Should I switch from REPE to traditional PE?

I am currently an associate in real estate team of a top private equity firm. Should I switch to traditional PE? Real estate is ok but I am not that interested in it.

I am thinking about this in several aspects:

1, Pay in traditional PE is higher.
- I am not sure how much higher, but from what I heard, total comps may be 30% higher. That make sense to me because, as you may know, most REPE's IRR is around 20%. In comparison, IRR for traditional pe is much higher, top PE could hit 40%-50%. When you make more money, you get more. Make sense. (would be better if you guys could quantify the comps difference)

2, Broader exposure and sense of accomplishment in traditional PE.
- In traditional PE, you can feel you are really helping a company to grow, rather than just earn your return. You talk with the entreprenuer, you think about strategy for the firm to grow. But in REPE, we (our fund) are acting just as a financial investor, earn the 20% return, and that's it. It's very project-based, and no need / also no expertise to help RE firms to grow.

3, However, hours for traditional PE is a question. I know KKR/Blackstone's hour are really bad, but some other top PE firm seems ok. By "OK", I mean 9:00-20:00 average. I know some people in top firm go back home at 5:30PM everyday.....what's a happy life....

4, But, sometime I do think that maybe I could have a better career in real estate, if later in my career I could focus more on the Asset Management side. Many buildings are operated in such an inefficient way, and this may be an opportunity. Generally speaking, I feel there is less competition in RE than in traditional PE. (am I right? there are so many traditional PE firm chasing for a few good deals), so less competition means existing opportunity if you dig deep down and work hard.

So, what do you guys think? Would like to hear your advice!

Note: I could switch to traditional PE if I want. I have some connections.

Comments (34)

Feb 16, 2012

It sounds like you're in another country, possibly even a developing country?, so I'm not sure what comp or returns are like in your market, much less the firm you're at. But you mention Blackstone, for example. Obviously it depends on how the market is doing, but in '07 Blackstone reported higher returns from their real estate group, over a decade or two, than in PE. I'm also pretty sure pay is just as high and hours just as bad in their real estate group as on their buyout team. So it really depends.

Feb 16, 2012

Blackstone RE... best of both worlds for you

Feb 16, 2012

All other things being equal, do what interests you and what you feel motivated about.

Personally, I couldn't care less if I am "adding value" to a company/asset or if I'm getting involved in operations or asset management for the sake of it... I'm more concerned with the bottom line as an investor and making money personally. "Adding value" only matters to the extent it helps me achieve this.

REPE works for me in this sense. However, I have had colleagues who fall in love with buildings and have had guys who get excited about different types of companies they invest in. I'm not like that. Don't get me wrong, I like to do a good job and think there are many opportunities to improve real estate or company's operations, but I'm not kidding myself. Ultimately, what matters is that we (read "I") have to get paid. You seem like you care more about "adding value" for the sake of it than I do.

If I were you, I would take the opportunity you have now to learn Real Estate, but also transition into Corporate PE. Just make sure your PE experience is with control investing, or at the very least significant minority/growth investing. You don't want to be in PE and be far removed from actual deal making (e.g. co-investments & LP investing). In your first 5 years of your career you are building a skill-set and a basic network / reputation with your peers. It make sense to develop both areas if you can. It will give you options in the future and will help you mature as an investor.

RE in major markets like London and New York is extremely competitive. You're not just competing with some wall street guys, you're also competing with RE families, REITs, RE companies, Sovereigns, institutional investors and entrepreneurs... most of those guys, apart from the entrepreneurs, have a lower cost of capital and some have better expertise on the asset side... in better times you even compete with the debt/refinancing markets... In corporate PE you compete mostly with other PE firms, strategic buyers and the IPO market. Different kinds of competition. Maybe corporate PE guys can give their opinion on this.

The asset management / portfolio management sides of REPE and PE don't pay as much as acquisitions / investing roles. So, this kind of conflicts with your first point focused on compensation.

Feb 16, 2012

Totally agree. Many entities have a lower cost of capital than us, and may require a bit lower of return. That's why I don't see we are in a growth mode, and why I am concerned about the pay growth in the future.

Thanks for your advice Relinquis.

Relinquis:

......most of those guys, apart from the entrepreneurs, have a lower cost of capital and some have better expertise on the asset side... in better times you even compete with the debt/refinancing markets... In corporate PE you compete mostly with other PE firms, strategic buyers and the IPO market. Different kinds of competition. Maybe corporate PE guys can give their opinion on this.

Feb 16, 2012

how did you get on?

Feb 16, 2012

?

Feb 16, 2012

You should expect to be asked why you want to move from REPE to traditional PE, especially when it's completely different. What skills from REPE are transferable to traditional PE? What kind of detailed modeling, structuring, waterfalls, etc. have you done? How do you go from passive investing to more hands-on operational investing?

Feb 16, 2012

Personally, I don't feel challenged enough with what I've been seeing as an Analyst in REPE for the past two years. Perhaps it's firm specific, but I feel like I could have done my job prior to undergrad with the exception of a few corp fin classes. Feel like Traditional PE would be a step up in difficulty and something else to learn in order to broaden my expertise in investing (Envisioning eventually being a VP/Principal at a PE firm with RE arm and being able to straddle. Maybe I'm wrong, but there has to be a market for that type of expertise right?)

I'd say all the modeling is synonymous in REPE (we usually deal with NOI rather than EBITDA, but essentially the same thing: Income - OpEx = NOI - CapX - Debt Load = Before Tax CF (EBIT)). Calculating fund returns and equity waterfalls would be the the same minus some added tax sheltering for investors within a RE fund. Obvi, fund structure will vary depending on fund mandate, GPs and LPs, but I'd imagine one would approach purchasing different companies the same as properties (by asking where one can add value? either in a burgeoning market/location, through increasing operational efficiencies, potential value-add strategies, etc.) Research and macro level view of firm/property within a market/location would continue to be extensive - obvi not going to buy a firm/property without doing proper due diligence. But hell, what do I know...I'm sure it's completely different and it would be a steep learning curve at first, but what industry doesn't? Guess I'm just bored with what I'm currently doing and looking for other areas of investing that I can add value to.

Feb 16, 2012

bump

Feb 16, 2012

I am in the same boat with you, I've researched this a bit and this is kind of what I gather:

A) We're lucky, we got into PE out of undergrad. That does not happen, it just doesn't.

B) We're also screwed. IB experience is often the litmus test for a lot of these PE firms out here looking to hire analysts/associates.

C) RE is pretty niche, like consultants we either come from a successful career in a specific industry to work in PE or become industry-specific after a few years of working in PE... this is both on paper and in reality since very, very few companies need to go out on a limb for analysts with no experience in the subject field given the sheer amount of applicants chasing these jobs.

I think it can be done, but you either need to downgrade to a smaller firm that will give you that opportunity, find a mentor within your firm (if it has other investment divisions) who will take you into your chosen field or pivot during an MBA by getting a concentration in your new chosen field.

Feb 16, 2012

Yeah, this is similar to what I've realized through research. Wonder if it would be more attainable to go to an IB role and then back to PE... The major deterrent is time.

Feb 16, 2012

Care to explain to us all how you fucked up your current opportunity so we can avoid doing what you did and being like you?

    • 3
Feb 16, 2012

You've definitely already thought of this, but you're right at the business school age. You could change industries that way

Even though I'm not much help I'm curious about your situation. Is this one of those shops that typically hires associates and lets them go after 2-3 years? Or did something go wrong

Feb 16, 2012

Nothing I did wrong, it's a headcount thing. They're just cutting staff. This wasn't the plan, but they are giving me a few months heads up to find something else. I'm not set on leaving RE PE, but am just wondering what potential options could be.

Feb 16, 2012

Care to explain why you're leaving REPE? Is it just because you failed out of the industry?

    • 7
Feb 16, 2012

Have you reached out to any recruiters to see if traditional PE (in addition to strategy, Corp dev, etc) is an option? The RE part might make it harder for strat or CD, but not impossible.

The other thing is to see if there are some profiles on linkedin where someone went from REPE to something different. You are at the right age for an mba... but unfortunately a lot of the 2nd rounds at top US schools have likely passed and 3rd round is generally advised against because it's so difficult (unless you have an amazing story, or you have no choice timing wise).

    • 1
Feb 16, 2012

Depends on what type of RE you're doing--if you're doing pureplay RE (e.g. apartments, condos, development), it might be a tougher spin; however, if you're in a more general RE (REITs, lodging, gaming) then it won't be too tough since the valuation and LBO logic is effectively the same corp fin as a non-RE experience.

Feb 16, 2012

All of the major opportunity funds look at both REITs (corporate-level privatizations, JV's, etc) and smaller assets/portfolios. You could use this experience and spin it to you advantage.

Feb 16, 2012

I'm currently an analyst at a REIT and we just had someone leave to go to Carlyle (in their RE group).

Does anyone know how the comp in the RE groups at the Tier-1 PE shops (i.e. Carlyle) compares to their normal PE operations?

Feb 16, 2012

I'd like to know this as well.

Feb 16, 2012

^Bump

Feb 16, 2012

interested as well

Feb 16, 2012

Just curious, do you have an offer from a RE PE firm ?

Feb 16, 2012

bump

Feb 16, 2012
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