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Look before you leap: Should you really ditch investment banking for private equity?

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Junior investment bankers in IBD are gaming their careers these days and, for most, it’s a simple track. Spend a couple of years at a bulge bracket bank, clock the hours, acquire the skills and then move into private equity.

In fact, of the analyst class to join in 2012, 55% made the switch across to the buy-side within two years. And, while IBD generally is the primary target for PE recruiters, it’s the leveraged finance teams of investment banks that see the biggest exodus.

For Ben Thompson, a managing director in J.P. Morgan’s high yield and leveraged loan capital markets team who has also spent some time in PE, this is a source of frustration. It’s also, he suggests, not always a wise move for a junior banker.

“There’s a blurred line between leveraged finance teams and private equity firms. They can be, in some cases, clients, partners or competitors,” he says. “They love to hire juniors from investment banks, because they’re well trained and have the sort of background they’re looking for.”

PE firms don’t have to work hard to attract juniors, and usually only the very best make the cut. “Private equity firms have a good head-turning pitch,” says Thompson. “Come here, you’ll be part of a small investment team, see the whole deal process and get access to senior management.”

“That can work for some people,” he adds. “I’ve known people who have switched across at the right time, managed to move up the ranks and it’s worked for them. However, I’ve had conversations with other juniors who have told me that, honestly, the work is essentially the same – just from the other side of the table, the hours aren’t much better and the pay is on a par with investment banking. And I certainly see juniors here getting daily exposure to the most senior members of the firm.”

Private equity firms don’t pay that much more to their juniors than investment banks. An associate in private equity earns at least £150k in total compensation, according to research from recruiters Kea Consultants. An equivalent role in an investment bank pays an average of £145k, but it varies between firms – J.P. Morgan pays the most, according to recruiters Dartmouth Partners.

“The hours really aren’t that much different from investment banks at large private equity firms, and compensation can be on a par with banks – or even lower,” says Gail McManus, managing director of Private Equity Recruitment. “But people don’t move for the cash, and longer term it can be more lucrative. In my experience, people rarely move back to banking.”

The logic is simple, she says – if you have any ambition to work in private equity, the window of opportunity is tiny. Most people she encounters realize that they don’t want to work in banking forever, but if they leave it too long they will never have the chance to switch to the buy-side.

“By the time you’ve reached VP, you’re stuck,” she says.

It’s easy, of course, to bash investment banking careers and the sell-side’s struggle to keep hold of millennials is well-covered. But are there genuine reasons for sticking around?

“Our counter-pitch is that we’re a global organisation with a huge array of opportunities,” says Thompson.

People at J.P. Morgan have joined the leveraged finance team from debt capital markets or investment banking coverage teams in the past few months, he says. Right now, an associate working in its London levfin team has just switched with a Chicago-based junior for a year.

“Juniors should be able to have an honest conversation with their manager, who can talk through what opportunities are available to them,” he says. “I’ve been in leveraged finance for many years, but started out in the Telecom Media and Technology investment banking coverage division. There are a lot of cool opportunities within the IBD or the broader firm.”

But McManus says that aside from progressing up the ranks, there’s a clear career path for juniors who have made the switch across to the buy-side.

“The hours and the culture at mega-firms can be very similar to large investment banks,” she says. “So, more often, juniors spend a couple of years at a large firm, get the brand name on their CV, and then move to a mid-market firm. There the deal exposure is greater and you can really start to make your mark.”

Contact: pclarke@efinancialcareers.com

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