How to Break Into Commercial Real Estate and Build an Empire
This is a guest post from Mike Moran, CFA, a portfolio manager at a long-only asset management firm. He started Life on the Buy Side to teach you what it’s like working in asset management, hedge funds, and more.
When it comes to commercial real estate, you’ve got two choices: do something extremely risky, or do something boring and conservative.
OK, you could also pick something middle of the spectrum – but what fun is that?
If you have your sights set on building a real estate empire, you’re going to have to take the leap and embrace the risk with open arms.
Here’s how to do it:
Risk, Reward, and Reality
With commercial real estate, it’s easiest to think of investment opportunities from least risky to most risky and then analyze the players in each category:
- Least Risky: Core Investing – Acquire and Operate Existing Properties
- More Risky: Value-Added and Opportunistic Strategies – Improve Existing Properties
- Most Risky: Real Estate Development – Build Completely New Properties
Core Investing is all about stability and getting high single-digit returns by operating existing assets. There’s little risk when a building is already operational and generating rental income – think of the GM Building in New York or a class-A regional mall as example investments.
Since these are stable assets that provide a steady income stream to the owners, pension funds are the main investors in core funds – firms that specialize in acquiring and operating existing properties.
You also see Real Estate Investment Trusts (REITs) – both publicly traded REITs and private REITs – in this space, as well as core real estate funds run by real estate investment managers such as AEW and RREEF.
REITs are like private equity firms but for buildings rather than companies – they acquire, operate, (possibly) improve, and then sell properties to earn high returns.
After you leave this Core Investing space, you get into Value-Add and Opportunistic Strategies – this is where the investors try to make substantial improvements and renovations to existing properties rather than just acquiring and operating them.
Returns are typically in the 15 – 20% range, but may go higher depending on how risky the strategy is. Some REITs and core funds managers dabble in this space, but you mostly see private equity shops like Blackstone here – a high single-digit return is horrible for PE, so it makes more sense for them to focus on riskier strategies.
At the riskiest end of the spectrum is real estate development, and the players there are all over the map.
Some REITs have large development pipelines and invest significant resources into constructing new properties – examples are AvalonBay [AVB] (apartments) and Prologis [PLD] (industrial), which often have multi-billion-dollar pipelines.
Private equity can sometimes be active in development, but usually only as the capital partner to developers.
There are also large private companies like Opus that focus on real estate development without the pressures that come from being publicly traded.
Risk = Reward?
Based on the descriptions above, you might think that real estate development offers the highest potential returns and the highest pay since it’s also the riskiest.
But you’d be wrong: It’s a boom-and-bust business, and developers are also the first people to get fired in a downturn.
While Prologis had a $4B development pipeline at the market peak, it dwindled down to less than $500MM after the market collapsed; three of Opus’ five major subsidiaries filed for bankruptcy in the past downturn.
This is not to say that real estate development is “bad” – it’s just that you shouldn’t jump into it expecting to make bank right away.
It’s great if you’re into the brick-and-mortars side of real estate, but if you’re not, think about the other options above.
There are also asset management firms and hedge funds that specialize in real estate securities, and even shops that invest in REITs – if you want to blend real estate and the public markets, both of these can be good options.
How to Break Into Commercial Real Estate
As with everything else in finance, at the entry-level you’re just a high-paid spreadsheet monkey who works on deals all day – whether that’s at the core funds or at private development companies.
A typical “path” for breaking in is to go to a target school and then get into real estate investment banking – that’s what many of the top people at the biggest real estate firms and REITs have done.
Mike Fascitelli, CEO of Vornado [VNO], is an example of a real estate big shot that followed this path. He went to Harvard for his MBA, started at McKinsey, and then went to Goldman as a real estate investment banker. After several years at Goldman, Steve Roth lured Fascitelli away from banking to work at VNO.
But you don’t have to follow that path to break in – and an MBA isn’t even a prerequisite.
The best example is Jonathan Gray, the co-head of Blackstone’s real estate group – Gray started at Blackstone with just an undergraduate degree from Wharton and worked his way up to become co-head of the entire real estate group by age 35. At age 37, he was busy pulling off the $36 billion Equity Office Properties acquisition, the biggest private equity buyout ever (at the time)!
Yes, Wharton is a target school and it also happens to be one of the top undergraduate schools for real estate – but more importantly, it has a great real estate alumni network.
Just like everything else in finance, leveraging your alumni network is essential to breaking in: I wouldn’t be surprised if Gray tapped his network to land his gig at Blackstone right out of school.
Other top undergraduate schools for real estate in the US include UC Berkeley, USC, and Wisconsin – these are well-known institutions, but they’re not the Ivy League and they’re not the ones that immediately come to mind when you think of a “target school.”
Real estate is very much a “who you know” business and having a well-connected alumni base is critical – if you’re at a school without much of a presence in real estate, your next best option is to get an MBA at a school with a strong real estate program.
If you’re already out of school and working, you could get involved in trade groups like ICSC, ULI, or YREP if there’s one in your area.
Whatever you decide to do, networking is even more important in real estate than in other industries so start pounding the pavement as soon as possible.
Got Real Estate Development?
While many top real estate jobs required work experience and/or more than an undergraduate degree, development is one area where undergrads from all different backgrounds can get in right out of school.
So if you’re in this boat and you’re interested in real estate, you’re better off using your career center and alumni network to break in and focusing on development rather than PE, REITs, or anything else.
Q: Do I need investment banking experience to break into development?
A: No, no, and no. In fact, you might have too much experience if you actually do real estate IB and want to break in afterward – an entry-level development role would be a step backward.
Development is significantly different from real estate IB or PE, and they shouldn’t even be in the same category.
Q: Wait, but what should I do with my life if I don’t do investment banking first?! Otherwise everything is meaningless!
A: Pick a major that lends itself to real estate development. Example majors: Real estate, civil engineering, architecture, or construction management.
Since development is much more bricks-and-mortar than other RE-associated industries, knowing these subjects is valuable for breaking in – and you’ll get the alumni network to help you land a development job.
If you don’t know what major and/or school is good for getting into RE development, just ask around and see what types of jobs most graduates get – if “real estate” is a common answer, you’ve found a good match.
Breaking Into REITs
Real Estate Investment Trusts (REITs) are investment vehicles that are exempt from corporate income taxes as long as certain criteria are met; the main one is that REITs must pay out 90% of their taxable income as dividends, which means they have little cash on hand and are constantly issuing debt and equity to fund their operations.
Historically, REITs were passive vehicles that focused on owning properties and escalating rents over time, but today they’re more dynamic, and many REITs buy, sell, develop, and manage properties and 3rd party joint ventures all the time.
A few of the larger REITs in different segments include the Simon Property Group [SPG] (shopping malls), Boston Properties [BXP] (offices), AvalonBay [AVB] (apartments), and Prologis [PLD] (industrial).
Since REITs use so many different investment strategies, there are all sorts of different job opportunities there.
On the operations side are developers, property managers, and acquisition people that deal directly with properties.
On the capital markets side, you’ll find finance people that work on equity and debt deals to fund the REIT’s operations.
If you want to get into the operations side of a REIT, it’s similar to what you need to break into RE development: Get a real estate-related undergraduate degree and network with alumni.
But if you’re interested in capital markets, you need real estate investment banking experience – REITs are one of the main exit opportunities for RE bankers since you advise REITs all the time as a banker.
Bottom-line: if you’re more interested in finance, go the banking route and look for REIT exit opportunities; if you’re more interested in the bricks-and-sticks aspect of real estate, skip banking and go straight into development or acquisitions.
Compensation: What Compensation?
Unfortunately, there are few good data sources on real estate compensation – but pay tends to be commensurate with risk and expected returns, at least in buy-side roles.
The main exception is development – it’s the riskiest investment class and yet the pay is also the worst.
The real money in development accrues to those that put their money at risk in the developments.
To complete construction of a new property, the developer itself only puts down a very small portion of the total equity – maybe 5% or less.
Many times, the developer simply contributes their land basis as the only equity in the project and then uses debt and mezzanine financing to fund the entire construction cost.
Most of the returns will go to the 3rd party investors that come up with the rest of the funds – and to make things even worse, there’s no cash flow from properties that are under development until tenants move in and rental income starts flowing.
Even the fees the developers charge are not great compared to the overhead, so there isn’t much money left to pay salaries to employees.
So, do not get into development if money is your main goal – only do it if you’re interested in building and construction side of real estate.
You will not make it big until you have enough money to invest in development projects yourself.
For core funds and REITs, pay is consistent with base salaries for recent graduates elsewhere in finance – the main difference is that you won’t receive Wall Street-like bonuses in these jobs because the fees and returns are lower than in PE, for example.
On the private equity, hedge fund, and asset management side, compensation is similar to what you would earn at non-real estate funds. So real estate PE is similar to normal PE, real estate HFs are similar to normal HFs, and REIT-focused asset management is similar to normal asset management.
And on the investment banking side, you don’t see much of a difference at the junior levels between real estate banking and other groups.
As with other buy-side jobs, the buy-side itself is the end-game. Once you get there, it’s just a matter of working your way up until you become the next Jonathan Gray.
Be careful of getting pigeonholed: If you get into real estate and don’t like it, move on as quickly as possible or it will become more and more difficult to find a non-real-estate job.
In addition to moving up the ladder, investing in real estate yourself is another possibility: A number of friends have amassed nice little portfolios of multi-family assets.
And unlike buying entire companies, the capital requirements for real estate are far lower and you don’t need to raise hundreds of millions of dollars just to buy a house.
Raising a small fund of your own is also possible, but just as with starting a hedge fund you need to raise some seed money to get started – you would go to friends and family first, show solid performance, and then approach a broader set of investors once you can point to results.
Whither Real Estate?
It’s a great field, but keep your expectations in check.
Until you have enough cash to fund massive real estate developments by yourself, you won’t see your name on any buildings.
And if you want to become as famous as a certain real estate developer – and maybe even become President of the United States as well – it might just be easier to get your own reality TV series instead.
Even More on Real Estate
If you want to learn more about the modeling and valuation side of real estate, check out the BIWS Real Estate Financial Modeling Course, which covers both individual properties and REITs via case studies of an apartment complex, an office development and sale, a hotel acquisition and renovation, and Avalon Bay, a leading apartment REIT.
There are also real estate private equity case studies based on stabilized multifamily, value-added office, and pre-sold condo development deals.
Free Exclusive Report: 57-page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews
Money, Hours, Models, Bottles: Investment Banking in New York, California, and Everywhere In Between
“Are you guys even in the office past 8 PM? Whenever I call no one’s there.”
“New York is hella lame, people are so much better out here.”
“If you say ‘hella’ again I’m going to make you pay for the bottles next time – and maybe the models too.”
“Fine, I’ll do some research and see what I can send over. NY is still overhyped, though.”
No, it’s not a short story or a new TV show about bankers – it’s a banker from NYC and one from San Francisco talking to each other.
And you read that headline correctly: today you’ll learn how banking differs in different regions of the US rather than going off on adventures to distant lands.
As one reader pointed out a while back, “Hearing about all these different countries is great, but what about how banking is different on the east coast vs. west coast of the US and everywhere in between?”
The Most Common – and Wrong – Arguments
Many people claim that the pay and hours differ significantly and that New York is more “hardcore” than other regions.
That makes sense intuitively: New York is the biggest financial center and the biggest deals tend to happen there.
But in practice, these differences are greatly exaggerated – pay is standardized at the junior levels in finance and bonuses depend more on your bank and group rather than the city you’re in.
At the senior levels, geographic differences become more important because certain offices have better deal flow and clients, and senior bankers’ bonuses depend 100% on performance.
New York bankers like to argue that they work way more than people in other regions, but there are no scientifically controlled surveys to support these claims.
Yes, maybe the hours are somewhat worse since more deals happen there – but we’re talking a difference of 85 hours per week vs. 90 hours per week: you still won’t have a life.
So the more substantial differences have nothing to do with pay or hours, but rather the industries covered, the cost of living, and the exit opportunities.
And yes, I’ll address the ever-popular models/bottles, networking, and a few other points as well.
This is the main difference – banks in the top 5 cities for finance in the US focus on a different industry:
- NYC: Diversified
- Chicago: Industrials
- Houston: Oil & Gas
- San Francisco: Technology / Healthcare
- Los Angeles: Gaming & Lodging / Media
There is no “best” because it depends on what you want to do in the future and how certain you are of your career.
Some of these fields are more specialized than others; something like oil & gas requires more specific knowledge than tech or healthcare since energy companies play by different rules and require different valuation methodologies.
So if you’re already interested in a specific industry, it may be a good idea to start out in the region that focuses on that industry – but if you have no idea yet, New York is the safest bet.
Just as actors get typecast, you will get more and more pigeonholed as you move up the ladder, so you need to consider these options carefully.
One friend worked on a telecom deal at a small VC firm, then got placed into the telecom group at a boutique bank, and was then placed into the telecom group at a bulge bracket bank.
Effectively, he became “the telecom guy” all because of one small deal he worked on ages ago.
And it’s even worse once you move beyond banking: good luck interviewing for that hedge fund that wants people with European telecom merger arbitrage experience if you don’t have any.
But What About Deal Flow?
“But,” you rightly point out, “There’s a difference between deal flow, hours, and industries covered – even if you’re working a lot, you might just be building pitch books all day. And what if your industry isn’t ‘hot’ at the moment?”
I don’t disagree with you there, but it’s almost impossible to determine deal flow of specific offices without talking to real people.
So if you’re such an overachiever that you’re going to pick your bank and group based on deal flow and exit opportunities, go talk to people at the different offices you’re considering and see what they say – but keep a critical eye open because they’re likely to oversell you on everything.
And no, I’m not going to rank cities and groups by deal flow here since that changes quite frequently and since you’re likely an obsessive-compulsive person already if you’re reading this.
Cost of Living
In ancient times, New York was the most expensive city in terms of real estate, taxes, food, and so on.
Now, however, San Francisco is actually more expensive, or at least as expensive, due to the tech boom and the number of high-paid startup employees there (as of 2015).
So you are not likely to save much money during the year in either place; it’s also a bad idea to live in New Jersey or another location outside the main city to save money, since you might go insane in what little free time you have.
The “cost of living” ranking looks something like this:
- NYC ~= SF > LA > Chicago > Houston
You will save the most money working in Houston because Texas has no state income tax, rent is ridiculously cheap, bottles are less pricey, and even the models are less demanding and will give your wallet less of a workout.
Cost of living shouldn’t be your top concern, but you should be aware of it.
Finance people are notorious for making millions of dollars and then blowing it all on luxury spending – so pay attention if you want to retire on more than $50K in that savings account you forgot about.
One other note: driving will be required in most of these places, especially in a city like LA where there is no public viable transportation.
So if you hate driving and owning a car, your best bet is New York.
NOTE: Ride-sharing services such as Uber and Lyft are actually changing this dynamic.
If you live relatively close to the office, you might be able to take one of those to and from work every day and gain some peace of mind in the process.
The main problem with exit opportunities is that it’s hard to interview when you’re far away.
You need to take time off work by using questionable excuses, hope people don’t notice your repeated absences, and then visit the firm enough times to seal the deal.
Since New York to SF or LA is a 5-6 hour trek, it’s not easy to hop from banking on one coast to the buy-side on the other coast. Pretty much all the analysts I knew in California stayed there, and pretty much all the ones in New York stayed on the east coast.
So you’re more likely to stay in your first region unless you can pull off in-person trips or interview entirely via video conference (unlikely for traditional exit opportunities).
Again, people like to argue that New York has “better” exit opportunities, but plenty of analysts on the west coast and elsewhere get into mega-funds as well; it’s just that they work at local offices rather than in NYC.
One legitimate difference is that there are more exit opportunities in New York just because it’s the biggest financial center.
And you also run into the pigeonholing problem if you start out in another region: go to Houston and you’ll more than likely recruit only for energy-focused PE firms and hedge funds.
But aside from those differences, the actual quality of exit opportunities doesn’t differ as much as you might expect.
Networking opportunities are another more significant difference, and one that people overlook all the time.
Since NYC is much bigger than the other regions, you’ll simply meet more people there and you’ll be better equipped to network your way into other roles.
Just as with other financial centers like Hong Kong and London, sometimes half the people you meet in NYC will be in finance (the other half will be “aspiring” artists or models, which is great for you as a financier).
How much does the quality of networking really matter?
It depends how certain you are of your “career path” – if you’re interested in doing tech banking and then doing venture capital in California, you’re better off starting in SF and networking with tech and VC groups there.
But if you have no industry preference, you’ll gain more options by starting out in New York.
How to Satisfy the Models
Ah, now to the fun part.
The main difference is that the New York models tend to be higher-maintenance, more expensive, and more demanding; LA comes close since everyone is required to get plastic surgery, but you’ll still spend more overall in NYC.
But flashing around wads of cash also doesn’t impress as much in New York because $200K is barely middle class – not enough to satisfy models who are expecting a new bag every day.
In all seriousness, you really will spend a lot more money going out in New York if you actually enjoy it.
LA and SF can also be expensive, while Chicago and Houston are more reasonable. Some also argue that people in the South and Midwest are “friendlier” but I don’t want to get into a debate over that one.
I’m not qualified to comment on the quality of men in each place, other than to say that SF is probably the worst place to find hot guys unless you’re into tech guys with a ton of money from startups.
(Yes, a female friend recently asked if there were a lot of tall, muscular blonde guys in SF and I started laughing.)
“Aha,” you say, “But even if the pay and hours are not much different, surely they must ask completely different interview questions in each region, right?”
Sorry to disappoint, but no, not really.
No one sits down and says, “Well, in Chicago we should ask this specific set of questions but in Houston it will be completely different.”
Once again, the main difference comes down to the industry focus: you don’t need to be an expert on the industry of focus in each city, but you should know something about recent deals and any industry-specific valuation methodologies.
It’s not really “easier” or “harder” to get into finance in different cities – there are fewer spots outside of New York, but there’s also less competition.
Yes, there are banks in places besides NYC, Chicago, Houston, SF, and LA – but the offices tend to be much smaller and they don’t always recruit on-campus.
Other cities with a presence in finance include Boston (similar to SF due to the industry focus), Washington, DC (aerospace/defense), Atlanta (lots of wealth management), Miami (healthcare, Latin America), Dallas (got equities?) and maybe a few others.
I can’t recommend starting out in these places if you have the option to go to one of the 5 major centers listed above.
Maybe if you’re interested in only a very specific industry, like aerospace and defense, then DC makes sense – but you’ll be at a disadvantage in terms of deal flow and exit opportunities.
A lot of boutiques are also based in other regions, so you should jump at the opportunity if you have nothing lined up in a bigger city – but otherwise, stick to the top 5 above.
Outside of IB: Sales & Trading, Hedge Funds, and More
You run into the same differences in other fields like private equity, sales & trading, hedge funds, and asset management: a different industry focus and more geographically limited exit opportunities.
Some cities also tend to be stronger in certain fields.
For example, Chicago is great for prop trading and the SF Bay Area is the spot to be for venture capital.
One downside to any type of markets-based role such as trading or hedge funds is that you have to wake up very early if you’re on the west coast because you work New York market hours.
If you’re fine waking up at 4 AM, getting off work at 5 PM, and sleeping at 9 PM every night, you might be OK; if you’re not a morning person, though, you may want to stay away.
So, Where Should You Work?
If you have absolutely no idea what you want to do and don’t mind spending more money, New York is your best option – there’s more networking, more opportunities, bigger deals, and you don’t even have to drive.
But if you have a more specific goal such as going into VC, joining a tech startup, or working in the oil & gas industry, you could make a good argument for starting out in a different city.
There may be slight differences in pay, hours, and how much you save in your first year (with bigger differences on that last one), but those don’t matter much in the long-term.
To figure out which office has the best deal flow, network with bankers and ask directly – that information changes quickly and you’re always better off going straight to the source.
And whatever else happens, make sure you don’t end up doing equities in Dallas.
Free Exclusive Report: 57-page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews
From Analyst Monkey to King of the Jungle MD: The Investment Banking Hierarchy
“This is not a fraternity house,” my staffer explained as he hauled me into a small conference room.
“Some of the MDs have complained about how messy your desk is, so clean it up.”
Genuinely curious, I replied, “Were you referring to the empty Red Bull cans or to all the papers too?”
Not a good start to your 3rd week on the job.
I told this story to a few co-workers afterward and they all laughed and responded the same way:
“He’s lying, a bank is exactly like a frat house.”
They were right – just like a fraternity, there’s hazing, a hierarchy, and certain rituals you must go through to advance.
While this site has been analyst-focused in the past, today you’re going to learn all about this hierarchy, how much you get paid at each level, how the work differs, the average age range, and the possible exit opportunities.
And if you’re curious about hours please stop reading this site right now.
Footnotes & Starting Assumptions
As with the analysis of where your paycheck goes, here I’m starting with the assumption that you’re in a developed country in a major financial hub like New York, London, or Hong Kong.
At the end you’ll learn how this hierarchy might differ outside banking, outside those cities, and in other countries.
These pay figures are not exact – I used recent salary and bonus figures, data from the Careers-in-Finance compensation listings, and other sources like that to get numbers.
So yes, there are exceptions and sometimes you see more pay or less pay – these are rough averages.
Let’s dive right in and start with the bottom of the hierarchy: the analyst monkey.
What You Do: You’re a monkey, and your chief responsibility is to collect bananas for the bigger monkeys higher up in the food chain.
You do most of the Excel and PowerPoint work, take notes, send emails and call people, and even take care of random tasks like fixing printers and picking up dry cleaning.
How You Get In: You’re recruited from a top undergraduate or Master’s program, or you network like a ninja and get in from a lesser-known school. Once you go beyond a few years of full-time work experience, you won’t get in as an analyst because you’re overqualified.
Yes, some people pull this off anyway but it gets exponentially harder the longer you’ve been working.
Age Range: Most analysts are just out of school, so 22-27; in countries with military service or with 5-year undergraduate programs (Europe) the upper end of the range is more common.
Pay: This varies by region and the state of the economy, but most 1st year analysts make at least $100K USD all-in (base salary + bonus) and that may go up to $150K or more if the economy is good.
2nd and 3rd year analysts see increased pay, usually closer to $200K in a good year for a 3rd year analyst, and maybe $150K or a bit less on the lower end in a bad year.
Time to Get Promoted: Usually it takes 3 years to become an associate.
Possible Exit Opps: See our comprehensive article on IB exit opportunities.
Analysts have the most exit opportunities out of all bankers because they’re young and haven’t had “too much” experience in a certain field yet.
What You Do: If the analyst is the monkey, you’re a bigger and better-groomed monkey who’s much smoother in social situations.
You may still do Excel work if the model is complex, but mostly you are checking the analyst’s work and making sure he doesn’t screw up. You spend most of your time managing the analysts and making sure the VP’s orders get executed.
Much of your time is spent talking to clients and seeing what they need when you’re working on deals; analysts are too busy cranking away to have much client interaction, at least at large banks.
You get to attend more meetings and pitches than the analyst, but you will always have a non-speaking role unless the MD needs a number from you.
How You Get In: You either work as an analyst for 3 years and get promoted, or you get recruited out of a top MBA program after working full-time for 3-5 years in another industry.
Theoretically you could get recruited for an associate position if you’ve already graduated from an MBA program and have been working in industry for a while, but this is rare – your chances are 100x better when you’re still in school.
Age Range: This one varies more than the analyst age range because associates come from more diverse backgrounds; 25-35 is the safest estimate because some associates are promoted directly from the analyst pool while others get recruited out of business school.
Getting in when you’re under 25 would be virtually impossible unless you graduated college early, and having 10+ years of experience pre-MBA makes you overqualified.
Pay: Again, there’s more variation here than with analyst pay because the bonus takes up the bulk of an associate’s compensation and that’s heavily dependent on the economy.
In a bad year, a 1st year associate might get between $150K and $200K USD all-in, while more senior associates (3rd and 4th years) might get closer to $400K or $500K all-in in a great year.
If your group is just OK and the economy is neither great nor terrible, your pay will be in the middle of that range.
Time to Get Promoted: Usually it takes 3-4 years to reach Vice President, and it’s harder to get that promotion than it is to go from analyst to associate – you need to show more leadership and client management skills.
Possible Exit Opps: It is more difficult at this level, but the same exit options that exist for Analysts also exist for Associates.
There’s less of a structured process, and you have to be far more proactive in reaching out to recruiters and networking.
What You Do: Moving up the pyramid once again, you are an even larger and more intimidating monkey, and you’ve got lots of barrels to throw down at the chimps below you climbing up the ladder.
You make sure that deals and pitch books get done – you interpret what the MDs and Directors want, and ensure that whatever pops out of your analyst’s cubicle resembles it.
You get a lot more client interaction, and may call buyers and directly pitch a company that you’re selling.
And as you move up, you have to start shifting over to relationship development and winning clients – which is incredibly tough and one of the most difficult transitions to make.
How You Get In: You get promoted after working as an associate for 3-4 years.
It’s extremely rare to break in as a VP coming from outside banking, and I’ve never seen it happen. To have the skills required to run deals and win clients you need to have been in banking for a long time.
Age Range: Since you must have been an associate first, we could say the age range is 28-40, with the average somewhere in the middle.
Pay: There’s even more variability since the bonus takes up such a high percentage of your compensation; base salaries do not increase that much as you move up (even MDs might see only around $150K-$200K base).
Most VPs will earn between $300K and $1MM USD, with the upper-end of that range for more senior VPs in a good year and the lower end for more junior VPs in a bad year.
Time to Get Promoted: Probably another 3-4 years to reach Director / Principal / SVP, though it varies and you may do it more quickly depending on performance.
Possible Exit Opps: Even more limited than associates – either stay in banking or go to a normal company in corporate development.
Moving into PE from this level would be “challenging” to say the least, and even in other fields of finance you would have too much experience to have a good shot.
NOTE: Again, though, in practice people can and do move around – so exit opportunities do still exist even at this level
Director / Senior Vice President / Principal
What You Do: This one is a mix between what VPs and MDs do, and the role differs depending on the bank and group.
Sometimes you focus more on developing relationships and winning clients, and other times you do more execution work and project management like VPs.
But no matter what your role is, you will have to move closer to winning clients if you want to advance to the next level – Managing Director.
How You Get In: You’ve already been an associate and a VP, and you get promoted to this level after a few years of being a VP. I challenge you to find a single example of someone who was not already in investment banking and entered the industry at this level – it doesn’t happen.
Age Range: Sometimes you could get promoted more quickly (2 years rather than 3-4), so we’ll say 30-45. 45 is on the high end and you’d see that only if the person did something else for many years before getting into business school and then investment banking.
Pay: This one’s hard to pinpoint because it’s somewhere in between VP and MD in terms of pay; we’ll say $400K – $1.5MM USD to reflect that range.
As with the other pay numbers here, you should expect the lower end of the range in a bad economy if you haven’t performed well (your closed deal count is low or nonexistent) and the higher end of the range in a good year.
Time to Get Promoted: Similar to the others, a few years to go from here to the next level: Managing Director. We’ll say 2-3 years to get a specific number.
Possible Exit Opps: Imagine a blank screen with no visible life forms. Now imagine seeing this every day after you quit or get fired.
In all seriousness, you could always move over to the corporate side but it would be tough to move into other fields of finance from this position unless you happen to be a serious rainmaker and you have enough contacts to make yourself useful to a PE firm or other buy-side firm.
What You Do: You’re King of the Jungle. All the other chimps answer to you, and you move them around much like a chess grandmaster would move around pawns, bishops, and knights.
90% of your time as an MD is spent winning clients, meeting companies, and developing relationships – you fly around to conferences, meet with PE and VC firms, and position yourself to advise CEOs and win deals.
Occasionally if there’s a massive deal and it’s too big to fail, you get involved with the negotiations. Or if you have a special relationship with an investor or buyer, you may pitch a client to them.
But otherwise, you are sitting back and bringing in new business while everyone below you executes.
How You Get In: Most of the time, you’ve been a banker for life (or close to it) and you’ve worked at all levels in IB before – often across many different banks.
Sometimes you do see MDs who get into the industry from other fields (e.g. a Partner at a law firm that focuses on corporate and securities law, or a PE Partner who has lost his sanity and wants to move back to the sell-side).
But those scenarios are rare even at this level and you don’t see them much at large banks.
Age Range: This one is impossible to define precisely because some MDs really do stay in it for life, or at least until retirement age – for most bankers it is the highest they’ll ever go.
We’ll say early 30’s is the minimum age here, but on the upper end of the range there’s no limit – you rarely find MDs who are past their 50’s, though, so maybe that’s the limit.
By that time they are either burned out and retired on a beach somewhere in Thailand, or they’ve advanced further within the bank (see below).
Pay: This is where compensation has the highest “beta” (this is a finance site, so I am allowed to whip out finance jargon when convenient).
In a bad year with no closed deals, an MD might not make much more than his base salary – maybe the $200K – $300K USD range.
In a good year, they might make in the low millions USD ($1MM – $3MM) depending on how the group is set up, how many deals they’ve closed, and how well they’re playing the office politics game.
Time to Get Promoted: Yes, there are levels beyond MD at large banks (Group Head, C-level executives) but there’s no set path to reach them – you could get lucky and get there in a few years, or you might be there for a decade and never see the light at the end of the tunnel.
Unlike other levels of the banking hierarchy, it’s not “up or out” at the MD-level – it’s more like “make lots of money for us or out.”
So as long as you keep producing, your position will remain intact.
Possible Exit Opps: If you’ve been a lifelong banker, it will be very difficult to move into a completely different field – but you do sometimes see financiers at the top moving around to other high-level positions in the industry.
Some MDs may also just retire and do something completely different – business coaching, angel investing, writing, and so on – especially if they are worth tens of millions of dollars and don’t have a pressing need for cash.
Wait, What About Other Levels?
Note that in some regions and at some banks these levels have different names – VP might be labeled “Director” and SVP might be “Executive Director,” for example.
At firms with a partnership still in place (Goldman Sachs), there is also a difference between normal MDs and Partnership MDs – the Partnership ones make a lot more money.
And then beyond MD, there are Group Heads (e.g. Head of M&A Europe or Head of Capital Markets Asia) and the C-level executives at firms.
With those, the potential compensation is even more variable and could range into the tens of millions (or higher for C-level in a good year) – or the bank might slash its CEO’s pay to $0 in a symbolic gesture if they’ve had a bad year and caused economic Armageddon.
Differences at Boutiques?
Boutiques tend to have fewer levels than bulge bracket banks, so you might not see as many VPs and Directors/SVPs.
Advancement may be faster depending on the firm’s size, but pay will also be lower since the deal sizes are smaller – regional boutiques might pay 50% of the bonus that bulge brackets do (very rough estimate).
This does not apply to the “elite boutiques” (Evercore, Lazard, etc.) which pay more in-line with bulge brackets.
What About Trading?
On the trading side there is a flatter hierarchy and you may reach the MD level more quickly.
Pay is also extremely variable and the top traders might make tens of millions even if they never advance beyond the MD-level (ok, it’s questionable how true that will be post-crisis and financial regulation).
The Buy-Side: Private Equity and Hedge Funds
This one is impossible to cover fully here (maybe in a separate article if someone has good data), but let’s give it a shot:
The private equity side is similar to banking, but you will make more at each level; as a Partner in PE you could make significantly more than MDs in banking (hundreds of millions if you’re Henry Kravis), but at smaller firms you’ll see compensation closer to what banking MDs earn.
The main difference is that you get carry at the Partner-level as well, so that opens up the possibility of earning into the stratosphere if you’ve invested well over the years.
On the hedge fund side, there’s so little reliable information that it’s hard to say anything concrete.
You hear stories about people making hundreds of thousands or millions at young ages, but the average case is probably closer to the compensation levels above for banking.
And while hedge fund managers making billions of dollars a year get a lot of attention, that is far from the average case: the majority of funds out there are much smaller ($100M – $1B AUM) and it’s impossible to earn anywhere near that amount.
In short: hedge fund pay has the highest ceiling of anything here, but there is a massive difference between the founder or the portfolio manager and everyone else in the fund, and pay is almost 100% dependent on fund size and returns.
Developed countries (Western Europe, Hong Kong, Japan, Australia, etc.) see similar pay levels and have the same sort of promotion timelines.
In emerging markets, it’s more chaotic and you might advance far more quickly – but also make less in absolute dollars, even if you have your own palace and a harem or two.
The investment banking culture is not as well developed in the BRICS of the world, so you will see many deviations from the hierarchy above.
But in most of these places you have a 0.0% chance of breaking in as a foreigner with no connections: they are looking for locals who have studied or worked abroad and who are now returning to their home countries.
How Do You Move Up the Ladder?
Please see this article on investment banking promotion.
So, what does all of this mean?
Stop Assuming That Investment Banking / Finance in General are Guaranteed Paychecks
Especially as you move up, your pay is based almost entirely on your performance and the economy. A VP who has several closed deals may make more money than an MD who has nothing and gets a bonus of $0.
I’ve attempted to estimate pay ranges above, but to get there in the first place you’ll have to work 80-hour weeks for years and sacrifice your social life and maybe your first-born son or daughter.
Most MDs are Not Mega-Wealthy
Look at the Forbes list of richest people in the world, and you’ll see that there are very few (no?) banker-types on there, unless you count Warren Buffett as a banker (he’s not).
After you’ve taken into account taxes, recessions, the cost of living, and so on, a 10-15 year veteran MD might have $10 million or more saved up.
That is an enormous amount of money to most people, but you will not become a billionaire in finance unless you’re on the buy-side and you’re one of the best in the world like John Paulson.
Forget About Breaking Into Banking in the “Middle Years”
You either get in as an analyst or associate, and if not, you’ve missed your chance unless you have highly relevant experience, the market is frothy, and you trade down (i.e. go from a F500 to a boutique).
Even getting in at the top from other industries is uncommon – you see it more often in VC or PE where operational skill sets are valued.
If you’re in this position, you’re better off looking at other industries or starting your own business.
Expect Your Role to Change Gradually, Not Rapidly
Even though banking has a rigid hierarchy, what you do at each level is not as narrowly defined.
When you move from analyst to associate, you won’t instantly start dating super models or get your own reality TV show – sorry.
Your hours might improve slightly and you won’t have to do as much grunt work, but the pressure to perform will be greater than ever as well.
Oh yes, and please reduce your expectations of $10 million and that beach in Thailand.
By the time you get there as a banker, you’ll be old and wrinkly and probably can’t stay out in the sun for very long anyway.
A frat house, on the other hand, might be well within your reach long before that.
Free Exclusive Report: 57-page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews