Investment Banking Exit Opportunities: The Myth of the Buy-Side Job
NOTE: This is a new version of one of the oldest and most popular articles on this site (the first version was written in 2008, pre-Bear Stearns).
While the main points in the original article still hold true, a lot has also changed in the past ten years. So I wanted to cover the differences in today’s landscape of investment banking exit opportunities.
What’s the easiest way to distinguish an American investment banker from a European one?
You might point to one of the following:
- The European banker probably speaks 4-5 languages; the American one knows only English and 5-10 words of Spanish.
- The European banker is still having nightmares about assessment centers and logical tests, while the American one is still worried about a slightly-too-low GPA from a non-target university.
- The European banker is panicked over the consequences of Brexit, while the American one is more concerned with a psychopath or criminal assuming the White House.
But something much simpler tends also sets them apart: The American banker is far more obsessed with exit opportunities.
And that might not be so smart in today’s environment:
Exit Opportunities… What?!
Many articles, videos, and forum posts jump into a comparison of different “exit opps” without defining what an exit opportunity is.
So let’s start with the basics: An “exit opportunity” is another field that you go into after starting out in investment banking and working there for a few years.
Often – though not always – this field involves investing in companies instead of advising companies, or acquiring companies rather than advising on those acquisitions.
- Private equity and growth equity.
- Hedge funds and asset management.
- Venture capital.
- Corporate finance and corporate development.
- Startups and entrepreneurship.
Bankers are motivated to move into these other fields because the work is more intellectually engaging, the pay is higher, and the hours are slightly better.
The Most Common, Flawed Thought Process Behind Exit Opportunities
For many years, the thought process behind exit opportunities was:
“I’ll suffer through investment banking for 2-3 years and work terrible hours, but that suffering will allow me to move into a more interesting and lucrative role with better hours in the future.”
In the original version of this article, I pointed out the flaws in this reasoning:
- The Work is Not THAT Much Different: Yes, there’s less grunt work, and you get to use your critical thinking skills since you’re acting as an investor… but if you think financial statement analysis is boring, you’re going to hate these jobs as well.
- The Hours Aren’t Necessarily That Much Better: For example, you’ll still be working long hours that prevent you from having much of a life if you’re at a “mega-fund” (one of the largest private equity funds or hedge funds). The hours are better at smaller firms, but you’re still looking at 60-70-hour workweeks in many cases.
- They Have Unadvertised Downsides: For example, at many PE firms you have to do a lot of “sourcing” where you cold-call companies and pitch your firm as a source of capital. You also have to monitor portfolio companies and do administrative work related to the fund, and you’ll end up passing on ~99% of the deals you look at.
Then there’s the social aspect – you’re more of a “lone wolf” in many of these roles since you have to come up with investment ideas and drive deal processes by yourself.
There’s less office politics, but also less teamwork.
All those drawbacks still exist; almost nothing about the work itself has changed.
So What Has Changed?
Much of the process that takes place before you can access these exit opportunities has changed.
Also, the industries have changed – everything from compensation to long-term prospects is different.
Here are the main changes and how they affect the appeal of exit opportunities:
1) You Need a Sequence of Other Internships Before You Can Even Win an IB Internship, Let Alone a Full-Time Role
Often, these internships will be at small private equity funds, hedge funds, or venture capital funds.
There are three implications:
- These experiences must be part of your story when you interview for buy-side roles.
- These early internship experiences are a great way to “test drive” exit opportunities before you commit to anything.
- You might not even need investment banking to pursue some exit opportunities – if you get the right sequence of internships early on.
For example, you could potentially move into hedge fund or asset management roles right out of undergrad if you’ve gone the CFA route and completed prior internships.
2) Buy-Side Recruiting Now Starts Ridiculously Early
If you’re working at a bulge bracket or elite boutique, headhunters will start contacting you a few months into the job, even if you’ve had no real deal experience yet.
So you might not have much to talk about in interviews, at least if you focus on the mega-funds that start ridiculously early.
It also means that you may not have much time to decide on your best option – wait too long, and many PE and HF opportunities will be gone.
You can still move into other industries, but you’ll have to focus on smaller funds or areas like corporate finance without hyper-accelerated recruiting.
3) The Lifestyle Improvement Might Not Be So Great Anymore
Banks, realizing that investment banking jobs were no longer desirable next to jobs at Facebook and Google, have been attempting to improve Analysts’ lives for several years now.
They started offering “protected weekends,” where Analysts get guaranteed time off from Friday night into Sunday morning for one weekend per month, and some banks have gone beyond that and attempted to limit office time on all weekends.
Banks have also been trying to keep junior bankers around longer by promoting them more quickly and paying bonuses in December/January.
You’ll still be working all day and night on weekdays, but these changes have made 110-hour workweeks a bit less common.
So the lifestyle improvement in moving from IB to exit opportunities might not be as dramatic anymore.
4) There’s a Greater Variety of Exit Opportunities
Anecdotally, it seems like more bankers are pursuing non-PE/HF exit opportunities now compared with 5-10 years ago.
The tech startup is the biggest and most obvious new area, but there has also been more interest in corporate finance and areas like consulting and equity research.
An optimistic interpretation of this trend might be: “Aha! Finally, people realize that there are other options outside of private equity and hedge funds.”
A more cynical interpretation might be: “PE and HF roles have become so ridiculously competitive that bankers have to look at other options.”
5) Private Equity and Hedge Fund Compensation is Down and Probably Won’t Recover to Its Old Levels
For reference, pre-2008-financial-crisis pay was insane.
IB Analysts who left banking and went to mega-funds would often earn $500K in all-in compensation, and it could be even higher at the top hedge funds.
Pay dropped immediately after the financial crisis, and it hasn’t recovered since then.
Over the past five years (2011 – 2016), the average “all-in” PE compensation across all levels has been around $250K – $300K, with HF compensation around $300K – $350K (Source: The Job Search Digest compensation reports).
But those are averages across all levels: If you enter after a few years in banking, you’ll be earning on the lower end of that range until you move up the ladder.
Average Analyst and Senior Analyst compensation at hedge funds has been around $200K – $250K over the past several years.
Yes, those are big numbers, but they’re not that much of an increase over investment banking compensation: Associates currently earn between $200K and $400K all-in.
You do get a bump if you go from being a 2nd or 3rd Year Analyst at a bank to a buy-side role, but you won’t double your compensation.
6) You’re Not an Early Mover Anymore – Everyone Knows About These Industries
Finally, all these industries are more mature and developed now.
If you had joined a hedge fund in 1996, you would have been an early mover.
But in 2016, you’re another one of the tens of thousands who wants to move in.
It’s better to join new industries early because there are more opportunities, and it can be faster and easier to advance.
With many investing roles, there’s now too much money in search of too few good opportunities.
Simple math means that many funds will not perform well and will shut down.
You’ve already seen this in the news with many high-profile funds closing over the past year or two and more funds closing than opening.
Many investors have also been clamoring for lower management fees – less than the 2% of assets that funds typically charge – which will reduce base salaries and make total compensation more variable.
The Best Way to Think About Exit Opportunities
These changes mean that you should not think of exit opportunities as the be-all and end-all.
Even the word “exit” is problematic because it implies that you’ll only move in one direction: From investment banking to something else.
But if you read some of the reader accounts on this site, you’ll see that reality is not quite so rigid.
It’s better to think about exit opportunities like this:
“I’ll test various fields with internships in university, or with pre-MBA internships or school-year internships during a Master’s program, then go into investment banking, and then think about returning to one of those fields.”
What Do You Need for the Best Exit Opportunities?
To pursue the “best” exit opportunities – the most selective or prestigious ones – you need:
- A Bulge-Bracket or Elite-Boutique Bank – You have the best chance of winning mega-fund offers if you’re at one of these. The specific bank matters less than the type of bank you’re at.
So if you have a choice between two bulge brackets, don’t choose based on which one is “more prestigious”: Pick based on the team and culture you prefer.
If you’re at a middle-market or smaller firm, you can still win exit opportunities, but you’ll have to do a lot more work on your own and aim for smaller companies.
- The Right Geography – There are far more exit opportunities in New York, London, and Hong Kong than in other cities in North America, Europe, and Asia. And it’s tough to make an East Coast to West Coast move, or vice versa, if you’re in the U.S.
- A Top Undergraduate Institution and GPA – Yes, these still matter, especially since recruiting starts so ridiculously early.
- The Right Industry Background – It’s tough to move from something specialized, such as FIG investment banking, into a more general team, such as a healthcare or consumer/retail-focused private equity fund.
- Solid Deal Flow – Particularly for private equity interviews, you won’t have much to talk about if you haven’t worked on deals yet. You might be able to get away with the “But it’s so early!” excuse, but you’re still at a disadvantage.
- The Right Preparation – Amazingly, many candidates, even ones from Ivy League schools at the top banks, walk into buy-side interviews without a stock pitch or investment recommendation and without knowing their deals inside and out. OOPS!
- Relevant Pre-Banking Experience – Ideally, you’ll have previous internships that are related to this exit opportunity, such as VC or PE internships if you’re aiming for growth equity roles.
You should avoid super-specialized groups such as FIG if you don’t want to work in those industries in the long term.
But other than that, you shouldn’t obsess over your group too much.
Yes, you’re more likely to get solid deal experience in some groups, but it’s difficult to predict deal flow in that critical 6-month window when you first start.
Yes, it’s better to be in M&A, Leveraged Finance, or a good industry group than the ECM or DCM teams, but it’s not the end of the world if you’re in capital markets.
Which One is Right for You? Rank the Exit Opportunities!
Someone will now ask for a “ranking” of exit opportunities.
I won’t do that, but I will briefly describe the trade-offs of the most common ones:
Private equity is best if you enjoy working on deals, but you want to think about them more critically and work with companies over the long term – years instead of months.
You have a lot of options if you go into PE and decide you don’t like it: You could go to business school, join a portfolio company in a finance role, or even move to some other exit opportunity.
You get more of a “generalist” skill set because you’re not doing just one thing over and over: It’s a mix of financial analysis, negotiations, leadership/team coordination, and sales skills (if you do sourcing or fundraising).
Compensation is another positive, but to make serious money – in the 8-figure range or beyond – you’ll have to advance to a very senior level or start your own firm.
Besides the fact that it’s so difficult to get into private equity, another drawback is that it’s very tough to get promoted up to the top.
Partners at these firms have such cushy positions that hardly anyone leaves voluntarily.
Hedge Funds & Asset Management
Hedge funds are so different from private equity that it’s almost deceptive to group them together.
The main difference is that you follow and invest in individual companies, or other securities, rather than buying and selling entire companies.
The day-to-day work is more stressful since you monitor the markets constantly, but you’re less likely to have a disaster on a pending deal that kills your weekend.
You should consider these roles only if you have a track record, an undying passion for investing, and specific ideas; you don’t necessarily need those in PE since you can talk about your deal experience, but it’s essential here.
The main downside to these roles is that you develop a very specialized skill set, which makes it difficult to move to different funds or different industries.
It’s also tougher to get into top MBA programs because it’s difficult to explain a complicated investment thesis to admissions committees.
By contrast, it’s easier to explain a deal or a difficult client situation, so you have an advantage coming from IB/PE roles.
Venture capital is sort of like “private equity lite”: You still work with entire companies, but the deals consist of minority-stake investments.
Since you invest in early-stage companies, there’s less financial analysis, and you spend most of your time analyzing the market, finding interesting companies, and networking.
You also earn quite a bit less than you do in private equity, but the hours and lifestyle are better.
If you want a long-term career in venture capital or you want to work at a tech or biotech startup in a finance or business development role, VC is a good path for you.
But if not, it’s not necessarily the best option: It’s even more difficult to move up the ladder since firms make hard distinctions between Partner-track and non-Partner-track positions.
Also, while you can get into top MBA programs from VC roles, it would be tough to move into private equity, go back into banking, or go to a hedge fund.
Corporate finance is quite different from these other exit opportunities because it’s arguably not even a front-office role.
In other words, you’re not working with clients or companies that your firm might potentially invest in – corporate finance is mostly internal and related to your company’s budgeting, internal processes, and financing needs.
You’ll earn less than in the PE/HF/AM exit opportunities, but you’ll also have better hours and a more regular lifestyle.
The end goal in corporate finance is to become the Chief Financial Officer (CFO), which has various trade-offs vs. becoming a Managing Director in investment banking.
Corporate finance roles are best if you want a better work-life balance, you don’t care about a slower progression up the ladder, and you want to use your skills at a real company that makes something.
We group corporate finance and corporate development together on this site, but the roles are quite different.
Corporate development is all about working on acquisitions and joint ventures at a company – deals – rather than the budgeting and financing processes at that company.
So if you like working on deals and longer-term projects, but you want a better lifestyle than what you’ll get in PE, and you’re willing to accept lower pay, corporate development is a solid option.
If you work at a well-known company, you’ll have many options afterward: You could go to business school, go back into investment banking, or even go into private equity.
It would be tough to enter a public markets role such as hedge funds or asset management from here, but I’m sure someone has done it before.
Startups / Entrepreneurship
This last one is very different from everything else on the list.
It’s less of a traditional exit opportunity that requires a finance skill set and more of a “trendy thing” for bankers to do.
The banking skill set is not particularly useful for these roles unless you join a later-stage startup that has budgets and customers.
The main advantage of this path is that you get to determine your destiny.
It would also be tough to move to a normal company if you’ve run your own business for years and years.
So you have to be pretty certain you want to go this route, and if you decide against it, you need to get out ASAP.
Take a look at the Articles page on the site or do a search to find coverage of other industries.
Finally, don’t rule out staying in banking.
This obsession with exit opportunities is a U.S.-specific phenomenon, and it makes less sense now than it did in the past.
While the work is still less interesting than critically analyzing deals or investing, there are some benefits to a career in banking:
- Mid-six-figure to seven-figure pay at the mid-to-senior levels, and if you’re at an elite boutique, that pay will be in cash rather than stock or deferred compensation.
- The risk-adjusted compensation can’t be beat. Yes, you can earn far more money in buy-side roles, but there’s also far more risk from your fund blowing up or shutting down. And pay at normal companies doesn’t come close unless you reach an executive position at a huge firm.
- There is a clear progression up the ladder. This progression is in sharp contrast to many other roles where you keep the same title for years.
To Exit or Not to Exit: Is That the Question?
No, that’s not the question – or at least, that’s not the complete question.
Rather than thinking about “exit opportunities,” you should think about your long-term career progression.
Test out different industries with your internships, see what you like and don’t like, and then see what you think of your full-time role in banking.
If you want to leave and you have your heart set on a mega-fund, move quickly!
If not, take your time and see what fits you best.
With enough time and treatment, you might just lose your obsession with exits.
Do it well enough, and people might start thinking you’re European.
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