Views on the future of Private Equity

Subscribe

I'm currently working in IBD and after weighing up what I want to do next, PE seems to be the winner as I've found myself becoming increasingly interested in the industry and the nature of the work.

However, from my standpoint, it seems like the industry is way too crowded, too much capital chasing too few deals; there's nothing like an overly competitive auction process to kill your IRR.

I recently had a conversation about this with an IBD old timer and he was of the opinion that we're going to see a polarisation in the market with funds that have diversified into other areas (distressed debt, real estate etc) at one end, and specialist PE funds that only operate in one or two sectors where their expertise (aided by partners with operational experience) can genuinely add value, at the other.

What are people's views on this? Will we see less generalist PE shops over the next decade or so?

Moreover, is compensation on the way down? I've not personally seen the data to back this up, but I read a post on WSO that said:

- Today only half of all buy-out funds in Europe earn carry (beat the hurdle rate of 8%)
- Transactions are today priced at an IRR of 15-17%, down from 23-25% 5 years ago

If this is indeed true, are we likely to see GPs pulling their money out of PE and towards other alternative investments with the potential more attractive returns (and similar risks) e.g. HFs?

I still want to go into the industry regardless, but my enthusiasm may be tempered if I am essentially working my butt off to board a sinking ship, especially with having to face the competitive private equity interview process…

Comments (90)

 
Nov 23, 2014 - 7:48pm

One thing for certain, your path to the top will be much much longer and harder than for many in previous times. There are just so many more firms out there and it's uber competitive between funds (fundraising ain't easy either) and there are so many candidates trying to get analyst/associate positions. So try to have an idea of what you may want longer term before making the jump and/or keep an open mind.

Otherwise I think this is a timeless debate and there is no right answer other than, things will change and then they will change again. The big generalists will either carve out specialist funds (which we have seen) or allocate to those sectors in their actual funds and hire said people. They will make a ton of money in that area, and that team might spin out, go independent or become senior in that organization or lose a ton of money in that area, if the latter in which case said specialist fund gets shut down/run off and PE firm goes back to being "generalist".

Good generalists who make money consistently and have loyal LPs will stay that way - that's what they are getting paid for... though they may diversify into other products (HF, sector funds etc), to "give" their LPs more "diverse" offerings (ie. generate more management fees). Specialist funds that are good will stay specialist and tweak with their strategy to stay with the times. Things are cyclical and change all the time, so just like in any industry you will have shakeouts and bubbles.

PE is well established now so moving up will be tough. It's not like the 80s where people were getting to senior positions pretty quickly. People forget that a lot.

A bit of an unstructured ramble, apologies...

Good Luck

I used to do Asia-Pacific PE (kind of like FoF). Now I do something else but happy to try and answer questions on that stuff.
 
Dec 1, 2014 - 4:19pm

Jamoldo:

One thing for certain, your path to the top will be much much longer and harder than for many in previous times. There are just so many more firms out there and it's uber competitive between funds (fundraising ain't easy either) and there are so many candidates trying to get analyst/associate positions. So try to have an idea of what you may want longer term before making the jump and/or keep an open mind.

Otherwise I think this is a timeless debate and there is no right answer other than, things will change and then they will change again. The big generalists will either carve out specialist funds (which we have seen) or allocate to those sectors in their actual funds and hire said people. They will make a ton of money in that area, and that team might spin out, go independent or become senior in that organization or lose a ton of money in that area, if the latter in which case said specialist fund gets shut down/run off and PE firm goes back to being "generalist".

Good generalists who make money consistently and have loyal LPs will stay that way - that's what they are getting paid for... though they may diversify into other products (HF, sector funds etc), to "give" their LPs more "diverse" offerings (ie. generate more management fees). Specialist funds that are good will stay specialist and tweak with their strategy to stay with the times. Things are cyclical and change all the time, so just like in any industry you will have shakeouts and bubbles.

PE is well established now so moving up will be tough. It's not like the 80s where people were getting to senior positions pretty quickly. People forget that a lot.

A bit of an unstructured ramble, apologies...

Good Luck

Great post.

Do you think a lot of anecdotal evidence is what pushed people into PE? Or atleast, gunning for it?

Seems like it's the holy grail of places to be, but guys who are billionaires now were flourishing in a bit of a new market.

I'd compare it to tech guys hitting it big during the late 90s...

I mean, yeah, you can COME UP in the tech world today... But many are jumping in because what they heard happened when it was booming.

And it's much tougher to make the world shattering app today than it was just 4 years ago due to competition.

 
Nov 23, 2014 - 9:04pm

In the 1980's, you could have become a millionaire by the age of 30 selling munis to retirees in Florida. Just like that would be difficult now, things in PE or hedge funds are also harder now. Maybe not as difficult as the first example, but everything that is easy money doesn't stay easy for long. Going to a hedge fund is still better than almost anywhere else, all things considered. You're almost certainly not going to become a billionaire if you join KKR and stay there for a long time like the founding partners did.

 
Dec 1, 2014 - 6:05pm

DickFuld:

In the 1980's, you could have become a millionaire by the age of 30 selling munis to retirees in Florida. Just like that would be difficult now, things in PE or hedge funds are also harder now. Maybe not as difficult as the first example, but everything that is easy money doesn't stay easy for long. Going to a hedge fund is still better than almost anywhere else, all things considered. You're almost certainly not going to become a billionaire if you join KKR and stay there for a long time like the founding partners did.

100% true. Schwartzman was even pretty late to the game when they started Blackstone, in terms of drawing absurd amounts of income, though of course they didn't miss the boat. A lot of money was made in PE in the 90's but not like the 80's, and nowadays with so much competition flooding the industry income is trending down.

 
Best Response
Dec 1, 2014 - 7:55pm

Everything that has been said above, but I'd also add that HF's aren't having the best of times now either, and this isn't someone in PE trying to crap on HF's by any means, but their returns haven't been too great recently and I think I just read today that more funds have shut this year than since 07/08 when so many blew up. Just like PE used to be easier (a term I use cautiously), HF's used to be much smaller and nimbler and could beat the market rather than be the market. So I don't really see a big shift in the LP landscape where they drop PE . If anything, with things like Calpers (or sters) pulling out of HF's, I'd argue the opposite. In addition, remember that carry in PE is almost certainly taxed as a long term cap gain and as far as I know HF's are a short term gain/ordinary income so from the pov of the guy working in it, it's a better deal tax wise.

PE is currently different than it was and it will be different in the future. The same can be said of HF's, IB, trading, tech, medicine, etc. @"DickFuld" is completely correct: I actually knew a guy who moved to one of the Keys and made a few hundred grand a year selling muni's to retirees and lived the life in the 80's/early 90's. Highly doubt he's doing that now. However I don't think PE is going to change that much.

I'd caution against always looking back and thinking that the good ol' days were so much better than now. When I graduated from college in the mid 90's and got into REPE, all that everyone talked about was how awesome the 80's were for RE. When I got into more traditional PE, people talked about the 80's and the awesomeness of the corporate raider days. In the early 00's (or whatever the they're called), I talked about how awesome the dot com boom days were and traders talked about the glory days of pre-decimalization. And now we all talk about how great the world was pre 07/08. I know guys older than me who still reminisce about the days before the end of fixed commissions. While there's some lumpiness to it, I'd lay money down and say that folks in Wall Street style finance jobs make more now on average than they ever did. With the amount of money at play and the sheer intelligence that surrounds Wall Street (in combo with the greed), we'll always make far more than the average professional in nearly every other field.

PE now and in the future:

-it's harder to make partner or to get into the partner track because more people want it and less people have retired because of the recession. Remember that carry in PE is a long term game and a lot of guys who are in their later 50/60's who would have retired in, for example, '10 or '12 or today didn't because their funds didn't do as well as they had planned because they invested during the bubble and overpaid or harvested in the crash or directly after the crash. There are more funds than ever, but more guys stuck around for another cycle because they either planned on making more money or didn't want to go out on a flat fund. It'll be interesting to see what happens when a lot of these guys retire. However there are more than enough suits to fill their chairs.

-entry multiples have increased recently but you just have to be smart about not buying simply to deploy capital. I honestly don't know how guys in big MM or megafunds do it because every deal is an auction. It's a reason I'd argue for getting into the smaller market. In the dozen or so years I've been in the MM/lower MM, I've seen many more deals being part of an auction, but there still are off market deals available, and there's a lot of opportunity in buying a platform auction deal and doing a bunch of smaller bolt-on's with off market deals and being able to greatly increase the value of an investment. It just takes a lot more work to not just receive calls from M&A bankers marketing a deal than it does to go out and find direct deals.

-fundraising is tough, but it almost always has been except for a few glitches such as 2006. But good investors will always be able to attract money. Starting a new fund is very difficult admittedly. I've always found the LP herd mentality pretty amusing, and I suppose ironic, because they're willing to throw money back at big funds with recognizable names who lost them money or were flat, but they hesitate to invest with newer guys who have great track records. I don't see LP's getting any smarter.

-as others have stated, you're most likely not going to be Henry Kravis if you get into PE now (although who knows, maybe one or two guys will in 40 years) but they and other similar guys basically started the private equity business. It was probably pretty risky for them to leave a solid Bear Sterns partnership for a relatively untested field, although with the egos involved they most likely didn't have a minute of personal doubt. Today, you're joining an established business with much more security and more defined opportunities. In the 80's how many PE/corporate raiders could you go work for?

-I agree with the bifurcation of the industry with smaller specialized firms who concentrate in a particular niche and the planet wrecker megafunds who have really become alternative asset manager platforms, and public co's at that (I find that ironic: private equity, which says it's better to take a company private and improve it outside of public company scrutiny are themselves public companies). I think this will continue, but I don't see the smaller funds (and I'm not just talking about a micro $100MM fund, but anything below the funds that have dozens of unrelated strategies and tens of billions of current AUM) going away. There are tons of smaller LP's who can directly invest in PE funds where they don't have to or can't deploy hundreds of millions at a time because they'd be 25% of the fund.

Apologies for the ramble. Just a few thoughts.

 
Dec 1, 2014 - 8:20pm

I basically agree. I was probably a liter+ deep in Bombay when I wrote the comment above and didn't really mean to draw a distinction between PE or HF. My main point is that, while the money is going to be relatively good in PE and HF, you will never become a billionaire by joining someone else's fund. Or, at least you shouldn't expect to. The same way I would tell you that you wouldn't be able to do that in an investment bank even though Sandy Weill and I did it.

It doesn't matter if we're talking about PE or HF, the answer is the same. It is extraordinarily difficult to make ridiculous money in those areas because institutional investors will continue to go with the safe bet for their career, which means the big will likely get bigger. The only real way to get that sort of upside is to start your own firm, which is exponentially harder to make exceptionally successful than twenty years ago.

To give an example of how much harder it is in the hedge fund world, ponder this: convertible arbitrage was one of the more popular investment strategies in the eighties and even the nineties. Now, there 's practically nothing to be had there because everybody knows how to price basic call options that are embedded in these bonds.

But, to support the point of @"dingdong08", activist strategies are much more effective BECAUSE of the size and clout of those funds. Nobody is going to give a shit about your suggestions with a $20 million position in your company. But, of course, if you have a much larger position, you're much harder to ignore. People adapt their strategies, like they do in anything else.

 
Dec 5, 2014 - 4:40pm

"The Future Is...Private Equity" (Originally Posted: 09/25/2008)

From today's WSJ:

"The Future Is...Private Equity

It may seem counterintuitive, given the problems infecting a number of private-equity firms such as Apollo Management, Blackstone Group and Kohlberg Kravis Roberts & Co.

But these firms have a tremendous opportunity in front of them. They can build some hugely profitable businesses on the cheap, affecting a transformation from private-equity shop to full-blown institution. KKR already has its broker-dealer license and has dabbled in debt and equity issuance. With scores of bankers soon to flood the Street, it could pick up teams of talented people and try to fill the void.

It will take some time to develop challengers to the megaliths now assembled. Still, is it any wonder why Blackstone shares were up Monday in a horrendous trading day for financial stocks?

"For the institution of the investment bank, the players are changing," says William J. Wilhelm, a University of Virginia professor who studies the history of investment banking. "But the needs are the same."

Is it me or does it feel really good over here in the buy side, specifically in the mid market sphere? Yeah, leverage multiples are down significantly from the boom days of 04-05, but this doesn't sway MM PE firms very much. We're looking at significantly lower valuations and correspondingly lower entry multiples. A lot of opportunity out there.

 
Dec 5, 2014 - 5:02pm

The increasingly grim future of PE and how to solve it! (Originally Posted: 10/28/2014)

PS: If we could "sticky" this on the front page, that would be fantastic!

Guys,

I wanted to open the floor for a discussion on the future of PE.

If you were to start a PE fund: i) what kind of product would you offer to your investors; ii) and how would you manage your investments differently? In other words, how can you differentiate yourself from traditional (and increasingly struggling) PE funds?

Regarding my background, I've worked at a large-cap buy-out fund in Europe for 5 years (mostly doing mid-cap transactions due to meager deal flow), most recently as a VP, I thus believe the following trends are given and don't need to be discussed in further detail:

  • PE is becoming increasingly commoditized as all players have access to (more or less) the same industry experts (ex-CEOs), DD advisors (commercial, financial and legal advisors) and debt packages
  • There are too many players in the market and too much capital which needs to be invested
  • The market is extremely sticky with commitment periods of 12+ years, which means that it won't get better anytime soon
  • The conflict of interest between maximizing management fees (earned on invested capital) and carry (earned on excess return over a hurdle rate) leads to many firms making extremely aggressive investments in order to have "money at work"

TWO FACTS FROM THE MARKET:

  • Today only half of all buy-out funds in Europe earn carry (beat the hurdle rate of 8%)
  • Transactions are today priced at an IRR of 15-17%, down from 23-25% 5 years ago

As mentioned above, I would like to discuss the following two questions. I'm keeping my initial thoughts relatively brief as I don't want to disturb the creative thought process, but I'll follow up soon:

i) What kind of product would you offer to your investors?

  • Blind pool investments are a huge issue for investors these days, they want to know what they buy, would it thus be possible to offer investors transactions on a deal-by-deal basis. How could this be structured, especially in a competitive auction where access to capital and transaction certainty is key? What kind of rights would you give to your investors?
  • Lower management fee but more carry? Would investors be willing to pay a retainer in order to see deal flow?
  • More information than traditional quarterly / annual fund reporting?
  • Board seats?
  • I believe family offices are currently underserved, how would you specifically taylor a product for them?

ii) How would you manage your investments differently?

  • I don't really have an answer to this question, but it will likely involve (even) more focus on operational improvement during the holding period as well as longer holding periods
 
Dec 5, 2014 - 5:11pm

Current state of PE and its future - from the best sources (Originally Posted: 04/25/2007)

If you're interested in PE and its current state and its future, there's a video on Bloomberg today (4/25/07) with a conference of 4 titans of PE: Rubenstein of Carlyle, Lee of THL Partners, Bonderman of TPG, and Black of Apollo, and moderated by money honey herself.

 
Dec 5, 2014 - 5:19pm

10 Year Outlook for PE (Originally Posted: 02/22/2008)

For the past several years, PE has been the hot field, with comp still very high. With the credit crunch, is it plausible to think that comp in this field will remain high over the next decade? Or will rates rise, hurting the profitably substantially?

 
Dec 5, 2014 - 5:29pm

PE future (Originally Posted: 03/11/2010)

I'm switching career from entrepreneurship to finance, I may have an opportunity to start in PE or VC, which I find really interesting and all but what do you honestly think of the future of this asset class, lots of people tell me it had its glory and now it's over etc...
In an other thread I read that currency trading was the next big thing, what do you think?
Thanks

 
Dec 5, 2014 - 5:38pm

Where is PE as an industry/asset class going? (Originally Posted: 07/26/2014)

Private equity as an industry and asset class is relatively young. It's gone through a lot of changes since it rose to popularity in the late 80's. Where do you see the industry going in the next 10-20 years? What fundamental changes do you think will/are taking place? How do current regulatory changes impact the future of the industry, and how will prospective future regulation impact it? How will the demands of LP's change, and/or change the way private equity business is done?

 
Dec 5, 2014 - 5:39pm

I'll speak to the lower MM to MM because that's where I've operated. I really can't comment credibly to guys who compete higher because it would be based on third party knowledge from friend who work in that world. And this is all my opinion and I could very well be wrong. It happened before.

Fundraising has become more difficult since 08 because LP's have become more irrationally cautious. They seem to want to invest more dollars in fewer funds but that actually doesn't make sense in my space because a fund that invests in, let's just say $200MM deals with $50MM of equity can invest a $500MM fund, but throw them a $1B fund and it stretches what can be done during the investing period. It's the same for a right sized $800MM fund that raises a $1.5B fund. It also makes them go outside of their comfort zone deal size and the sectors in which they should have experience.

Fees and carry are also being squeezed, especially fees. Outside of the 2/20, funds were able to charge transactions fees, financing fees, monitoring fees, etc and make good (very good) money along the way. LP's have wised up to those fees and are banging them down, or forcing the fund to share or basically give them back, so you have to wait longer for the carry to truly pan out. I'm not saying that's not better for LP's, it's just worse for the fund. And the 2/20 is being eroded as well with more hold backs in escrow for earlier deals (can't take money out on a deal and not let it sit there for a decade).

Strangely, even though LP's want to invest more with lesser numbers, there's far more competition for deals because there are more funds out there. When 10 years ago in the MM you could find more non-auction, non-rep'd deals, even on the smaller side they're now rep'd by bankers who market it. I can't even imagine the difference for mega funds between 20 years ago and now.

PE makes more money on average than any other alt strategy so it's not going away by any means and it will be an incredible career option but it's matured so some of the Wild West early days stuff just won't happen.

 
Dec 5, 2014 - 5:40pm

Hit add comment before I meant to.

A very good friend of mine is a consultant to big LP's and the interesting point he made about the shift of LP's going in house with direct investing, which is all the rumor wave, is that the biggest pension funds, or whatever funds, can't employ a truly talented PE guy to source and do deals because the pension fund can only pay a few hundred grand for a senior guy who would be making a few million at a PE fund so regardless of the LP's desire to bring it in house it's not likely they can attract the talent to do so.

That said, personally I was offered a senior
position at a well funded start up (helped it raise their first few rounds and invested personally) and I'm seriously considering it. But that may be a personal desire to build a business rather than invest.

 
Dec 5, 2014 - 5:41pm

I'm not in PE and it looks like @"Dingdong08" has given an excellent answer. From the outside looking in here is my understanding of the near future of finance, and those of you with more knowledge can feel free to point and laugh if I am sorely mistaken.

There are a number of structural and regulatory influences happening domestically that "could" radically change the dynamics of the US credit market - most notably direct impact of regulation from Dodd Frank and new leverage "guidance" being dispensed from the OCC.

Without going into the full specifics, the high level net effect is that it will not only reign down on the capital leverage (i.e. balance sheets) from the credit producers (i.e. the banks, CLO firms, etc.) but it will change the amount of leverage available to the credit consumers (i.e. institutions, PE firms, etc.).

Traditional LBO's that are getting done at 5 by 7x debt multiples (implied 10-12x total enterprise values) are now being guided down by the OCC towards 3 by 5x or 4 by 6x. And that's before we get a swing up in the cost of capital (its inevitable, rates can't stay this low forever.....at least i don't think).

Lastly, its worth noting that all the recent debt issuance/refinancing has a maturity wall that has been extended but NOT eliminated. One wonders what the next wave of debt issuance/refinancing looks like in a newly structured environment (be it 2016-2020)........and if its in a "higher" interest rate environment (which it almost has to be), it will have a massive impact on net incomes.

Now, to be fair, Wall St usually has a pretty high financial incentive to get around these issues, and maybe they will again.....even if these regulations seem like common sense. One man's opinion.

 
Dec 5, 2014 - 5:42pm

Dingdong's post is pretty spot on. I'll add in some of my own additional observations / commentary:

- LPs consolidating fund investments is definitely happening. This is also resulting in a very active secondaries market (banks dropping their illiquid investments is helping drive this too but that's a different story), something that I think will continue for a while.

- In regards to the standard 2/20, some funds are moving towards different classes of LP interests. So you can come in with Class A Shares and pay 2/20, Class B shares and pay 1.5/30, etc. I think this will definitely continue.

- Speaking of carry, something that is getting a TON of pushback right now is tiered carry. It's still fairly common to see in VC (e.g. 20% carry up to a 3.0x net, then 30% thereafter) but some buyout funds have tried / are trying to get those terms and it's not being very well-received.

- Agreed with the point about LP direct investing; it's far too costly to have a true in-house PE team... but cheaper and just as beneficial to build out a dedicated co-investment team. Almost every LP says they want more co-investment exposure but few actually have teams that can move quickly enough on deals to make it happen. My prediction here is to see LPs build out dedicated / bigger CI teams.

- On transaction fees, if you don't offer 100% offset, you're already behind. You'll get pushed back a ton in final LPA negotiations if you're dealing with any LP that isn't completely unsophisticated.

- This has been going on for a long time now, but GPs continuing to build out their in-house operating teams.

- A lot of the megafund / upper MM guys are reaching down into the middle market and the middle market guys are reaching into the lower middle market. There will be a prominent megafund that will start raising very soon and I think a lot of people will be surprised when they see the target size.

- Multiples and leverage are back to, and even exceeding, pre-GFC levels. Driven by the frothy M&A market, cheap credit, covenant-lite, and huge amounts of dry powder.

Just some random musings and observations from the top of my head.

 
Dec 5, 2014 - 5:43pm

Any thoughts on what PE looks like a decade from now? (Originally Posted: 01/02/2015)

I spoke with a guy a few days back who'd done pretty well in an MM PE firm, and when I asked him for advice on how to build a career in the industry, his advice was "if I were graduating business school now, I'd probably join a different industry." Part of the reasons were personal (his experiences seem to have jaded him) but largely he argued that the industry's become so mature and competitive that there's just not as much money to be made.

I'm curious to get some other perspectives on this. I've spoken to other PE investors and LPs in PE firms who've said a version of the above: there's so much dry powder searching for limited opportunities and the industry's matured to a point where there's pretty limited "secret sauce" and so career/income prospects in the industry simply won't be what they used to. Either you stay stuck as a Principal or VP for a while or you slog it out to start your own fund and likely fail under the face of enormous LP pressure.

I'm kind of curious what you guys see as the counterargument to this / why so many people still strive for PE? Just a lagging indicator from past successes? Still see growth / change opportunities in PE? Or is it just better than any other option available to people with finance backgrounds?

You could more generally ask this question about investing as a whole: the last two or three decades have seen a massive inflow of super smart people into finance (I get the sense that this wasn't the case pre-80's or even 90's), Are there really many fruit left unpicked?

 
Dec 5, 2014 - 5:45pm

I agree with the guy - any professional field becomes less 'blue ocean' and more 'how much share you can take from your competitors?' with time...
That said, there are great performers and poor performers in both scenarios. My suggestion would be to pick a path you like and focus on winning in that area.

 
Dec 5, 2014 - 5:46pm

Consulting provides a lot of the same services as PE firms (restructuring human capital, strategy reorientation, operations overhaul) without the added benefit of capital. Consulting has matured but the MBB's aren't strapped for cash.

I'm not a PE professional, but I find it difficult to believe that the number of inefficient firms in the United States is dwindling. Maybe it's an issue of economic uncertainty?

>Incoming Ash Ketchum, Pokemon Master >Literally a problem, solve for both X and Y, please and thank you. >Hugh Myron: "Are there any guides on here for getting a top girlfriend? Think banker/lawyer/doctor. I really don't want to go mid-tier"
 
Dec 5, 2014 - 5:47pm

Red3:

Consulting provides a lot of the same services as PE firms (restructuring human capital, strategy reorientation, operations overhaul) without the added benefit of capital. Consulting has matured but the MBB's aren't strapped for cash.

I'm not a PE professional, but I find it difficult to believe that the number of inefficient firms in the United States is dwindling. Maybe it's an issue of economic uncertainty?

Are you suggesting that PE firms are strapped for cash?

 
Dec 5, 2014 - 5:50pm

I would argue with the steady decline of returns over time. The LBO as an asset class has for a long time been driven by paying more or less fair value for an asset, with an optimal capital structure. The equity return on average is therefore a function of the leverage and cost of capital available in the market. In other words, in the last 10, 15, maybe even 20 years, the seemingly high returns produced by private equity are really just levered beta. Kind of hard for me to imagine this changing other than due to fluctuations in rates.

The "too much capital chasing too few deals crap" has been said since literally 1992. Obviously the deal biz ebbs and flows, but it's a really silly assertion given how tiny the PE industry is relative to the economy (people always banty about the PE dry powder number of $450b or whatever as a huge number, but the equity value of just the SP500 is like $15 trillion, and god knows what the equity value of privately held capital is in the US alone).

TLDR on the above; in terms of gross returns generated by the LBO asset class, the competitive nature of PE isn't likely to move the needle all that much for the forseeable future.

Regarding having a career in PE, it's like anything else. The billionaires at the top of most of these firms basically invented the industry. You can still have a great career in PE but the probability of joining xyz capital management as a sperm and making it to partner within 20 years is increasingly slim. And at the institutionalized firms, making partner equals a good if tenuous living, but not zillions of dollars. no free lunch mon amies.

 
Dec 5, 2014 - 5:51pm

Lets frame this in the context of a common interview question. What are the levers to drive returns in an LBO? Purchase Price, Growth/efficiencies in operations, and Exit Price.

Purchase Price = more firms out there with dry powder and more banks on deals means more competition, which means you are going to HAVE to pay more than you would have 20 years ago when there were less competing funds. Also with so much dry powder there is a strong force for people to put that capital to work to generate positive IRRs as well as the management fees.

Growth/Efficiencies in Operations = if you are looking around a lot of companies are fighting for top line growth. Especially in the sectors/industries that often get LBO'e . And on the efficiency side, companies in general now run leaner and more efficient than they did 10 to 15 years ago. We just went through a recession so a lot of the fat has already been trimmed so expecting to increase an EBITDA margin by 20% probably isnt realistic (im speaking generally).

Exit Price = No real control over. You cant control the market timing and whether you will get 6 or 7x as an exit multiple. To model or EXPECT multiples expansion is just poor investing.

The landscape is changing. You have to adapt and build a real business savy tool kit to actually add-value going forwards. PE sells itself as adding value but om reality most of PE levers up and just clips coupons to paydown debt between enter and exit. That mindset is facing SERIOUS headwinds. The funds who have a solid tool kit and can vertically and horizontally integrate and help with logistics and operational efficiencies that companies are facing and will face as they grow... have and will continue to do very well.

 
Dec 5, 2014 - 5:52pm

You're probably all correct. DaBBzMan nailed it - Headwinds.

Still opportunities but it's going to take time before demand/supply balances. Gotta look for those special opportunities or have some unique skills where you can really add value.

In many ways working without LP money is easier because you can take the time to be selective which is what this market demands.

Global buyer of highly distressed industrial companies. Pays Finder Fees Criteria = $50 - $500M revenues. Highly distressed industrial. Limited Reps and Warranties. Can close in 1-2 weeks.
 
Dec 5, 2014 - 5:54pm

DaBBzMan:

@Paladin. I have talked to a couple family offices and its a big + of that business model. No finite investment horizon or LPs to deal with.

Yes, but at the same time, because of their typical deal structure (senior debt only, in most cases), they haven't been able to buy anything because they are unwilling compete on price with sponsors.

 
Dec 5, 2014 - 5:55pm

I think like any industry or asset class there are cycles and a natural maturation. No, we likely won't see a return to the glory days in PE, but in my opinion it is still one of the best options out there for IB analysts and management consultants.

In my opinion it's interesting work that teaches you a lot (in many funds, you can dig into the weeds at the portfolio companies so you get operational experience)...especially how to think like an investor. That mindset is valuable no matter if you move to hedge funds, corp fin or back to the sell side.

Point is, the industry is in the maturation stage so I'd expect returns to come under pressure on average, but there will always be big winners and losers. If you pick the right horse, you can still make a killing, even with a steady decline on average across the entire industry.

This may mean less compensation for analysts & associates, but the pay is still amazing at many places and the skill set you build still keeps a shitload of options open for the rest of your career. Not a bad place to be for a few years, even if those post MBA spots are becoming harder and harder to break into with less and less upside / carry...

 
Dec 5, 2014 - 5:56pm

at the end of the day PE is a business like anything else, no business makes asymmetric gains for too long, other businesses start entering and margins get thinner. There is still plenty of money to be made but if your joining another MM PE or megafund (which is great) then relatively speaking $ : energy spent, is going to be like any other industry, meaning while you make more money than say an accountant at a big four its because your work is more taxing. Of course not to say accounting at big four is a walk in the park, its just that PE has a different type of energy tax...

If that makes sense :/

 
Dec 5, 2014 - 5:57pm

As a former PE Professional I would say that although returns are declining in the typical lbo model due to both competition and companies willingness to restructure on their own, I believe that new asset classes have become a huge play for the industry (i.e. infrastructure). PE won't die but will go the way of the stock broker, not the heavy hitter it used to be but a need for the market.

 
Dec 5, 2014 - 5:58pm

You can make the argument of both Hedge Funds and PE that the industry is maturing and returns and fees are coming down. But in my experience, good PE funds are still making 20%+ Gross IRRs on large equity checks, which is pretty good, if not steller.

And because the industry is mature, you are not going to found the next Blackstone/KKR. But being a mid-senior level professional at a good fund still offers the opportunity for pretty outstanding pay days. I'm pretty sure that people in PE now who suceed and become MDs will accumulate $25-50m over the course of their careers - and there aren't that many jobs out there where you can say that.

 
Dec 5, 2014 - 6:00pm
Man made money, money never made the man
Start Discussion

Popular Content See all

Received my PWP rejection email!
+90IBby Prospective Monkey in Investment Banking - Mergers and Acquisitions">Prospect in IB-M&A
Is Evercore the next Bulge Bracket bank?
+24IBby Intern in Investment Banking - Mergers and Acquisitions">Intern in IB-M&A
I got a top IB SA offer thanks to WSO
+17IBby Prospective Monkey in Investment Banking - Mergers and Acquisitions">Prospect in IB-M&A
Is Liontree the next bulge bracket bank?
+16IBby 1st Year Analyst in Sales & Trading - Equities">Analyst 1 in S&T - Equities
Virtual Summer Interns - which banks sent you WFH gear?
+14IBby Intern in Investment Banking - Industry/Coverage">Intern in IB - Ind

Total Avg Compensation

October 2020 Private Equity

  • Principal (6) $693
  • Director/MD (14) $640
  • Vice President (53) $361
  • 3rd+ Year Associate (60) $272
  • 2nd Year Associate (112) $246
  • 1st Year Associate (241) $222
  • 3rd+ Year Analyst (23) $162
  • 2nd Year Analyst (52) $141
  • 1st Year Analyst (150) $118
  • Intern/Summer Associate (17) $66
  • Intern/Summer Analyst (167) $60

Leaderboard See all

1
LonLonMilk's picture
LonLonMilk
98.4
2
Jamoldo's picture
Jamoldo
98.3
3
Secyh62's picture
Secyh62
98.2
4
CompBanker's picture
CompBanker
97.8
5
redever's picture
redever
97.7
6
Addinator's picture
Addinator
97.6
7
Edifice's picture
Edifice
97.6
8
NuckFuts's picture
NuckFuts
97.5
9
frgna's picture
frgna
97.5
10
bolo up's picture
bolo up
97.5