What is so hard about staying on (and moving up) in private equity?

We hear about how hard it is to move up. What makes it so difficult?

It would seem that given how exclusive each offer is, a firm would hire with the intention of investing in you as hopefully a lifer.

But then I read about stories like Patrick Curtis's and how he after graduating with a H/W/S MBA, he randomly gets axed from his PE job after three months and gets asked to sign some (non-disclosure?) regarding his firing.

What makes it worse is that when people leave, they rarely tell you why. They make it sound like their own choice or like they just wanted to make a startup.

What do newbs need to know about office politics? About the first few months? What else?

When people get pushed out, what is the real reason behind that?

Comments (30)

 
Most Helpful
Sep 13, 2020 - 9:57am

As they say, follow the money.

The reason is fund economics. It's hard to move up in PE because as you get more senior the expectation is you'll start to receive more carry. That carry doesn't come out of thin air though - it's zero sum. So for you to receive some or more a different senior person has to receive less (usually the Managing Partners unless someone senior leaves and forfeits their carry). These Managing Partners will only give you a share of the carry pie if you can demonstrate you're worth more than what they're giving you, which frankly is difficult. To understand why it's helpful to think of PE as a funnel in two ways, with the first funnel causing the second. They are 1) Deal Funnel and 2) Organization Funnel:

1. Deal Funnel: Take a hypothetical PE firm. I'll use simple math in a stylized way to make the point. They may look at 1000 CIMs a year, decide to do some work on 200, submit an IOI on 50, submit a LOI on 20, and ultimately win 5 deals in that year.

2. Organization Funnel: As an Associate you touch every stage of that funnel and are most often the only person really exerting any significant effort before the IOI stage. In addition to serving as a workhorse during live deals, you act as a filter for lots of bad deals. If you double the # of Associates you have you can roughly double the number of deals you can look at. This doesn't mean you can double the number of IOIs you submit though, because that grouping of second thousand businesses you look at are likely poorer quality than the first thousand. There's still marginal value in another Associate because they're relatively cheap (you don't have to pay them carry) and they provide the potential to find a diamond in the rough deal, but that doesn't mean 2x Associates gets you 2x actionable deals, which is important. Once you get to VP, the job changes to QB'ing a deal. That means running the process for the ~50 deals you submit an IOI on. Because there's just so many fewer deals that get to this stage, you just don't need nearly as many VPs as Associates. VPs are also more expensive, so you want to be a bit more judicious in proliferating them. When you move on up to Principal the funnel tightens again because then the job is less about QB'ing a deal and more about being the General Manager to keep the sports analogy going. Yes you're interested in this season (the live deals) but also spend a lot of time thinking about preparing your team for next season (sourcing new deals). With only 20 deals a year to be really engaged with quite frankly you just don't need a lot of General Managers. In order to make it from Principal to MD you have to prove that you can source great deals for the fund and that is worth giving you a significantly higher share of the carry. Sourcing great deals is really hard and can take years, so making that final step from Principal to MD is also a huge challenge.

Hope that helps. 

Array
 
Sep 13, 2020 - 4:51pm

Wouldn't ignore the fact that many PE shops (and probably most of the best ones) are pretty brutal. Even if less brutal than IB (this is debatable TBH, would need to look at firm vs. firm) still a pretty tough lifestyle that may be acceptable in one's 20s but not in one's 30s for many. 

 
Sep 14, 2020 - 8:58am

 

It would seem that given how exclusive each offer is, a firm would hire with the intention of investing in you as hopefully a lifer.

 

In IB and PE in general, nobody cares about your career.  You are a disposable slave meant to do as much grunt work as possible to make the lives of the partners/MDs easier. That is your role in basically every single finance organization.  Nobody thinks for a second , "Wow, this kid would make a good VP or MD one day - let's hire him and invest for the long-term"

 
Sep 14, 2020 - 2:22pm

Even VP roles in megafund PE are cushy seats given carry and running deals long-term, and as others have said, very few leave once they claw and fight their way to get there.

 

Especially as you see some of these profiles of Harvard/Princeton ugrad, GS TMT, megafund PE, Harvard HBS, megafund PE, 2nd megafund PE, to VP. Once you go through that, there's little incentive to leave, even excluding the 5-8 year carry vesting timeline.

 
Sep 14, 2020 - 5:34pm

My role is a bit unique as a non-MBA hire but expect low 7 figures in total value.

This $ figure becomes less if the fund ends up below estimated m-o-m, i.e. hitting a 1.6x vs. a 1.8x vs. a 2.0x and early on you'll get a bit less than linear calc in order to minimize clawback. Also timing is impossible to gauge, past funds may start returning $ in year 3, vs. the longest one was in year 6. In between would obviously be years 4-5.

 
Sep 18, 2020 - 12:50am

What's makes a good analyst, associate and sr. associate does not make a good Principal or MD. The jobs are completely different. Attention to detail, being a grind horse and on top of all the numbers and different workstreams is what makes a good junior investment professional. Inspiring management teams, junior investment professionals and gaining the trust of your Investment committee, investment bankers and business founders is what makes a good Principal or MD. There's a lot of junior employees who are rockstars at coordinating diligence and being on top of the numbers, but have no business leading a company as a transaction MD and board member. They really are two different jobs.

 
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