Equity that is Private (PE)

Equity that is Private (PE)

An outline of the private equity sector that includes important positions, leading businesses, career paths, and pay

How does private equity, or PE, operate?

What is private equity? Limited Partners (LPs), who are external investors, provide funds to private equity firms, who use those funds to acquire, run, and enhance businesses in order to generate a profit. To be paid back, sell them.

Because the businesses in which private equity firms engage are either privately held from the outset or as a consequence of the investment, the sector is known as "private" equity.

Pension funds, endowments, insurance companies, family offices, funds of funds, sovereign wealth funds, and high net worth individuals are examples of external investors or limited partners.

A Basic Example of Private Equity

A basic example of "private equity for dummies" is provided here.

Imagine if you and your pals decided to become "home flippers" by purchasing homes, making repairs, and then selling them for a high price after approaching all of your connections and requesting money.

While you maintain a percentage of the revenues to run the firm, you offer your connections the majority of your earnings so they can cover the majority of the money required.

The same is done by private equity firms, but on a much grander scale, for businesses as opposed to individuals, and with institutional investors' support as opposed to "friends and family".

The work consists of some operational management, some investment, and some fundraising.

The best way to understand the distinction between private equity and investment banking is to draw parallels with real estate and some of the roles that are involved there:

Similar to a real estate agent, but dealing with corporations rather than homes, is investment banking. As their representative, you assist businesses with capital raising, purchases, and sales in exchange for a commission.

Private equity: Purchasing residential and commercial real estate, making improvements, and then reselling it for a profit in a few years is similar to real estate investing, except you work with bigger firms rather than individual buildings. Instead of receiving a commission on closed sales, you are paid a proportion of investment returns.

Real estate investors have a greater ceiling than brokers because, although success in any industry may lead to large financial gains, the ceiling in private equity is far higher: If the cost of a property is $2. The whole benefit is distributed to investors if the multiple climbs by 5x or 10x.

Many contend that working in private equity offers a better lifestyle, is more exciting and intellectually stimulating, and is a better long-term career choice.

After working for a few years as investment banking analysts, graduates often utilize their skills to go into other fields (sometimes known as "exit opportunities"), such business development, private equity, and hedge funds.

See our article on investment banking vs. private equity for further information on this subject.

Capital is raised by private equity and venture capital firms from outside investors known as Limited Partners (LPs), which include high-net-worth individuals, endowments, insurance companies, and pension funds.

The money is then invested by both businesses in either private or soon-to-be private businesses with the goal of eventually selling those interests for a profit.

However, other from these superficial parallels, the sectors diverge in the majority of other respects, such as:

Types of enterprises: VCs concentrate on technology, biotech, and cleantech enterprises, whereas PE firms invest in businesses in all sectors.

A majority share, or 100%, in enterprises is bought by private equity firms, while venture capitalists (VCs) only buy a minority stake.

Size: Compared to VC companies, PE firms close bigger transactions.

Deal Structure: While PE firms utilize a mix of debt and equity, VC companies use equity for their investments.

Stage: VCs invest in early stage startups, whereas PE firms buy established companies.

Risk: While PE corporations cannot bear this level of risk, venture capitalists (VCs) anticipate that the majority of the companies in their portfolio will fail, with a small number of significant successes recovering their losses.

The personnel: former investment bankers are drawn to private equity, while venture capital brings in a more varied group of individuals, including product managers, business development specialists, consultants, bankers, and past entrepreneurs.

recruiting Procedure: While most VC companies and smaller PE firms employ "off-cycle" recruiting, larger PE firms use an expedited and highly organized "on-cycle" procedure.

Reward: Due to the greater fund sizes in private equity, you will get a much higher salary.

See our coverage on venture capital vs. private equity for further details.

Please visit our page on the contrast between hedge funds and private equity for more in-depth information on this subject.

To put it simply, hedge funds (HFs) and private equity (PE) firms are similar in that they both collect money from outside investors known as Limited Partners (LPs) and then use that money to invest in businesses or other assets. Invest, aim for high returns, and be paid a management fee based on the amount of money generated in addition to a portion of those gains.

But there are also a few significant variations:

Investment Types: HFs purchase significantly smaller shares in businesses or other liquid financial assets including bonds, currencies, commodities, and derivatives, while PE firms purchase whole companies using stock and debt.

Investment Strategies: Hedge funds place more emphasis on short-term profits over a 12-month period from financial sources than compared to operational sources; PE firms become greater participants in the operations and business growth of their portfolio companies even though they hold the companies for longer periods (3-7 years).

Investor Lockup: Because PE companies make long-term investments, their limited partners (LPs) are sometimes required to lock up their capital for a number of years. However, redemptions are made considerably simpler since hedge funds invest in highly liquid financial assets.

Risk: In the absence of any other factors, hedge funds may be more dangerous because they lack control over the assets they trade and because it is very difficult to outperform the public markets.

Fee structure: Both businesses charge a proportion of investment earnings (carries) and management fees on assets under management; however, the percentages are smaller for hedge funds (HFs), and the metrics used to assess success are somewhat different (hedge fund vs. NAV for IRR as well as hurdle rates for PE firms).

Candidates (who join): Hedge funds draw a more diverse group of people, including investment bankers, equity research specialists, buy-side analysts at other firms, sales and trading professionals, and consultants. Private equity draws a lot of Big 4 and corporate development professionals in addition to former investment bankers.

Hiring Process: While most hiring for hedge funds is unstructured and "off-cycle," most hiring for private equity is highly organized and "on-cycle."

Work and culture: Hedge funds differ substantially in that their founders and portfolio managers come from a wider range of backgrounds, but private equity is simply investment banking 2.0, with the same people and stress at work.

Required Skill Set: Understanding valuation and being able to identify mispriced financial assets are prerequisites for employment in a hedge fund. In addition to valuation expertise, private equity requires transaction understanding and the ability to identify and close acquisitions.

Private Equity Fund Types

Private equity companies may be categorized based on:

Very early on in the investment stage? Progress? Developed? Feeling down?

The US or North America is the target geography. Asia or Europe? developing markets?

The fund's intended industry: healthcare? technology, retail? Not dependent on a region?

Value contributed by the company: Does it prioritize restructuring, add-on acquisitions, operational enhancements, or something else?

Exit strategy: Will they go public with the firms in their portfolio? or offer them for sale to investors or strategic buyers?

Among the most popular kinds of funds are:

funding for venture capital (VC)—see above description; They make investments in startups with a high failure rate.

Growth equity funds make investments in more established businesses that want to grow or enter new markets.

Funds for leveraged buyouts, or LBOs: The majority of people refer to these funds when they use the term "private equity." They use loans and equity to purchase fully developed firms, with the intention of holding onto them for three to seven years before making a move.

Distressed/Turnaround funds: These funds start with loan or equity investments and then buy struggling firms to save them.

Mezzanine funds: These provide high-yield loans to suitably established businesses that need extra risk capital but often have strong profits and cash flow.

Real estate funds are concentrated on properties (either debt or equity), with the goal of gradually purchasing, enhancing, and disposing of them. Refer to the Real Estate Debt Fund and Real Estate Private Equity.

Infrastructure funds: Unlike private equity funds, infrastructure funds make investments in public infrastructure (such as highways, bridges, airports, public transit, etc.).

Fund of funds: A private equity fund of funds is a spin-off from individual transactions that makes investments in other private equity funds.

Typically, private equity firms fall into one of the aforementioned categories, although throughout time, many have branched out into other areas of expertise or founded spin-off companies with distinct investing focus.

Please refer to our discussion on private equity techniques for further information on this subject.

What makes working in private equity appealing?

To answer the question, "Why private equity?" You'll most likely respond in an interview to questions about your interests in operations and investment, along with your desire to build long-term value for businesses.

However, in reality, the majority of individuals are drawn to private equity because it provides relatively better hours and more interesting work than investment banking, along with greater earnings.

Some individuals also like the thrill of working on more significant projects, connecting with the "best and brightest," and gaining a deeper grasp of business processes.

Since private equity is seen as an exit strategy in and of itself, unlike investment banking, exit prospects are not a primary driver of private equity investment.

Leading Private Equity Companies

The "best" private equity funds in the world are a topic of constant discussion, however the top ten funds globally in terms of assets under management (AUM) are as follows:

Jobs in Private Equity, Career Advancement, and Compensation

It is quite difficult to enter into the private equity industry, and if you do, the job is demanding, requiring long hours and sacrifice, particularly during the closing phases of acquisitions.

However, you may advance more quickly and get more pay, bonuses, and carry—a portion of the profits from investment returns—if you perform well.

This is an example of a "typical" career development in a medium-sized to big New York City-based private equity company, along with an approximation of total remuneration (base salary + yearly bonus + "carry" or profit shares). is incorporated. In US dollars:

The Most Popular Jobs for Newcomers in Private Equity

Analyst and associate are the two most popular entry-level positions in private equity.

Analysts help Associates with financial modeling, transaction research, sourcing, due diligence, and portfolio-company monitoring. They are recruited straight out of graduate.

Typically, associates join after serving as analysts in investment banking for exclusive boutique or upper-bracket institutions.

While they do some of the same duties as analysts, their primary goal is completing agreements rather than assisting with the "day tasks" that must be completed.

More associates at smaller firms come from boutique and mid-market banks; Big 4 and corporate development specialists are also present, along with some management consultants.

Without prior experience in investment banking or private equity, it is very difficult to enter the private equity industry directly after receiving an MBA.

It is possible to be recruited for private equity employment after completing an MBA, although this is much more difficult than entering into investment banking without one.

To enter the private equity space, you will require:

a variety of very relevant professional experiences, such as financial modeling and transaction work.

superior academic qualifications (grades, exam results, and reputation of the institution);

plenty of preparation for interviews and networking;

Something "interesting" that distinguishes you from a robot: the capacity to evaluate businesses and investments critically as opposed to just "selling" them.

Strong cultural fit with the company: Soft skills and "fit" are significantly more crucial since PE companies are smaller than banks.

See our in-depth guide on how to enter private equity for further details.

courses on private equity

The industry of private equity has grown to be very demanding and competitive.

Technical expertise and a good "fit" are sought for by private equity firms since their organizations are smaller than investment banks and each team member has much more responsibility.

While banks have the capacity to employ thousands of workers, private equity companies prefer to work with smaller teams of highly skilled individuals who can make a positive impact right away.

To assist them become recognized, recruited, and promoted, many prospective private equity professionals spend money on specialized education and training.

The following are a few Mergers & Inquisitions and Breaking Into Wall Street courses that are relevant to private equity:

Investment Banking Interview handbook: Contains four practice LBO case studies and modeling exams in addition to a 120-page handbook on LBO modeling.

BIWS Premium: This course covers basic financial modeling techniques and goes into more in-depth LBO case studies.

Our most sophisticated LBO model (stub term, dividend restatement, OID, working capital adjustments, etc.) and an open-ended, "take home" private equity case study are included in our advanced financial modeling package.

Venture Capital and Growth Equity Modeling: This is very important for positions involving investments in early-stage businesses, since it requires familiarity with detailed financial models and cap tables.

Upon completion of these courses, you will be better prepared for a career in private equity and will be able to get interviews and job offers for positions earning $150K+.