Private Equity is Paradise

After 2 full years of blood, sweat, and tears in investment banking, you’ve become nothing less than a financial modeling prophet. In fact, according to your resume, you’ve helped advise “$69 billion USD worth of M&A transactions” during your stint at an Evercore/Lazard/FT Partners/Centerview type bank. $69 billion USD. You’ve even added this figure to your LinkedIn and Instagram bio; it's also now your fun fact of choice for any ice-breaker events. Reflecting on your godly accolades, you can’t help but laugh at the fact that you’ve already added far more value to society at age 23 than any of your Big 4 friends will during their entire careers, combined. And you’re only just getting started, you think.

Given your impeccable mastery of “problem-solving” well enough to make every potential deal look accretive, it is evident that you would be doing society a disservice by sticking to a career in banking. No, instead your vocation calls your spirit to a more worldly and prestigious endeavor. Just like Moses, you too have been recognized as a prophet, and are therefore, called upon God the Father to enter the “promised land”. You are going to Private Equity.

With your $69 billion sell-side value creation (which is roughly 30x Bill Ackman’s 2022 fiscal year net worth), you weren’t even surprised when you scored better in Megafund recruiting than the other thousands of mentally benumbed investment banking disciples. As a matter of fact, you pity the poor “common men” who couldn’t break in from the middle-market banks. “I guess it’s just God’s way of natural selection”, you surmise, figuring that they’ll likely end up joining your Big 4 friends at a corporate job soon. Couldn’t be you.

When you first secured your private equity offer, you would often daydream at the fact that you were soon going to be known as a long-term value investor, a profession that gives you full authority to contemptuously look down upon any other career in finance as “speculative and short-term-minded”. Most of your peers at EVR/LAZRD/FTP/CVP agreed with you, since they were also headed to the promised land, only at slightly less prestigious shops since after all, you added $69 billion of value - definitely more than them you think.

Public Markets Are A Poor Man's Private Markets.

However, a small minority of your analyst peers, known as the “hedgies” have not seemed to worship you in the same regard. Instead, they laugh at you behind your back and you’ve even heard one of them refer to you and your PE friends as a “herd of grass-fed sheep”. The “hedgies” have all accepted offers from multi-manager hedge funds and constantly have the urge to remind you that “private equity is nothing else but banking 2.0 for muppets.”

But you’re not a muppet or a sheep, you’re a prophet, singlehandedly chosen by the Lord above to perform God's work, and while they’ve been laughing at you, you’ve been laughing back at them as you cackle to yourself, “Don’t you guys know the public markets are efficient?” Then to get the last laugh, you post a few comments on Wall Street Oasis, your favorite social media other than LinkedIn, whistleblowing the hard cold facts that 95% of “hedgies” underperform the stock market, risk-adjusted, net of fees over ten years. Your also love to refer to them as “lacking worldly character” and having a “cheaply speculative and short-term-minded investment philosophy”. Couldn’t’ be you.

Welcome to the Buyside.

When you finally began your role as an Associate at the megafund, you realized that God summoned a lot more prophets to “add long-term value for investors” than just you initially thought. In fact, you’ve noticed that the fund is actually filled with hundreds, perhaps thousands, of investors all held responsible for trying to identify undervalued firms with durable business models in the private markets. Who knew the private markets were that big or had so many opportunities? Yet, across the board, the greater the seniority, the more you would like to kneel down to them and proclaim your loyalty, hoping they promote you to a more godly title.

At the same time, you’ve also encountered a few false-prophets. These kinds of people didn’t come from the humble beginnings of investment banking. No, in fact, they don’t even know how to respond to “Walk me through a DCF”. Rather, you learned that they came from an entirely different religion, something called “Management Consulting”. You were able to identify these false-prophets purely from their lingo as you picked up on the fact that they constantly seem to chainspeak meaningless and artificial buzzwords from their mouth such as “framework,” “Greenfield”, “workstream”, and “action plan”.

However, attempting to build a bridge between their blatantly verbose dialect and your superior financial acumen, you started a conversation with one of them, asking if they worked at Big 4 (since a couple of your friends did consulting there). This question severely strained their faces, as they expressed great disdain and responded, “You really think I worked for Big 4? I’m ex-McKinsey bro.” Your knee jerk reaction was to respond with “Well that’s funny, I didn’t see any analyst from McKinsey advise $69 billion worth of M&A deals within 2 years. I’m ex-Evercore/Lazard/FT Partners/Centerview. Who the f*ck are you?” but you decided to be the bigger man and walk away instead, as you reflect, “forgive them Principal, for they know not what they do (modeling-wise that is)”.

6 months in.

Around this time, you finally begin to understand what your actual job entails. Most of it is due diligence for acquiring and monitoring portfolio companies. You also languish in the fact that investment bankers are churning out deal pitches your way all the time. Looks like someone couldn't break in to PE, haha! All jest aside, you still find much of the work similar to banking but you assure yourself that financial engineering a private company’s capital structure is far more sophisticated and prestigious than an underperforming public markets strategy.

After all, you verify that you are, (or at least the Partner you work for is) a ”long-term investor with a worldly purpose, not some slimy hedgie,” as a drip of sweat glides down your face at 10:53pm on a Thursday night when you finish up an LBO model. After all, someday, you, the ex-Evercore/Lazard/FT Partners/Centerview junior analyst will be anointed Partner. When that day comes, you will shock the world when you decide to take Airbnb private again, at $120 bn, grossly representing the largest buyout transaction ever recorded in modern history. You fantasize at the possibility that you will rake in carry that is large enough to feed the entire population of a third-world country from that deal.

1.2 years in.

You now fully comprehend the entire investing process for your fund. Importantly, you notice that your Partner went through and fully executed the last 2 portco acquisitions, despite the fact that you flagged both of them for being extremely dilutive and overall kindergarten-level investment choices. “How on earth does the IC approve that garbage?” you ponder, as you spent the last 16 hours pumping up the projected IRR on the deals to support your Partner’s bias. You begin to believe that you have far better valuation skills than your Partner, Principal, and VP combined. You’ve even looked at their track record over the last 3 vintage funds and it appears that they've been playing nothing different than the greater fool theory of musical chairs: buying at an EV/EBITDA multiple of 9.6x, hoping to sell it to some even more incompetent schmuck for 10.6x 5 year later, and then another 5 years later planning to buy it back from the schmuck at an even higher multiple of 11.6x, all without any material “operational improvements to margins or revenue”. “He must’ve been from a consulting background,” you conclude, “probably worked Big 4 too.”

However, you aren’t all that upset considering that you now serve as an unofficial gatekeeper for junior banking analysts’ dreams. In fact, to most 22 year old bankers you are nothing less than a household celebrity, kind of like OJ Simpson, before he murderer his wife of course. Since you’ve started, hundreds of brown-nosing prospects have reached out to you to set up a time to chat, to which you reply, “Hey Prospect - happy to chat. Will talk soon”, creating a massive amount of confusion on the prospect’s end as to whether they should follow up asking for a specific time or wait in purgatory for you to email them back 'soon'.

To the hardos who are bold enough to take initiative, you make them grind for the referral. In fact, since you’re a modeling god, you tend to shrewdly respond to each prospect's question with a question of your own. “What is your investing strategy” — “Well, what do you know about LBOs? Matter of fact, why don’t you give me some color on what you think an LBO is first,” as you diligently wait to correct them regardless of how accurate their answer is - proving your dominance. But in the scheme of things, none of this really matters to you since you choose to refer someone based solely offer their bank name. “Wells Fargo,” you notice, “definitely could pull him through… oh wait never mind he was placed in Charlotte. My mistake. No shame in being a lifer in banking… the sooner he embraces it, the better he’ll feel.”

1.4 years in.

Suddenly on your way to work one day, you run into a homeless guy on the street. You swear he knew you worked in private equity, probably by the full-zip men’s better sweater Patagonia you were wearing. You thought he was going to ask you for money but instead he looks directly into your eyes and says, “You can never reach the promised land, only march towards it.” Was that Moses? No, it couldn’t be. "What does that mean exactly? I thought I was in the promised land," you shriek. Suddenly, you wake up and realize it was a dream, noticing you fell asleep right on your company-issued laptop after 12 straight hours of LBO modeling. You think about this dream a lot from now on.

1.8 years in.

Having second thoughts about what the promised land actually is, you decide to call up your friend who works at a hedge fund. Still trying to maintain the eternal status that you're more sophisticated and lucrative than him, you start the conversation talking about how “transactions are actually really cool to follow, there’s so many great companies to learn about in the private space.” You also let him know that your fund returned an IRR of 39% last year. Abruptly, he laughs at you, letting you know that IRR doesn’t consider risk-adjustments. Astutely, he adds, “You know private equity returns are 100% correlated to publicly-traded small cap stocks, right? I guess financial engineering is the most prestigious way to underperform net of fees nowadays.” You try to object in disgust but before you open your mouth he lets you know he cleared $600k, scoring a 1.8 Sharpe last year by longing FAANG and shorting Consumer Staples, while working less hours than you. You end the call, down bad. You can’t believe a ‘hedgie’ gets to make investment decisions by himself while your valuation skills get overlooked by your musical-chair-seeking partner and the IC. You begin to question if you’re playing the wrong sport and consider where other promised lands might lie.

2 years in.

While most of you peers have made arrangements to enroll in a top-tier business school, you’ve decided against it. No, to you, business school is just a fleeting and overly-expensive place of refuge for a herd of muppets who drool at the possibility of becoming a VP in PE, a role where they will play musical chairs for the rest of their sheepish lives. In fact, you've always regarded yourself as a sophisticated investor with financial modeling superpowers, not a groupthink coward who hides risk-adjusted underperformance behind years of illiquidity, homegrown return-smoothing, and solicited "Me-Too" fairness opinions from Big 4 plebs. Couldn’t be you. Instead you’ve decided to take a chance on your investing acumen and let everyone see your ability from day one. “Only fools think markets are efficient”, you say to yourself. If your inferior friend who works at a hedge fund cleared a 1.8 Sharpe, God knows what you can do. You've decided to join a new fund that focuses on “taking a private equity approach to the public markets.” 

This is the way.