by Mike Moran, CFA Comments (94)

How to Break Into Commercial Real Estate and Build an Empire

Commercial Real Estate Groups

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:

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.

Getting Riskier…

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.

Exit Opportunities

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.

About the Author

Mike Moran, CFA is 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.

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Why You Can’t Break Into Private Equity as a Foreigner in China

China Private EquityDespite my repeated warnings that emerging markets don’t care about you – only people who know the language, have connections, and are qualified to work there – this question won’t go away:

“I really want to work in China! How can I break into finance there? I’ve studied Mandarin for 5 years and I can read faster than Chinese people now! Show me how to get into PE!”

I’ve gotten tired of answering that one, so today you’ll hear from someone much better qualified to answer it than me: a reader who works in private equity in China.

He’ll tell you all about:

  • How to network your way into the industry and how it’s different from PE in the US/Europe.
  • Why foreigners are getting pushed out of the industry and why you’d have to be “crazy” to go work there these days.
  • What you should do instead if you want to do business in China.
  • How the pay and work culture differ from other parts of the world.

How It All Began

Q: Can you walk us through your background and how you broke into private equity in China?

A: Sure. I was a newly minted MBA, and back in 2005-2006, China’s PE market was much less developed.

I went to AVCJ’s annual conference in Hong Kong, networked like mad there, and got an internship helping a small fund with a capital raise. That fund later went on to become the #1 PE fund in China, and I rode their coattails to success.

I still believe that conference, among others, is the best way to break in but today it would be almost impossible to follow the same path if you’re a foreigner.

There are way too many local Chinese who work or study abroad and then return home, and too many bankers eager to move into PE.

And even though I’ve been here for years, even I have been getting pushed out of the industry – just like all other foreigners.

To be frank, I wish I had heeded the warnings of others and had spent the time breaking in to PE in the US/EU instead. Now, nearly six years later, I don’t think I’ve had the experience and training I would have had in the more developed markets.

So, if you’re a foreigner, be kind to yourself – don’t try to get into PE in China. If you absolutely must have your China experience, feel free to come over, but focus more on “bridging” roles, like investment banking, sales & trading, and so on.

PE is a local market, and in China, it is hyper-local. Five years of Mandarin won’t cut it; heck, near-native-fluent Chinese won’t cut it.

Even foreign-born Chinese, Taiwanese, Singaporeans, and people from Hong Kong have a tough time finding roles here because they’re also too foreign. You were either born and raised here, or you weren’t – and if you weren’t, you’ll always be an outsider no matter how much baijiu you can drink.

Now, if you are from mainland China, then there’s still a lot of opportunity.

I would recommend coming here in that case, because there’s more going on and if you can hack the local game you can get some great deal exposure and you might even make a fortune in the process.

Q: OK, let me stop you right there because I want to return to that topic of how you actually break in at the end.

So most foreigners would face a near-impossible battle to get in, but what is the private equity industry in China like?

What types of deals and companies do you focus on, and is it mostly local firms or international ones that make investments?

A: The industries themselves are diversified – you see manufacturing, state-owned-enterprise commercialization, consumer/retail, clean-tech, software and IT, energy, construction, infrastructure, healthcare and so on.

Many firms are still generalists with certain sectors of expertise / focus, but a few sector funds have sprung up as the market has matured – there are a few healthcare funds, a few clean-tech funds, a few technology funds, and a few consumer / retail funds.

Local funds and international funds are completely, 100% different animals.

The local funds staff huge teams – sometimes up to 100 investment professionals in a firm – and the pay therefore is lower, there’s often little formal training. You may struggle to get noticed and find a mentor, and it’s tough to navigate the political environment.

But the local firms do most of the deals, whereas international firms are having trouble closing anything.

Some of the regional funds (such as Barings, HSBCPE, Actis, etc.) are able to get some good deals done, but PE firms such as Carlyle, TPG, and so on, don’t see much action here.

In short:

  • Local PE Firm: More deal exposure, but no structured training, and lower compensation.
  • International PE Firm: Brand, better pay and training, but lower chance of closing deals – which will hurt your CV.

Friends here have been frustrated at both types of firms – those at local firms feel underpaid and under-appreciated, and those at international firms complain about never closing deals.

Q: Right, so you’re stuck between a rock and a hard place there.

What’s your average day like in terms of responsibilities and work? Is it mostly due diligence and modeling, or do you get more “random” tasks?

A: So far I’ve focused more on fundraising and investor relations than anything else. When I first joined this firm I started out as a deal guy, but once there were more skilled locals in the market, my role was shifted to fundraising.

I actually don’t mind that since I enjoy fundraising more than deals – analysis and due diligence can get repetitive, and you see companies at such a high-level that everything starts to look the same after awhile.

The good part about fundraising is that I get a lot more exposure to Limited Partners than if I were in the US or EU – there’s a lot of potential there for future networking since they all know who I am now.

Sometimes it does get repetitive telling the same story to potential investors, but that’s true of any sales job or even if you’re the CEO of a company.

Q: So they’re pretty much limiting the investment/deal work to locals?

A: Yes. Again, I would actively discourage foreigners from trying, unless you really have native-level Mandarin (beyond just “fluency”).

The nature of the job for locals or returnees, however, is compelling.

The deal professionals get to explore very interesting companies across a whole spectrum of industries, and the work includes due diligence and business analysis, which involves researching an industry by speaking with experts, interviewing the company’s management, and speaking with competitors.

You do some financial modeling, but it’s not really meaningful – at least not in the traditional sense.

Most businesses are growing so quickly that standard models are meaningless. With 50-100% revenue growth rates, analyses like the DCF break down and even valuation multiples don’t tell you much if the company is growing at that rate.

Private equity here is more like venture capital in developed countries.

Investors spend their time on industry and management team analysis, and most of their time is spent deciding which industry is best to invest in, whether the target company can become a market leader, and whether or not they can trust the management team.

Trust is still a major issue in China, and you can’t depend on legal documents to be truly binding – they are a framework, but interpretation and enforceability are questionable.

So half of your due diligence time might be spent understanding the psychology of the management team – particularly the founder. If you’re depending on your closing documents to protect you, then you’re already in trouble before the ink is dry.

Q: Interesting – and that foots with one of the previous interviews here from a reader who completed a PE internship in China.

What about the pay and work culture there? I’m assuming that pay is lower on an absolute basis, but higher relative to the cost of living?

A: Pay varies greatly between local and international firms. Foreign firms here pay about average global pay for PE – so between $150K and $250K USD all-in for associates.

Local PE firms pay less – maybe around $90K USD for new associates.

In 1990 or 2000 those figures might have been a ton of money in China, but over the past 10 years the cost of living here has skyrocketed and places like Beijing and Shanghai aren’t as cheap as they used to be.

They are still less expensive than New York, and so you won’t starve on $90k per year. But it just isn’t the bargain it used to be. The tax rate is also higher than in Hong Kong – up to 30-40% vs. about 15% in HK – so that also eats up a good chunk of your pay.

Bottom-line: you will make less in PE here compared to the US / Europe, and you’ll make significantly less working at a local firm. You have to decide if it’s worth it, and that trade-off makes little sense unless you’re truly committed to staying in this market for the long-term.

Q: What about carry? Since the market is less developed do they give that to associates or anyone less senior than MDs?

A: Carry is almost always restricted to the senior MDs here.

There is a very patriarchal/monarchical feeling at many of the firms – you’re either a rain-making MD who brings in deals, or you’re commoditized execution.

This may sound just like the US and EU, and to a certain extent it is – just a more extreme version of the usual investment banking hierarchy.

It’s not unheard of for just a few guys at the top to get all the carry and for everyone else to get nothing. That creates a situation where the guys at the top are making literally millions (or billions) and everyone else below them is making base pay, keeping their fingers crossed for bonuses, and hoping to climb up the pyramid for a shot at some equity… hopefully… someday… maybe.

That said, those who did manage to get a slice of the carry are probably looking at returns that could easily fund a comfortable retirement in just a few years’ time. Many of the funds have returned 3-5x, and have had IRRs of over 100%, so the carry really is making some people incredibly wealthy.

Again though, carry is not awarded to the non-MD investment professionals. Yes, it can be similarly lopsided in the US/Europe, but at least as you move up you’ll earn progressively closer to what MDs and Partners make, and eventually you will get carry even if you’re not the top person at the firm. In China, carry is just shared among a small number of hands.

Foreigners, Abandon All Hope?

Q: Let’s go back to why it’s so tough for foreigners in the China PE market. Do you have any foreign co-workers, or are they all locals from mainland China who worked or studied abroad and returned home?

A: There are fewer than 10-15 foreigners working full-time in the entire PE industry in China, and we all know each other.

Most of us have been pushed out from deal work and, like me, focus more on fundraising and investor relations.

Q: OK, but I’m sure there must be a few foreigners there in high-up positions? One of our other interviewees mentioned that the MD at her firm was foreign.

A: There are some exceptions. For example, a few foreigners got in 5-10 years ago as founding MDs of their firms, so they have unique positions.

But the rest of us – other investment professionals – have been mostly pushed out. There was one other guy who was relocated to Asia by a major international PE shop, but he was then axed to free up the position so that a local could be brought in instead. And he was a senior officer with 10 years+ of PE experience and fluent Mandarin.

Q: OK, point taken – but wouldn’t knowing the language give you a big advantage and let you compete more effectively with people from mainland China?

A: No.

Becoming 100% fluent in written and spoken Mandarin has about a 1% chance of helping you break into private equity here.

These “exceptions” I’ve referenced were already 100% fluent in the language and could read and write extremely well, and they were still pushed out.

Most of the foreigners here are now in fundraising roles, even if they worked at bulge bracket investment banks before and earned MBAs from top schools.

No one is interested in foreign professionals anymore, and it’s not even about the language – it’s that the work culture and deal environment here are so local.

It’s not like some countries (the US and UK) where anyone who can learn the language can advance to the top. They heavily favor locals and will tolerate foreigners, but will never fully accept them.

That’s why I’m making such a strong recommendation against coming here to work in PE – it’s just not realistic with the current state of the market.

You could spend years studying and learning the language, then more years struggling to break in, only to find yourself sidelined and underutilized because they don’t care how good you are or how much experience you have, only that you’re not a mainland Chinese who can bring in deals and charm the local entrepreneur.

Q: Not exactly the rosiest picture there…

Let’s say that someone is really interested in doing business in China – would you tell them to just give up altogether, or just to forget about PE?

A: If you’re from here originally, have family/connections, and want to go back home, China is great. There are opportunities in PE, banking, consulting, and entrepreneurship – you name it. The rapid growth engenders opportunity.

But if you’re a foreigner, and you absolutely, positively can’t get China out of your mind, then you can take your best shot.

However, if you want to make the leap I would steer clear of PE and focus on other areas like investment banking, investor relations, consulting, or being the CFO of a company.

In those areas, international experience/exposure is more valued and you don’t actually have to be Chinese to fulfill the role.

Oh, yes, and make sure you get to 100% fluency in Chinese – reading, writing, speaking, and listening; obviously reading and writing are the hardest parts and will consume 95% of your time.

Q: Out of curiosity, why do you think there is such a strong bias against foreigners in PE?

A: Similar to venture capital in the US, Europe, and other markets, private equity is a hyper-local business here. You need to be here on the ground communicating directly with management teams to have any chance of winning good deals.

They favor locals because they know that they have connections and are better able to reach local businesses; plus, they understand the culture implicitly and won’t get “rejected” by entrepreneurs nearly as much as foreigners.

Also, both the local and international firms must project an image of being local from a marketing standpoint – whether they are showing their local chops to entrepreneurs, the government, and especially their own LP investors.

Q: So we’ve established why you don’t want to work in PE as a foreigner in China.

But let’s say that someone reading this is from mainland China, has studied or worked abroad, and is returning home – how would he or she go about breaking into private equity?

A: It’s all about networking and conferences here. You need to go to the AVCJ conference in Hong Kong and the SuperReturn China conference, and then do a lot of networking with people you meet there. Bring 300 or so business cards, meet everyone, and try to set up side-line meetings in advance.

You should also connect with friends who work at the firm you’re interested in and who can help you get in touch with the senior staff (MDs or CEOs). Business school classmates and alumni can also help.

Some of the larger domestic firms have also been going to business schools lately to recruit there, so that’s another option as well.

If you’re returning home and want to be here long-term it’s still a great time to get into the industry, since you can join a fast-growing firm and rise to leadership. The competition is tough, but it’s possible to break in and advance, and the rewards are certainly there.

It definitely gets more competitive each year, but since most PE firms are looking for people with very specific profiles you have a much better shot of getting into PE here than you would by competing with the broader market in the US or Europe.

Q: Are there any differences they should be aware of with recruiting, CVs/resumes, and interviews?

A: The main difference is that you don’t need investment banking experience to get into private equity here.

Technically this is not true in developed countries, either, but let’s be honest: the majority of people who break into PE have done banking or something similar like management consulting or Big 4 Transaction Advisory Services.

But in China, most PE professionals are not from an investment banking background, so they don’t expect you to have that experience either.

It’s really about networking, meeting the right people at conferences, following up with them and being persistent until they give you interviews.

CVs/resumes are not much different, and in interviews they’ll ask similar questions though there’s obviously less focus on modeling and deal experience; it’s more about “fit” and your general knowledge of how to analyze businesses.

Q: Great, thanks for your time. And I hope your situation improves and that you can find a better role in the future.

A: No problem – enjoyed sharing my story even if it sounded a bit pessimistic at times. And yes, I’m working on other roles right now….

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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Degrees and Certifications: Got CFA + JD + MBA + MD?

Degrees and Certifications: Got CFA + JD + MBA + MD?

Despite my best efforts to bash certifications and give snarky responses to related questions, there’s still confusion on what banks care about, what you can do with different degrees, and the meaning of life.

While I can’t help with the meaning of life (42?), I can tell you which degrees and certifications mean something and help you break into finance – and which will not.

Why the Hate? You’re Already Biased!

I’ve seen lots of aspiring bankers use degrees and certifications as a distraction from more important goals, like getting solid internships, networking, and even getting leadership roles in groups.

You may also think that degrees and certifications are a magic bullet: sure, you have a 2.1 GPA from an unknown school and you’ve worked in telemarketing for 5 years, but if you get that Bloomberg certification, Goldman Sachs will give you an offer right away, right?

Maybe I should get into the business of selling certifications with logic like this…

Definitions: Investment Banking / Private Equity vs. Other Fields

The usefulness of degrees and certifications varies widely by the field of finance you’re interested in.

For example, if you want to be in risk management then the FRM exam is essential; if you’re doing portfolio management or equity research, the CFA is viewed as a requirement. And bankers, of course, don’t care about either of those.

I’m focusing on investment banking and private equity here because that’s what this site is about and what you’re interested in if you’re reading this right now.

For more on other fields and where certifications might be useful, check out these articles from Bionic Turtle:

5 Degrees Above Zero

Let’s start with degrees since they’re less painful to write about.

The only degrees that banks care about are Bachelor’s, Master’s, and MBA degrees, and only for very specific reasons.

But just for fun, let’s jump through the entire list and learn why – and what to do if you’ve taken the plunge into JD/PhD/MD land.

High School / Secondary School

Please, no more questions from 16-year olds who want to get an investment banking internship. Go outside and play in the sun, you’re probably Vitamin D-deficient anyway.

This one is just a check-the-box requirement at banks, and if you’ve only graduated high school you won’t be able to do anything real – you need at least an undergraduate degree (maybe you could work as an assistant but is that what you want to do?).

Your actual performance in secondary school matters more in countries like the UK where A-Levels are huge – in the US, listing high school grades or AP scores on your resume when applying to banking jobs is silly. And where you went to school only matters if it’s somewhere prestigious, like Exeter or Andover, where you might get some networking benefit.

University Degrees

This is the bare minimum you’ll need to actually work at an investment bank, and most other finance firms.

Every week I get comments asking, “I’m 38 and never graduated from college – do you think I can become an investment banking analyst?”

No, you can’t.

Why not?

  1. Supply and Demand – Banks have so many university graduates who’d give up a kidney to work for them that they can afford to reject 99% of applicants and still have more people than they know what to do with.
  2. Work Ethic – If you can’t finish a university degree then banks will assume that you cannot finish any project, which is a problem when you have a 100-page pitch book due in 3 hours.

Yes, I know there are good reasons you didn’t get a degree – you dropped out to start your own multi-billion dollar company, you couldn’t afford college, or you became a pop star and you’re still on leave.

That’s lovely, but life is not fair and if you don’t have a degree you’re not getting into investment banking or private equity.

Maybe you could trade for a small prop trading firm if you’re a baller trader without a degree, but even there it’s tough – they care less about pedigree than banks, but everyone else there will have the degree.

It’s approximately 100x more difficult to get into banking coming from a “non-target” school (one where banks don’t recruit) compared to a “target” school (the Ivy League, LSE, Oxbridge, and so on), so go to the best school possible.

What you major in doesn’t matter too much as long as you get decent grades and internships, but you can review your options right here.

Master’s Degrees

There are several good reasons to get a Master’s degree:

  1. You need the prestige because your undergraduate school was unknown.
  2. You had poor grades and need to press Ctrl + Z on your transcript.
  3. You didn’t get an offer and want to try again, with better access to recruiters.
  4. You’re in Europe and 5-year programs that include both the Bachelor’s and Master’s degree are common.

The most common question on Master’s degrees:

“So, if I go for a Master’s in Finance program I can start as an Associate, right?”

No, you can’t, because:

  1. You would need at least 3-5 years of previous work experience or 2 years as an IB analyst first.
  2. Master’s programs are less of a time and money commitment compared to MBA programs.

I must have heard this question 500 times at career fairs and the answer is always the same: “You’ll still be an Analyst.”

MBA

This is the only advanced degree that allows you to “level-up” when you start working.

IF you have had enough experience (usually 3-5 years in a normal industry, or 2 years as a former IB analyst), then you’ll start out one rung above the Analyst: you’ll be an Associate instead.

Which means you get paid a bit more, have more responsibility, and you get to sleep 6 hours per night instead of 4.

But do not assume that just because you get an MBA, banks will automatically interview you or think that you can be an Associate.

There are plenty of ways to screw it up, including going to a non-top-tier school, not having enough work experience, or not showing a clear progression toward being interested in banking.

So make sure you learn how to properly re-brand yourself and how to use MBA programs the right way in the first place.

JD

While Damages the TV series is awesome, most law firms are not even close to that interesting in real life: the Partners at your firm might be sadistic, but they’re still far from Patty Hewes.

So many lawyers get the bright idea that they could go into finance instead and make bank while abusing their former co-workers.

Just one small problem: banks don’t give a crap about law school.

OK, that’s not 100% true and it’s viewed a little more favorably than the MD or PhD – but there’s no added bonus for going to law school and it’s a much more indirect path to banking.

You have to graduate from law school, work in corporate law for a few years without going insane, and then network your way into banking from there.

Having the law background may benefit you in areas like Restructuring and Distressed Investing where there’s legal overlap, but it’s a stretch to say that you should go to law school specifically to get into those fields.

If you’ve already taken the plunge, you can’t exactly abort midway through – so finish, do corporate or securities law, and then network into banking after working for a few years.

You may actually start as an Associate if you do law school and then corporate law before banking, so the JD can be another way to level-up.

PhD

If you thought bankers looked down on lawyers, you’ve never seen their reaction to PhDs – ouch.

Bankers and PE-ers don’t care about the degree because the math in both fields is trivial: arithmetic and a few circular references in Excel.

You might be the next Stephen Hawking, but that doesn’t matter because you don’t need to understand wormholes to be a banker – you just need to understand how to change the font size in pitch books.

Most bankers think that PhDs are too well-educated to go back to fixing printers and scouring through SEC filings, so there’s a significant bias against hiring them.

Sometimes you can still get into finance if you have the degree, but usually you have to:

  1. Target a boutique that fits your background exactly – like an industrials-focused firm if you have a PhD in materials engineering, or a healthcare-focused firm if you completed an advanced degree in biochemistry.
  2. Go for equity research instead. They actually care about the degree because they want people who understand an industry in-depth – again, you would focus on groups that match your background.
  3. Go the quant route (works best with physics/math/related degrees). Sure, trading will never be what it once was, but firms always need quants and smart math people to build their models.

MD

You face a similar problem here: you’re over-educated and banks will assume that you have no interest in spreading comps if you’ve qualified to perform open heart surgery.

They may also assume that you’re unable to commit to anything and stick with it: how could you have made it through years of med school without realizing you wanted to do business earlier?

In this situation you’d have to follow the PhD advice above and go after boutique banks in the healthcare/biotech/pharmaceutical space and/or look into equity research. You don’t have the ideal background to be a quant, so that’s not the best idea here.

You’ll also need a really good story about why you’re making this move – not just “I realized business was so much cooler!”

You need a specific incident or person that made you interested, and a perfect explanation of how you realized that medicine was not for you after years of doing it, but how you’re simultaneously certain that finance is for you with 0 years of experience.

Combo Degrees – JD + MBA?

Combo degrees get another “thumbs down” from me.

We already learned that adding a Master’s degree on top of a normal bachelor’s degree, for example, won’t let you start as an Associate.

But what about that famed JD + MBA combination – surely that must open up more exit opportunities, right?

No, not really. Most jobs are geared toward law or finance, but not both.

It would be most useful in areas like Restructuring, Distressed Investing, or arguably Real Estate / Project Finance where there’s overlap with the law and legal codes.

But even there, it’s a stretch to say that the JD would add much: even the MBA might not be terribly helpful if you’ve had previous, relevant experience.

You may also face a branding problem if you have a law degree and a business degree: business people will think you’re a lawyer, and lawyers will think you’re in business.

There’s always a temptation to think that more = better when it comes to degrees or certifications, but that’s just not true.

You want the minimum investment required for maximal gain – anything more than that reduces your ROI.

What about other combinations like JD + PhD + MBA, or JD + MD + MBA? Please, don’t even waste your time and money – it’s just silly.

Adding more advanced degrees like this will hurt you and make you look like more and more of an academic and less and less like someone who can actually make money in the real world.

Certifications

This part will be shorter because certifications matter far less in banking and PE than degrees.

The main one that generates debate is the CFA and whether or not it’s helpful for breaking in – others are either completely useless or marginally helpful at best.

Series 7 / 63 / 65 / 66 / 79 / 84563X2

If you have a ton of free time, you’ve already networked extensively, and you already have great internships and/or a full-time job lined up, then sure, knock yourself out.

Just be aware that if your bank requires them, you’ll complete the exams during training anyway.

If you really want to set yourself apart before you start working, you’d be better off moving to another country for a few months and doing something interesting there.

CFA

I’m not going to rehash all the arguments for and against the CFA here – go consult this article if you want to go down that path again.

The short version is that it’s not the best use of your time for investment banking or private equity in developed countries, but it may be more useful in emerging markets or in fields like equity research, portfolio management, or some types of hedge funds.

And do not think that it will cover up an unknown school, low grades, or no work experience – it won’t.

Think of it as an added bonus and something to look into if you already have top schools, high grades, and great work experience.

CPA / FRM / Other Certifications with C and F in the Names

Look, if you want to be an accountant or a risk manager or perhaps other things outside of IB/PE, then sure, go ahead and pursue these.

There’s an alphabet soup of other certifications out there, and David from Bionic Turtle does a great job of summarizing them here.

There’s nothing wrong with any of these – it’s just that they will not help you much with IB/PE, because getting in is based almost entirely on practical experience.

In the future, who knows, there may be an exam to get “certified” in investment banking – but for now no one takes anything like that seriously (yes, I’m talking to you, “Certified M&A Advisor”).

There’s another critical reason why such certifications don’t apply to IB and PE: at the top levels these fields are based on sales, relationships, and negotiation skills – skills that can’t be tested on a written exam.

Bloomberg / FactSet / Other

Don’t even bother – you’ll learn everything you need to know (which is not much) when you start working, and you don’t even use the complex features in banking.

These may actually hurt you because you do not want to be known as “The Bloomberg Guy” or “The VBA Guy” or anything else that results in annoying requests to fix other peoples’ broken-beyond-repair spreadsheets.

Standardized Tests: SAT, GMAT, GRE, A-Levels…

These aren’t quite “certifications” but why not throw them in here anyway?

None of these is as important as grades in university, but in the US most banks will still ask for your SAT scores, and GMAT scores can be helpful if you have low SAT scores (under 2100 in the new system). No, don’t bother going back and re-taking them if they’re low: not worth the effort.

As with grades, these tests are more about whether or not you meet the minimum score they’re looking for rather than “standing out” – so please do not re-take the GMAT if you got a 720.

Got Degrees or Certifications?

I hope not – unless you mean a university, Master’s, or MBA degree.

Otherwise, save your time and money and if you’re already too far down a path to turn back now, cut your losses and change direction as soon as you can.

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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