Questions about Growth Equity Private Equity

Hi, I come from a top US bank (GS/JPM/MS) I've rotated across debt capital markets and equity capital markets so I have pretty much no financial accounting and modeling experience but I'm really interested in PE.

I know I won't be suitable for traditional buyout funds as I'm aware you need excellent financial accounting and modeling skills to succeed which I don't have, but what about growth equity at a top fund like General Atlantic or Blackstone's / KKR growth equity team? How much financial accounting i.e. three statement analysis and modeling do they do?

Some other questions below:

A) how does the financial modeling differ between someone working in growth equity PE vs traditional buyout PE? i.e. would you have to build out three statement models / operating models during a growth equity investment? Do you need to be a top performer in financial modeling?

B) what about financial accounting, how does it differ? do you need to have strong financial accounting knowledge to work in growth equity?

C) do you get involved with the businesses in growth equity and think about ways to improve the business/cut costs/increase revenues etc or is it more passive and you just provide the growth capital and that's all?

Thank you.

Comments (13)

 
Most Helpful
  • Analyst 1 in PE - Growth
Jun 27, 2020 - 6:35pm

A lot of your experience with financial modeling is going to depend on the shop you end up going to. If you are targeting growth equity funds that are structured more like a late stage VC shop, then you will not do as much modeling (maybe even no modeling) as a fund that is focused more on investing in profitable businesses.

For funds that look at businesses where there is no profitability yet or for the next few years, it is unlikely you will need to be a top performer in financial modeling. These shops at the junior level will focus more on sourcing, research, and due diligence. Your split for work will depend on how the shop is structured.

Some places will have Analysts do all of the sourcing and that's it while some will give Analysts a lot of responsibility early on. In your case, you will be joining as an Associate so I would say you should expect to do a little bit of everything. If the shop hires Analysts and all they do is sourcing, then you can expect an Associate role to be more focused on due diligence and if there is any modeling done, you can be expected to do it. I wouldn't say that your modeling skills would have to be superior to succeed though.

I don't think you need to be extremely sharp on financial accounting knowledge outside of the basics. Growth equity investors focus more on metrics and ratios. There are a handful of metrics that almost every growth equity fund will focus on like the unit economics of the business or the annual recurring revenue. You don't have to be an accounting whiz and most of these metrics can be found pretty quickly or you could just ask the founder and they would know.

To address your last point, it depends on the fund but I would say most are looking to get involved. Growth equity funds still seek board seats on the companies they invest in and the large ones will have a team to help improve the business. The team can help with sales and marketing, business introductions, and talent. I would say the operations team in growth equity is much different than buyout funds though. Buyout funds are definitely more focused on cutting costs and optimizing expenses. You will certainly focus more on just growing top-line at a growth equity fund. If you are an Associate at a larger fund, I wouldn't say your job is to really get into the portfolio and help out. Your job will be to source in quality deals and keep the pipeline strong with new businesses to invest in.

 
  • Analyst 3+ in IB - Ind
Jun 27, 2020 - 7:26pm

This is super helpful thank you.

Interesting to know the juniors are the ones that do the sourcing, it sounds similar to a hedge fund in the sense the juniors search for investment opportunities and then pitch it to the seniors, is this how it would work? compared to traditional buyout PE / IBD culture where the seniors source the deals and pass them onto the juniors to do the analysis and due diligence.

Could you provide a bit of insight into the sourcing aspect? How do juniors go about sourcing deals, would a senior say something like 'go find me a list of private companies at series x stage, in this sector within this geographic region' etc... ? and What are the typical tasks/ways juniors do sourcing, do they attend events, build network with sell side bankers at private m&A boutiques, cold email/call private start ups, spend hours on google searching etc? I originally would have thought the seniors do the sourcing through their network and then the associates/analysts do the due diligence/analysis.

So at the senior / partner level in growth equity would you say the main responsibilities are making the investment decisions based on the investment ideas pitched by your juniors and once meeting these companies etc, getting involved with the portfolio companies via board seat and thinking about growing top line (unless you have a dedicated operations team which would handle this) and getting involved with the investor relations work of fundraising for the next fund etc.?

Thanks again

 
  • Analyst 1 in PE - Growth
Jun 27, 2020 - 7:59pm

Sourcing is a pretty critical aspect of growth equity. If you are working at the junior level you can expect that sourcing will take up more of your time than at the senior level. The senior guys also source in deals but they aren't doing the major grunt work to identify these companies like Analysts and Associates. They source through relationships and however else the fund decides to source. If you are an Analyst/Associate then yes you will pitch to senior guys on the companies you find.

Sourcing can be done in a variety of ways at the junior level. A lot of it would be identifying companies in target industries and then sending emails to the founders to connect through phone. It can be as simple as using Google to find these companies. Attending events is also a common way to source. Growth equity shops have a unique way of sourcing in deals and opportunities so the answer varies from fund to fund.

The Partner level is mainly making investment decisions and meeting with companies they want to invest in. The Partners do meet a lot with founders but only with the ones they believe they want to invest in. Whoever sits on the board depends on the fund, some will allow a VP or Principal to sit on the board whereas others only allow Partners to take a board seat.

The investor relations work varies from fund to fund as well. A smaller fund will probably have the General Partner be more involved with it. At my fund there is a team who is designated to handle the investor relations and the Partners only chime in with the new prospective LPs who will invest a good amount of capital into the next fund.

As you can tell, the structure of a growth equity shop will vary from fund to fund. I would say it really depends on the size and scale of the fund at the end of the day. A bigger fund has the luxury of delegating more responsibility to other people. Small funds will require everybody to wear more hats and play higher than their role.

 
Jun 27, 2020 - 8:04pm

What if you are not able to source any companies as an Associate or Analyst? Do you get fired? Is it just a requirement to show that you have contacted a few companies to source?

Will update my computer soon and leave Incognito so I will disappear forever. How did I achieve Neanderthal by trolling? Some people are after me so need to close account for safety.
 
Jun 28, 2020 - 10:05pm

Getting a deal done is very unpredictable and it wouldn't be uncommon to not have anything close in your first year. But if you try for 3 years without closing you likely won't be top of the list for promotion.

Here's how I evaluate sourcing aptitude for my junior colleagues:

1) Volume - calls / meetings per week, etc

2) Quality of deals that come through the funnel - how much time do we spend on them, do we seriously consider submitting an LOI?

3) How well does the person filter for things? Are there false positives - where we end up following up with things that should have been an obvious pass - or false negatives where we pass on something too quickly that ends up being a good opportunity?

4) Rapport with founders - is the relationship purely transactional or does the person actually make them want to stay in touch, etc?

5) Hustle.... any idiot can call up a banker and see what they're working on. The mark of a good sourcer is if you can convince the companies that aren't exploring investment to work with you, and in some cases go all-out to get in front of them

 
Jun 28, 2020 - 10:17pm

gosh, this sounds so much like a sales job! How are mid 20 year olds with a cuple years of IB experience supposed to get deals in?

Will update my computer soon and leave Incognito so I will disappear forever. How did I achieve Neanderthal by trolling? Some people are after me so need to close account for safety.
 
Jun 29, 2020 - 12:21am

I would just caveat that growth equity is a pretty broad term which can mean a lot of things, from essentially late stage VC to much larger check sizes.. When I was working as a banker we would speak to TPG Growth on any process that was basically less than $1bn check size. Obviously junior investment team members aren't doing any proprietary sourcing here, and the deals are coming through bankers.

Funds like Summit write much smaller checks, and as a result there is a big sourcing angle to the associate role (I've heard it spoken about quite negatively). GA would be somewhere in between but closer to TPG.

As far as the OP, I think you'll really struggle both at and to get looks from the funds you mentioned (MF growth groups). They are modeling / accounting intensive and pretty much exclusively hire from IBD groups (non capital markets). You'd be better off looking at the MM growth funds, and I have seen a few (though it is still uncommon) people move from an ECM role to growth on the west coast. As someone in ECM on the TMT side, you at least get a good look at the tech landscape / would have participated in a number of IPOs, so I think certain shops would find this valuable. If you're in ECM non tech that would make things even more challenging in my view.

 
  • Prospect in IB-M&A
Jun 29, 2020 - 7:10pm

Somewhat unrelated question, but would appreciate if anyone could weigh in here. Is there a comp difference between GE funds and traditional buyout firms at the junior level? Assuming buyout would pay more, albeit have a worse work-life balance. Is this right?

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