Why is everyone in love with PE?

It's been a few months since I joined WSO and I still don't get why everyone here seems to be in love with PE. Most people here who are getting into IB have the same vision of eventually going into PE. My question is why? What is so appealing about PE that everyone wants to land there someday as opposed to rising the ladder in an Investment Bank or going into the buy-side.

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Comments (92)

Oct 24, 2019 - 1:19pm

Ok but is it the Goldman Sachs? I want to work at the Goldman Sachs.

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Oct 23, 2019 - 2:33am

There's a perception that its better pay relative to hours. Now that can take many forms. At a megafund for example, nobody expects their hours to be better than IB, but pay will be higher. At a smaller fund, pay may not be better than IB but hours almost certainly will be.

Another reason - and this is vague but more valid than the hours reason - is that some people are more suited to an investor's mentality than a client service mentality. I left IB at the VP level to take a mixed PE/HF role with a family office (I never know which WSO badge to use . . lately using HF because the public side is taking more of my time). My hours only got slighly better and my pay is way less in these early years. My reason for doing it, is that it allows me to bet my future on my ability to generate returns rather than my ability to win clients. I have much more confidence in my ability to do the former. That's a very personal decision and its hard at a young age to know who you really are, but if you have a very strong conviction that you're good at X then that's going to trump any other reason for doing something.

Oct 23, 2019 - 7:46am

Given how difficult it is for active managers to outperform, why are you so confident in your ability to do so? Not giving you a hard time (I work in public markets as well) but genuinely curious.

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Oct 23, 2019 - 9:37am

Just guessing here, but at a family office it is likely more about capital preservation and generating solid risk adjusted returns. That is a different skillset than just picking a basket of public equities to try and beat the index.

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Oct 24, 2019 - 6:42pm
PteroGonzalez:

ThereAnother reason - and this is vague but more valid than the hours reason - is that some people are more suited to an investor's mentality than a client service mentality.

This is worth repeating because I believe it is very true and a strong distinguisher.

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Oct 28, 2019 - 4:31am
PteroGonzalez:

There's a perception that its better pay relative to hours. Now that can take many forms. At a megafund for example, nobody expects their hours to be better than IB, but pay will be higher. At a smaller fund, pay may not be better than IB but hours almost certainly will be.

Another reason - and this is vague but more valid than the hours reason - is that some people are more suited to an investor's mentality than a client service mentality. I left IB at the VP level to take a mixed PE/HF role with a family office (I never know which WSO badge to use . . lately using HF because the public side is taking more of my time). My hours only got slighly better and my pay is way less in these early years. My reason for doing it, is that it allows me to bet my future on my ability to generate returns rather than my ability to win clients. I have much more confidence in my ability to do the former. That's a very personal decision and its hard at a young age to know who you really are, but if you have a very strong conviction that you're good at X then that's going to trump any other reason for doing something.

Oct 23, 2019 - 2:48am

@PteroGonzalez" has a great response.

Aside from that, it's simple economics. There's few industries where you can generate billions of dollars in profit with few employees, little overhead, and little/no skin in the game.

Keep in mind that at the biggest megafunds (which now reach tens of billions in committed capital), the management company can earn hundreds of millions of dollars in management fees alone before even thinking about the 20% carry award.

Now, whether all the lemmings charging hard at PE will ever actually be the guy making millions and having a carry award is another story entirely. But the perception keeps the ranks replenished.

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Oct 29, 2019 - 3:16pm

yeah but those lemmings are making low to mid six figures in their 20s so it's kind of a win-win.

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Oct 29, 2019 - 10:54pm

Yeah, but I'm not entirely convinced that most PE associates are actually being rewarded better than their counterparts at respectable banks.

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Oct 23, 2019 - 3:59am

My reason was pretty simple: I was done on being my MD/D/VP bitch and to deal with totally unpredictable hours / schedules.

PE is not heaven but at least you can see the tsunami of shit coming over you and organize yourself accordingly.

  • Associate 2 in CorpDev
Oct 23, 2019 - 5:12am

Another thing that puzzles me is why is everyone in love with hot girls? Why aren't people crazy over the 3's?
Man it's so wierd...

Jun 7, 2020 - 9:04pm

wow read the whole thing. what a machine, these kinds of people are few and far between. some may have the potential but few really put it into practice.

always dreamed of mastering and owning a niche market like that but it probably won't happen nowadays. good on him what a guy.

Oct 23, 2019 - 7:23am

The allure of PE:
- make insane amounts of money in the long run with carry if you make it to a more senior role and are picking the right businesses to back/have the operational ability to improve them
- it's arguably "safer" than hedge funds/other AM because of long lockup periods on AUM while not having the same failure rates at VC since you're investing in mature cash generating businesses
- it's a natural progression from IB for many since there's so much process management overlap with one main difference being a shift to an investor mindset
- arguably more control over your time since you are the decision maker and you're not a service provider answering to a client on a deadline (more true at senior levels, junior you'll still be worked like a dog in most cases)

So in the long haul make more potentially way more money while having more control over your time with a natural build up of related skills from IB, in a career that's a relatively safer option compared to other alternative asset investing jobs.

It's in many cases genuinely greener pastures than IB (or at least that's how it's advertised) so why wouldn't bankers therefore try to make the move?

Oct 23, 2019 - 10:25am

I have an entrepreneurial background and PE was the best way for me to deploy my funds. Being able to leverage my operating experience to drive returns isn't really something I'd be able to do if I was investing in oubcos.

Oct 23, 2019 - 3:00pm

I don't think there is a solid reason why the majority choose PE. I think only a small percent do it because they genuinely feel like it is their calling in life to be on the buyside. The reality is most are just following the crowd and chasing an idea of something that in most cases does not exist. Headhunters also have a lot to do with it. Everyone likes feeling valued and when your getting abused as an analyst in IB and a recruiter shows you all these "magical" options that exist in PE it is hard to pass up. While I agree the work is probably much more engaging in PE at the junior levels, the pay in the majority of cases is worse and so are the options for promotion (especially now that a lot of banks offer A2A without requiring a third year from analysts). To me it only makes sense if you have a clear path to partner at an existing fund or you are using it as an avenue to get into a role at a portco. There is nothing all that glorious about just being a PE associate.

Oct 24, 2019 - 11:14am
alwaysb1:

I don't think there is a solid reason why the majority choose PE. I think only a small percent do it because they genuinely feel like it is their calling in life to be on the buyside

Ha. If someone ever told me, with a straight face, that they felt it was their "calling in life" to be on the buyside, I would immediately tune out and never listen to another word that person said. How far up your own ass can one person get, to make that kind of comment?

Oct 24, 2019 - 2:54am
  1. The pay is among the highest in finance given the same position/level
  2. It is much more intellectually challenging since you really have to look the companies as if you were the one who's investing
  3. Networking.
  4. Chance to learn so much (even more than IB) in such a little time.
  5. Prestige.
  6. Because most likely you will get bored in IB after 3-5 years.
Controversial
Oct 24, 2019 - 9:43am
ASEANalyst:

1. The pay is among the highest in finance given the same position/level
2. It is much more intellectually challenging since you really have to look the companies as if you were the one who's investing
3. Networking.
4. Chance to learn so much (even more than IB) in such a little time.
5. Prestige.
6. Because most likely you will get bored in IB after 3-5 years.
  1. Not much higher (or lower even on avg) than IB at EB/BB or MC at MBB
  2. Not really. You are speculating here. It is more challenging at a senior level (this is controversial still) as you are providing insight and guidance to mgmt teams. Certainly not as an Associate.
  3. I would argue that the real network comes from B-school, and most people positioned to get into PE likely already have a half decent network.
  4. If you get bored of IB in 3-5 years do you think you wont be bored of PE? The work is essentially the same, you just sit on the other side of the table.
Oct 24, 2019 - 10:04pm
Deal Team Six:

1. Not much higher (or lower even on avg) than IB at EB/BB or MC at MBB
2. Not really. You are speculating here. It is more challenging at a senior level (this is controversial still) as you are providing insight and guidance to mgmt teams. Certainly not as an Associate.
3. I would argue that the real network comes from B-school, and most people positioned to get into PE likely already have a half decent network.
6. If you get bored of IB in 3-5 years do you think you wont be bored of PE? The work is essentially the same, you just sit on the other side of the table.
  1. In my country, PE comps is almost always more (+15-20% all in post tax) in comparable position. Maybe not so in the US/EU.

  2. I would have to agree, good points all around.

  3. True, but working in PE is networking @ bschool injected with steroids. If you wanted to know who's who in your particular space/country, PE offers you quite nothing else (maybe MBB but i have to check). You could be having dinner with the richest conglomerate in the continent and meeting with the minister the next day.

Nov 1, 2019 - 10:08pm

Agree with the point on being bored. I started out in an corporate finance consulting role and then spent 3 years in IB at an elite boutique. Was about to be an Associate 2 in the spring but ended up leaving for a career track PE role.

Literally couldn't take the monotony of the work even tho I was being paid extremely well.

Another point that people don't realize either is that banking has largely been gutted or talent by PE / HF / Corp. Dev. / Tech / Startups. The ranks are filled with mediocre talent which means if you are good you end up getting crushed and do most of the work.

PE is a better talent pool and you will find more intelligent colleagues there from my experience / the experience of friends.

  • Analyst 1 in Consulting
Oct 24, 2019 - 1:20pm

Sounds like this is what happens when you follow the heard for the sake of following the heard. Typically, after working for a few years and thinking critically about what you've done, you get to (or should be working toward) a point where you should be informed enough to figure out your next move, but for some reason you can't. If you work in PE you are likely a qualified candidate for 99% of the finance jobs out there. What areas of finance do you legitimately still like? Build your next position based off of skills/tasks you sincerely enjoy. Hate finance now? Work at a start-up where you can take on a hybrid position (maybe its a blend of marketing/sales/finance, 33% - 33% - 33%). Not unheard of for someone to hold multiple roles within one position even if they don't directly relate at all. Want to start your own company? B-School is a good transition point. Hate finance altogether? Go get a masters in something niche. You have so many options because you've clearly excelled within your career (getting into PE is a testament alone) for a while and have a demonstrated history of success.

Oct 24, 2019 - 10:56am

I'm a first year analyst so mostly speculating here I suppose. I did some on cycle recruiting as well as a lot of other people in my class and my honest takeaway was I'm not sure I want to do PE.

It seems like it's a lot of the same work, there's a good chance you have the same or similar hours, the pay is generally worse than staying on till associate and (perhaps most importantly) at my bank if you're an analyst who wants to stay for more than 2 years or an associate who's not dogshit, they seem more than happy to promote you, in fact they try hard to convince you to stay. That seems pretty different from PE where a lot of funds I talked to were basically like "this is a strict 2 year program and we don't hire our own associates back after MBA"

The associates / senior associates in PE I've worked with all seem pretty stressed still and are always online just like the bankers. Our A2As and senior associates seem to have a pretty good relationship with senior bankers and can push back on work (when warranted) and block off time to have a real life (to the degree that's possible in M&A). And the senior PE people seem even more stressed than my senior bankers.

A lot of my friends in banking recruited for PE and the two reasons seemed to exclusively be 1) everyone else does it so I am and 2) banking has sucked ass so far but if I get a PE job I can have a greener pasture after 2 years (but who knows how green it'll be)

I decided to wait a year to recruit again and maybe at that point I'll hate banking and look back on this post and think I was an absolute idiot (I've thought it was fine so far) and want something new. Or maybe a really cool fund will reach out to me, but at this point it seems like I'd be doing mostly the same job for likely less money and starting over again with 0 social capital at work for a job that would probably push me out in 2 years and I'd end up in a similar MBA program to what I could get into from banking or doing a corporate development job I could have gotten out of banking.

  • Incoming Analyst in IB-M&A
May 4, 2021 - 1:30pm

Can i ask what you ended up doing. Will be a first year this summer and would love to hear about how your thought process around staying vs leaving banking evolved over your two years

Oct 24, 2019 - 2:01pm

Most of what I would say has been mentioned above somewhere, but my thoughts are:

A lot of people go into it because it's the logical next step after banking. The hours are supposedly better, the pay can be higher, the work more interesting etc. In some cases this is true, in many cases some aspects might be better and some might be worse. Unless you're at a MF, the pay in banking at the Associate level will be the same if not higher than most PE firms, especially as almost no associates will have an equity-based incentives. Hours are dependent on firm, but if you're at a "good" firm with a recognizbale name, you're probably working pretty hard still. And the work itself can be interesting, in my opinion, more varied than banking, but it's still a grind at the end of the day.

I work in the LMM space and I've done some interesting strategy work with the businesses and I've also had to do super mundane stuff like set up bank accounts and had to think about the right insurance coverage we should have.

I've said this in other posts, but PE and Banking are fundamentally different skillsets in my opinion. Not necessarily at the junior level, but as you move up the ranks, banking is about getting deals done, it's more process, more repetitive, but a good banker is worth his/her salt if they can run a great process, get the right buyers invovled, drive the price up, etc. To me banking is wheeling and dealing, client-facing, pitching, and selling. It's fast paced, but being at the beck and call of clients can make for a tough lifestyle.

PE is also about sales (as most upper-level jobs are), but it's a different sale and has more of an intellectual component (or quasi-intellectual) in that there's more thinking about investing, value creation, selling a fund vision to investors. It moves much more slowly and it can takes years for deals to come together. While there is some repeatable process, each business is a little different, so it might require a little more creativity.

With all that being said, overall I think PE is idealized. There's few firms that are doing anything too revolutionary in terms of value creation and it usually centers around the same few places of cost-cutting, financial engineering, etc which of course then boils down to process-related items. Carry is also tough to come by even if you have it and unless you're at a big fund (which means it's really hard to get carry) or high up in a small fund that is killing it and also has good headcount to returns ratio, carry is a nice bonus but is rarely as life changing as people think. Sure as a Principal at a MF it might be a few million over the life of the fund. Even if it's $10M over the life of a fund, that's $1M annualized, on top of a ~$500k salary or so, is that a ton of money? Sure. Is that so much better than a junior MD at an investment bank? Probably not, some would argue that if you went straight through at a bank, you might even have a better quality of life as an MD.

So at the end of the day, it's still finance, it's still stress, it's still mostly boring work, etc. It's white vs egg shell white. Some like the faster pace of running a process and putting together a great sale. Some like raising capital, hunting for a great value creation opportunity over the course of years, doing a few deals, grinding out value, and selling to LP on giving one more money to rinse and repeat.

Oct 24, 2019 - 2:05pm

PE and other buyside jobs can lead to really engaging, fulfilling and lucrative long-term careers. I think the wrinkle is that there is a bias at many of these firms to hiring kids only a few months out of college - and at basically no time thereafter, should a person not have prior PE experience - which puts a lot of pressure on analysts to take the fleeting opportunity when it arises, none the wiser. (To say nothing either of preoccupations with things like prestige and public opinion...)

Does IB suck? Yes, it is frankly quite horrible. I was an A2A, and no one can pay me any amount of money to do my first year over again. But does it change as time goes on? It did for me. By the time you hit the latter part of your 2nd year as an ANL, you are so fed up with everything, so burned out, and, surprisingly, bored. But if you can stick it out to a 3rd year and/or the ASO rank, you'll find that you can break through this terrible plateau. If you were good, your daily responsibilities change and expand, you've developed strong rapport with colleagues, senior people and clients, and can captain your ship a little more, you face new, interesting challenges at work, and you have to learn and cultivate new skills you didn't bother with before - all while being compensated very well.

Is it still terrible and frustrating and tiring at times? Totally, haha. But you are welcome to leave at any time before VP/Director (when the career track starts to narrow), and you are just as well set-up to pursue any other avenue of your career, especially in finance, as your buyside brethren.

Oct 25, 2019 - 10:03pm

Online forums led me to Private Equity. I graduated from undergrad five years ago with a 2.5 from undergrad, went to law school, and spent way too time on the law school version of WSO which held PE up to a high regard, so I focused my career on private equity from when I started law school and made it to an investment role at an UMM shop in the past year.

Now that I am here, I am grateful for where I am in life, I have a good lifestyle, do extremely well on a monetary basis for my age, I am higher up the shit chain than my biglaw job and have more control over my schedule, and am generally satisfied with my work. . . however I constantly have the "what if" question if I had pursued what I was interested in instead in of following the herd.

I would highly recommend thinking about why you want private equity instead of blindly pursuing a dream that others have set for you. There is still a shit-ton of execution and process in the job at both the junior and senior roles over the heralded "rewarded for innovative investment ideas" thoughts about the job. The profession is very crowded in the UMM/MF space, which hurts returns, and going forward the successful funds in private equity will lean more towards management fees than incentive allocation, unless you have a super special "sauce" (think Vistria/Silverlake/Vista where portcos will choose to partner with you with deficient offers in auctions).

Array
Oct 26, 2019 - 9:35am
Making Gravy:

Was with you until you said Vistria in particular... care to elaborate?

I think they play the government angle pretty well and it's a bit unique. Returns aren't the best but for sourcing/winning deal purposes it definitely can play a big factor.

Array
Oct 26, 2019 - 11:27am

i think many people are in love with the theoretical returns available with sharing in the carried interest. However they fail to realize that getting rich off of carry requires some pretty big pieces to all line up perfectly: 1) you have to be at a fund that has sufficient operating leverage (a relatively low number of people compared to the fund size), 2) a high return on the fund, 3) be invited to participate in the carry program (often carry is concentrated at the top mgmt of the firm), 4) you have to wait out the fund life / get to exits to get carried interest disbursements, 5) liquidity (if you're in growth capital or even LBOs you need to wait for some liquidity event for return of capital). All things considered, it makes simple deal-based bonus comp in ibanking look pretty good.
Some people fall for the glamour and stars and go to big PE funds only to realize that they made more money, more reliably, in ibanking. Also there's the whole aspect of variance in PE funds. The success repeat-ability of funds is low, and there's such vast differences fund to fund.

I think a big part of the attraction of PE is the difficulty of getting in. We're so busy jumping through hoops our whole lives, that we believe in the prestige story, and inherently believe that if something is hard to get into, it must be awesome and worth having. Because PE is selective, with few seats, people assume that it's better than IBD. And it may not always be the case. Like getting the sought-after girl that turns out to be a nightmare to live with.

Oct 27, 2019 - 1:05am

PE assoc comp at 3bn-10bn+ latest fund raise is 250-325 for Assoc1

PE post-mba comp at 1bn-7bn+ latest fund raise is 375-500 year 1 with median carry ranges in the 1.5-3.5m range with 4-7 year vests assuming 2x MOIC. That blows banking out of the water.

Granted few analysts with that goal will make that coveted post-mba seat. But that promise drives folks. To me it's clear why folks choose PE

Oct 27, 2019 - 9:29am

if you guys say so. In my experience, the chance of hitting the carried interest pot-o-gold even if you're at a top performing fund is not high. I was at a fund that was the country's top performer, with ridiculous IRRs and realizations, and the partners just kept all the money. Even the base salaries noted above are multiples of what even our best performers earned. So, I'm probably just jaded. Maybe America is better in that way, but I've never seen PE to be all that lucrative, unless you're a partner making carry. Frankly, I suspect many of these self-reported numbers to be highly inflated. Hope I'm wrong.

Oct 27, 2019 - 1:19am

To be honest, people have started poo-pooing those who choose PE, but a lot of people recognize premises 1-5 for what they are and still want to roll the dice. I don't think there's anything wrong with going into PE, wanting to get to the top of hypothetical possibility that you've described, but recognizing that it might not work out.

Look, people may buy in to the hype, but I believe they're generally not stupid - they realize that in many cases the stars have to align but they're okay with the gamble because it's not like the trade off is huge from banking given the "pro" factors others have described

Oct 27, 2019 - 10:59am

I think you could ask the same question about IB. When I did a semester abroad at one of the universities in NYC, it shocked me how many students claimed they were 'passionate' about banking (and PE, HF for that matter). I'm working in real estate M&A at one of the big4 and while it's fun, I'm not sure how passionate you can really be about many parts of the job like building slides, etc.. But It seemed like that's what everyone in my finance classes wanted, completely neglecting any other career path you could take in finance. I think a big part of it was that in the city and among the students working in these fields has somehow become the definition of making it, maximum prestige, and proving to others how great you are. Pretty much all the students I met who had scored IB internships were kinda cocky about it. While choosing a job should probably be based on subjective interests, I got the feeling that career choices in finance have become more of a standardized path (obviously only in the minds of students) with a few 'good' steps like PE and a bunch of others that you only take if you can't make it to PE, IB, ... or in other words, there's a lot of peer pressure involved and if more people actually looked into the other finance careers out there, I'm pretty sure some of them go would with something else

"The impediment to action advances action. What stands in the way becomes the way." - Marcus Aurelius
Nov 2, 2019 - 3:22am

Everyone says banking gives you unlimited exit ops, but PE is far, far better. You are equipped and vetted to do basically anything given where you're at.

Want to swap to consulting?

You're equipped to do it as someone who gets strategy, has been in the real c-suite huddle before, knows how to break down competitive dynamics, and can actually contextualize what's fluff and what can actually drive shareholder value.

Want to swap back to banking?

You have the M&A skillsets and requisite buyside knowledge to be dangerous as you rise up.

Want to found your own business?

Who else at your age has reviewed every aspect of a business (strategy, accounting, tax, legal, environmental, insurance, employees, operations, engineering, etc) in incredible detail, with the benefit of a roster of 3rd party experts, and with intense pressure to get it right?

Want to go to a hedge fund (or mutual fund equivalent)?

As someone who previously did PE, you know what a good business looks like and you know what a cheap price actually is. You're also well prepared to sift through BS management reports and figure out what's really going on.

Want to be a corporate lawyer?

In PE you manage every major type of corporate legal document and topic, from purchase agreements to tax complexities to formation docs to lawsuits to patents to everything else. Highly relevant if you decide to go to law school.

Want to go into politics?

You, unlike say a lawyer or a hedge fund manager, actually know what living, breathing companies (and employees) look like. You will, in your times in PE, be faced with hard decisions that will impact the lives of hundreds, thousands, or maybe tens of thousands of real people. You will (hopefully) be forced to become a grown up.

Want to just say f*** it?

PE pays well. You can fool around for a bit, cash some checks, then head for the hills (or the and regroup a year from now. Entrepreneurship is always an option, especially if you got a greenback safety net.

An underrated aspect is how much power you can have (if you are good). If you are good you can command your own schedule pretty effectively. If you are good you can drive your commitee towards the good deals that you want to do. If you are good you can win the hearts and minds of your portco management teams and develop effective strategies and tactics.

Finally, PE is a straight up fun job. It's like getting 95% of the rewards for being a successful entrepreneur without having to actually pulling off founding a successful new business.

Is PE comoditizing? YES!

Will you get 10 years of 100% IRRs like Kravis from '75 - '85? NO!

Would I bet that in 30 years the CEOs, Societal Leaders, and just general ballers of the world often used to be PE Associates (a la former GE, or bell labs, or the equivalent)? YES!

Seems clear to me

Nov 13, 2019 - 9:17am

I used to be in IB and I never thought I wanted to do PE after. I actually even got into placement agent / fundraising after doing M&A however while raising money for PE I (and my PE clients) thought I would be more suitable in PE so I jumped over to a client and now work as an investment professional (VERY rare path to PE I guess but it was also the most natural thing ever). Now that I have been doing PE for a few months for a small sector fund... honestly, it's incomparable with any job I have ever had.
1) The fact that you DON'T SERVE any clients and are 100% in control of your time makes a huge difference to your overall happiness
2) the work that you do is so MUCH more interesting
3) you have cool entrepreneurs come an pitch to you, it's so interesting to hear their stories
4) People you work with are generally happier and more relaxed which creates such a nice atmosphere
...I do earn less though which is annoying but I would still never trade it with going back to IB. How

In my opinion: join a megafund from IB and your life will not change much and you will continue to earn well. Join a MM or sector fund with a small team and your life will be transformed BUT most likely you will earn less (in the short-term)

Nov 13, 2019 - 12:13pm

Agreed with everything you said. Conceptually, our overall comps/returns in PE should be analogous to the classic PE J curve, aka negative returns (vs banking) in the beginning of the years and positive returns in the long run. Can anyone who experienced the J curve tell us that personal comps/returns do get better after a few years in relativity? Young monkeys like me don't see the end of the "negative J curve"...

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