Private Equity (PE)

An Overview of the Private Equity Industry, Including Key Functions, Top Companies, and Careers & Salaries

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What Is Private Equity (PE) And How Does It Work?

Definition of Private Equity: Private equity firms raise capital from outside investors, called Limited Partners (LP), and then use this capital to buy companies, operate and improve them, and then sell them to realize a return on their investment.

The industry is called “private” equity because the companies that private equity firms invest in are private initially, or become private as a result of the investment.

The outside investors or Limited Partners might include pension fundsendowments, insurance firms, family officesfunds of funds, and high-net-worth individuals.

A Simple Private Equity Example

Here’s a simple “Private Equity for Dummies” example…

Imagine that you and your friends went to all your contacts, asked for money, and then decided to become “home flippers” by buying homes, fixing them up, and selling them at higher prices.

You keep some of the profits for yourselves in exchange for operating the business, but you give the majority back to your contacts for providing the bulk of the required money.

That’s what private equity firms do, but on a much larger scale and for companies rather than houses – and with the backing of institutional investors rather than “friends and family.”

The job is part fundraising, part operational management, and part investing.

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Investment Banking vs Private Equity

It’s easiest to explain the differences between investment banking and private equity by comparing them to real estate and some of the job functions there:

  • Investment Banking: You are like a real estate agent, but for businesses rather than properties. You represent companies and help them buy, sell, or raise capital, and you earn a commission when they do so.
  • Private Equity: You are more like a real estate investor, buying homes and commercial properties, improving them, and then selling them again in a few years to earn a profit – but you do this with large companies rather than properties. You earn a percentage of the investment returns rather than commissions on completed deals.

You can earn a lot of money if you’re successful in either field, but the ceiling is far higher in private equity for the same reason the ceiling is higher for real estate investors than it is for brokers: if an asset’s price increases by 2x, 5x, or 10x, the investors reap all the gains.

Many people argue that the work in private equity is more interesting and intellectually engaging, that the lifestyle is better, and that it’s a superior long-term career.

Undergraduates often start as investment banking analysts and then use the experience to move into other fields (“exit opportunities”), such as private equity, hedge funds, and corporate development, after a few years.

For more on this topic, see our coverage of investment banking vs private equity.

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Private Equity vs Venture Capital

Both private equity firms and venture capital firms raise capital from outside investors, called Limited Partners (LPs) – pension funds, endowments, insurance firms, and high-net-worth individuals.

Then, both firms invest that capital in private companies or companies that become private and attempt to sell those investments at higher prices in the future.

But beyond these high-level similarities, the industries differ in most other ways, including:

  • Company Types: PE firms invest in companies across all industries; VCs focus on technology, biotech, and cleantech.
  • Percentage Acquired: Private equity firms acquire majority stakes or 100% of companies, while VCs only acquire minority stakes.
  • Size: PE firms tend to do larger deals than VC firms.
  • Deal Structure: VC firms use equity to make their investments, while PE firms use a combination of equity and debt.
  • Stage: PE firms acquire mature companies, while VCs invest in earlier-stage companies.
  • Risk: VCs expect that most of their portfolio companies will fail, but that a few big winners will make up for the losses; PE firms can’t afford to take such risks.
  • People: Private equity tends to attract former investment bankers, while venture capital gets a more diverse mix: product managers, business development professionals, consultants, bankers, and former entrepreneurs.
  • Recruiting Process: Large PE firms follow a quick and highly structured “on-cycle” process, while smaller PE firms and most VC firms use “off-cycle” recruiting.
  • Compensation: You’ll earn significantly more in private equity because fund sizes are much bigger.

For more details, see our coverage of private equity vs. venture capital.

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Private Equity vs Hedge Funds

For detailed coverage of this topic, please see our article on the hedge fund vs private equity comparison.

In short, private equity (PE) firms and hedge funds (HFs) share some similarities: they both raise capital from outside investors, called Limited Partners (LPs), and then invest that capital into companies or other assets, attempt to earn a high return, and then earn a portion of those returns and a management fee on the amount of capital raised.

However, there are some important differences as well:

  • Types of Investments: PE firms tend to acquire entire companies using equity and debt, while HFs acquire very small stakes in companies or other liquid, financial assets such as bonds, currencies, commodities, and derivatives.
  • Investing Strategies: PE firms tend to become more involved their portfolio companies’ operations and business growth since they hold the companies for the long term (3-7 years); hedge funds focus more on short-term profits over 12-month periods from financial, rather than operational, sources.
  • Investor Lockup: Due to the long-term nature of their investments, PE firms often require their LPs to lock up their money for years. But since hedge funds invest in highly liquid financial assets, redemptions tend to be much easier.
  • Risk: All else being equal, hedge funds are probably riskier because they do not control the assets they trade, and it’s very difficult to beat, or even match, the performance of the public markets.
  • Fee Structure: Both firms charge a management fee on assets under management and take a percentage of investment profits (carry), but these percentages tend to be lower for HFs, and performance is measured a bit differently (NAV for hedge funds vs. IRR and hurdle rates for PE firms).
  • Candidates (Who Gets In): Private equity overwhelmingly attracts former investment bankers, along with some consultants and Big 4 and corporate development professionals; hedge funds attract a more varied crowd, including investment bankers, equity research professionals, buy-side analysts at other firms, and sales & trading professionals.
  • Recruiting Process: Most private equity recruiting is highly structured and “on-cycle,” while most hedge fund recruiting is unstructured and “off-cycle.”
  • Work and Culture: Private equity is essentially Investment Banking 2.0, with similar people and on-the-job stress; hedge funds vary a lot more because founders and portfolio managers come from more diverse backgrounds.
  • Required Skill Set: To work at a hedge fund, you must understand valuation and how to find mispriced financial assets. You also need valuation skills for private equity, but in addition, you must understand deals and how to source and execute them.
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Types of Private Equity Funds

You can divide private equity firms according to:

  1. Stage of Investment – Very early stage? Growth? Mature? Distressed?
  2. Target Geography – U.S.? North America? Europe? Asia? Emerging markets?
  3. Fund’s Target Sector – Healthcare? Retail? Technology? Sector-agnostic?
  4. Value Added by the Firm – Do they focus on operational improvements, add-on acquisitions, restructuring, or something else?
  5. Exit Strategy – Do they plan to take portfolio companies public? Or sell them to strategic or financial buyers?

A few of the more common fund types include:

  • Venture Capital (VC) Funds – See the description above; they invest in very early-stage companies with high failure rates.
  • Growth Equity Funds – They invest in companies that are more mature and looking to scale up their operations or penetrate new markets.
  • Leveraged Buyout (LBO) Funds – When most people say, “private equity,” they’re referring to these funds. They acquire 100% of mature companies using debt and equity, and they plan to hold the companies, improve them, and exit in 3-7 years.
  • Distressed / Turnaround Funds – They acquire companies that are undergoing difficulties and rescue them – starting with either debt or equity investments.
  • Mezzanine Funds – They provide high-yield debt to reasonably mature companies that generally have positive earnings and cash flow, but that need additional risk capital.
  • Real Estate Funds – They focus on properties (either equity or debt) and aim to buy, improve, and sell them over time. See: real estate private equity and real estate debt funds.
  • Infrastructure Funds – Infrastructure PE funds invest in public infrastructure (e.g., roads, bridges, airports, public transportation, etc.) rather than companies.
  • Fund of Funds – A private equity fund of funds invests in other private equity funds and is further removed from individual deals.

Specific private equity firms are often classified into one of the buckets above, but many firms have also expanded into different strategies over the years or started new spin-off firms that make different types of investments.

For more on this topic, please see our coverage of private equity strategies.

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Why Work in Private Equity?

If you got the “Why private equity?” question in an interview, you’d probably say that you love investing and operations, and you want to build value for companies over the long term.

But in real life, most people are drawn to private equity because it offers high salaries and compensation, somewhat better hours than investment banking, and more interesting work.

Some people also enjoy the excitement of working on large deals and interacting with “the best and brightest,” as well as understanding company operations in more depth.

Unlike investment banking, exit opportunities are not a major reason to go into private equity because PE itself is viewed as an exit opportunity.

Top Private Equity Firms

Although there is always some debate about the world’s “best” private equity funds, ten of the world’s biggest private equity funds, according to assets under management (AUM), are as follows:

Private Equity Firms

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Private Equity Jobs, Career Progression & Salaries

It’s extremely difficult to get into private equity, and once you’re in, the job is stressful and requires long hours and sacrifices, especially when deals are in their final stages.

But if you perform well, you can advance quickly and earn high salaries, bonuses, and carry (the profit share from investment returns) in the process.

Here’s what a “typical” career progression might look like at a mid-sized-to-large private equity firm based in New York City, including estimates for total compensation (i.e., base salary + annual bonus + “carry” or profit share) in USD:

Position TitleTypical Age RangeBase Salary + Bonus (USD)CarryTime for Promotion to Next Level
Analyst22-25$100-$150KUnlikely2-3 years
Associate24-28$150-$300KUnlikely2-3 years
Senior Associate26-32$250-$400KSmall2-3 years
Vice President (VP)30-35$350-$500KGrowing3-4 years
Director or Principal33-39$450-$700KLarge3-4 years
Managing Director (MD) or Partner36+$700-$2MVery LargeN/A

For more on these topics, please see our article on the private equity career path.

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The Most Common Entry-Level Jobs in Private Equity

The two most common entry-level roles in private equity are Analysts and Associates.

Analysts are hired directly out of undergraduate and assist Associates with tasks such as financial modeling, deal analysis, due diligence, sourcing, and portfolio-company monitoring.

Associates usually join after working as Investment Banking Analysts at bulge-bracket or elite-boutique banks.

They do some of the same work as Analysts, but they tend to focus more on driving deals to completion rather than assisting with “tasks of the day” that need to be completed.

At smaller firms, more Associates come from middle-market and even boutique banks; some management consultants and Big 4 and corporate development professionals also get in.

Getting into private equity directly after an MBA is nearly impossible unless you’ve done investment banking or private equity before the MBA.

You could complete the MBA, use it to win a full-time investment banking job, and then recruit for private equity roles, but that’s far more difficult than breaking in pre-MBA from investment banking.

To get into private equity, you’ll need:

  1. sequence of highly relevant work experience, including transactions and financial modeling.
  2. Top academic credentials (grades, test scores, and university reputation);
  3. A lot of networking and interview preparation;
  4. Something “interesting” that makes you appear to be a human rather than a robot;
  5. The ability to think critically about companies and investments rather than just “selling” them.
  6. A strong cultural fit with the firm – PE firms are much smaller than banks, so “fit” and soft skills are even more important.

For more, see our comprehensive guide on how to get into private equity.

Private Equity Courses

Private equity has become a highly competitive and sought-after field.

Private equity firms want people who are technically proficient and who demonstrate strong “fit” because firms and teams are far smaller than those in investment banking.

Banks might have tens of thousands of employees to perform grunt work, but private equity firms have no such armies; they want to hire small teams of the top professionals who can hit the ground running and add value from day one.

That’s why many aspiring private equity professionals invest in specialized courses and training to help them get noticed, get hired, and get promoted.

Some of the courses offered by Mergers & Inquisitions and Breaking Into Wall Street include:

Completing these courses will help you win interviews and job offers for roles that pay $150K+, and position you for careers in private equity.

Private Equity
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