Why Private Equity?

139 Comments | Private Equity & The Buy-Side - Interviews and Case Studies

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Why Private Equity?So you’ve made it through your first 6 months in banking alive. Your waist is bigger from all those tiramisu desserts, but luckily your bank account has gotten even fatter than your stomach.

And your bank account is set to get even fatter in the future – if you can successfully break into private equity.

While you know about the case studies and modeling tests you’ll get and the deals you’ll have to discuss, you haven’t put any thought into the “Why private equity?” question.

Which is a problem – because the last thing PE guys want is a banker or consultant who wants to do PE simply because he/she hates banking or consulting or because everyone else doing it.

Why Does This Matter?

While PE firms want people who are technically proficient (one reason why consultants face a more difficult time getting in, at least in the US), fit is even more important than in banking because firms are an order of magnitude smaller.

Whereas the top banks have tens of thousands to hundreds of thousands of employees, the biggest PE firms in the world only have a few hundred – and there are thousands of PE firms with fewer than 10.

Unlike banks, private equity firms have no need to hire an army of analysts to do grunt work: they’re not creating pitch books and competing for sell-side, buy-side, and financing mandates all day, and if they’re understaffed they can say “no” to potential investments.

The interview process can also be much more of an extended affair in PE, with many firms below the mega-fund level conducting interviews over months rather than the days or weeks you see in banking (the mega-funds do it much more quickly).

As a result, fit is critical and if the Partners doubt your motivations for wanting to do PE, they won’t give you an offer.

What NOT to Say

As with some other interview questions, there’s a temptation to say something stupid in response to “Why private equity?”:

  • “I don’t like the hours in banking, and I want a better lifestyle.”
  • “You can make much more money in PE because you’re an investor rather than an advisor!”
  • “Well… all my friends are doing it!”
  • “I want to control companies rather than taking orders from my MD all day.”

I doubt you would say anything this bad in a real interview, but your actual answer may not be significantly better, either.

All the reasons above are bad answers, for different reasons:

  • While the lifestyle may be a bit better at smaller firms, it’s still far from a 9-5 job. And at mega-funds it’s banking all over again.
  • The pay is also not that much better, especially when you first start. Yes, Steve Schwarzman makes more than any MD in banking but he’s also the Co-Founder of the best-known and oldest PE firm in the world, with 30+ years of experience.
  • If you want to become an investor, you want to demonstrate independent thought as opposed to following what all your friends are doing.
  • You don’t “control” companies as an analyst or associate, you manipulate spreadsheets.

In short, any variant of “I don’t like my current job and PE would be better because [Insert Reason Here]” is bad because it’s too negative.

And anything where you sound like you expect to conquer the world and become a trillionaire also sounds bad because it shows that you don’t have a clue about how the industry works.

PE: The Promised Land? Fact and Fiction…

You might have had dreams of becoming a baller at KKR or Blackstone making $100 million per year, but you should pinch yourself and wake up since that will never happen.

I often group IB and PE together on this site because the work is not much different.

If you don’t like Excel, if you think EBITDA is boring, or if you have no interest in analyzing financial statements or reading about different companies, you should stop right now and do something more creative like advertising instead (I hear Don Draper is hiring…).

There are advantages and your role differs from what you do in banking, but if you fundamentally do not like analyzing and valuing companies, you’re going to hate it.

You do get more responsibility at certain firms, sometimes you’ll get to observe Boards of Directors and sit in on meetings, and you don’t get the stupid fix-the-printer-and-fetch-coffee tasks that you see in banking.

But please do not assume that it’s a night-and-day difference just because a bunch of 22-year old students in your finance club say it is.

Better Answers to “Why PE?”

To answer this question successfully, you need to avoid the clichés above and point out positive differences between PE and banking or between PE and whatever you’re moving in from (consulting, corporate development, etc.).

But you need to do that by highlighting what you’re looking for rather than what you don’t like about your current job.

Examples of solid reasons:

  • You want to work with companies over the long-term instead of just on a single deal.
  • You want to get exposed to the operations of companies and understand all aspects rather than just the financial ones (note: “exposed to,” not “control” or “improve”).
  • You want to contribute to companies’ growth by looking at add-on acquisitions and other expansion opportunities that only an investor would be able to execute.
  • You see yourself as an investor in the long-term, and want to learn all aspects of the process and how to evaluate whether a company can deliver solid returns.

It’s not “wrong” to make a direct comparison between PE and other fields (see the first 2 reasons) but you always want to downplay the negative part.

Ideally, you’ll tie the investments a PE firm makes to what you’ve done previously in school or work:

  • The engineer-turned-banker has a much better story to tell if he recruits for a tech PE firm or growth equity firm and explains how he’s interested in applying his knowledge of IT and finance to investing in IT companies.
  • If you’ve worked in Restructuring or Distressed M&A, you have a much better story if you recruit for a firm that specializes in turnarounds or distressed investments.
  • If you’ve done consulting for restaurants or food chains, you’ll have a much better story to tell when you recruit for a PE firm that specializes in those types of investments, or even in the consumer sector as a whole.
  • If you’ve done corporate development at a media or broadcasting company, you’ll have a much better story to tell when you interview with Bono at Elevation Partners.

The exact reasons depend on your background and where you’ve worked before, but you should combine these points – industry / company / deal focus + investing and working with companies in the long-term – to frame your answer:

  • The banker would talk about how he wants to work with companies over the long-term and learn how to assess whether they can deliver solid returns so that he can become an investor in the future.
  • The consultant would talk about how he wants to learn both the financial and the operational aspects of companies, and how he wants to be involved with decisions that a company implements rather than just recommendations.
  • The corporate development guy/girl would talk about how he/she wants the opportunity to work with all different types of companies in the market rather than just one.

It’s not rocket science: highlight the positive differences between PE and your current field and why you’re interested in pursuing them as you transition into becoming an investor yourself.

If you’re coming from a banking or consulting background, you may get questions about PE vs. other exit opportunities:

Why PE Over VC?

If the PE firm you’re interviewing with asks you this one, say that VC is too far in the operational direction for you, and how you feel it’s more about predicting the next Google/Facebook/Zynga than analytical reasoning.

You prefer PE because it’s a blend of both operations and finance and because you can help Founders with well-established businesses make them even better via solid analysis and research rather than just guesswork.

And, of course, if you’re interviewing for VC you want to take the opposite position and say that PE is all about financial engineering with little value-add and that you can truly help early-stage companies take off because they’re more in need of help than established ones.

Why PE Over Hedge Funds?

This one is harder to answer because there are so many types of hedge funds and the strategies used and the fund sizes can make for completely different experiences.

But the main difference between most hedge funds and most PE firms is that in PE you invest in entire companies (at least, in developed markets) whereas at hedge funds you make much smaller investments and it’s often closer to trading.

You prefer PE because you want to understand how entire businesses work – at a hedge fund you would only get the financial aspect and your skill set would be more limited.

Why PE Over Corporate Development?

This one also has a more subtle distinction: the main difference is that in PE you look at all sorts of different investment opportunities and companies, whereas in corporate development the scope is more limited and you’re always looking at deals and partnerships for your own company.

So that’s exactly what you say in your answer: you want to gain a broader horizon and work in industries and sub-industries outside your own.

You’re more likely to get this type of question if you’re already in a corporate development role and you’re moving into PE – as a banker or consultant it’s not terribly likely unless you say you’re also interviewing for corporate development jobs (um, don’t do that).

Is Any of This True?

I mentioned above that many of the myths about PE (becoming a baller making $100M USD at age 25, buying countries, and surpassing deities) are untrue.

For all these “Why PE” examples I’ve been referencing the mix of operational and financial work and working with companies over the long-haul – so you might rightfully wonder if any of that is true.

It’s somewhere in between: some firms do focus more on add-on acquisitions and operational improvements, whereas others really are just about financial engineering and using as much debt as possible to boost returns.

Even if the firm you’re interviewing with is more focused on finance, though, you will still learn more about operations because you do a ton of due diligence before you actually invest (in banking you mostly just send these documents to other parties).

Unless you start or work at a real company, you’ll never learn the ins and outs of how it “really” works, but you will at least learn more than you would as a banker – so it’s more true than the bad “Why PE?” answers in the beginning.

Why PE?

Hopefully not because you have delusions of grandeur and you’re planning out which beach in Thailand you’ll buy with your first $10 million.

Focus on the positive differences, link your reasons to your background and long-term goals (just like with the “Why investment banking?” question), and don’t fall prey to any of the bad answers about pay or lifestyle.

For Further Reading

About the Author

is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys learning obscure Excel functions, editing resumes, obsessing over TV shows, and traveling so much that he's forced to add additional pages to his passport on a regular basis.

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139 Comments to “Why Private Equity?”

Comments

  1. Mike says

    Hi, I’ve been offered a role in a large PE Secondaries fund and wanted some opinions on how similar this would be to your standard PE buyout role and if this would provide good opportunities to move into a standard buyout fund at some point in the future? I’m coming from a Corporate Finance role at a big four accounting firm so recognise that any sort of move into PE will be difficult (although I also have an offer at a lower/mid PE house)…

    Essentially I’m wondering if I should hold out for the standard buyout role in a large fund, make a move into secondaries at a large fund and then try to move a few years down the line, or move to the small/mid fund (salary and fund size interests me less here) and then move on later.

    Sorry that’s a bit long winded!

    • M&I - Nicole says

      I am not quite sure why you’d want to hold out for the standard buyout role. I think it can be challenging to move from big 4 to PE, so I’d probably move to the secondaries fund now, unless you don’t like the team and company

  2. Samuel Cullen says

    Hi, I have a serious question about the PE hierarchy, it seems as though that in Private Equity very few ever come to be a Partner anyways. If it is so hard to become a PE partner, why would people leave Investment Banking if there is little internal advancement waiting for them at a major PE firm. I understand that the hours are better and that making MD is very difficult (but not as hard as becoming a PE partner). But my question is why do so many people leave banking for a dead end street with little room for moving up the hierarchy? And also am I correct in stating that it is much harder to move up in PE over i-banking? Wouldn’t the difficulty of advancement in PE make i-banking the higher-paying field in the long run?

    Thanks and, FIN-ance or FI-nance? (Haha, I had to ask!)

    • M&I - Nicole says

      Samuel, great question. http://www.mergersandinquisitions.com/investment-banking-exit-opportunities/ should help you. In some cases being on the buy side can give you more autonomy, better hours, and yes better pay if you’re any good at what you do. However, if you’re no good at what you do, chances are you’ll be eliminated even more quickly than in banking because buy side firms are smaller and they are likely to weight more importance on people’s output. So to answer your question, people leave because they think they can do better on the buyside, and there maybe some truth to that. Not necessarily, it depends on the firm and how good you are. Some people thrive in PE others thrive in IB, some thrive in both! http://www.mergersandinquisitions.com/private-equity-recruiting/ is also a great resource.

      • Samuel Cullen says

        Thanks so much for your response and for the entire staff, thanks for keeping up this website. Mergers & Inquisitions is such comprehensive and well-maintained site that it has become an valuable resource in determining what field I hope to pursue, (probably investment banking)! Thanks again for your time.

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