Q&A: European PE professional at a Large-cap Megafund

My background:
- PE Associate at a Large Cap Megafund
- Experience across 2x US Megafunds out of London / Europe. Dabbled briefly in fundamental L/S hedge funds
- Target European school with 4.0 GPA equivalent

**Career-related facts: **
- I've always had the interest to do investing even before college. I never did it to "get into finance".
- I've always been fascinated by how businesses work, what makes them tick and what makes them great. PE is perfect for that and thats why I'm here today
- There are limited materials on PE investing frameworks out there (mostly academic), so one day my mini-ambition is to develop this (both on investment DD + operational value creation) and publish it. I want it to be deeper and more practical than anything I've seen online or at on-site workshops

Other facts:
- I've lived and worked internationally across 4 countries. I love all sorts of good food and will go all out to hunt for local gems
- My LT goal is ridiculously simple....financial independence + becoming a business coach of sorts
- I don't know why but a huge pet peeve of mine is when I realize how many senior professionals have massive capability/knowledge gaps or outright smoke their way around - yet they get away with it because they make money at this point in time. Sure, I "get it", thats their primary objective but comparing it to professions like law / medicine / engineering, they will never see the light of day. Holistically competent, truth seeking senior professionals i know are few and far between

View my previous Q&A answers here

WSO Mentor

Want to work with me? Check out my profile here

Comments (113)

Jul 8, 2020

hey man thanks for doing this. much appreciated.

similar situation as you, lived all around, top european bschool etc.

you mentioned your experience at the L/S fund + that have been investing before that (which i presume was public markets). Why did you leave the L/S fund to go to PE?

i would have thought that at a L/S equity fund you actually get a more holistic view of what "makes" an investment and what does not "make it", both in terms of thesis and process.

Whereas in PE you are only a part of a larger process and your responsibility set is limited to only a part of the investment, specially at a MF.

Given this I always thought the experience at L/S equity funds or even activist funds would be more satisfying for people with a passion for investing than a PE fund.

Would be great to get your views on this.

Cheers

Array

Most Helpful
Jul 8, 2020

Hi - totally agree with your "L/S HF vs, PE" views. Let me maybe first be clear on i) my view on how the 2 are different, and ii) why I chose PE in the end.

Differences:

  • Investment Thesis: in the L/S world, a thesis is a differentiated view ("alpha" / "edge") on the company, not yet priced in but you've found sources of hard evidence to support this view AND have a catalyst (no catalyst = not real thesis to me). In the PE World, a "thesis" really is your view on value creation (how big, how concrete / actionable) - usually everyone has unlimited info to form a realistic view on the quality of the company / industry.
  • Time Spent on the Job: in the L/S World, majority of your time is spent researching your thesis or keeping up with your portfolio company performance. Much of the work is "intellectual". In PE - lets be real, there's a TON of process work (sometimes >50% of the time) that is a necessary evil to i) get a transaction over the line, ii) manage the company to your satisfaction (e.g. financials reporting standards, act on your value creation plan)

Now to get straight to the point on why I chose PE

In terms of time spent, I like the L/S world's model on spending your time researching the industry/ company. However, What I like about the PE world is the depth of this research. Please don't get me wrong, I have the utmost respect for L/S world and its infinitely harder to be successful there, but if I'm honest there's simply no way they can get as deep as PE because

  • Unlimited access to management information. I'm not talking about GAAP/IFRS financials, I'm talking about 300 page financial due diligence reports with every KPI you could ask for. You also have access to a dataroom, which you can then work some excel magic to understand the business better
  • Great access to management without fear of "unfair disclosure" policies like in the public world. You can have day-long Q&A sessions with them and sure they can be dishonest - but it doesn't really benefit them if you actually become the owners of them (so they have more incentive to tell the truth)
  • Granular support to form a view on the industry / sub-sector from quite literally, an army of people from various backgrounds / sources. For instance, very senior "operating partners" (people we have long-term contracts with to give us the insider industry view - they are former CEOs usually), strategy consultants who spent their whole career in that one sub-sector, other industry employees via expert networks, direct Q&A sessions with company operational staff.....the list goes on

In short, I just find it hard to believe I can go deeper in understanding a company at a L/S HF. Even if I'm at some tiger cub spending 1 year researching 1 public company name....its tough really (but maybe I'm just incompetent!)

In terms of the investment thesis, yet again I really admire the work done and concentric focus on this in the L/S world. However, what I like in the PE world is the ability to take control and change the outcome, simply from the sheer fact that we own the company. Its no secret that the best L/S guys get it right maybe 60% of the time on the thesis - but then what? Sure, you can size and factor-balance a portfolio in a smart way and do great - but then I'm not really so comfortable with having no control of the outcome when I'm wrong in that 40% of the time. Even in the 60% of the time I'm right, how do I know its "all me" and not a false positive? Multiples can make no sense, markets can overreact, a rising tide can lift all boats. In the long run I'm sure the best L/S PMs will showcase their talent, but in short I think it boils down to personality.

On this point, I basically like having influence on my investments rather than forming a hypothesis (which is really what an investment thesis is) and seeing if it works by the sidelines.

Hope its helpful and again, I really do admire and am deeply humbled when I see great guys on both sides of the fence.

Jul 17, 2020
European_PEMonkey:

* Investment Thesis: in the L/S world, a thesis is a differentiated view ("alpha" / "edge") on the company, not yet priced in but you've found sources of hard evidence to support this view AND have a catalyst (no catalyst = not real thesis to me).
...

  • Great access to management without fear of "unfair disclosure" policies like in the public world. You can have day-long Q&A sessions with them and sure they can be dishonest - but it doesn't really benefit them if you actually become the owners of them (so they have more incentive to tell the truth)

On the first quoted point, the need of a catalyst is a remarkably good point., well said..

On the second one, while I like too the more relaxed conversations with the management team of private companies, I would not agree on the fact that they don't benefit from bul****ing you. The information asymmetry is a game that almost always pays back so I usually tend not to take any conversation as a truly transparent one.

    • 2
  • Analyst 3+ in IB - Ind
Jul 8, 2020

I've seen so much online about hours in large cap PE, but could you provide an honest insight if the hours are as bad as everyone makes them out to be?

I.e:
- typical working hours Monday to Thursday
- typical working hours Friday
- how often you work weekends

Assume it ofc varies if you're in a live deal or not but would be helpful to know

Jul 8, 2020

Sure. Like all transaction driven jobs, it varies. I'll also caveat that it's not so much whether it's a MF or LMM fund, but it's more the culture of the place that drives the hours. Smaller deals doesn't mean less hours.

On a live deal, assuming it's not an urgent / rush process timeline:
- probably mon - thurs you'll work from 9am-12am (15 hours)
- On fri you'll work less in Europe so probably pack up by 7pm
- maybe half day on a Saturday, none on Sunday
- if you have an investment committee in that week, you'll work till 2am or so on 1 or 2 of the weekday nights, OR maybe burn a weekend depending. not always the case but again it depends on who you work with

on non live deal times, most of the work is focused on portfolio company initiatives / monitoring. this kind of depends on the fund's approach. does your fund involve associates / VPs in the operational improvements? is your fund robust and aggressive in pursuing this? does your fund have a large portfolio team to help drive this?
anyway for me I'm fairly involved and it looks like this
- maybe Monday - Wednesday it's 9am-8pm
- Thurs-fri it's 6-7pm
- no weekend work except for the occasional emails

in general, I would say you have infinitely much more visibility on your workload so you can make plans in advance.

  • Analyst 2 in IB-M&A
Jul 9, 2020

Thanks a lot for doing this! Two questions from me:

1) There's not a lot of good info out there for comp in PE in London / Europe. To help us benchmark offers from firms and think about career trajectories, could you please break down the salary / total comp for megafunds in Europe for associates / senior associates / principals / MD or Partner.

2) Usually most sources naturally focus on megafund culture / performance in the US. Could you please give us some insights into the London offices / teams? (e.g. KKR, BX, Carlyle, Apollo, Silver Lake, Permira etc.)

Thanks in advance!

    • 1
Jul 9, 2020

1) sure. For Megafunds (everything in GBP before tax)
Associates:
- market is 90k Base, going up to 100-110k by senior associate year (so around 5-10k increase per year depending)
- some funds like APO and H&F are known to pay high (100-120K Starting). but everyone knows they really have the worst hours (IBD style or worse)
- bonuses are quite standard. usually 80-120%. aggressive funds might go up to 150% but very rare and for exceptional individuals

VPs: start at 120k, moving up to around 160-180k over 3 years. Bonuses can be from 100-150% typically
- Carry really doesn't mean much at this point although it matters. it's something like 1-2% of profits (of the fund after LPS make their money, net of management fees). Vesting really depends but it's usually over 3-5 years and have many clawbacks (eg if the fund doesn't meet the hurdle, esp if something blows up).
- cashing out the carry is even tougher. you are sort of implicitly expected to roll over as co investment into the next fund if you stay till director and want to one day make partner, it just really signals commitment to not jump ship
- gross amount of vested carry over 3 years is not life changing, probably 500-800k before tax, depending on the funds performance and some linked performance metrics to your own deals performance
- the most aggressive funds have 'deal by deal' carry, which is what CVC in Europe has. Very competitive but you live and die by the sword vs the fund's overall performance
- min. 3 years to make director from here in my view. can be longer as director is where it begins thinning out (you really don't need that many)

Director: 210k-250k base with 100-200% bonus depending
- your carry will start to be more 'real' in cash terms at this point. once you make Director at a fund it's very unlikely for you to want to leave because of this
- your carry is now probably something like 4-8% of funds profits, amounting anywhere between 500k-1M per year depending on the carry model your firm adopts (deal by deal, fund performance etc)

MD: I have no idea and would love to know. this is where it gets really hazy I feel, because some deal making sourcing machines can be paid differently from those solid execution MDs.

in general, people overestimate how much carry you get in cash terms (which takes a long time plus subject to your funds performance upon realisation). you have to really be committed to the fund to reap its benefits. Once you hit senior VP, you really don't want to be moving so much anymore

Jul 9, 2020

2) sure.
- KKR: pre 2015 was known amongst headhunters to be 'the place with brand but mediocre performance'. I personally think they turned this around with a completely new senior team since then. their prior European fund vintage is a testament to that
- APO: worst culture, mostly do FIG deals and juniors are overworked to the bone because of an overly lean deal team. generally a place I think people avoid like a plague unless they are so desperate to have that brand name. I would personally stay miles away
- BX: do few deals, but very big deals (refinitive, merlin, clarion etc). very pan European because they do most things out of London, so they don't really need non European language speakers there. last vintage fund I've seen is second quartile performance, but tough to make so much money on super large deals so I think that has to be taken into account. mixed culture reviews I've heard
- TPG: really not a good European franchise. almost non existent if you ask me.
- top megafunds in Europe are actually: CVC, Advent, Cinven. I think most people would agree on the whole if they are in the know
- Permira comes close and have built a really solid tech franchise in recent years. But they don't have as many mega deal profiles as the top 3 dogs (more UMM if you ask me)
- Hellman&Friedman: the killers in town with top returns. didn't put them in top 3 because it's slightly unfair given they do very few deals and run a highly concentrated fund vs the other guys (who are more like a megafund)
- not really megafunds or have a US founding, but I also like the guys at Bain capital, Apax (only the tech team), HG (for their software deals but horrible culture), and EQT

Probably missing a few but these are my top takeaways

  • Associate 1 in Consulting
Jul 9, 2020

Can you give more detail about Hg's culture please? Also, I really liked working with Carlyle - do you know if them or Silver Lake take consultants?

Jul 9, 2020

Do you have any thoughts on a few of the other larger / MM European players? Bridgepoint, 3i, Vitruvian, and BC in particular?

Jul 28, 2020

Helpful Q&A, thanks for this.

What do you base these rankings / ratings on if I may ask? What makes CVC, Advent and Cinven the top funds in Europe in your opinion? Sitting in a similar seat as you, I am always struggling with people broad brush ranking funds vs. each other, but then again this is WSO.

  • Prospect in IB-M&A
Jul 9, 2020

Do you need to work for a Top 3 BB or EB or is it possible to go to a MF from a mid-tier BB (BAML/Citi/CS)? Which teams are interesting from a PE point of view?

Jul 9, 2020

To be honest, to get an interview it really doesn't matter that much if you're a Bulge bracket (regardless of ANY tier), or boutique.

the headhunting market in Europe doesn't segment as much as what I've understood from my US peers.

What DOES matter though is convincing them to put you in the interviews, and that's just a combination of
- proven deal sheet (closed and not some fluffy fake news)
- decent ranking
- good testimonies (headhunters know everyone in banking... trust me that they can dig dirt up on you)
- come across mature and able to crush technical interviews (qualitative judgement by them)

Jul 11, 2020

Hi,

Thank you for doing this. If possible, I would like to follow up on the boutique comments. Having done a thorough search through Linkedin for alumni from my EB (CVP / EVR / PJT / PWP), there seems to be a limited number of analysts from these banks at the MFs / UMM funds. Is there a particular reason why? Given the amount of responsibility I've received / my colleagues have received on our deals, I would presume that the analysts from these banks are "better equipped" but please correct me if I'm wrong.

On "good testimonies" if I lateraled from another bank where I didn't do as well (given I didn't mesh too well with the team) but am now crushing it at my current bank (think I'm in the upper quartiles / top based on recent reviews), how much does the previous "dirt" matter? Would headhunters ask you to disclose your feedback form to them?

Once again, thank you for your taking your time out to answer these questions! It's incredibly helpful having a European perspective on this forum.

    • 2
Jul 9, 2020

In your experience, does European PE follow the same highly structured Target school -> IB analyst -> PE Associate -> MBA -> PE midlevel track as in the US? Or is it more open to less traditional backgrounds (i.e. post-MBA IB associates without prior PE experience)?

Jul 9, 2020

MBA is totally optional and isn't even a said 'track'.

Apart from that, everything else is kind of the same
including background / pedigree you would imagine in the US.

what you will notice is that Europeans generally are older as an associate class because we are more open to doing masters to begin with (culturally).

Jul 9, 2020

what is your view on CVC with its recent raised fund of 20bn+? any insights about team culture/pay vis-a-vis US MF etc.?

thanks for the great Q&A!

Jul 10, 2020

arguably the best in Europe, standing above the US 'born' megafunds. Culture is what you would expect of a US megafund but they stand out for being quite lean as a deal team.

Very top heavy and less juniors than you would expect of a fund that size. I've heard the hours can be tough but other than that decent team & culture. people stick on there

  • Analyst 3+ in IB - Ind
Jul 9, 2020

Thanks for this Q&A, incredibly helpful.

How important do you think financial accounting knowledge is for PE?
How often do you have to build out three statement models vs the sell side / buyside M&A bankers handling it?

Jul 10, 2020

Well you don't need to be 10/10 in accounting to do the job to be honest, because all you really need in an LBO are the Cashflows (you don't need to model 3 statements with a balance sheet done to perfection).
you also always hire the big 4 both on the sell-side / buy side to help you with proper accounting. I wouldn't trust the bankers because if you know what really goes on in banks you would know that they aren't real pros if we strictly talk about accounting. you would also know the shady tricks they pull to artificially make the model balance but I'm sure it's not right from an accounting standpoint!

that being said, I absolutely think everyone working in PE should know how to do 3 statement LBOs. if you spend years in PE, I think as a professional you should equip yourself With this baseline knowledge if you are self respecting and honest enough about your required capabilities.

  • Prospect in IB-M&A
Jul 9, 2020

Cheers for doing this thread
I speak no European languages, how hard will it be for me to place in a MF or UMM shop?
How many years does it usually take to reach each rank in a PE shop?
In your experience what have most people done career wise after PE?

Jul 10, 2020

Not 'hard' if you are selective. your goal is probably to be hired out of London if that's the case.

look for funds with plenty of local offices, because that means that their London office wouldn't require European languages (unlike blackstone that runs Europe mostly out of London, they then need the language skills).

many decent UMM funds are focused on UK too like bridgepoint. you have a decent chance and Europe is massive anyway so they can always squeeze in a non European language speaker if you make the cut on all other areas!

Jul 11, 2020

Thanks for taking the time - very good insights

While I agree with 99% of what you wrote, I do think you downplay the difficulty of recruiting into the UMMs / MFs if you don't speak on the "relevant" European languages (e.g. German, French, Italian, Spanish, Swedish, Dutch) or are not a native Brit (which I guess covers bulk of Europe anyways...).

Although I managed to make the transition into one of the UMMs / MFs in London without belonging to either of the above groups, my experience was that I had far less leeway than e.g. my German speaking colleagues. In fact, the headhunters would often explicitly tell me that although my profile was good (4.0 at European target / good performance at a top IB group, e.g. GS TMT / previous internships at MBB, MM PE, EB), I would still likely get passed on by funds for candidates with weaker profiles but more desirable language skills. This actually did happen a couple of times, as few of my friends with relatively similar profiles, albeit arguably slightly weaker profiles, had a chance to interview for a couple of funds I got passed on, whereas the converse did not happen.

That's not to say that it cannot be done, esp. if you are URM / female, but the numebr of such profiles is still relatively miniscule in Europe. Overall, if you plan to recruit for one of the funds and still have the time to learn a useful language (at least to a C1 level), I would highly recommend it.

Jul 10, 2020

timing for ranks are 3 years associate, maybe 3-5 years VP, 3- forever years as director to make MD.

can be longer or shorter depending on fund and your own personal contribution + huge luck element too (eg if someone at the next rank suddenly leaves). don't underestimate luck in this space - MDs really didn't make it purely on sheer skill all the time.

in terms of what people do after PE, I think it's really different VS US where for some reason those PE analysts in formal programs At MFs want to work at hedge funds?

in Europe I would say 7/10 people want to stay and genuinely rise through the ranks. it's not as diverse of exits as the US. the remaining 3/10 either do entrepreneurship, business development at corporates or just an investing role maybe at a public shop. it really varies and not so planned and structured like what I've understood from the US

Jul 10, 2020

Thanks so much for the AMA. Lots of helpful intel in this discussion. I can second most of your observations based on my own experience.

Slightly off piste since it's distressed PE but have you heard anything on or come across SVPGlobal (Strategic Value Partners) - specifically their European franchise?

Jul 10, 2020

Good to hear and always helpful to "check" my personal views with the many people here who are very knowledgeable.

Yes, I've heard many things about SVP and the one thing for sure is non of them are positive. Junior to mid level churn is high and culture from the top isn't great. Some confidential things I can't say here but the deals they touch are hairy and much pain goes behind each deal.

Jul 10, 2020

curious to know what about the rational to move from one MF to another MF.

was it team-driven? how did you explain this move to HH given that MF is somewhat the end-station for PE?

Jul 10, 2020

Partly 'biz model' driven , partly team / culture driven.

by biz model I mean I basically wanted to get involved more on the operational side post investment.

I said exactly this to the HH and they completely got it. I wouldn't say a MF is the be all end all. I mean even at mid- senior ish levels you see people move for so many reasons, even 'downstream' to the smaller funds sometimes (comp, opportunity set to invest, managing partner possibility etc.).

In the long run, this MF brand / prestige matters much less and if moving makes your work more interesting or life better overall - never say never, right?

  • Analyst 1 in IB - Gen
Jul 26, 2020

Hey, could you please expand on how "biz models" vary accross funds?

I know some funds are more involved hands-on in their investments (eg. Silverlake that sends some associates 6 months on site to work with the CEO/CFO to turn around the business model, and I guess some other funds have dedicated teams for that.

Would love to know your view on which funds have what business model and what you would prefer among those

Thank you!

Jul 10, 2020

Mind going into more detail on the top EU players - lifestyle, comp, strategy, sector focus?

I'm currently at a MM fund ($3b latest fund) and noticed there were a number of opportunities for EU large cap firms - CVC, EQT, Advent, Cinven, Permira, and a few others. How do those firms compare to the traditional US MFs?

Jul 10, 2020

sorry could you please clarify what detail you are expecting? I felt like I covered most of these funds in some detail in my above responses.

happy to answer more if you can specify abit further

  • Analyst 1 in CorpStrat
Jul 11, 2020

It appears there is a race for the first $100bn European PE fund. Since you have already covered CVC, could you please talk a little about Ardian and Partners Group?

Jul 11, 2020

Well its not just Europe, and its not just 100bn. Its everyone including americans / asians and "as big as possible" is the ideal fund size.

Ardian has a FoF heritage and they are okay in infra too. Really bad at PE and I don't think any of the players I mentioned would take them too seriously. I mean sure, they have a fund and like anyone with a fund they can bid for deal. But they aren't in the same league as any of the above as an investor.

Partners is slightly better, but they are still building their franchise and groping around in the dark to be on the same playing field as the rest. Much better investment approach than Ardian by miles - they have a really rigorous internal investment process (not saying it leads to better outcomes necessarily), but are still trying to create a set investment playbook that works well. Still trying to find their footing, unlike the rest who have already done so.

They used to exploit cheap analysts in the past by paying them ridiculously below market and rotate them between divisions -but I think HR has been trying to improve their corporate image after their glassdoor comments were becoming something of a meme.

Jul 12, 2020

Can you elaborate on Ardian? Their first 4 midcap funds are 1st quartile, while fund V generated 14% / 1.7x net according to Preqin, so they must be doing something right...?

Jul 15, 2020

I don't work there but I would beg to differ regarding Ardian's PE franchise in France. It is really top notch there and will appear on every sell-side bankers "potential buyers" slide for a wide variety of targets (from mid-cap to the very large cap). But indeed they are not doing so well in their other European geographies

Jul 11, 2020

What do you think of Aurelius?

Jul 12, 2020

I'm not an expert in distress so won't pretend i know. I just know they do some real quirky stuff and are sometimes controversial. that's all the headline comments I have unfortunately

Jul 13, 2020

Thank you for your reply. Any thoughts on Charterhouse? I heard they lost quite some money last year with one of their investments in Italy that they exited, but don't know much about them overall.

  • Incoming Analyst in IB - Gen
Jul 11, 2020

As outlined above, in general, you perceive the top EU funds (CVC/Cinven(/Permira/EQT)) + Advent to be a notch above the key US MF names such as BX/KKR/Carlyle etc.

Would you still potentially consider the latter to be the better first career step due to their global brand? From what I have seen, at HFs and other options post PE, these funds seem to generally be a bit more represented than the Europeans, except for maybe CVC.

Jul 12, 2020

Well I don't think ALL European funds are ahead of US MF - please forgive me if it seemed that way. I view only 3 very specific funds (Advent, CVC, Cinven) to be 'better' as investors and as a place to work. the US MFs are still heavyweights in Europe!

Any of your aforementioned are great as a 'first career step' - I wouldn't care if they are European focused or US global MF brand. you will learn a ton and develop your toolkit as an investor (in general).

but if you have a specific destination in mind like a HF, then maybe I need a bit more detail to be helpful?

Jul 12, 2020

also to sort of correct myself, Advent is a US fund but the weird thing is that they are mostly Europe focused and have done much better in Europe so to me they are a 'European' megafund although founded in Boston.

  • Analyst 3+ in IB - Ind
Jul 12, 2020

Thanks! Had a few questions

1) How narrow is the funnel in Europe PE? It is generally smaller than the US so is upward mobility were difficult?

2) Was watching an interview in which a partner was saying that in Europe the deals are few and far in between relative to the US. How true is this? How many deals would you expect to close typically during a MF associate stint

3) You mentioned why PE over HF but was curious to hear your thoughts on why Pe vs IB -t thanks

Jul 12, 2020

1) The funnel is the same in my opinion. It's roughly the same 'associates to senior partner' spots if you're comparing across megafunds only. mid market then I don't know... could be anything really and fund structures vary more there. I'm speaking mostly to only large cap funds

2) where did you hear this from? sounds like a very inaccurate blanket statement. Sure, US has more deals but 'few and far between' in Europe sounds VERY off. you are talking about a continent with multiple economic superpower countries here.

just look at prequin or any other decent databases just as a rough directional estimate - the ratio is at most 2:1. even then it's counting a lot of tiny deals <100m that appears at the lowest end of the market (which US is much more liquid in vs Europe).

I admire the US capital markets and the great American dream but somehow I get the sense that some Americans don't really know what happens in Europe! it's as if we are a fantasy island to some... I assure you we're not Narnia in your wardrobe :)

Jul 12, 2020

3) I don't think I have much to say because IB vs PE isn't really a comparison to me. it's two completely different jobs.

I compared PE to HF because both involves investing at its core. the form is different but the core idea is substantially similar.

banking is a whole different ball game and unless there's a specific dimension I can help you with I wouldn't really want to try and compare for comparison's sake

  • Intern in PE - Other
Jul 12, 2020

Thanks for the post! Do you have any idea about the compensation at the credit arms of PE funds in London?

Jul 12, 2020

For fresh new analysts 1, At least 50K GBP starting, going up to 60K is what I've heard from friends working there. bonus 80-100%

Jul 12, 2020

Analyst 1 meaning straight out of uni? Wasn't really aware that credit PE arms hired that junior level.

Array

  • Intern in PE - Other
Jul 12, 2020

Great, thanks. What about the progression?

Jul 12, 2020

Curious on how PE fund can do "operational value creation" for portco, assuming the PE fund is holding a minority position in the company?
My experience with PE so far (MF funds) with minority position is that they look at portco as purely a financial instrument and their involvement in the portco operation is rather minimal. From portco perspective, the management does not find PE fund to have much added value to their operation as well.
I mean it makes sense when you look at it: a management team running the company in the past 10-15 years vs PE guy with 2 months of DD. Sure, PE guy can say "among my portcos with similar business model and growth, the average SG&A is 15% vs yours at 20% so cut your SG&A down please", but each country and industry dynamics is so different that such comparison is hard to draw

Jul 12, 2020

No of course not minority... how would we even then do that?

I'm not sure where you get this info from but I'm sorry it's grossly inaccurate so forgive me for being direct here. I don't think you really know what PE MFs do?

I am not claiming that PE guys know operations better than management teams. I'm saying we do TONS of value creation in portfolio companies through multiple levers and resources, none of which is related to what you are describing. we don't rely on financial engineering like what Elizabeth warren says. it's just not how the real world in PE is?

For instance, we have dedicated portfolio team that are former executives with decades of real life operating experience. Our deal team MD have severed on multiple boards. when relevant, we take on senior advisors who have been there done that and are heavyweights in their respective industries. we also bring in a swat team of industry specialists to help with specific projects where that type of specificity is needed. we build playbooks for certain sub sectors and repeat it across similar investments.

it's not some finance guy sitting with his excel making stuff up - which is what you seem to imply.

Jul 12, 2020

Well, from my experience working as Corp Dev for an Asian company. Our holdco and portco companies past and current minority PE shareholders are MF with significant presence in Asia (think KKR, CVC, TPG, Warburg Pincus...) - but their value to us is "branded capital" rather than operation improvement. Couple of the aforementioned funds have a separate ops team to monitor portco post investment, but it is rather financial performance monitor like what I mentioned before
Probably different operating model in Asia vs Europe for PE, also minority investment as well

Jul 12, 2020

I've worked in Asia for a brief rotation so I can chime in here - you are correct, it's a totally different ball game and the concept of LBOs aren't prevalent at all like you mentioned (mostly structured, growth / minority) so not a LFL comparison

Jul 12, 2020

Thanks a lot for the thread. What is your view on the technology growth equity space? In terms of:
i) How interesting is the work and how valuable investing skills are developed on the associate level (or is it a different skillset altogether due to the sourcing aspect, minority position, less concentration, DD etc)
ii) Lifestyle vs. more process-driven buyout PE
iii) MFs raising dedicated growth funds (KKR, BX, Apax) - yet to be determined if these are good places to be, but see ex-MF PE associates making the jump to the growth side? What is the virtue in doing this

Jul 13, 2020

1) You are right that it's a different skill set, the biggest difference is that sourcing is a meaningful part of their job and cold-calling is a real thing. It's also less modelling focused, less leverage available, many a times minority like you said etc.

I think what makes it stand out is the simple fact that a growth company is a different animal altogether - it's a lot more exciting seeing your company grow double digits a year, struggling to hire more people than it can sell products etc. vs. a traditional LBO which is 'sleepier' in comparison.

friends in this space who loved it always had a knack for technology OR had an 'entrepreneur' in them. if neither of these two huge factors speak to you, I think this sort of investing won't clique to your personality. a lot of passionate people in this space and it's a competitive world out there

2) Lifestyle is on the whole better but I've heard it can be more stressful with sourcing as an explicit part of your performance evaluation, even at the very most junior levels. if you don't close a deal long enough, you will really start feeling the heat.

upside is that you probably have much more autonomy to define your worksteam vs MF

3) I don't know and I don't think this is common theme Any more so than MF associated leaving for something different in another industry. it's not a 'thing'

For those that do, I'm guessing they are like what I said - passionate about technology or loving the growth space because it's a lot more entrepreneurial and they have some of that in them too. it's almost never better comp or a definite better lifestyle that's the driver

  • Associate 1 in Consulting
Jul 13, 2020

Do you have any opinion on some of the smaller funds such as Marlin Equity Partners or merchant banks like Five Arrows? Greatly appreciated

Jul 13, 2020

Have heard good things about Marlin and think they are okay as investors. Have no real insight into culture.

FAPI I've crossed paths with them in a former life. Think its very mediocre and they give me the impression that they are just doing the bare basics analysis without much "meat".

I would generally avoid Merchant Banks if you want a longer term career in PE for 3 reasons:
- merchant banks are inherently conflicted with the other banking division's business, that already limits their investable universe (e.g. you can't buy your IBD client's desired acquisition target)
- they also can't do crazy value creation plans that puts the bank's reputation at stake. too many inter-related lines of business that could take a hit from this PR nightmare
- I've heard comp from the mid-senior level is meaningfully lower due to less aggressive carry structures

  • Investment Analyst in HF - Event
Jul 13, 2020

How would you suggest I approach recruiting from a US distressed HF? Joined out of school and am interested in PE / HF in london. When would it be appropriate to reach out to headhunters (1 year into job / 6 months in?) for getting onto the cycle? Also would networking help or is it as structured as headhunters connecting you and getting you interviews as in the US? Thx

Jul 13, 2020
  • PE roles are more structured, with min. years of experience required. I suggest having at least 2 (the bare minimum) before you begin (typical in Europe). Hedge funds less so but this is very fund-dependent, so check with headhunters
  • Approach headhunters probably when you are 1 year in at least. Ideally the closer to the time you are ready to go out guns blazing, the better (i.e. closing to when you actually are ready for interviews)
  • Its quite structured, but networking in any country is usually only a plus in my opinion - no real harm done trying, and its so competitive that the incremental edge sometimes does matter. I would invest some time in doing so
Jul 14, 2020

Thank you for doing this!

Could you tell us about the Infra PE players in London specifically (and at a high level in Europe). Any funds/teams that are particularly strong? Also any idea on comp for these kind of roles? (is it similar to what you wrote above or is Infra PE lower?)

Jul 14, 2020

I'm not too familiar in this space unfortunately. I know BX is rolling out their franchise, Ardian is pretty strong, Macquarie is the OG as a principal investor, and Brookfield/oaktree is decently involved.

I'm more on the corporate PE side so it's a vastly different world

Jul 15, 2020

Can you elaborate on the tests you completed at both MF?

  • financial model: how sophisticated were these (standard LBO model you see online?) Is there a good proxy available which is very close to the original test? How many hours? Something difficult in particular apart from the time pressure?
  • did you face any technical questions in interviews, and if so, what kind of questions?
Jul 15, 2020
  • interviewed at a few MFs. All had either a 3 hour or a longer 5 hour case study, which included modelling and then answering some questions based on the model. If you buy the WSO PE prep that should give you a good idea
  • Yes, of course there are technicals. This is too broad a question for me to answer here without doing some injustice... I think you're looking for some laundry list or common themes in Technical questions? if so just buy the WSO prep pack, look at the multiple dedicated posts on this forum for this etc.. you know the drill.
  • Associate 1 in Consulting
Jul 15, 2020

Were the 3-5 hour case studies for funds that only take bankers or is it a mix? Was it 3 statement for all? Asking I'm going to interview for a growth fund and they require a 5 hour, 3 statement model. I'm a consultant and haven't put much time into 3 statement as most of my friends said it's unnecessary (e.g. Advent, Bain Cap and other consultant friendly do simplified models if at all). Want to gauge the yield of getting 3 statement fully under control...

Many thanks, really insightful so far

  • Analyst 1 in IB - Ind
Jul 16, 2020

Many thanks, any other resources you would recommend on this front on top of the WSO prep pack?

Jul 17, 2020

I don't really know a good resource but I would say get your hands no good investment case study examples and practice coming up with a good view.

If you work in a bank, there should be someone somewhere who has this on hand or has worked on a deal that mirrors this. If not, you should get in touch with friends who can help.

One day I will write a mega book on this but....until then I'm sorry I don't have bright ideas ;)

Jul 21, 2020

One interesting question is if you can dwell a bit on what do finds actually do to increase the value of their portfolio. Allegedly financial engineering should not be a thing?

Every has heard of but and build / platform companies, launching in another geography / internationalisation, but haven't really seen in practice more complicated things like launching a new product line or etc.

On top of this management teams should know the company and the asset inside out right?

I heard in some mid market companies pricing consultants are brought in or some other optimisations might take place (examples besides HR and cost cutting - which weirdly should not be applicable most times with professional companies).

Jul 21, 2020

There are many operational value creation levers that private equity firms literally create libraries of playbooks to roll these out. Some examples you've already mentioned (pricing, new products, new geog) which hits a few revenue levers. But there are also cost levers (e.g. G&A optimization, foot print rationalization) and cashflow levers (e.g. NWC management).

The "what" is not difficult to know once you are in the industry, the "how" becomes very resource and knowledge intensive, and having a track record definitely helps build best practices and conviction.

Execution is everything - and the "how" is so detailed that I set myself the goal (in my intro above) that I'll write a whole publication on it one day.

The Second thing i would say is that you might over-estimate how knowledgeable management is or how "professional" companies are run. If you've worked with companies in your current job, I'm sure you'll come to realize through tasks like building the data room, how inefficient the inside of companies can be. Even among big public companies, its wrong to assume all of them are "well run" just because of size, credentials and legacy.

Whilst management is also knowledgeable about day-to-day operations, surely not all of them are i) "world class" in their capabilities ii) view the business in the same investing lens we do. Just like how there are A-players in finance, there are also A-players to put into businesses. Just because management knows their business / markets well, doesn't mean someone from a PE background can't add value. Don't forget - it isn't just finance monkeys (like me) telling the CEO what to do. We build our playbook over i) past deal track records of having "done it before", ii) Team of in-house operating advisors who are the veterans of the industry, iii) specialist teams of functional experts (e.g. HR, IT, Finance, Digital...) who can advise on specific levers, iv) when necessary, specific consultants for particular projects. The last thing I'll also say is that management spends 24/7 running their business, but we (PE monkeys) spend 24/7 finding good companies and trying to make them better (with an army of supporters)

Its like coordinating a war as a general, rather than telling the CEO how to do his battles. We can't "fight" as well as the CEO in the battlefield, but a general can mobilize and lead. It takes a lot of execution horsepower, not just some slides / analytics.

Jul 22, 2020

Nice answer, and very much looking forward for your "how" post.

I've seen indeed that even small PEs have playbooks, dedicated websites where they gather past experiences etc. One thing that's not clear is that besides some generic topics, it gets harder to build a body of knowledge, because a specific fund will only do 1-2 acq in the same subvertical (and may do 3-4-5? other add-ons), then they'll move to another widgets producing subvertical... actually how do funds tackle a sub sector they never invested in?

In terms of operational expertise and functional experts -- these are not on the fund's payroll, therefore is it the case that partners know them / have access to them and they get paid on a project basis?

Jul 22, 2020

The operational industry executives and functional experts are all usually sourced through various industry networks like you said, and they are sometimes on a retainer + success fee if they achieve certain portfolio company goals.

There are also in-house ones that are typically on the payroll for longer term engagements.

Regarding getting exposure to new sub-sectors, I would say firstly there's a lot of cross pollination in learning. Things like functional expertise are quite transferable. Then in terms of 'getting smart' in that sub sector, it really isn't the case where you need 20 years or 20 deals to get there.

That's kind of why people preach about this so called 'investing mindset' - it's not JUST a finance thing, because a good investor also has a decent understanding of operations. People seem to think being a good investor is dichotomous with having a good understanding of business operations - I don't think it's true.

If you look at the top PE MDs who built their track record in certain industries, at some point they have decent knowledge on the industry and have been on multiple boards of various companies in that sector. They also have interacted and spoke with so many 'true' industry experts / former CEOs who partner with them, that at some point this boardroom decision making skill within the industry is second nature. I would be surprised if there was a pure finance guru who just buy low and sell high without knowing a thing about the biz ops, especially in this day and age when PE is getting crowded. You just can't rely on that anymore.

If you think about how some F500 CEOs can move into sometimes completely different industries and still learn an entirely different set of operations and manage the business well - that's kind of how we would do it as well. A good business sense built over different industries, good investor sense by underwriting several deals, and hands on experience improving different companies goes a really long way in building a baseline level of corporate skill. People overvalue the idea of needing to 'be' in an industry for decades just to improve the company

Jul 22, 2020

Curious to know any of the mid-market players you rate? Particularly thoughts on Duke Street and Inflexion?

Jul 26, 2020

do you have any advice on how to approach PE recruiting for London while living in the US? is this even a possibility?

Array

Jul 26, 2020

Yes, that is definitely possible. Several non-US citizens who didn't manage to get their work visa come to London. You just have to reach out to London headhunters and they are familiar enough with how to get you sorted. Headhunters are: Arkesden, Blackwood, Dartmouth Partners, KEA, PER are the main ones.

  • Analyst 1 in IB - Gen
Jul 26, 2020

Hey, thanks for the great post.

I noticed that you mentionned how carried interest was different from one fund to another (e.g., some funds have carried per deal, others have carried as a % of the whole fund based on their paygrade).

As someone who had some internship experience in one of those "carried interest per deal" funds, I've noticed that it really impacted the way the deal team approached every opportunity (as they said themselves). The team would always focus on the intrinsic value of the companies, even when sometimes they didn't have any deal for 2+ years -- they had a reputation for always bidding a bit low and therefore losing most auctions involving several bidders. They kept speaking about past deals that went bad (20 years+ prior sometimes) and how the deal team had to pay back carried interest into the fund and then got fired. They had a very risk-oriented approach, and phase 1 on a deal was basically trying to identify all drivers of value creation, while phase 2 was always focused on the risks, which meant their phase 2 bids were consistently lower.

I suppose that other funds which have a "fixed" carried % based on their paygrade look at companies differently, at least on the junior level (it's more like a job you have to do rather than something as entrepreneurial where you take a lot of risks). Maybe taking into account not only the deal itself but also external factors like management fees or a required amount of capital to deploy per year, especially if they haven't done any deal in the past months/years.

The former fund might decide to pass on a 20% IRR deal to try and get a 25% one the following year, while the latter would rather have 20% this year than no investment at all that year.

1- Would you think that his analysis is correct? In your opinion, how does the way the carried is paid to the deal team impact the decision making process?

2- Which funds have a carried program per deal (you mentionned CVC), and which ones have a carried program per paygrade (you mentionnes the american MFs)? Are their any other firms with a different program than those two mentionned?

3- Which type of firm would you prefer and why?

I'm generally very curious about investing and I find this topic very interesting. In theory, you could know by working in an american MF that if you face a fund with a per-deal carried in phase 2 on a process, you can more easily win the auction by raising slightly your bid (lowering your IRR but at least you win the auction which might be better for you in the end).

Thanks again for the great post.

Jul 27, 2020

1) I think you are generally right in that if your compensation in any shape / form is tied to the deal, you would totally care more about the deal from an incentive perspective.

I don't however think that they really scrutinise IRR and take it as a 'holier than thou' metric - they focus more on a fan of outcomes based on upside / base case / downside scenarios and the deal has to be attractive from an OVERALL risk-reward perspective. Not just reward.

Also I don't think they will pass up a good but lower irr deal just to be conservative. I mean there is an investment horizon in every fund (around 5-7 years) and if you keep passing on deals your compensation from that no deal is exactly 0. Between 0 and 'possibly some number', I think most people would opt for the latter.

2) carry interest comps are not that transparent so I won't pretend I know how all funds calculate this. You can look at heidrick's comp reports for PE to get a rough sense, but even then I wouldn't overly rely on that too much because funds tweak this all the time.

What you should think about is that those who compensate purely on deal by deal basis is rare (and aggressive), and usually it's a formula that mixes both direct deal contribution and overall fund performance.

3) I have a preference for a balance. Like all things in life, I think removing accountability from outcome is a disaster. If you are held responsible for an outcome, you should be somewhat bearing both the risk and reward for it.

On the other hand, I think sharing in group profits does encourage some form of collaboration because you are 'forced' to care about other people's deals and help if you can. This makes people less selfish and self preserving in only caring about their own deals, which I think is good from a partnership model point of view (something like law firms).

Don't think anyone has a holy grail answer for this but there are other softer elements that drive overall behaviour of the firm apart from comp as well. I think that is equally important (eg risk seeking behaviour, culture set by the top, investment committee practices etc.)

Jul 28, 2020

Thoughts on growth equity places like General Atlantic or Warburg Pincus?

Jul 28, 2020

Very positive on both.

Would say GA is more willing to move "up" the growth curve and invest in earlier stage companies recently, where Warburg not really (similar to TA Associates).

GA has all along had a heritage in growth so I would say their track record is longer (not necessarily better), whereas Warburg made a push in the last decade and made decent progress.

Both are solid shops if you are keen on growth but "DNA"-wise GA is probably the old-timer for this strategy

  • Associate 1 in IB-M&A
Jul 29, 2020

Do you know if GA also does majority / full buy-outs? Their website isn't fully clear in terms of strategies to me. As an example, would they consider buying a growth asset from for instance Vista? Also, do you think they'd be interested / be able to merge / significant add-ons to their portcos in the same industry? For example, they own a #4 in the market in Series C, the #2 in the market is also series C and combined they become the clear market leader, would that be compelling?

  • Analyst 3+ in IB-M&A
Jul 28, 2020

How does lateraling tie in with recruiting? Eg if I do two or three years at a MM then move to an EB or BB, how do I navigate recruiting?

On the one hand I am at risk of becoming too experienced, but on the other I am sure it would look bad to leave / recruit after less than one year at the EB or BB. Would be great to hear your thoughts on the best way to approach this.

Jul 28, 2020

Well the question is whats your current position / where you from? Can't really comment as I don't know whats the background / context of this move.

  • Analyst 3+ in IB-M&A
Jul 28, 2020

Thanks. Still in progress, but likely from a Big 4 background (M&A team) and 3-4 years experience into an EB. My question is really if I make the jump to an EB (Lazard / Roth's most likely) how long would I have to stay before moving to PE?

Clearly it is a huge jump in terms of prestige on the CV, but does it mean I would have to do another 2 years in M&A before moving for example.

For what it's worth I am a UK guy so this is more relevant for the MM funds that take this background I suppose.

Thanks for all the comments in this thread! It's very informative.

Jul 29, 2020

Do you know which of the larger PE opportunities in the London market are open to people who don't speak a European language (i.e. just Anglophone)? How much of the recruiting market do you lose out on if you only speak English?

Thanks for doing this AMA, very helpful.

Jul 29, 2020
Comment
Jul 31, 2020
  • Prospect in IB-M&A
Jul 31, 2020