Private Equity for Intermediate
There are some things that should be considered if you want to invest in private equity. One of these is that if you want to gain an advantage over others, you should do several internships at top-notch private equity firms. Networking is useful in this matter. Knowing more people in this industry will reduce your barriers to entry. If you’re aiming for an entry position, your age should be below 30. If you want a senior position and you have relevant experience, your age can be over 30. Undergraduates who are hired by large private equity firms don’t need any experience.
If you don’t have a relevant background in private equity but you want to venture into this industry, you still have several options. You can consider real estate roles such as commercial real estate brokerage. If you have banking experience and you’re too senior, you can consider joining a private equity firm as a consultant or operating partner. If you’ve completed MBA and you have experience in investment banking, you can join a private equity company as a post-MBA associate. You may be in charge of financial modeling, managing advisors like accountants, investment banks and lawyers as well as screening deals.
The usual tasks at private equity firms include identifying new deals for an LBO, analyzing spreadsheets of a target business, collecting data on a target company where there’s already an investment, and coordinating research and diligence for a transaction.
Those who have an engineering background can get into private equity through investment banking or consulting. Engineering graduates can work hard and banks like this aptitude. Engineers may need to join a top-notch institute for a Masters in Finance or MBA and do intensive networking. They also need to master financial modeling.
Undergraduates hired by large PE firms have usually completed internships at private equity firms or in restructuring or strategy consulting. Undergrads have to learn financial modeling on their own, secure an interview and learn cold calling and networking skills. If you bag an interview, you should show your passion for investing. Smaller firms may consider young private equity candidates.
Since a solid grounding in private equity, investing and finance is needed, you should take the initiative to improve your technical skills. You can join training programs offered by online platforms or institutes. You will have an advantage over your rival undergrad aspirants if you learn financial modeling through an online or tutor-driven course.
One of the best things about getting into private equity directly is the fact that you don’t need to experience the instability and long and exhausting hours that banking analysts face. Private equity jobs provide more variety. Since there are fewer people, you need to fulfill several duties such as deal brokering, financial modeling and managing legal issues. This also means that smaller private equity firms seek experienced recruits below 30 years old.
Undergraduates who move straight to private equity don’t benefit from the laborious training that bankers get. This means that they will not have the names of prominent banks on their resume, which can come in handy if they want to change careers later. They can still get recognition for not taking the usual route to private equity through banking.
What Educational Background Should You Have?
You can’t just get into private equity without the right knowledge and skills for the job. Here are the educational qualifications that you need to meet.
Chartered Financial Analyst (CFA)
You can become a Chartered Financial Analyst. This requires having 4 years of relevant experience and clearing 3 reasonably tough levels. Being a Chartered Financial Analyst offers a lot of benefits. For instance, you can pursue various investment career options other than just private equity. Some of your options include equity research, investment banking and hedge funds.
Masters in Finance
You need to have a Masters in Finance. If you’re purchasing a bachelor’s degree in finance, you should consider getting a master’s in the same discipline.
MBA from a Top-notch Institute
Private equity firms have different requirements and if you can’t meet even one of them, you’d have no chance of being picked. If you’re not getting a Masters in Finance, you need to pursue an MBA from a top-notch institute. Large private equity firms in the US and Europe usually get people who graduated from Oxford, Harvard, Cambridge, Wharton, Stanford and INSEAD. If possible, get your MBA from one of these institutes.
After 2 or 3 years at a private equity firm, MBAs can become a director, VP or principal. They create investment ideas, complete transactions and source their investments. The next level is partner or managing director. They raise funds, manage relationships with investors and lead a private equity firm’s strategy. Partners may invest their personal wealth in their own firm or fund. Compensation depends on the company’s investment profits.
Pre-MBA candidates are generally hired as pre-MBA associates or analysts. It’s common to see candidates who have worked in accounting firms, investment banks or strategy consulting companies for 3 or 4 years. Their tasks usually include conducting investment analysis or prospecting. The next level is senior associate. Some shift to corporate development, another private equity firm or hedge fund or leave to pursue MBA. Post-MBA candidates are employed as senior associates 2 or 3 years after graduation or straight from b-school.
You can also pursue other certifications such as Associate Chartered Accountant (ACA) and Chartered Alternative Investment Analyst (CAIA).
What Skills are Required to Pursue a Private Equity Career?
There are many skills that you should have to pursue a private equity career. However, these are the 3 skills that you should develop if you want to stay for a long time in the PE industry.
Even if you don’t even have an exceptional career graph and you’re not from a top-notch institute, if you have great networking skills and a decent background, you can still work with other private equity experts who came from top-notch institutes or have excellent backgrounds. In order to develop excellent networking skills, you have to be honest and confident about your skills. You should also communicate professionally and briefly as well as tell what you offer.
Creating a structure of your story and using it whenever you send an email is one of the best ways to build relationships. You should also connect personally with the senior personnel of a private equity firm and personalize a telephonic communication. Don’t hesitate. You will face a lot of rejections, especially in the beginning, but this skill will save you a lot of time and hard work.
If you want to have a successful private equity career, you should have excellent technical skills such as valuations, financial analysis, term sheet, LBO modeling, deal structuring, financial modeling and due diligence. If you don’t have these skills, you should consider taking an online course. Training can also help. Make sure that the training helps you learn the skills step-by-step. There are video courses that you can take anytime. One of the best things about this kind of training is that you can learn at your own pace. You can go through the training over and over to master the skills.
Cold calling is also a skill. It is actually your best bet if you are seeking a job in private equity. Private equity firms will share your email with their HR. In most cases, you will get a generic rejection email. In other private equity companies, the possibility of getting a response from a senior PE professional or HR is 1 percent.
Communicating with the person directly will significantly improve your chances of getting hired. You can begin with smaller funds that don’t have a structured recruitment process. The main goal of cold calling is to get an interview. In case you don’t pass the interview, you can offer to work for the company for free for a few months. Aside from learning new things, this will also improve your resume’s value and push you a step ahead towards a successful private equity career.
You should try to establish connections with headhunters. Don’t expect to find PE openings on a traditional job portal. PE companies are usually small in size and depend mostly on head-hunters to handle their operations such as conducting interviews and initial tests as well as screening resumes.
How Much Will You Earn?
Most people want to get into private equity to work comparatively less and earn more. However, private equity companies require their staff to work longer hours if needed. Sometimes, the working hours are longer than investment banking. You won’t earn great compensation by working less in private equity.
Private equity analysts usually work 12 to 14 hours a day. Depending on the workload, they may work more than 16 hours. Senior personnel in private equity firms would usually get benefits in working hours. You can still enjoy a healthy work-life balance, but you may occasionally cram all night if the workload is heavy.
Private equity jobs offer high compensation and it’s what attracts most people. There are 3 types of compensation – carried interest, basic salary and bonuses. Carried interest will matter once you achieve a higher rung. In the US, the average carried interest that senior associates and associates get is within $60,900 to $200,000 every year. They usually earn $173,000 to $259,300 every year. By combining the two together, you will get a large sum of money that you can use to live your desired lifestyle. CEOs and MDs of large equity firms in the US earn higher carried interests. They usually get between $3.3 million and $3.4 million every year only in carried interest. The average carried interest that CEOs and MDs in Europe earn is between $3 million and $1.5 million.
Private Equity Terms You Should Be Familiar With
There are some terms that are strictly used in private equity. You have to know these terms to make everything easier for you.
General partners manage the investments in private equity funds. They can be legally responsible for the fund’s actions. General partners receive management fee for their services, usually 2 percent of commitments paid yearly. There are some exceptions when they receive less. Aside from the management fee, they also receive carried interest or the percentage of the fund’s income. Carried interest can range from 5 to 30 percent of the profits earned within the PE fund.
Limited partners are typically high net worth or institutional investors who want to get the capital gains and income associated with private equity fund investments. They don’t participate in the active management of the fund. Limited partners are protected from losses outside their original investments and all legal actions taken against the PE fund.
Clawback Provision and Preferred Return Provision
Private equity can have complicated compensation structures. They usually have clauses in their payment agreements. Clawback provision and preferred return provision are the 2 main types of clauses found in compensation contracts. The preferred return is the minimum yearly income that the limited partners can get before the general partners start getting carried interest. The rate is usually about 8 percent. The clawback provision, on the other hand, allows the limited partners to reclaim a percentage of the carried interest of the general partner. This is allowed only when losses from later investments cause the general partners to withhold a large amount of carried interest.
Committed capital is money that’s allocated by limited partners to private equity funds. It’s usually not invested instantly. Committed capital is invested over time as investments are determined.
Drawdowns are also called capital calls. It’s given to limited partners when the general partners have identified new investments. A percentage of the limited partner’s committed capital is needed to pay for those investments.
Vintage year refers to the first year that private equity funds calls committed capital.
Paid-in capital pertains to the combined amount of drawn down capital. The amount of paid-in capital that has been invested in the portfolio companies of the fund is called invested capital.
Residual value refers to the remaining equity’s market value. It is common to see the net asset value or residual value of a private equity investment. This is because the net asset value represents the worth of all investments in the fund’s portfolio. PE investors can compare their fair value with the residual value of an investment’s purchase price. The difference represents the loss or profit and unrealized opportunities or potential from the sale of the shares. Private equity-sponsored funds usually report the residual value on a quarterly basis. Residual value is more significant for limited partners as it shows the current market or value of the remaining equity they own.
The investment multiple is determined by dividing the cumulative distributions of the fund and the paid-in capital’s residual value. The investment multiple provides the investor with ideas about the performance of the fund by showing the total value of the fund as a multiple of its cost basis.
Cumulative distribution is the total amount of stock and cash that has been paid to the limited partners. Private equity investors have to know the timing and amount of the fund’s cumulative distributions. This is particularly important when they are considering the investment track record of the fund.
The realization multiple is determined by dividing the cumulative distributions of the fund by paid-in capital. When combined with the investment multiple, the realization multiple allows potential private equity investors to see how much of the fund’s profit has been paid out to investors.
The PIC multiple is determined by dividing the fund’s paid-in capital by committed capital. It allows potential investors to know how much of the PE fund’s committed capital has been drawn down.
The RVPI multiple pertains to the existing market value of unrealized investments as a percentage of called capital. To determine the RVPI multiple, you have to divide the residual value or net asset value of the fund assets by the cash flows rewarded to the fund. Cash flows represent the fees paid, capital invested and other costs incurred by the limited partners to the PE fund. Higher RVPI ratios are favored as it shows the total multiplied value of the limited partner’s up-front capital costs. It shows how much of the PE fund’s return is unrealized and reliant on its investments’ market value.
The private equity industry is extremely appealing to savvy investors. Breaking into this market requires a solid background in PE, knowledge how to network and a burning desire to be successful. You should start as early as possible. The industry’s influence on the financial market continues to grow, so it’s important for you to become familiar with the terms used in the PE industry. Being familiar with these terms will help you make informed decisions when investing in private equity.