Investment Banking Exit Opportunities: The Myth Of The Buyside Job
“Before I became so fervent about Private Equity, I thoroughly considered all my other career options: hedge funds and VC.”
-Hicks Musings, The Leveraged Sellout
One common question I’ve been getting lately goes something like this:
“Inquisitor, I just started as a freshman at Harvard. I am majoring in economics and finance and I’m in the stock market club, the investment banking club, and I even borrowed $500,000 of my Dad’s money to invest in my personal accounts. So far I’ve earned a 50% return in 6 months.
How can I make sure that I work at Blackstone by the time I’m 25?“
Another variant of this same question:
“I am only doing investment banking so that I can pay off all my student loans in 2 years, but I have no interest in ever doing it again. What are the exit opportunities like for Associates at boutique banks who want to get into hedge funds?”
For those breaking into investment banking, the exit opportunities are always a big motivation.
It makes sense on paper: you go from working 90-100 hours a week and doing mindless work to working 60 hours a week and doing meaningful work 100% of the time, right? Right?
The Hours
Lifestyle is a common reason for switching from investment banking into private equity or hedge funds. Specifically, people assume that they will actually be able to have lives for once rather than sitting in front of a computer for 18 hours a day.
Private Equity Hours
If you go to a large private equity firm, like Blackstone, KKR, TPG or Bain, this assumption is false. You will be working banking hours for another 2-3 years - bet you can’t wait for that.
I’m amazed at how many people don’t realize this until they get to interviews with these places or until (gasp) they actually start working there.
If you go to a smaller PE or growth equity firm like Summit Partners or TA Associates, then you won’t be working 100 hours a week. But you will still be doing 60-70 - significantly more than a normal job - and on top of that you will have to travel quite a bit, so forget about a consistent schedule.
And when a deal heats up and you’re close to acquiring a company, your hours may remind you of what it was like to be an investment banking analyst: weekend work and sleeping under your desk for a few nights each week.
Hedge Fund Hours
Hedge funds tend to be better than private equity in terms of consistent schedules. You work market hours, and weekend work is not required unless you work at a PE-like fund that acquires companies.
However, some travel can still be required for doing “channel checks” (e.g., checking to make sure that the toy retailer you’re acquiring still has Wii stockpiles even in its Minnesota office).
And if you’re at a West Coast hedge fund, you now get to wake up at 5 AM every day so that you’re at work before the market opens on the East Coast.
Bottom Line
Some exit opportunities can indeed offer a better lifestyle, but you’ll never be working 40 hours a week in any of these industries. And you’ll almost always have a difficult time getting a consistent lifestyle with anything in finance.
Before diving into your next job, figure out what the lifestyle is really like so that you aren’t surprised by the mandatory weekly visits to the Yukon Territory in the middle of winter while doing diligence on an oil company.
The Pay
Yes, private equity and hedge fund pay tends to be higher than those investment banking salaries you always hear about… but that’s not the whole story.
Private Equity Pay
At private equity firms, you will make about as much per year as post-MBA Associates at banks make (e.g. significantly more than you made as an Analyst). At smaller places and growth equity firms, the difference in pay is not as huge, but it does tend to be higher than banking at the equivalent levels. At bigger places, it can be much higher than entry-level banking Associates; some even guarantee $500,000 or so per year.
However, the pay difference is much greater at the Managing Director/Partner level than it is at the more junior levels of private equity and investment banks.
So it would not be rational to want to switch into private equity solely because of higher pay, unless you are a very senior hire.
Hedge Fund Pay
Hedge fund pay can vary wildly between different funds. The standard seems to be a base salary of $100,000 for those coming in directly from banking, plus a bonus that will take you to the $200,000 - $300,000 total compensation level (very similar to private equity Associates).
This is much higher than what you could get as a 3rd year investment banking analyst, and is about on par with what post-MBA Associates at investment banks make.
Depending on the fund, their performance, and your performance, the bonus could be significantly more or less than this; if you have really bad luck, you might just get nothing as the fund collapses before your eyes! (ok, this is unlikely) And if you do really well, you might make closer to $500,000 total. That scenario is unlikely except for the largest funds.
However, as with private equity pay, there is a significantly greater difference at the Partner level, where top hedge fund managers can pull in over $1 billion in cash per year. That is more than private equity Partners make and far, far more than even the CEO of Goldman Sachs made last year.
It should also be noted that hedge fund managers making $1 billion are exceptions rather than the norm and most managers don’t make anything close to that, though in general they still make more than investment banking Managing Directors.
Exceptions Apply
One exception to all these salary figures is prop trading and certain small hedge funds / prop trading firms that could potentially pay you an unlimited bonus. I know of at least one place that actually pays you 50% of what you earn from trading, and there are several recent college graduates earning millions of dollars per year there.
But most people going into buyside jobs are not going to suddenly be earning millions of dollars at age 24. Your salary will almost certainly increase, but the really substantial increases over investment banking salaries come at the more senior levels.
The Work Itself
This is where people have some of the most incorrect ideas about private equity and hedge fund jobs.
Yes, there is a lot of stupid grunt work in investment banking that everyone hates doing… changing periods and commas in presentations, editing text in documents 500 times… formatting PowerPoint graphs.
The amount of stupid work you do certainly decreases when you move onto private equity or hedge fund jobs.
But guess what?
If you don’t like Excel or you think analyzing companies, doing valuations, or modeling are boring, you’re not going to like the buyside very much.
The work is just not that different.
You still do financial modeling… you still do diligence, and you still have to do some annoying grunt work. When private equity firms acquire companies and work with banks, for example, the Associate will be tasked with writing “bid letters” and working with banks on financing, which can often require a lot of number scrubbing and attention to detail.
Sourcing
Not only is the work fairly similar to what you do in investment banking, there is also a new type of work that most people despise: sourcing.
“Sourcing” is a euphemism for cold-calling. This is more prevalent at growth equity places (Summit is notorious for making its Associates cold-call companies all day) than at large private equity firms.
It may sound impressive at first to say that you’re in charge of bringing in deals. You may even think to make it part of your private equity resume.
But actually, you’re just in charge of cold-calling; the Partner still owns the deal, even if you “sourced it.” Some private equity firms do pay their Associates a bonus for closing deals they generated, but it’s paltry compared to what the Partners will make off it.
Managing Directors in finance source deals via their long-standing relationships and through regular communication with prospects. They don’t cold-call every company on the Inc. 5000 list until someone says, “yes.”
You, by contrast, will be doing this, or at least some form of it. And it’s one of the most common reasons why people don’t go into private equity or at least avoid the firms with a “sourcing model.”
The Social Aspect
This is one of the most overlooked aspects of investment banking vs. buyside jobs. With banking, you have a group of other Analysts working alongside you and you chat with them in your downtime, go to Starbucks together and enjoy models and bottles with them outside work. It’s almost like living in a dorm in college all over again.
With buyside jobs, this disappears.
You might be the only Associate; you might even be the only person under 30 in your office, depending on the firm.
Private equity firms and hedge funds tend to be much smaller than banks and don’t have as much of a need for an army of Analysts and Associates to do work… there simply isn’t as much work to be done.
This may sound less significant than the other factors I list above, but don’t underestimate it.
I actually know of some 2nd and 3rd year Analysts who were reluctant to leave for this very reason - yes, the pay and upside might be better, but not having any close friends in the workplace can make for a bad experience.
The Bottom Line
I don’t agree with those who think investment banking is only a stepping stone to working in private equity or at a hedge fund.
Doing the job only because you think those options are going to be completely different experiences is a bit absurd. They’ll be better in some ways, but they can also be worse in some respects as well. No one in banking ever yelled at you for not cold-calling enough companies.
If you want to work in private equity or at a hedge fund, it’s better to go there directly; if that is not possible, just do banking for a year and switch over (harder to do now with the market downturn).
But What About Venture Capital And Other Jobs?
I know someone is going to bring this up unless I discuss it here.
Venture capital and corporate development jobs can indeed offer a significantly better lifestyle than either private equity or hedge funds.
However, you will likely take a pay cut compared to what you were making as an investment banking analyst. You could actually be as senior as a VP in banking and make less than a 3rd year Analyst!
Plus, you still have the issue of the work not being that much different and the social aspects referenced above.
Don’t get me wrong: if you want to still have a good salary and a much better lifestyle, venture capital or corporate development could be right for you.
But do recognize that, as with any other choice you make, there are tradeoffs between all these options and nothing is “the best.”
Feedback
What has your experience been with buyside jobs? Am I off on anything here? I’m curious to know what others think about these issues.
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Tags: Corporate Development, finance industry, Hedge Funds, investment banker lifestyle, investment banker salaries, investment banking, investment banking exit opportunities, Private Equity, private equity jobs, understanding investment banking, Venture Capital
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Excellent post, thanks!
Thanks Wouter, glad you enjoyed!
Great post, thanks!
I am currently in management consulting but have been reading up on the academic papers defending value investing and indexing respectively.
Could you provide some insight into the lifestyle and compensation level of fund manager using a value approach?
My current estimates are ‘one-zero’; About one percent of AUM and no additional pay for exceeding a certain hurdle rate. Also, I have been told 40-45% of revenues goes to expenses, so the manager-entrepreneur of the fund ends up with about 0,50% of AUM. I could accept these compensation levels even with as little as 100M AUM if the lifestyle provided is great…
Feasibility feedback would be great too.
Hi PJ,
Thanks, glad you enjoyed the post.
Value Investing Fund managers generally have much better lifestyles than investment bankers/private equity partners/hedge fund managers. Expectations are not as high in terms of returns, so quite frankly they don’t get paid as much either.
I’d say the ‘one-zero’ you quote is accurate; 0.50% of the assets under management is probably a good estimate of how much goes to the employees. So much less than the 2% taken by “alternative investment” guys.
Again, lifestyle is indeed good but people often get bored of it and move on because it’s not nearly as competitive as other fields in finance.
I am currently a first year analyst at a regional bank. A regional bank was really the only option I had, given I went to a state school. All of the positives that they say about boutique/regional banks have been true in my case. I have had likeable coworkers, have gotten great “exposure,” and the hours are better.
I am starting to think about what I want to do after next year, and am considering everything (from operational roles, to PE, to hedge funds). The biggest unknown for me is hedge funds. Can you provide any insight into what I would be doing at a hedge fun coming from an analyst position? What parts of my job are relevant and where I should focus time to gain skills in that department? Is there any chance that I could get my foot in the door?
Thanks.
Hi there,
Unfortunately it’s very, very difficult to generalize hedge fund jobs as they differ dramatically in scope and what you do on a daily basis. You could be more of a trader; you could do a lot of financial analysis (so basically like banking but without all the BS) or you could basically just follow companies or debt issuances.
I would focus on developing your financial modeling skills… the other more qualitative stuff from banking is kind of useless at a hedge fund.
And given how many funds there are, yes, you’ll be able to get in somewhere.
Good luck!
To get to a VC, would this route be feasible - tech consulting > tech emerging tech startup > b school > equity research in emerging tech/markets > VC?
In place of equity research, would being an IBD associate at a BB bank be a better option?
Thanks in advance, again!
Yeah that’s viable, but you probably would not come in as higher than an Associate unless you work at a startup that really takes off (e.g. the next Google).
Either equity research or IBD works, some VCs actually prefer equity research because it is more about following the markets etc.
After 2 years of being an analyst at an investment bank would it be feasible to get an MBA while working for a hedge fund or PE firm? If so, would this be a good option or just unnecessary?
People generally don’t do that - it’s common to get an MBA -after- doing banking and after working for a PE/HF, but usually part-time MBAs are not viewed in the same way as full-time degrees.
Also, if you’re already in finance sometimes the MBA isn’t even worth it unless you need it to advance (more the case at some PEs and some banks rather than HFs). It’s generally a much better deal for career changers.
Thank You. So is it common for IB analysts to stop working and get their MBA after their 2 year contracts expire, before becoming an Associate? Or do a lot of IB analysts move up to associate status or into a PE/HF with a similar payscale without getting an MBA?
Basically why/when would a banking analyst need to get an MBA and how would they go about it if necessary?
In the past few years it has been pretty rare to get an MBA at all because the market has been good and people want to stay in it and take advantage of bonuses etc. I think that’s changing now and more are going back for MBAs.
Some IBD analysts go back after 2 years but the more common route is 2 years IBD and then 2 years on buyside and then MBA. It’s not really “necessary” to do this but some of them just want a break and opportunity to advance more.
A banking analyst doesn’t really “need” an MBA unless the firm requires it to advance or something… and they would always stop working and do it full-time to get it.
Hello Inquisitior, love the site… very interesting and informative.
I have a few questions. How does one go about trying to work in a hedge fund or private equity firm straight out of undergraduate school? Assuming you go to a top tier business school, what kind of grades do you need and then what are your chances?
Do a lot of hedge funds/ PE firms come to schools to recruit undergrads for internships and potential full-time contracts?
You need to have had an internship to have a shot at PEs/HFs right out of undergrad.
If you go to business school you’ll need previous banking experience, grades aren’t really relevant with an MBA.
These firms only recruit undergrads if you’ve had a previous internship - otherwise you have an extremely small chance of moving to anything directly. Best strategy is to do an internship somewhere small and then move up.
Hi,
I just want to say that your site is absolutely brilliant! I have already decided that I would really like a career in investment banking. Now my plans are to get my BA, get a summer internship at a major investment bank and then finish my MBA. Then, I plan to become an associate and eventually work my way up to a VP. I have calculated that I should reach a VP position by the time I am 29. I hope to get married by the age of 31 and have children by the time I am 32. I really like the work an investment banker does but by the time I get married, I would like to be home before 7. I was wondering if there is a job that is similar to investment banking pays very well but obviously not as much as a banker. Or I am still curious about how many hours a VP works.
Thanks in advance
Uh that’s a difficult question to answer but you’ll never have a “normal” lifestyle as a banker. As a VP you will be traveling A LOT so forget about being home by 7.
There are ways to earn a lot of money and have a very flexible lifestyle, but none of them involve working in finance.
Thanks for your early reply,
So what jobs do you think I should go for, I dont mind working long hours when im in my 20’s. I was thinking about strategy consulting…… what kind of jobs would make me a lot of money and still have a flexible lifestyle? Besides starting my own business….
I just want to say that I am very interested in mergers & acquisitions, I have done a lot of research and I am adamant I want a career in that industry. Could you please give me some information about careers in that industry? Anything other than investment banking. Or if banking is my only option……. would I still be working those hours or will the hours be better at a european bank such as credit suisse?
Hmm, making a lot of money WITH a flexible lifestyle WHILE in your 20s BESIDES starting a business… nothing, sorry.
Every way of making money has a downside - whether it’s lack of flexibility, hours, or risk or simply not making that much. You can’t have everything.
Mergers & Acquisitions IS a part of investment banking so I think you’re a bit confused - I would suggest doing some more research first and reading more of this site.
The only way to get “better” hours in banking is by going to really small boutiques and even they’re not MUCH better.
Hi Inquisitor,
let me also join the people out here in appreciating the content on your site. Its really clear and understandable. Thanks!
My question is pretty much connected to the text on these above pages.
It relates to my work experience hitherto and my next steps. I have worked with data analytics firm for 1.5 years and then moved on to a bank as a risk analyst - there i am involved in credit risk modeling. The work is interesting. However i am increasingly getting interested in investment management. So now if i am right, the jobs which relate to this subject will be found in PE, at an HF, or a VC firm. Are their any buy side jobs? Also, I eventually want to become a portfolio manager.
However, i do not have any experience in this field. I am trying to build my credentials; i am a CFA level II candidate.
i wanted to know what are my options. Also, will working for an IB firm be required? Or is it easier to get into a buy side job if you have an exp. on the sell side? i plan to spend next 3.75 years before going for an MBA, in this field. And i want to make good use of the time i have till MBA. Will it be easier to get into buy side job firms?
Regards,
Analyst
Going to be very hard to get into PE/HF/VC with no prior experience, I would do IB first. CFA is relatively useless.
Hi
I understand it will be pretty hard and especially at this time. Also, are PE/HF/VC - these the only buy side job employers? or is there something more to it? And in an IB job, if i at all get a choice, then what kind of work should i look at, which proves helpful for a future job in PE/HF/VC or any other buy side employer?
Thanks in anticipation.
Analyst
It’s pretty much PE/HF/VC… there are some small variations but those are the main buy-side places. I would try for M&A at a bank, that is more useful for buy-side work than equity/debt work.
But surely a job in private equity or a hedge fund is more secure than a IB especially during economic downturns like now. (Or am I getting it wrong?)
And how different is M&A banking to private equity?
PE would be more secure, yes. HFs not so much.
M&A and PE are almost the same in terms of work and such… difference is that you are the investor/buyer in PE rather than the advisor. But same type of culture/people etc.
Does a private equity associate/partner attend pitches given by other companies and do they give pitches in any way or form?
In other words, do private equity associates get involved in meeting with CEOs and CFO’s of big companies?
Sometimes but it’s more of a note-taking / attendance role. A 24-year old PE associate is not going to tell the CEO of a $100Bn company anything he doesn’t already know…
My understanding was that IB is the typical path into VC and PE, but that research and asset management are the most common paths into HF. Am I wrong. Is it tough to go from research and asset management into VC or PE?
Yes it’s definitely harder… research/asset management most commonly go into HFs rather than VC/PE.
I mean you can still do it but it’s not exactly what I’d call easy, and you often have to go to smaller places to make the move.
I interned at a small/mid-market private equity firm this past semester/summer and it was a great experience (I’m currently a junior about to start recruiting for summer internships). However, I feel I should focus on recruiting for bulge bracket IBs to get that name, network, etc. Should I really be focusing on IB if PE is what I want to do in the long run? I feel that starting at a small PE firm may not be good for my career in the long run in more ways than one: pay, networking opportunities, brand name / resume, firm instability (some PE firms are going under these days, as I’m sure you know). Starting at a bulge bracket IB and then moving onto a more prominent PE firm may seem “safer” and more rewarding. And it’s not like these small/mid-sized PE firms are going to pay standard PE rates you see at Blackstone, etc…they’ll be similar to IB levels, I believe. Your thoughts?
This topic might be worthy of its own article…in terms of undergrads going directly to the buyside. How can undergrads know whether a buyside gig at a, presumably, small firm be good enough to pass up IB? And in general, how can undergrads achieve jobs in the buyside world (for those who are interested)? Is this route better/safer than the traditional “2 years at a bank, then jump to buyside”? Do you know any people that have gone directly to the buyside out of undergrad (to a small firm and is doing well, supposedly better than his/her peers than took the “traditional” route)?
(By the way, these questions in the previous paragraph are all rhetorical and meant to spur some ideas for a new article or further discussion…heh). Thanks!
Yes I would generally recommend starting in banking instead. As you said, it is a bit more risky to jump to PE first and it does limit your options somewhat depending on where you go.
I’ve had friends who have done it before but most of them have ended up not liking it too much… hours/pay are actually worse as a PE Analyst and such.
Thanks…excellent site, by the way!
Nice post!
A tangential question: Weighing pros & cons between investment banking and investment management (totally different, I know), what are the exit strategies for investment management analysts, say after 2 yrs? Would investment management open doors to HFs or PEs the way IB does? I would think IM does more so than IB b/c it’s on the buy-side, whereas IB is on the sell-side…I’m just speculating and am interested in hearing your (more learned) take on this. Thanks!
It’s harder to do PE because you don’t really work on deals the same way bankers do… so it’s far more common to go to a hedge fund instead. Yes, it’s technically on the buy-side but the work is also quite a bit different… IB and PE are almost exactly the same despite what people say.