Private Equity

What is this industry?

While Private Equity (“PE”) refers to investing in privately owned companies of all stages (including early stage private companies otherwise known as “venture capital”) most in finance refer to “private equity” as investments into, and/or buyouts of mature private companies. Traditionally, “private equity” denotes funds who pursue a “levered buy out” of companies, i.e. purchasing the total enterprise value of companies using mostly debt and then servicing the debt using cash flow generated from the acquired company

PE firms, especially megafunds (funds with >$5bn or more), can also invest in the public market. However, instead of trading large volumes as would a hedge fund investor, large, well capitalized PE funds have the ability to take a public company private. In industry, this is called a “take private” and typically, the PE fund wants to be the majority shareholder (over 50% stake in the company) 

Private equity professionals generally have a background in corporate finance / investment banking

  • Of professions on the buy-side (i.e. hedge funds, private equity, alternative asset managers), private equity recruiting is the most linear if you have a background in investment banking
  • Some PE shops have also started analyst programs to attract top talent directly from college undergrad, but those positions are few and far in between

What is a “day in the life”?

Investment committee 

  • Preparing investment theses, memos, overviews, financial analysis for select group of general partners who decide if should bid on a company and at what price / structuring 

Transactions 

  • Generally a busy period where the deal team has been given the green light to submit a bid for a company 
  • Due diligence: Once the company has selected your fund to be part of the bidding process, you will complete due diligence on a company by going through its “data room” which is a data repository on the financials, strategy, operations, and supporting documents of the company 
  • Negotiations and signing: If the target company accepts your final bid, you will negotiate the terms of the transaction (closing date, management payouts, operational transition topics such as layoffs, etc.) 
  • Financing: In order to submit a final bid, your fund will need commitment financing, where you show financial projections and other analysis to banks who will provide the debt financing for the acquisition 

Portfolio company management and asset management

  • After the fund invests in a new company, a process of asset management takes place. Your fund typically places a member of the fund onto the invested company’s board of directors and provides frequent progress updates on how the investment is doing
  • General portfolio management is also required to keep track of how the fund’s overall portfolio of investments is doing. This involves:
    • Quarterly review of financials, often reconciling actual vs budget 
    • Working with senior management CEO / CFO on strategy and financial analysis of whether the fund should refinance/restructure/invest more into existing investments 

General industry research and financial modeling

  • In slower periods, associates will be asked to support research projects to determine which companies the fund should target to acquire next. Most of your down time as a junior will be spent performing market and company research of potential companies to invest in and building financial models for each of these companies to project whether they meet your fund’s desired IRR return and are worth pursuing

How to ace your interview

When interviewing for the analyst / associate roles at PE firms, it’s important to demonstrate four key competencies:

Being technically fluent with advanced understanding of corporate accounting (modeling)

  • Most (90%+) of PE interviews will ask you to build a basic operating model (some will ask for a three statement) and an LBO
  • Sometimes this happens live (in the office), while other times it’s a take-home model

Thinking like an investor (case studies) 

  • The in-person interview process will often involve live case studies where you’re presented with a business and decide whether or not you / the firm should invest in it
  • Sometimes, this is a high level discussion, but if your modeling test is in-person, the case studies will often be linked to the modeling test. This involves building an LBO model, running sensitivity analysis on the returns, and defending your assumptions for the company discussed

Know your deals 

  • Often times, PE interviewers will ask you about a deal. It’s important to demonstrate your ability to speak fluently about your deal experience, what you’ve done, and why it is / is not an investment you would make 
  • Often these conversations can make up a large duration of the interview, as PE interviewers want to make sure you understand what you’re working on. It’s also a fun exercise for your interviewers to run diligence (doing what they’re trained to) on the deal you’re bringing to the table, so make sure to know it well 

Knowing why you want to do PE 

  • Investors are always doing due-diligence, and they will do the same when it comes to hiring another member to the investment team. Just as it’s important to meet the technical competencies, it’s equally important to show demonstrated interest in private equity as an asset class
  • Good answers are ones that “make sense” and are eloquently and confidently presented. Common answers for “why PE” include:
  • Genuine interest in the scope of responsibility and having “skin in the game” on the buy side
  • Working with management teams to help companies grow
  • If recruiting for megafunds: Working with a tight-knit deal team to make billion dollar transactions 
  • If recruiting for generalist fund: Getting to deeply understand several industries from the inside 

Showing you’ve done your homework

  • When interviewing, firms may ask what is a good investment in their portfolio and why. You will not have all the information, but be sure to read deal announcements of the firm you’re interviewing with a few days in advance of the interview. Answers here can be very high level unless you’re an “expert” in the space / sector / deal

Resources for learning about this industry

Newsletters

  • Termsheet, PE Hub

Typical industry entry process

If you’re interested in private equity and are currently in investment banking, the process is very linear and structured. Recruiters reach out to investment banking analysts for associate programs shortly after the analyst program begins 

If you are not in IB, entry points into private equity funds, especially mega funds, are severely limited. Occasionally smaller private equity funds will hire post MBA associates from business school

Typical career trajectory

Exit strategies/opportunities

  • Most associates in private equity have great optionality to go on into opportunities to pursue an MBA, stay on at the firm, transfer to another private equity firm, leave for a public investment firm / hedge fund, or pursue corporate development.

Typical challenges in this industry – and how to deal with them

  • Private equity is a very male dominated industry 
  • Furthermore, one must be very interested in becoming a good investor, because that is your sole objective as you become more senior. This is different than an in investment banking where client facing skills become increasingly important as you become more senior since it is a service industry

Companies to know in the industry

  • Megafunds: Apollo, KKR, TPG, Blackstone, Carlyle 
  • Other funds: Apax, Advent, TA Associates, Vista, Thoma Bravo, Welsh Carson, Golden Gate, Irving Capital, Bain Capital, CVC, Warburg Pincus, 3G, GTCR, Goldman Sachs Private Equity, Macquarie Infrastructure & Real Assets, Hellman & Friedman, General Atlantic, Permira, Silverlake, EQT

On-Campus resources related to industry

Wellesley generally does not recruit into PE straight from undergrad, so on campus resources can be scarce. If you’re interested in PE, reach out to alums a few years older to better understand the recruiting process

Girls Who Invest is a great platform to gain access to several buy-side internships. The program is competitive, but is an established program which feeds into top-tier buy-side firms (including PE shops)