type of thing.
Tech seems like the next frontier in that one can basically just bet on getting lucky on joining an early stage startup. I think about all the average engineers who started at Snowflake ~5 years ago. They probably got ~$1M in stock options at the beginning, refreshed that a few times over their career and upon Snowflake's IPO probably ended up with equity that was worth an order of magnitude more at exit. That's in addition to making a few hundred thousand in base+bonus each year. So from that perspective, there are still some pockets of tech that can pay that type of money out.
With that being said, for everyone one of those stories, I think of situations like Uber, where employees hired later than 2015 are still underwater on their options. In in the early 2010s, Uber looked like it was going to take over the world. Having a ton of shares priced at $30/share seemed great, hell, even $60 a share and you'd still 5x your money, that stock was easily going to 10x and maybe more. Flash forward to now and ... perhaps one has made some money, but there's a good chance it's nothing that meaningful. And that's a good outcome. Think of all those people at Theranos or the likes that were counting their paper money, only to have it all go to 0. Years of slaving away, taking a 50% paycut vs what they could have been making at a Google or Facebook, chasing the big IPO bump, and to end up with nothing. For every Snowflake you could probably find 100 failed startups (or honestly maybe like 1000).
PE is less likely to make you crazy rich as it used to, but PE still has a significant moat in the sense that, you're acquiring businesses at a scale that is unachievable by the masses. There is a huge capital advantage that others can't touch as well as access to leverage. PE is playing with a somewhat stacked deck to begin with, so even if returns aren't going to be quite as good as they used to, if you're smart, hardworking, and well-connected and can build a team of others who are the same, you'll likely do pretty well. As far as needing to buy tech companies goes...maybe yes and maybe no. There's still a ton of small and medium sized businesses out there that will likely still be good businesses in a decade. Typical PE businesses like Pest Control, HVAC, and other services are in high demand, highly recurring, and essential needs businesses. You could roll up 10 local plumbing businesses, consolidate the backend, raise prices, build a nicer website, combined with 50% leverage on the deal and you could cashflow that thing forever.
If you're ultimately seeking to be worth $100M, you absolutely need to think about how you can ditch your W2 job and do your own thing. There are almost no roles that could make you that type of money without a ton of hardwork, skill/knowledge, and frankly luck.
If you're seeking to be better off than most, look for something you enjoy that is sustainable and be smart about your money. Most finance/banking roles at the mid/senior levels will pay at least in the ~$500k range if not higher. That's a ton of money. Earn that type of money for 15 years, maybe add a couple of better years in there, manage your money well, and you could retire with significant money in the bank, maybe a couple of houses paid off, and for all intents and purposes have most luxuries you could want. You won't have a garage full of supercars, but you could maybe have 1/2, maybe not a watchbox full of Pateks, but maybe 1/2...you get my point.
It all depends on what you want out of life. If you want to be a billionaire, go for it, but don't wish for a job that can get you there just by you showing up to the office each day.
SB'd, great post. Really agree with your final comment, but also Uber. Good example of survivorship bias in what gets talked about on this board when referencing Tech rainmakers who made millions off options packages. For every guy/girl who's options vested and are 1000% ITM there's a few who are underwater.
PS if you ever want co-invest on that plumbing roll-up idea, hit me up. I love unsexy businesses. Some folks may call me crazy, but I'd take a parking lot near a downtown core over the latest and greatest iOS app any day.
Lots of good comments. Overall, I'd say its a misconstrued concept because as others have said very few in PE or Tech or insert whatever really "make it". It takes a lot of luck, paired with some skill. Think about how many people in tech there are vs how many people that really hit it out of the park, its a very small fraction. Same for PE/HF/IB. The main benefit to tech would be lifestyle adjusted risk relative to hitting it out of the park is much higher than PE. Instead of aiming for the low probability event of being one of the lucky few that truly makes it so to speak, the better question might be what's the best lifestyle adjusted comp I want. You'll always be paid in finance, you're just going to work a hell of a lot more than in tech.
Really though, the people that make it are the risk takers, not the people hoping to be promoted to partner or get a job at a hot startup.
That's why Growth Equity/VC/Growth Buyout is hot and is the trend.
I'll say that you're completely right in the PE industry's competition and commoditization. The fund structure often times prevents upward mobility, especially at the VP/Principal level given those folks are usually the ones gunning for MD/partner. In turn this makes upward mobility for associates more restrictive but one could argue that given the largely misconstrued way a lot of associates enter the industry out of banking, this is almost a natural selection event. However, even for those who are mentally geared and crushing in their role, there are significant barriers which can prevent a promotion to VP. There are many threads about this exact phenomenon given this is where many people find themselves stuck in the funnel but I'd say there is a lot of skillset which is required to be demonstrated from a senior assoc. expecting to transition to VP in terms of leadership ability and people acumen which often isn't required to such an extent when in a pure execution role. As a result, many find themselves having the conversation that their skills may be better utilized at a different fund after their 2yr or however long stint. There's no real straightforward path and a lot is decided on several external and internal factors which aren't up to the person in question, no matter their capability, but there is a lot that one can control to hopefully carve a path forward mobility-wise.
TLDR: Those who get in the industry, can accept and deliver in their role as a junior PE employ, and can then demonstrate the attributes of a successful VP may still face a wall given how top-heavy PE firms can be
if there's little/no ability to move up at the funds you've worked at, what do you see most of the associates doing after their 2 years
Depends on the fund, but from another thread on the subject a lot go to business school first and then eventually downstream to a smaller fund or a family office. Other common exits are growth equity, Corp Dev & Corp Strat, startups, etc. The key here usually being what fund you came from as those coming from a MF will intuitively have higher quality exits.
APAE thoughts?
Would you guys say one would earn more in BB IB or MM PE? For someone who has an offer at a BB and can rise the ranks without an MBA, BB IB seems more lucrative than MM PE, but could be wrong?
You’ll make more in whatever you have the most passion for.
What do people think about market-neutral hedge funds as a wave to ride? What about VC?
Can't comment on market neutral hedge funds. I can tell you that VC is even worse. Small funds with small AUM makes salaries low. There are even more dollars chasing fewer good deals in VC and unlike PE where you can't usually grind out businesses to at least an ok outcome, for example, my plumbing roll-up example is likely not going to 0, a majority of VC investments ending up going bust, a small percent return a little bit of money, and a very small amount produce an outsized return. It's something like 70% go to 0, 20% return ~1x money, and the remaining 10% are the big winners and are hopefully some crazy multiple. What this means is, if you don't get a couple big wins in each fund, you're basically going out of business.
Then, in order to find the big wins...you need to find them and given the way the VC industry is organized, it's pretty tough to 1. Find the next big thing 2. Even if you do find it, to compete with the A16zs of the world, who invest in everything from Seed to Late Stage, have the best VC name association "you raised from A16? this business must be amazing" and have all the resources that come with going with a larger shop. 2. Even if you do somehow find the next big thing that's overlooked, you need to raise money quick enough to protect your share in the business without becoming diluted or pro-rata'ed out. For those who don't understand what I mean by that, if you invest $5M in a business for a 20% stake (so a $25M total val) if that business does well and decides to raise at a $100M valuation for the next round you can either take liquidity and turn your $5M into $20, so a 4xer, or you need to pony up an additional $15M to maintain your 20% stake. Imagine you think this business is going to the moon, the problem is, if you only have a $100M fund (which is honestly pretty big for a 1st time VC fund, so good luck even starting with that), your LP docs will most likely not permit you to put 20% of your capital into a single deal, so then you need to figure out how to raise more money, take on co-invest, which provides your with worse economics, or just take a good, but not amazing deal and move on. That's not even mentioning some of the crazy capital recycling and other provisions that some early stage VCs have, which make it challenging to make big money.
To me, VC is likely a better lifestyle than other traditional finance roles. But unless you can join a well known fund, it's likely not a path to big money. Also, even if you join a big fund, good luck getting to partner. You think making it in PE is tough, unless you have some crazy connections and the ability to win deals or spot deals in a unique way that the other partners can't, I'd argue that breaking into the partnership at a well known VC fund is even harder than in PE.
What makes breaking into partnership at a VC harder than at a PE?
Everything has cycles. Industries become mature, at some point the maturation accelerates (in this case from pressure on fees due to underperformance which is due to low rates so too much money sloshing around, which drives up buyout prices driving down returns and round and round).
The next wave is clean energy and engineering/manufacturing. It's already at least 5 years in. It's got a few decades. Most people usually only see it once the boom has already happened and want to get in then. But most can't see or INFER how a newish industry can really explode and therefore see too much "risk".
I have never worked in Private Equity but I understand on a basic level its financial attractiveness. However, I think I can share some information on starting a tech business/product, since I have worked as both a tech product manager and started some ventures.
Regarding tech, I think the most important thing is how to test your business idea quickly and cheaply to see: 1) if it sells/people will pay for it; 2) if you can compete. There is a common notion that once you have an idea, you'd have to drop everything to work on it and incorporate, hire people, make a website/logo, rent an office, etc. These are peripheral elements. The 2 factors that would really make a business are 1) and 2) I listed above. Sounds obvious but I see time and time again people not prioritizing in answering these questions enough. Once you get those peripheral elements out of the way and focus ruthlessly to answer 1) and 2) as honestly to yourself as possible, then I think you'd have a worthwhile business idea. I'd recommend looking into No Code MVP/Prototyping and Product Management Idea Validation as keywords to begin your search for ways to test your idea quickly and cheaply. Although these methods are quite focused on tech products, I think they can be applied to other types of business ideas if you are creative enough.
The question of financial return between PE and being entrepreneur is a worthwhile one, but I'd say the more practical thing for you to ask is what business ideas you currently have are, how to test them, and whether they have better returns than your current job in PE. You can test your business idea as a side gig to your current job, if you manage to arrange enough time. I understand PE is incredibly busy, but if you know how to test your idea, you might be able to squeeze enough time to do it. I think this is a much more effective way towards starting a business than straight up quitting everything without having an idea whether your business idea really solves a significant problem for others.
IMO search funds, or just the acquisition of smaller businesses, is the new wave of the next 10 years.
Interesting. Can you elaborate on this?
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