If you’re ‘nice’ and you’ve got an excellent academic track record and you’ve spent some time on the training program in the investment banking division (IBD) of a major investment bank and you want to get paid well, you’ve probably thought about working in private equity. But which top private equity (PE) firm should you work for? How does one differ from another?
Analysts Luke Montgomery and Anojja Shah of Bernstein Research have run some numbers on the three biggest listed US private equity players – Apollo, Blackstone and KKR. Aimed at investors but equally relevant to anyone thinking of going for a job in a big PE fund, their conclusions are laid out in the charts below.
1. Any private equity fund won’t pay you carried interest for at least six years
The big money in private equity doesn’t come from salaries and it doesn’t come from bonuses. It comes from carried interest – or the share of the returns on a private equity investment that are distributed to the firm’s limited partners (LPs) and its general partners (GPs).
However, as the chart below shows, a typical PE fund doesn’t start generating the performance fees that allow for carried interest until year six or seven.
If deferred bonuses in banking are bad, waiting for carried interest in private equity is worse.
2. Funds that invested heavily after the financial crisis should be well placed to generate strong returns in the near future
In the years after the crisis, Bernstein says “deal valuations were more reasonable”, meaning that the large PE funds were better able to make investments that will generate strong returns. As a result, there has been some heavy investing since 2008 and the next few years should be lucrative for people working in the industry.
3. Blackstone invested most heavily in the ‘cheap’ 2009-2014 period and therefore looks best placed to generate strong returns in future
4. Apollo is under the most pressure to make investments soon
Of the three funds, Apollo has the greatest proportion of ‘dry powder’ (money yet to be invested) to ‘unrealized investments’ (investments made, but not yet cashed-in). On this basis, a job at Apollo looks particularly likely to lead imminent involvement in a live deal.
5. Don’t underestimate the importance of real estate investing to Blackstone
Blackstone is a private equity fund, it ‘s also a big real estate fund. 50% of its unrealized investments are in the real estate area. In future, a higher proportion of Blackstone’s investments will be in traditional private equity, however.
6. KKR is closest to a traditional private equity fund of the three. At the fourth quarter, it had a comparatively small proportion of funds left to invest
7. Blackstone has the most money to invest over the next three years. KKR has the least
Assuming a ‘supportive environment’, Bernstein predicts that Apollo will invest an average of $6bn over each of the next three years, that Blackstone will invest an average of $14bn and that KKR will invest an average of $5bn.
8. These are the funds you can work for at Apollo (note, they’re almost all in NY)
9. These are the funds you can work for at Blackstone (note, they’re all in NY)
10. These are the funds you can work for at KKR (including London and Hong Kong options)
11. Blackstone looks by the most lucrative PE fund to work for over the next five years
If you’re looking for a PE group that’s poised to make a lot of realizations (cash in a lot of its investments) over the next five years – and therefore to start earning you some good carried interest, Bernstein’s analysis suggests there’s only one option: Blackstone. Apollo looks puny by comparison.