So you want to work in private equity (PE) straight out of university? You'll be lucky. The traditional route into private equity involves doing your time at a top investment bank, learning the dark art of financial modelling, becoming a top ranked analyst (preferably), and then jumping across to a private equity fund sometime in your second year. And yet, a handful of private equity funds do hire people straight from university and a handful of top students do therefore manage to skip the banking stage and go straight into PE. We spoke to one of them. This is what he said....
So, you went straight into PE from university. Does that make you that normal?
"No. Breaking into PE from undergrad is almost impossible. This is because PE funds require you to have a certain financial background so they don’t have to waste valuable resources/time training you. A common background is 2-3 years at a BB bank or Mckinsey/Bain. To break in from undergraduate, it’s about aggressive networking, cold calling etc to somehow get a meeting/interview. On top of this, you have to spend time learning modelling yourself as this is a standard part of PE recruiting. This is easy for bankers as they spend hundreds of hours a week staring at Excel models, but as a student juggling studies, it is tricky. It all comes down to motivation, proactivity, desire to succeed etc.
It is a numbers game. I probably contacted close to 2,000 people before I secured my first PE internship."
Is going straight into PE a good thing?
"The main advantage of going straight into PE is the fact that you can skip the grueling hours/culture of large American investment banks. We still work very hard in PE, but the hours aren’t quite as bad and your work is much more varied/interesting, especially at the smaller funds. Moreover, banking analysts are planning their exit the moment they hit their desks. This is mentally stressful, especially when every time you answer your phone, your boss thinks you are trying to jump ship. Starting in PE means you don’t experience this as much. Plus, you can stop thinking about moving so soon. Churn rate in finance is very high, but PE guys usually stay much longer as your pay is usually directly related to the number of deals you work on.
When you work in PE, carried interest (“carry”) is where the real money is at. This is basically a direct cut of the profits that is paid to investment professionals in PE. This doesn’t really accrue/get paid to you until principal level, but can be several times higher than your base salary. At junior levels of private equity, total compensation is actually less than in IBD. It only starts to pull away dramatically when you start earning carry (as mentioned above, principal level, age 27-30). The earlier you break into PE, the more deals you can work on, so the higher your carry will be...."
Did you lose out by not spending time in banking?
"Kind of. The main downside is being officially trained by a big bank which spent millions on its training programme.
If you start directly in PE, you will initially be at a disadvantage to your ex-banker colleagues. That core modelling skill-set hasn’t been drilled into you via 100-hour weeks. Initially, they may not respect you, as you haven’t done the grunt work at an IB. You also don’t have a big bank name on your CV, so if you decided to move on from your current PE fund, it would be a bit trickier. However, as long as you impress and spend A LOT of time learning the technical side in your own time, there is no downside. In the long run, people will respect you a lot more because you didn’t sell-out and take the standard route of going to a bulge bracket. This shows that you can actually think for yourself, are willing to think outside the box, are willing to take calculated risks etc. It also gives you a unique flavour to your CV that will ultimately, with a bit of networking, allow you to score interviews with any firm you want, should you decide to explore other opportunities."
How does the skill-set in PE differ to that in IBD?
"At the big PE funds (Blackstone, KKR, Carlyle), the skill-set is virtually the same. This is the reason why these firms hire you after only 2-3 years at a bank. You are still a kid, but you have the raw materials that the PE shop can build upon. Most of your time is spent modelling or producing presentations/documents related to potential investments. One big difference is that you actually get to work alongside senior firm members. There is an air of working “with” your boss rather than “for” your boss, which is the case at an investment bank. Even as a PE junior, you are meeting CEOs, financial directors of companies etc. The level of responsibility makes you feel valued.
At smaller funds, it's a bit different - there is less manpower available. This means that everything from the due diligence to the legal framework to modelling to deal financing has to be sorted out by the team. As a result, your work is extremely varied. However, the obvious caveat is that much more experience/maturity is required. Small funds like to take you at 28/29, with employees usually having a diverse financial background in several disciplines."
What advice would you offer other people trying to get into PE directly?
Learn to network/cold-call. Remember, 99% of the people you reach out to via email have no interest in talking to you, and won't reply. You need to make the most of the 1% that do, and be able to demonstrate genuine passion for investing in companies. Don’t target the big PE funds such as Blackstone, as these guys literally get hundreds of emails a day and will simply forward you on to HR, who will give you a generic rejection email. Target smaller firms with no defined recruitment process/platform. You might hit gold. It’s a numbers game, and all it takes is for one person to say yes. This approach can work for you even if you didn’t attend Oxbridge/LSE, as your CV won’t be passed through an automated screening process like it would at Goldman or JP. However, reaching out to senior fund members who attended the same university as you is obviously a plus. You are more likely to find alumni if you attended a target school.
Spend time learning the technical side, mainly LBO modelling. I recommend spending the money to enrol in either an external training course, or online learning platform. These are abundant online, but are pricey. I definitely recommend searching for material online that has been specifically designed for people looking to enter the PE recruitment process. Materials usually consist of a pdf interview guide with answers to all the relevant questions, as well as templates and video courses regarding modelling. If you don’t utilize these materials, you will be found out very quickly. Note that 99% of undergraduates, even at Oxbridge/LSE, don’t have a clue about how to actually build a financial model. Practical experience is vital, which is why an actual in-person or video course is essential. Remember, during the recruitment process you will have to build a model of your own and rigorously defend all the assumptions you have made in a written investment thesis. This requires a sound knowledge of private equity, finance and investing, and is virtually never seen in undergraduate level (or even masters) students. I spent a year preparing myself, and even then it was tough.
Most importantly, HAVE A BACKUP PLAN. Absolutely do not put all your eggs into one basket, hoping to get into PE straight away. Remember, to successfully break in, you probably need to be at a standard even higher than the average Goldman or JP recruit. Your chances are miniscule, and you will be coming up against people much older than you with far, far more experience. If you struggle to land internships or graduate roles in consultancy or banking, you will find the PE recruitment process impossible. It is extremely intense, and as highlighted previously, is designed for professionals in their mid to late 20s.
If you have backup options, are extremely motivated, are willing to learn the modelling side and are willing to spend hundreds of hours doing ground work, networking, cold emails etc in the hope that a firm may interview you, then by all means try and take a shot at getting into PE straight from college. Just remember that your chances are probably one in 2,000 - at least.
Photo credit Bill Lapp