Private Equity Associate to Hedge Fund Transition

this is actually a pretty common transition at the associate level, both with/without mba.

for example, viking global only recruits from pe/hf/mba (with pre-mba hf/pe experience).

kidflash:

this is actually a pretty common transition at the associate level, both with/without mba.

for example, viking global only recruits from pe/hf/mba (with pre-mba hf/pe experience).

Generally true for them and other elite HF's, but I knew one analyst here who had no MBA and came from IBD on the sell-side, the guy was that smart.

Red Barchetta:

kidflash:

this is actually a pretty common transition at the associate level, both with/without mba.

for example, viking global only recruits from pe/hf/mba (with pre-mba hf/pe experience).

Generally true for them and other elite HF's, but I knew one analyst here who had no MBA and came from IBD on the sell-side, the guy was that smart.

It also greatly depends on what region you're in. In Europe for example, it's very common not do an MBA at all and just go directly IBD->PE->HF. I saw that happening twice or three times in that fashion and one time actually HF->PE.

What I've noticed though from people I don't personally know, is that RE PE seems to be a pretty good feeder to Macro Funds, due to the similar global understand etc.? Has anyone else noticed that?

Thanks for your comment. Is it common in London to go directly from IB into HF? I am now in banking and would like to skip the PE stint due to my passion for investing.

Great topic - i am interested in a discussion as well

Holy grail? Of what? You sound like a very big tool, brother.

I mean, I imagine you can answer this yourself, right?

Why go to a hedge fund?

A: You like public markets more than working on (mostly) private transactions. The challenges involved in a HF are different than those involved in PE. PE is very process oriented. HFs are to a degree, but the kind of thinking required is different since the public markets are a completely different animal.

Also, it's entirely possible to go to PE, learn a bunch, but still not really like it enough to want to make a long-term career of it.

Side note: the junior guy that worked on the Herbalife presentation / thesis with Bill Ackman is an ex PE guy (from Blackstone, I believe.) Probably about 30 - 31 years old now, joined Ackman's fund back in like 2008.

To be honest, I don't know many people who want to go to a megafund PE job with the expectation that it'll be a great job. The hours are still tough (though usually better than banking), the due diligence process can be grueling and boring at times, and it's extremely difficult to move up. Yes, the pay is good, but the pay at the top hedge funds is often better than at the megafunds especially in a good year. Many people are interested in HF/VC after a megafund but will got to a megafund out of banking because it represents 1. another strong, visible brand on the resume (KKR/Blackstone still has more name recognition than a comparable hedge fund, e.g. Eton Park/Glenview even though they're really both equally respected for those in high finance) that keeps doors open 2. a much more structured process, and represents a less risk averse path after banking. Afterwards, however, many MF PE associates leave for greener pastures, having gained another 2 years of a structured program and another top name on the resume

slowdive:

This kind of perspective makes me laugh and is fairly reflective of how prestige-driven and myopic students/junior bankers tend to be. There are two main reasons why there is a bid for HF jobs from ex-PE guys.

First is that PE tends to be a 2 year gig, after which you go to b-school, and then participate in a knife fight for a VP position post-MBA. The key here is that there are significantly more pre-MBA associates than there are post-MBA VP positions. Think about it. People often end up moving to a smaller fund, or leaving b-school empty-handed. Yes, there is no need to respond with your anecdote that your friend's friend was ex-BX and is now a VP at KKR. Anything can happen, but just look at the numbers, and this will only get harder in light of the following point.

Second is that PE is in decline. There is way too much AUM chasing a shrinking universe of LBO-able businesses. Think about the drivers of PE returns. A low entry multiple, leverage, cash flow expansion (through revenue growth or margin lift), and exit multiple. The increased competition is making it more difficult to make money through multiple lift, any decent business will run a process that maximizes valuation, and the run in the S&P doesn't help either. Cash flow expansion is also more difficult in this environment of low growth, close-to-peak corporate margins. Not trying to say that margins will necessarily turn down, but a lot of the benefit from labor market slack and general efficiency have plateaued out. Also, a lot of the easily fixable businesses have been picked clean. The LPs are aware of all of this, and for funds with weaker returns, it is getting more difficult to fundraise, so there will be a lot of sunsets over coming years.

Yes, the second point is somewhat relevant to HFs as well. Returns are being driven down across all asset classes. Risk premiums are very low and there is a massive amount of money that needs a home. But on a relative basis, the HF world is better able to withstand this than PE. You can think of PE as one particular strategy, long-only illiquid investing, just like long/short equity, market neutral equity, long/short credit, distressed credit, event-driven, capital structure arb, fixed income RV, macro, EM, quant, etc. At varying times, the potency of different strategies waxes and wanes based on market conditions, macroeconomic environment, and the amount of AUM in the strategy.

I won't go into the fact that HF jobs are likely to be more dynamic and interesting than a process-driven PE job (though this depends on strategy and also strategy fit). This is subjective and I'm sure there are people that like the PE environment more. Also, I believe that PE is less stressful, honestly the extreme stress is probably the biggest downside of a HF job, not everyone can thrive in this kind of environment.

JEEZ that was a great post! Thank you

Edit: Wow, just read the other two posts. Slowdive is a beast

Can anybody talk about skill sets you pick up in PE that are valued at HFs - or lets call it public equity? Which strategies and examples of firms would value a PE experience (say for example a Greenlight)? Lets set aside the megafund auction machines and assume we're talking about PE funds that only do "proprietary" deals.

Any hedge fund that invests in companies in a fundamental manner would be a relevant target for an ex-PE guy. Long/short equity is likely your best bet given that it is one of the most prevalent strategies. Long/short credit would be another. The Tiger complex likes ex-PE guys, as do many other fundamental managers. While the skills you learn in PE are valuable, if you really want to work at a HF, it would be better to jump in directly. If you have the raw materials, everything you need can be learned on the job. After a year or two, there won't be any material difference between an ex-PE guy and a direct recruit, and if anything ex-PE guys can be weighed down by their lack of experience with liquid markets. Remember, everything you do for a significant period of time leaves an imprint on you, unlearning things can sometimes be as important as learning them. One of the reasons that HFs like ex-PE guys is because they essentially get those extra two years of experience for free (not to say that comp would be exactly the same, but you are entering at a similar level). Also, it goes without saying that the longer the time horizon of the fund, the more likely it is that they will value PE experience.

Ex-HF guys tend to go to other HFs. I am always amazed at how guys who have lost money manage to resurface at other funds. I suppose they can spit a good game. Of course, at some point, continual losers will get run out of the HF world completely. They could then go to equity research, a FoF/pension/real money, or leverage their relationships to become a sell-side salesman. I've seen a few become professors (but by choice, not because they got fired).

But generally speaking, I view the lack of options as being similar. Honestly, the idea that you get material operational experience in PE is mostly false. PE firms like to hype this up when they are recruiting, but rarely is this actually true. Think about this from the PE firm's point of view - would you trust a 25 year old who doesn't know anything other than playing on a spreadsheet and stroking his dick to manage a real business? Why would you do this when you could hire a seasoned operator with decades of experience? At most PE firms, the role is somewhat similar to banking, just on the other side, with one notable difference. That is due diligence (tearing through a business to make sure it is a good investment), which will occupy a lot of your time, and this is the experience that HFs find valuable.

I will repeat myself because this seems to be a common misconception among college students (not necessarily talking about you Newspeak, just going off on a tangent here). There is very little about working in ANY finance role that will prepare you to operate a business. If you want to run a business someday, then work at a real business. For some reason, students often want to "have it all", but the real world doesn't work like that. The best game plan is to figure out what you want, find the path of least resistance to get there, and be willing to do whatever it takes. It is important to be open-minded about unconventional opportunities that come by unexpectedly, but why take intentionally take a circuitous route that distances you from your goals? Just like how a good business will grow profitably by generating strong returns on invested capital, I believe that successful careers are forged by generating strong returns on invested time. If you eventually want to be an entrepreneur, you could probably learn a couple of relevant things by being a banker, but it seems obvious that those two years will be much more effectively invested by working at a startup or a larger company in the targeted industry.

Wow! Slowdive, those posts were excellent. Thanks for that, it's some of the best stuff I've seen on this site in a while. +3

Slowdive, excellent insight. Very helpful.

hf over pe is a very very easy choice, the two are very different, also lol at PE being the holy grail of anything, your comp potential in a hf is about 10000x higher (again potential, averages probably even out, mf pay initially is better ofc and also less risk).

what I dont understand is ppl that go mf-> HF, doing 2 more years of 120 hours a week more than neccessary seems bad. You do collect another brand on your CV but if you are that risk averse you should probably stay out of the public markets entirely and just go back to banking...

Despite everything that I wrote above, your statement that the choice of going into a HF over PE is "very very easy" is misleading. There are many reasons that compel bankers to take the PE route, including the simple fact that most wouldn't even be able to describe what a HF does (I am not kidding). Working at a HF isn't for everyone, you have to be willing to do a lot of legwork on your own. Those that go to a HF straight out of banking are often the market junkies who were trading in college and can articulate a fundamental thesis in a compelling manner.

Looks like this thread got me certified. Thanks for all the love. Since I'm on a roll here, feel free to ask me anything else, I'll keep answering (to the extent that it doesn't compromise my identity). I've always wanted to give back since I benefited from this site back in the day.

A lot of ignorance in this thread

Thanks slowdive. Would you please elaborate this a bit more:

you have to be willing to do a lot of legwork on your own.

slowdive, thank you for your responses thus far - really helpful stuff. I'm currently a junior and have a summer internship with a top IB lined up. Let's say that I get a full-time offer and after 2 years I move on to a top 10 PE firm for another 2 year stint. At this point, I'm interested in working for a hedge fund. How important will my undergrad studies be? Will it be important that I have studied advanced math/finance/CS/etc.? What about undergrad GPA?

For what it's worth, as someone who left top pe firm for hf, I'd agree with the vast majority of what slowdive said.

As businesses, big PE firms are comparatively defensible. Reputation, track record, scale are big barriers to competition, and once you're in the small club of funds that can buy an X billion dollar asset in a given sector, you are pretty much guaranteed to get the look at the next big deal regardless of how your last deal is performing. It's hard to get a partner track job at those firms, but once you're in, you're less likely to lose your spot than at a hedge fund because the job requirements are more defined. A lot of the opportunity flow comes from the sell side, many aspects of the diligence are outsourced (to mck/bain, operating partners, accounting firms, lawyers), and the actual investment decisions are made by committee/partners...so it's just not as easy to fail if you have the baseline smarts, work ethic, people skills and attention to detail.

HFs, on the other hand, are pretty fragile businesses and can come and go, even good ones. Even more common than actually blowing up, a good fund can have a couple rough years and stop receiving inflows. At that point a fund can still be very lucrative for the existing few principals but will never grow enough to support new meaningful partners. So the business risk is big at a HF. But if you learn to be a true money maker in public mkts with a real library of differentiated knowledge and contacts in a given industry or two, then there will always be a seat somewhere on the buy side to put that to work if the current situation doesn't work out for some reason that isn't your fault. That's something that a PE VP with even a very good resume just can't guarantee.

Would comment on the below though:

"At a HF, PMs (if a multi PM shop) or senior analysts come and go, so there is room for advancement. The difficulty in HF land is the big gulf between analysts and PMs, which is very difficult to breach. As an analyst, you are not taught a lot of the risk management and portfolio construction knowledge that is required to become a good PM. Furthermore, at single PM shops (which are pretty common in equity land), a senior analyst is inherently the furthest you can go. Yes, idea-generating analysts can sometimes make millions if they are good. It just depends. Making generalizations about the HF world is difficult because there is so much variability."

The last sentence is right on. Everything before it just depends. There are analysts at "single manager shops" with real discretion over positions and enough equity in the GP to generate big personal wealth, and there are PMs at multi-manager shops that have no permanent equity, small capital allocations, mediocre comp through a cycle, and they live under the threat that their capital can be pulled. Just depends.

Comparing megafund PE to the hedge fund world in general is not a fair comparison. I think a lot of the gripes about working at a KKR here would apply just as easily to a Bridgewater. And conversely, working at a middle market PE shop can be very dynamic.

.

I've seen this happen a number of times and heard of it in other cases. We interviewed a pre-MBA associate from a large sponsor (lower-tier megafund I guess?), though it didn't end up being a fit. Moving to fundamental-driven funds (distressed debt/"special situations") or private debt funds (ie mezzanine/mm debt funds) have been much more common than structured credit, credit arb, or synthetic-intensive funds. Owl Creek is a value fund with a credit slant that hires former PE associates somewhat regularly.

Kenny, I imagine the distressed / special sits space becomes a natural fit given familiarity with capital structures, fundamental value etc. Would love to hear thoughts on what career motivations drive people to make such moves. I have heard and seen quite a few people from tier 1 megafunds go to hedge funds (fundamental value driven) as a preferred route rather than continue within the PE space. Obviously seen a lot of cases to the contrary as well. How is it mixed between career progression, need for a change, and economics....

Bump. Thinking of the same switch as well. Advice? Thoughts? Any HFs to target In a search?

Any fundamental-oriented, with a focus on event-driven etc. There are thousands of PE and HF firms out there so you should try to find a list of ones you'd like to work in terms of style, specific focus, etc.

From a practical note I wouldn't expect to be able to drastically "trade up" in terms of prestige. The large-cap value hedge funds often hire ex-analysts/associates from similarly prestigious PE firms. As a particular example, 3rd Point just hired a former BX PE analyst.

Any idea how the compensation differs?

Bump on jp's comment. Understand that each shop will have its own style to a certain degree, but could any assumptions be drawn given firms with similar AUM and similar #s of investment professionals? (at least for comp at analyst/associate level)

Interested in this as well

I've seen a guy do that and jump into a debt fund, so not quite PE. Probably tough to do and I've seen it rarely without an MBA. Public investing analyst skillset doesn't really teach you what you need to do for the VP process oriented role at a PE shop.

I have seen many people join hedge funds after working at private equity firms. The most common path I have seen is PE associate for 2 years > top business school > hedge fund.

I would speculate that moving directly from PE associate into a hedge fund would be possible, but business school provides the direct recruiting connection which makes the processes easier.

Yep.

From the nature of what you do at a PE shop, I imagine you could work your way into a distressed debt HF if that sounds interesting to you. search around more on WSO. I believe their are some good threads on distressed debt HFs and PE and how they interrelate.

What about the other way around? That is, from HF to PE.

Fundamental and event-driven funds have been known to hire pre-MBA PE associates. Owl Creek and 3rd Point have both hired analysts from top PE funds after their post-banking/pre-MBA stint was done in the recent past.

I see what you're getting at but I'm not sure there's really a body of evidence to support it. We're talking about people who are ~4 years out of college and PE and need to completely relearn everything, and it's not like the typical straight-to-HF analyst is running a book at 25-26. If you went 2 years top banking group>2 years top PE I'm guessing you've the firepower to give a good showing.

I don't personally know the people at 3rd Point or Owl Creek that I referenced, that was info from investor letters or from LinkedIn stalking. The handful of personally people I know who have PE experience and are now at a HF are either in less-liquid credit strategies or are more senior, so it's not really a helpful sample set.

Very common, and yes, it makes perfect sense.

It's very common. Some HFs will prefer to hire someone with a PE background over, for example, someone from an M&A background - because they (hopefully) think more like an investor as opposed to a salesman.

You see a lot of people go to fundamental-driven HFs after their pre-MBA associate stint, especially at the larger/higher-prestige end of both.

Makes sense for everyone involved-the HFs who use that approach get the additional layer of pre-screening and seasoning (banks use college ranking/GPA, PE uses banks, HFs use PE), the PE funds got the meat for their sausage makers for two years, and associates make a lateral move without the requirement of an MBA.

this is a bit like asking does the sun rise every morning? as others have said, very common

Very common. In ER and have many HF clients who made this transition. I think a few of them have warped mindsets on valuation, though. For example, one client at a big L/S with heavy portfolio turnover is obsessed with DCF modeling. In his first six months, he got lucky on a takeout and that stock appreciated near 50% to his target. Since then, he's tried to go back to the well and has picked a string of underperformers that will probably cost him his job, not factoring in the likelihood of catalysts that would help to actually unlock the theoretical DCF value.

Not saying everyone is like this but there's a big mindset adjustment. PE guys are categorically very bright and have great modeling skills so HF's desire them. The short-term investing mindset can be taught to some degree. And from a lifestyle perspective, HF's are generally much better hours with as good and potentially much better pay. But there's no equivalent to carry and job security is tenuous.

Yes, definitely use search function. Blackhat, Mr. Pink, Simple As, have some great threads on this. I was in a similar position and basically leveraged my deep industry/sector PE experience into interviews at various HF in groups that focused on same space. It was a relatively easy sell to recruiters once I convinced them that I had tired of the process oriented and redundant nature of the PE deal cycle and instead was more interested in a market oriented role. Be prepared to submit writing samples, operating models, and a full pitch (long and short) along with an on-site or take home case study. Feel free to elaborate your question here as it is kind of vague or PM me.

I'd be curious to know what sort of work experience you've had thus far in PE, considering you were a direct-from-undergrad hire.

Are you focused primarily on deal modeling and related analytics, or do you spend a lot of time deal sourcing? I only ask because the bulk of MM PE undergrad hires that I've seen spend a good deal of their time sourcing deals, and this is not the sort of work experience that an HF would value.