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 refers to investment funds that buy and restructure companies that are not publicly traded.

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 funds, endowments, insurance firms, family offices, funds 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.

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


Private Equity vs Venture Capital

Both “private equity funds” 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, almost everything else is different, including:

  • types and size of companies they invest in
  • percentage acquired
  • structures
  • Growth stage
  • risk profiles
  • operational focus
  • talent pool
  • exit opportunities
  • sources of returns.


Private Equity vs Hedge Funds

Private Equity Funds and Hedge Funds share some similarities – they are both alternative investment vehicles seeking high returns, albeit with relatively high risk. However there are a number of important differences too:

  • Investment scope: private equity firms invest directly in companies, whereas hedge funds invest in anything that will offer high potential returns.
  • Timeframe: private equity firms typically focus on the long term potential returns of their portfolio of companies. Hedge funds target maximum short term profits.
  • Money Release: with private equity firms, investors release money into the fund in tranches when called upon. With Hedge funds, investors release money immediately into the fund.


Types Of Private Equity Funds

Common fund types include buyout, venture capital, growth equity, mezzanine (subordinated debt and preferred securities), special situations (investments in financially-challenged companies), real estate, and infrastructure funds.

Funds usually focus on one or more sectors (otherwise they are known as “sector-agnostic”) and target specific geographic regions.

A few of the more common ones that you might join one day:

  • Leveraged Buyout (LBO) Funds acquire 100% of mature companies, using both debt and equity to finance their acquisitions (the debt portion usually accounts for 50-85% of the purchase price). Examples are the likes of KKR, Blackstone, and TPG – the biggest and most prestigious names in the industry.
  • Venture Capital (VC) Funds usually acquire minority stakes in startup companies in sectors with high-growth potential, such as technology or biotechnology. Examples include Sequoia, Kleiner Perkins, Accel, and Andreessen Horowitz.
  • Growth Capital Funds invest in reasonably mature companies that are looking to scale-up their operations (organically or through an acquisition) or penetrate new markets; these are somewhere in between LBO funds and VC funds in terms of assets under management and investment size. Examples are Summit Partners, JMI, and TA Associates.

Funds tend to be classified in specific buckets, but the sky’s the limit when setting a fund’s strategy.

Many firms have also expanded into different strategies over the years, or started new spin-off firms that make different types of investments.


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 salary 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 10 Private Equity Firms

Although there some debate about what the world’s biggest and “best” private equity funds, 10 of the most prominent private equity firms in the world are:


Private Equity Jobs, Career Progression & Salaries

Private Equity jobs tend to be high-pressure and high-status, but they also offer high salaries and bonuses – at least, if you’re at the right firm and group, and you’re at the right seniority level.

Here’s what a “typical” career progression would look like at a PE firm based in New York City, including estimates for base salaries and total compensation (i.e. base salary + annual bonus + “carry” or profit share):

Position TitleTypical Age RangeBase Salary + Bonus (USD)CarryTimeframe for Promotion
Analyst~22-25$100-$150KUnlikely2-3 years
Associate~24-28$150-$300KUnlikely2-3 years
Senior Associate~26-32$250-$400KSmall2-3 years
Vice President (VP)~30-35$350-$500KGrowing3-4 years
Director / Senior Vice President (SVP) / Principal~33-39$450-$700KLarge3-4 years
Managing Director (MD)~36+$700-$2MVery LargeN/A


The Most Common Entry Level Jobs in Private Equity

The private equity career path and hierarchy vary from firm to firm, but here’s a flow-chart summary:

At large private equity firms (“mega-funds”), junior-level hires (“Associates”) are overwhelmingly Investment Banking Analysts who spent 2-3 years at bulge-bracket or elite-boutique firms.

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.

Firms have been hiring more students directly out of undergraduate, so there are now quite a few “Private Equity Analyst” positions in the industry as well.

4-Part Formula For Breaking Into Private Equity

Truthfully, the PE recruiting process does not require much intellectual horsepower.

It’s not that difficult to build an Excel model quickly, plan out your story, or prepare deal discussions.

You’re not building rocket ships; you’re doing arithmetic.

The biggest challenge is that many people go into recruiting without a clear idea of what firms are looking for, what your background must look like, and the proper strategy to use.

The formula for success looks like this:

  • You Can Answer Technical Questions and Build Models Relatively Well – Good! Extra bells and whistles mean less than getting the fundamentals right.
  • You Have Good Reasons for Wanting to Be in the Industry – For example, you have a long track record of investing, you analyze industries for fun, and you have strong views on companies and deals. You’re not just doing it for “improved hours and pay.”
  • You Have Added Value to Deals and are Capable of Running Deals – No one will hire you if they have doubts about your ability to work independently.
  • You Pass the Airport Test – You will be in airports a fair amount, so the Partners and other team members must want to spend time with you.

If you follow and implement this process, you’ll be better-equipped for Private Equity recruiting than ~95% of candidates.

Private Equity Courses

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

While PE firms want people who are technically proficient, “fit” is even more important than in banking because firms are an order of magnitude smaller.

Unlike banks who might have tens of thousands of employees, private equity firms have no need to hire an army of analysts to do grunt work: they’re interested in hiring a relatively small team of elite professionals who can add value.

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


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

Completing these courses will help you win Private Equity interviews and job offers for roles that pay increasingly good money.