Should You Start Out In Private Equity or at a Hedge Fund Rather Than In Investment Banking?
“I read your articles on the myth of the buy-side job and why finance doesn’t guarantee you $10 million and your own beach in Thailand.
But I still want to do finance – I just don’t want to do investment banking. I’m an Economics major, I have a 3.7 GPA and I have no industry contacts.
Do you think I should start in private equity instead? How can I do it?”
This is a very common “strategy” I get questions about.
But is it a good idea?
The Usual Argument
Usually the logic goes something like the quote above – you want to do finance, but you want to skip all the grunt work, pitch books, and all-nighters.
Plus, the only reason to do investment banking in the first place is for the exit opportunities – right?
How do you get in?
Many places do some undergraduate recruiting and there are “Analyst” (just out of school) positions in addition to Associate positions (what you would get after working in banking).
And if you’re an “Analyst” no matter which type of firm you’re at, isn’t it better to skip straight to the finish line?
Elements of Truth
There’s some truth to this logic.
While there’s grunt work no matter what you do, there is less of it on the buy-side.
And coming from banking, there’s usually some lifestyle improvement – at least you have weekends now – unless you go to the biggest funds, where it’s exactly the same.
It’s difficult but possible to get into a lot of funds – mostly middle-market ones – straight out of undergraduate, so it’s more plausible than all the emails I get from high school seniors wondering how they can become Managing Directors.
The Catch(es)
But as always, there’s a catch.
Actually, multiple catches.
They’re not enough to make this strategy a flat-out horrible idea, but they are enough to make you re-consider whether you really want to do it.
Can You Even Do It?
Problem #1: Can you actually get into a PE firm or hedge fund straight out of undergraduate? Or if you’re in business school, can you go straight from your MBA to one of these fields?
Most of the time the answer is no.
The path into private equity is well-defined, and your chances aren’t good unless you’ve been a full-time investment banking analyst before.
At the bare minimum you need some type of finance internship (private equity is best but other fields can work) to have a fighting chance – without that, it’s a long-shot at best.
If you’re at the MBA-level, it’s very, very tough to pull off unless you’ve been a full-time investment banking analyst before business school.
Especially when the economy is bad, these firms are flooded with ex-bankers with solid deal experience… so if you don’t even have that it’s an uphill battle.
This doesn’t mean that you can’t get into PE or work at a hedge fund eventually – it’s just that it’s difficult if you’re directly out of school without any finance experience.
Pay – Not What You’re Expecting
Problem #2: Please, don’t expect $10 million and your own beach in Thailand even if you do manage to get in.
Yes, there’s the potential to earn more on the buy-side because you’re an investor rather than a salesman – the key word there being “potential.”
If you move into PE or HFs coming from investment banking, you’ll get paid more once you take into account the bonus and carry potential.
But if you move in straight out of school – or from another non-traditional background – you’ll often get less than you would as an investment banking analyst.
Two real-world examples of this:
- One friend did a PE internship his junior year, then went to a larger PE firm for his full-time job. His base salary was less than what banking analysts got, and the bonus was less as well. He did get some upside – like a bonus for any deal he brought in – but overall he made less than a banking analyst.
- Another friend moved over from equity research to PE and not only got paid less than a banking analyst, but was also “demoted” to an Analyst once again despite having several years of finance experience.
Don’t expect to make significantly more – or even the same amount of money – as you would if you had started off on the sell-side.
The long-term potential is higher, but it takes years to get there.
The Myth of the Buy-Side Job
Still one of the most commented-upon articles on this site, everything in The Myth of the Buy-Side Job still applies here.
If you think valuing companies, following the market, and working in Excel are boring, then you won’t like anything on the buy-side either.
Certain points in that article ring even truer if you move in directly from school – for example, you might work more as a private equity analyst than as an investment banking analyst.
Regardless of what your title is, you’re always ranked according to how much experience you have – so if it’s nothing, you’ll be below anyone with some experience.
The social aspect (i.e. Do you talk to people during the day or are you isolated?) might be better if you’re coming in with a “class” of others, but it’s still well below what you would get at a large investment bank – which hurts you both socially and for networking purposes.
What Exit Opportunities?
This is the most commonly overlooked drawback: your exit opportunities are more limited if you start out on the buy-side.
You can go from banking to almost any other finance role because it gives you the broadest skill set.
But as you move up, you become more and more niche.
And that “nichifying” process starts earlier if you skip banking altogether.
Do PE and you can move to other PE firms… work at a hedge fund and you can go to other hedge funds.
But the longer you do it, the more specialized you become – so if you haven’t worked on cross-border European telecom M&A deals between €500MM and €1B then you might be out of luck if you’re looking for something new.
If you know with 100% certainty exactly what you want to do in the future, go ahead and do it.
But if there’s any doubt in your mind, it’s better to start out with whatever gives you the most options.
So, Should You Do It?
The million dollar question: if you get the opportunity should you go to the buy-side rather than starting out in investment banking?
Of all the points above, the one on exit opportunities is the most serious. You can always make up for lost money or sneak in with the odds stacked against you, but you can’t erase experience from your resume.
So if you’re certain you want to be in one of these fields in the long-term, you have the means to get in, and you understand all the trade-offs, go ahead and do it.
But please, don’t expect to go from the mail room to Ari Gold just because you’re in a slightly different industry.
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Hey Brian, great article!
This may be a silly question, but I’m just wondering, why is it that everybody raves about IB exit opps? Even with banking, you still do either PE or hedge funds. And I guess business school or even more banking… Am I missing something? What are some other common paths taken after banking?
Again, sorry if I’m being naive! :(
You can also do corporate development or VC, or take some kind of other in-house finance role at a company.
It’s not that these are all spectacularly awesome, but they are much better than what you’d get if you went to a non-banking job and moved elsewhere afterward.
Hi
Great article as always.
I notice you mention hedge funds often as an exit strategy. But I don’t recall you discussing what BANKING ANALYSTS who get into hedge funds do. Would they typically work at hedge funds with strategies different to those filled with people from other backgrounds?
Are there any other common routes into hedge funds? What about working in asset management or sales and trading first?
Thanks
ZB
P.S. can’t help notice that in “No, you can’t have it all…”, you say
‘The risk is even greater with hedge funds, for one simple reason: they have a habit of collapsing.’
But in “The Myth of the Buyside Job”, you say
‘if you have really bad luck, you might just get nothing as the fund collapses before your eyes! (ok, this is unlikely)’
My interpretation is that a fund collapsing is fairly rare, but MUCH more common than a bank or a PE house.
Usually banking analysts go to more long/short fundamental-based hedge funds, or sometimes merger arbitrage. S&T could certainly work as well, but asset management is a less common route.
Thousands of hedge funds have collapsed since the crisis – a lot more than banks or PE firms – but it’s rarely publicized unless it’s big (i.e. Amaranth). Just goes back to risk and potential reward being correlated…
Thanks a lot for your response M&I.
just commenting, I’m a bit surprised that asset management is a less common route. After all, BBs have hedge fund practices within their asset management divisions.
What if I was more interested in a global macro or quant fund? should I do something else instead of doing investment banking (or trading)?
Keep it real
ZB
For global macro or quant, S&T or prop trading would probably be a better bet. Can still get in from IBD but other industries would be easier.
Thanks very much
Hmm… isn’t prop trading a part of S&T? Surely you don’t mean prop shops like Optiver (quite possibly first mention on this forum).
Still, I guess you’d learn quite a bit at an IBD.
Do you know much about HFs in Asia?
Keep it real.
ZB
I don’t know much about HFs in Asia. Prop trading is similar to S&T but the difference is that “prop trading firms” are not investment banks… investment banks do have prop trading divisions, but I was referring to specialized firms.
Everyone tries to take the natural progression from 2yrs in IB and then exit to PE. PE is much smaller, giving a limited number of spots for associates to be promoted. What do most associates do when they are in their late 20s and won’t make it to VP? This is something that always seems to be overlooked and have never heard an answer for.
The most common path is going back to business school or going to a portfolio company / something else in the industry. Even if you couldn’t advance within PE, plenty of normal companies would be happy to have you.
Hey Brian,
It is my understanding that there are far more “investment banks” (bulge bracket + middle market / boutique firms) than PE firms (elite firms + middle market firms). Does that mean it is very hard for an analyst not coming from the bulge bracket or a top boutique to get into PE afterward? Or is it fairly common for analysts from smaller, lesser known middle market / boutique investment banks to get into smaller, middle market PE firms? How exactly does the pay compare between the KKRs of the world vs. the smaller PE firms?
Thanks
That’s actually not entirely true – I did some research on this and found more PE firms than banks.
The real issue is that PE firms are much SMALLER than banks, which means that it is significantly harder to break in. Blackstone has 500 investment professionals total…. Goldman Sachs has thousands of bankers.
You can get into PE from MM and smaller banks, but not the biggest ones like Blackstone/KKR. You will get paid more at KKR, but you work twice as much and have no life. Pay is higher but order of magnitude is the same i.e. you might make 30% more but you won’t even be close to millionaire status.
1. Tell me about a time when you had to work in a team and something went wrong?
2. Tell me about a time when you could not meet a deadline?
My friend recetly got these two questions, and his been bitching about them ever sence. The more I think about them, the harder it is to come up with two god answers. What would you say?
And yes, I have read your interveiw guide & Vault.
Just talk about a school or work project where people did not get along or where you could not meet the deadline… but then spend most of your time talking about what you learned from it and how you applied the knowledge in the future. 1 sentence on the “failure” and then 2-3 sentences like “After that, I learned to make sure everyone on the team saw eye-to-eye and to discuss problems before they became problems – so all our future projects went well, and we ended up getting the best grade.” etc.
Hey Brian,
Have you written any articles describing the different groups within an investment bank? I am familiar with M&A, but that’s about it. Could you post a brief explanation of the different groups or, if it’s easier, provide me with links where I can learn about the different groups?
Thanks!
M&A and Restructuring below:
http://www.mergersandinquisitions.com/investment-banking-groups-mergers-acquisitions/
http://www.mergersandinquisitions.com/restructuring-hottest-group-cooling-economy/
With more coming soon – ECM and DCM next and then I need to solicit more interviews after that.
Thanks!
Do you have any information about the various coverage groups?
Not yet, but they will be coming if we can get readers to volunteer for interviews
lazard middle market – do you know anything about them? i have an interview with them soon and wondering how well-perceived they are. are they on the level of sagent, harris williams, jefferies, etc or a step below?
I think they’re good but probably not as well-recognized as the banks you mentioned because the others focus specifically on middle-market 100% of the time
How does working at a regional boutique ibank compare to working as a financial analyst at some large company? (compensation, exit opp..etc) Which option would you suggest someone take if they were unable to obtain a BB position?
regional i-bank is generally better – compensation may be similar but better exit opps and much easier to go into other bank or PE. I would strongly suggest regional boutique if you can’t get into BB
I’m getting mixed signals from current bankers giving me advice. One of them say that it doesn’t matter what you do and what position you have during your study time (part-time jobs while studying), as long as it’s at brand name businesses that bankers (recruiters) recognize.
Whilst another banker say that the company brand doesn’t matter at all, as long as it’s relevant finance experience that one can leverage to BB IBDs summer internships etc.
Management Consulted covered this a while ago (The Boeing guy). So to sum it up; are you rather a financial assistant or admin of some sort at a well known company/institution, or a financial analyst or M&A tactician at some unknown boutique far of in Saskatchewan?
For things outside finance, brand-name matters more (e.g. marketing internship at F500 looks better than at a 10-person company). But within finance, a boutique front-office position, for example, is better than back-office at a bulge bracket.
Is a 3.6 GPA from an Ivy low enough to be considered “the kiss of death” for top banking jobs and consequently the kiss of death for PE, business school, and my career and life?
Yup – I’d commit suicide right now if I were you. Make sure you send me your belongings before you die.
seriously – im really worried about my GPA. I know Goldman kids tend to have very very high GPAs (like 3.1-3.2) and I only have a 2.7, so I am worried about getting an interview. I feel my GPA doesnt reflect my abilities- I am treasurer of two campus clubs and vice president of a rocky group, so I am sure i can contribute al ot to the organization. Help on getting around this? I am a junior
Uh, 2.7 is tough. You have to do a lot of networking, or maybe postpone graduation / go to a master’s program instead so you can hide your low GPA.
Starting at a BB this summer but not sure if I am aiming for PE or staying in banking. Out of a standard analyst class, what percentage would you expect to go into PE/HF/VC and how many end up getting third year offers? How often do third year offers get associate offers? Thanks.
In the US I would say 90% go to the buy-side and maybe 10% or less stay on. Associate offers are pretty rare, they were much more common in the bubble. Maybe 10% will get them.
Brian,
First off, I want to thank you. Thanks to your interview tips and on the job knowledge I went from knowing little about what IB is actually about to garnering several offers from BB’s in London. Your site hands down beats whatever vault/wetfeet/etc has to offer.
Anyways, in regards to my internship the upcoming summer, how much preparation should I do prior to the internship? (other than keeping up with relevant news/deals and reading the WSJ and FT each day is a given). Should I should devote some time to financial modeling, accounting 101, or getting comfortable with excel? as I have little experience or knowledge with them.
Also, if I had a choice in choosing what division of the bank to work at, what would be a good place to start? As I’m only fluent in English, I think it’s generally down to product or industry focus. I’d love to do m&a as it covers a variety of sectors but is it as technical as people make it out to be? What about ECM, I hear the work is a little lighter but the skill set you develop is less significant. With the latter, I am worried that I may be placed in an industry that I’ll find dull. On the other hand, like the prospect of partaking in a variety of transaction types rather than say being restricted to capital raising in ECM. Do you see m&a activity picking up this year while capital raising dwindles down?
Sorry about the huge post, but I’d appreciate any feedback you may have.
M&A is probably better than ECM because the skill set you get is broader. I honestly don’t know if activity will pick up but most people are optimistic.
This article covers how to prepare:
http://www.mergersandinquisitions.com/prepare-for-investment-banking-summer-internship/
Brian, thank you so much for the post.
I checked the about page, but couldn’t find any email adress to reach you. Can you provide one or send me an email at the address: sezerburak[at]gmail[dot]com
so that I can reach you?
I do have a question, I’d like to provide you with some specifics, but prefer to do it via mail.
Thanks,
Please submit your inquiry through the contact form on the Contact page.
How come banks own shares in other banks. Like JP Morgan holds 8,720,631 shares in Goldman worth $1,607,648,324 (sep 09)?
Do they hedge against competition or what’s the deal?
That’s partially it. I don’t really know the specifics but hedging + diversification probably accounts for it.
Hello Brian,
Thanks for the article again, very interesting. Got some questions for you, a networking event with some reps from BBs are going to be there. I think I know the basics of the IB industry and I’m still in my junior trying hard to land on a summer internship (which is still yet to come).
I’m not quite sure what questions I should ask the professionals without sounding too stupid or too naive. What sorts of questions should I ask that you normally find the person intriguing and want to get to know them more? I tried reading your previous articles but can’t seem to find the sorts of questions or topics to talk about (i just know that one shouldn’t sound such a nerd talking about really technical questions). Your advice is greatly appreciated. Thanks.
There’s guidance on information sessions here:
http://www.mergersandinquisitions.com/investment-banking-information-sessions/
Ask about their backgrounds, joke about other people or the information session itself, talk about sports, travel, etc.
Hi Brian,
Do you agree that willing to do PE right after undergrad only works at the “KKR/Blackstones of the world”, knowing the low life conditions and the uphill battle to make a career in such funds?
This way of thinking implies that if one does not break into such funds (understanding the ridiculous small odds) and wants to make a career in finance/PE/M&A, then should follow the traditional path of IB and see if you can get a shot later on.
Agreeing that the biggest catch is narrowing the exit opportunities as you are specialising early on, if you want to make a career in PE, working in a mid marketfund only makes sense in a later stage of a professional career (not as an analyst/ associate).
What do you think? Thanks!
I would generally agree with that.
Hey Brian,
I have an offer from the Royal Bank of Canada Capital Markets in investment banking. I’ve heard that it’s a decent MM bank currently experiencing good deal flow. Do you have any thoughts on this bank? Would my exit options be substantially better at a BB?
Thanks!
RBC is solid and I think it’s a reputable MM firm, but a BB would still be better for exit opportunities.
Hey Vinnie,
Congrats on the offer! If you don’t mind me asking, is this the summer IB one in NY?
M&I,
I’m finishing out my first year at a reputable middle market boutique, I graduated from a top-tier liberal arts school with a 3.2 in finance and was wondering if this was going to be a “kiss of death” for middle-market PE recruiting?
My theory was that I would try and compensate for the lower grades by working hard to get a third year offer?
-Jordan
A lower GPA definitely doesn’t help with PE recruiting, but they tend not to care as much about GPA as banks do… 3rd year offer might help but I would recruit anyway and see what happens.
Hello Brian.
First, two thumbs up for the site. I ha ve found a great deal of info here in the past year.
On a more pratical side, I feel very linked to this article. I am right now going through the interview process and facing an important choice (please note that I am French and this offers are France bound):
- sell side: interning at a BB (one currently under fire and regarded as government subsidized…)
- buy side:interning in a large PE Fund (Howard Marks is their Chairman)
Any insights would really be appreciated!
Thx again,
If you’re more interested in PE I would just go to the large PE fund… for internships you still have mobility and can go into either IB or PE or most other things even if you spend a summer or a few months in PE.
Hey,
just wondering if you could post information on REIT’s and other real estate finance jobs? Would REIT’s fall under private equity?
I’ll add it to the list, REIT is a type of PE but it doesn’t work exactly the same way. Don’t know much about it personally but will see about doing an interview with someone who does.
Hey Brian,
First off, congrats for the site and the new format, it does look more pro and it’s easier to read.
So here’s the deal: I’m from an Emerging Market country, going to graduate in Economics from best school here, have one year of experience doing Risk at a BB, had many interviews over the last weeks and it all narrows to 2 offers I like:
(1) Corporate Finance at top Canadian bank as Junior Associate.
(2) PE at PE local firm (by far best in country and one of the biggest in the region), as Analyst.
Both of the teams are composed by Ivy league’s IBs (1+2) and Consultants (2) with years of experience abroad.
Do you think any of them is better in terms of where can I get myself in a few years? (as in BS or working abroad)
Thanks in advance for any advice you might have, I’d really appreciate it since I’m at a huge crossroads.
Best,
E.
Not really, it depends on whether you’re set on doing PE or whether you want to do something else in the future… if PE, option 2 is better, if you want to be more flexible option 1 is better.
I graduated May 2009 with a 3.75GPA in finance from Florida State. I didn’t understand the power of networking until recently, and had a lot of trouble finding my first job. For the last 9 months, I’ve been working as an accountant for $25,000!
I’ve been reading many of the posts on networking on M&I and the tips have helped me a lot!
The last 2 months I’ve been trying to break into BlackHawk Capital Management, a small hedge fund ($50M). The firm has only 7 full-time employees who are very protective of their operation. Unless you come in at the partner level, the only way to get a full-time job is to intern for dirt cheap ($10 an hr) for three months, then $20 for another three months, and then – if you play your cards right – you get a full time gig.
I was very willing and eager to do this until I landed an offer as a treasury analyst from an engineering company, Babcock and Wilcox. The job description isn’t nearly as appealing to me and I really don’t know what to do. They have offered me $45k and it’s the whole “bird-in-hand” thing….
Any advice??
Personally I would keep going for the hedge fund because going to the engineering company will make it harder to move to the HF later on.