“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:
“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 recognize that, as with any other choice you make, there are tradeoffs between all these options and nothing is “the best.”
Erhan says
Great article. How difficult is it for a post-MBA banking associate (2-3 years of experience at associate level) to get an investment analyst job at a hedge fund (Long Short, or distressed)? (assuming my odds of getting into a hedge fund right after MBA is slim)
I am trying to figure the best path of breaking into hedge funds after MBA. It seems like banking analysts make the jump regularly, but it is much less common for associates.
Is that true? Should I go to equity research to have much better chances?
M&I - Nicole says
I think you can start moving now. You’ve already had IB experience and this should be useful for HFs http://www.mergersandinquisitions.com/hedge-fund-recruiting/
Rahul says
I am a post-MBA first year associate at a bulge bracket firm in New York. I was a summer associate with another bulge bracket during my MBA. Prior to my MBA I worked with a bulge bracket investment bank in a non-finance role for 4 years. I have completed my CFA as well.
I have had relatively decent deal experience. I now want to try to get an associate position at a private equity firm. I would like to know if candidates like me land private equity jobs and how quickly is the window closing on me.
M&I - Nicole says
Yes please go to http://www.mergersandinquisitions.com/private-equity-recruiting/
Tan says
Hi,
I am just beginning my role as an analyst at a BB in Asia. I was wondering if PE/Hedge Fund recruiting worked similarly here as in the US? I understand that in the US, analysts get contacted for the buy-side roles as early as few months into their jobs and some even have buy-side offers by end of their first year at the BB. What is the scene here in Asia – Singapore, Hong Kong etc? Do analysts have similar opportunities (of course, not as prevalent as in the US) to make the shift early on?
Thanks
M&I - Nicole says
I’d say usually in 1-2 years. They may contact you as early as in a few months, but this can be relatively rare, at least in my experience, and I may be wrong.
Clara says
Hi Brian/Nicole,
What level will I be at if I were to get MBA, work 2-3 years at a BB and get into a mega fund?
And how do you define mega fund? Is a fund with $7 billion considered as a mega one?
Thanks!
M&I - Nicole says
Associate.
I don’t have the exact numbers but I’d say firms like Blackstone KKR etc
Sarah says
Hi Brian,
My banker friend broke into private equity as an associate this yr after 3 yrs working experience. If I get a MBA and get into private equity, will I be starting from senior associate positions?
Does private equity firm really value MBA degree? Thanks!
M&I - Nicole says
I’d say associate, not sure about senior associate.
Yes if it is from a target http://www.mergersandinquisitions.com/private-equity-recruiting/
Sarah says
So if I am not in the Target school, say I am in Ross/Cornell/Duke, do I have any chance break in? Does private equity value networking as much as banking do?
M&I - Nicole says
Yes you have a chance – the schools you list are good schools. Yes they do but they value IB experience http://mergersandinquisitions.com/private-equity-recruiting
Clara says
Hi Nicole,
What is the difference between asset management and hedge fund? Are they the same thing?
Thanks!
Clara
M&I - Nicole says
Not really. See below:
http://www.investopedia.com/terms/a/assetmanagement.asp
http://www.investopedia.com/terms/h/hedgefund.asp
Sarah says
If a MBA works as an associate, would be it years behind the banking analyst who got into private equity directly? How could a MBA to outperform or catch up with the people who got into pe directly?
M&I - Nicole says
Not necessarily. In some cases that can be true if the analyst is very smart with great deal experience.
To outperform, you’ll have to gain as much deal experience as you can and demonstrate your ability to source/bring in deals http://www.mergersandinquisitions.com/private-equity-recruiting/
Mike says
Good read. I’m a rising undergrad JR majoring in Finance and Math in Wharton. I want to try to get a PE internship as opposed to an IBanking internship next summer as a junior. Will that be detrimental to me if I ultimately decide that I want to get into IB after graduating?
Since I still am not 100% sure of what I want to do, my rationale for this is that it would be easier for someone with an internship experience in PE to break into IB, than someone with an internship experience in IB to break into PE. Is this wrong?
Basically, I want to set myself up so that regardless of what I end up in after undergrad business school, I will have the most opportunities in front of me, be that climbing the ladder or exiting (I know it sounds selfish haha). Thanks!
M&I - Nicole says
No it is not detrimental at all. You just need to explain yourself well. I think its a good idea to try a PE internship, though it can be challenging to come across such opportunities. If a PE internship comes by I’d take it. Otherwise, I’d also leave doors open for IB roles.
Siddarth says
Hi Nicole, I’m an engineer by degree. With effort I have changed my career from IT to Finance. Currently I’m working for a leading KPO in India.
If I apply for a top B-School chances of being selected are slim as I neither have exceptional achievements nor grades. My plus points will be 3 years of work ex and GMAT score (assuming I do well in GMAT)
On the other hand boutique banks or PE firms are not very interested in my KPO experience. They are more looking for deal experience which I do not have. I do not have any degree in finance, this might be a negative point too.
Taking all the above points into consideration if I have to get into a decent IB or PE firm where should I invest my next 1 year time. Should I continue to apply for boutique IB or PE firms or should start preparing for GMAT and try getting into good B-schools.
Please guide me for my career path.
M&I - Nicole says
I’d do both. Pick a few schools to apply to, and continue to network with boutique IB and buy-side firms to get an offer
Siddarth says
I don’t think I can get into long networking process. I must just start cold calling then. Is it a good idea to personally visit banks with CV in hand :)
M&I - Nicole says
You can try though I don’t recommend that. Maybe best to cold email and cold call.
Siddarth says
You guys have been very helpful.
Thanks Nicole.
M&I - Nicole says
Thanks for your comment. You’re welcome.
Syrymflash says
M&I, AWESOME article !!!
Honestly speaking, I never understood and still don’t get when someone says hours are terrible in finance. People in finance love money, thus they all are in finance (Talking about IB, PE, and HF). They sacrifice their time, relationships, and so on and so forth for better life later on.
You work more, make more and have better life; I think fair enough. At the end of the day, everyone works equally long hours. But, the difference – investment bankers work those hours in their 20s and 30s while others work entire life.
Personally, I prefer working while young; probably, it was the main reason I study finance in college and want a career in IB.
M&I - Nicole says
Thanks for your input!
HedgeFundGuy says
Hi Nicole. I am studying Petroleum engineering and Finance in UNSW, which is in the top 10 finance schools in the world. I want to work in a hedge fund and was wondering what is the best way to break into it? Also, should I eventually get an MBA after my work experience?
M&I - Nicole says
http://www.mergersandinquisitions.com/hedge-fund-recruiting/ should help you. An MBA from a target school maybe useful if you can’t get into the field with your bachelors, but otherwise, no I don’t think its that useful
HedgeFundGuy says
Thankyou very much for your help. I was also wondering, how are the hedge fund industries in Australia (Sydney) like? Also, are there any specific bachelor degree/s could I do inorder to improve my chances to get into hedge funds in Australia (I am still in first year and hence capable of easily transferring to other courses). I understand form your other articles that there is no specific path but surely there must be few degrees that would be helpful in the future.Finally, how can i get some work experience in these and related financial industries despite being a freshman. I would like to thank you again for all your help.
M&I - Nicole says
I’m not 100% sure with industry in Australia, but I think talking to fund managers through LinkedIn and industry events will help you. It also helps if you’re from a target school. I don’t think there are specific degrees though Finance/Accounting maybe preferable.
Steven Jang says
M&I , great articles as always !!!
I would like to ask a question about Hedge Fund and Private Equity.
I know that there are always exceptions.
But, is it commonly true that investment bankers generally go to Private Equity and traders commonly go to Hedge Fund (as exit options) ?
I really wish to work on Hedge Fund in the future, and I have no idea which one (investment banker or trader) has more advantages to get a job on Hedge Fund.
M&I - Nicole says
Yes this is a common path.
I’d say you’d want to stay on the markets side (i.e. S&T and perhaps research) for HF roles. Bankers do end up in HFs though, but it also depends on the geographical location and the opportunity. http://www.mergersandinquisitions.com/hedge-fund-recruiting/
Gordon says
Hi Nicole,
I thought it is the Bankers who usually end up in Hedge Funds as Portfolio Managers.
Is it really a common path that Traders end up in Hedge Funds?
M&I - Nicole says
Yes many traders end up in hedge funds.
Cedric says
Hello,
when you said that its a typical path to go from IB to PE and from trading to Hedge fund,
Investment bankers who are going to PE all come from M&A or other IB job like ECM/DCM/leveraged finance/structured finance are also eligible for PE jobs ?
And what about hedge funds, are there just traders who can land a job in hedge funds or is it right for sales and structurer ?
Thanks,
M&I - Nicole says
Yes they are.
These links will answer your questions:
http://www.mergersandinquisitions.com/private-equity-recruiting/
http://www.mergersandinquisitions.com/hedge-fund-recruiting/
Undergraduate says
Why would anyone ever choose to stay in IB rather than move to PE?
According to the article above, in PE the pay is better, the work is less grunty, and the hours are at least slightly less terrible. What is the upside to staying in IB? What prevents every IB associate from quitting and going to PE?
M&I - Nicole says
Because some people prefer to be in IB doing deals and on the sell-side. Some people may actually do better in IB vs. PE.
Pay, hiring needs all play a role in your 3rd question.
Rosie Bankston says
Nice article on investment banking opportunities….