Private Equity vs Megafund Credit

ironbanker06's picture
Rank: Chimp | banana points 9

Hi all,

I've been looking for a thread on this topic and haven't seen one. I'm currently an analyst at a boutique, energy-focused IB , and am considering a move to either a megafund's credit team (think Ares, GSO, Carlyle) or an energy-specific private equity fund (think Quantum, NGP). I was curious about y'alls input regarding likely differences between private equity and credit as far as career prospects, comp (over next several years), prestige, day-to-day work, etc. go. Any feedback would be helpful.

Thanks.

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Comments (4)

Jan 8, 2019

As someone who finished up energy-specific buy-side recruiting about a month ago: if you went into recruiting wanting to do Energy PE, then definitely go with the Energy-specific PE route at one of the top tier funds you mentioned above. Credit is a very different animal and will take you down a significantly different career path than traditional energy PE (not saying that's bad, just pointing out that your options seem fairly binary). Take this next tidbit with a grain of salt as it's pretty much all second-hand info from my perspective (older colleagues), but it clearly seems like switching from Credit to PE is a relatively tricky endeavour that won't be very straightforward/easy if you decide that you want to immerse yourself in the traditional private equity world later down the road. I was in a slightly different situation than yourself as I ultimately had to choose between MF Energy PE and Texas-based Energy PE instead of PE vs. Credit, but hopefully, my anecdotal insight can be helpful.

My reasons for choosing the Texas-based energy PE fund were primarily driven by the breadth of opportunities that would be afforded to me at the firm as well as the anticipated Associate experience (nuances will be somewhat fund-specific but I've found this to be the case across a handful of funds similar to the ones you are referencing based on networking/meeting with Investment Professionals who are both currently with or were previously with these groups).

These factors included the access that I would receive with respect to a very large and well-respected network of portfolio companies and management teams from an early stage as an Associate (working directly with Mgmt, having a meaningful role in IC meetings beyond content generation, etc.). I also felt that the growth-equity oriented approach towards backing new teams, as well as managing existing investments, would be a much more interesting experience for me personally vs. taking more of a "hands-off' approach to working with companies and management teams when it comes to modeling things on the credit side (where you ultimately are not going to be involved in the specifics of managing an investment/team and directing business building initiatives unless stemming from a more restrictive governance standpoint via covenants... or structuring investments for eventual conversions of debt to equity).

The alumni bases of investment professionals across the energy funds you highlighted are unrivalled in the space. I definitely put a lot of stock into the opportunity to work at a firm that has focused solely on the energy sector and has navigated multiple market cycles with great success. There has been strong continuity across all levels of leadership and fairly limited turnover (also is a fund that is very keen on promoting internally), whereas I found some of the MF PE Energy Groups I met with to be much more of a revolving door (specifically at the mid-to-senior level) or even on their way to downsizing their energy investing practice. I strongly believe that specialization can work to your favour, particularly in the energy sector. Can't really speak for the credit side but I would keep that in mind if the team within the fund you are looking at is relatively new or has had a good bit of turnover across its ranks. If you are interested in building on a potential career in energy equity investing (whether on the long-term private equity track or portco side as a management team member who has skin in the game), the network you will get access to at the premier Texas-based energy PE firms is unrivalled.

Lastly, I've found that the work-life balance tradeoff (broadly speaking) is generally quite reasonable across the top Texas-based energy PE funds relative to the comp... which is very competitive across the board based on the offer that I received and what I've heard from others (slightly under most MF PE shops, but likely on par with MF Credit, generally speaking). Year 1, you should expect to get paid between $225k-$275k all-in at the leading Texas-based shops. Also, the top firms have a relatively strong pipeline of Associates who go on to top B-Schools if that is something you are considering down the road (See NGP-> Stanford, Quantum-> Wharton). And exit opps will certainly be unrivalled across the portfolio company management team bucket or even public co-senior BD/finance side if you are eventually looking to be more entrepreneurial or hands-on/ops-focused within the sector. Have also seen a respectable number of former PE Associates transition to the traditional L/S side (if focused on the energy sector) at top hedge funds. I would also argue that MF Energy PE would lend you the same quality of HF and B-School exits. Unsure about MF Credit though, which may serve you best if you are looking to do distressed or special sits HFs. I'll defer to others who are more familiar with that space chime in.

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Jan 8, 2019

Thanks, that was really helpful, a lot of great points. Appreciate you taking the time to post.

Most Helpful
Jan 17, 2019

I'll briefly answer each of the points you raised.

Let me offer as context the fact that my role has allowed me to pursue investment opportunities across the capital structure, so I've done both equity and credit deals and interact with many names on both sides.

Career prospects:

Private equity will give you more career flexibility going forward than credit.

The recognizable private equity shops (even sector-specific ones) will give you better prospects for business school, ceteris paribus. There's something of a (misguided) idea among the adcom crowd that credit investors are ticking through loan checklists, whereas equity investors are out building businesses. That obviously doesn't reflect reality, and I'm being somewhat droll in describing the phenomenon, but it's a combination of:

  • b-school adcom herd mentality
  • a weaker pattern of b-school attendance on the credit side (which creates less strong of a repeating phenomenon of alumni to write recs and make calls on applicants' behalf)
  • (this is not fact and purely hypothesis) potentially weaker candidates, those who struck out in private equity and went to credit instead

Comp:

Credit tends to pay at a slight discount to private equity, but that's a thin rule and there are exceptions. This is a function of headcount and performance, obviously.

A lot of the megafunds show languishing IRRs (low double digits, high single digits) in their private equity strategies; that has some LPs wringing their hands wishing for a return to the glory days. Private credit, even in a current heyday with $107b raised by new funds in 2017 alone, has people excited at the indication of consistent high single digit returns at scale.

What I'm saying is that a $500m middle market private equity fund is putting up a cash multiple, which usually and hopefully translates into a better annual return than a $500m private credit shop is selling its LPs on. Better profits means better comp.

Prestige:

This goes back to perception, which I touched on previously in regards to business school.

Private credit gets pitched to LPs as a defensive play against the backdrop of mounting geopolitical risk, declining central bank support, and waning expectations in other asset classes.

In short, work that isn't sexy. Necessary but not sexy.

There are some shops that have a little more life in them (meaning risk appetite, ability to reach beyond the center of the fairway), but they're invariably smaller. In my experience the guys who cross $2b in AUM really begin to institutionalize.

It makes sense. If you scrabble for four years to collect $1b to manage (which gives you $20m [or less, because you may have granted fee concessions to early LPs]) to cover expenses and pay everyone and yourself ... meaning you are finally seeing consistent multi-million dollar income for breaking your back running your own shop), then you double that within the next 18 months ... you can start to see a clear path to $10b (and consistent eight-figure personal income) if you just don't fumble en route. This translates into predictable vanilla deals yielding 7-8%. "Nobody gets fired for picking IBM" holds true.

I just did a deal with a shop like this. They've gone from $1.6 the last time I showed them something (3Q17) to $2.2 right before the holidays. The second deal was less hairy than the first, but the pushback I got was much stronger (and for what it's worth, the process was much longer).

There are some exceptions, but not as many as you think.

I have a friend who's a VP at GSO. He is so unhappy. Before the Blackstone acquisition the firm apparently had more of a risk culture; now it can leverage the Blackstone fundraising apparatus (pedigree, global relationship set, benefit from LPs' "flight to quality" mindset) for larger scale. The boundaries are tighter.

The higher performance they generate tends to come from either advantages in structure or in dealflow. Structure in that they are innovative in finding minutia or levers that they can use to their advantage (read about Akshay Shah and all he did), dealflow in that they're the first phone call you want to make when you have a complicated situation that you need to resolve quickly.

It doesn't mean you get to send through the really hairy stuff that pays well.

On the flip side, everyone knows what private equity is about and all the big names involved. You can be three years out of school and forwarding a deal announcement in the news to your friends for a front-page transaction you worked on. A guy I went to school with went to Carlyle and was on three remarkably recognizable consumer deals before he left for business school. I don't think much more needs to be said here.

Other thoughts:

Some of the private equity names you mentioned are really strong. They have a tremendous amount of domain-specific knowledge, a narrower headcount which creates a lot more investment in younger professionals as well as a tighter-knit community among those who do choose to go on to another opportunity, and real, I mean real proprietary dealflow.

Out of your option set, this is a pretty advantageous path. If you want to go into credit down the road, you are by no means hindered in any way if you took the energy buyout role now.

Good luck.

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Jan 17, 2019