Private equity

Private equity refers to the financing of a private company through private investors. Many companies both large and small are financed this way.

They provide equity through three main outlets:

• Venture capital to finance small or startup businesses

• Buy-out - an acquisition of a significant portion or a majority control in a more mature company. The acquisition normally entails a change of ownership.

• Special situation investments in a distressed company, or a company where value can be unlocked as a result of a one-time opportunity (e.g. changing industry trends, government regulations, etc.)

See Wikipedia for more general information on private equity.

Private Equity Firms

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A private equity firm, or a private equity department that exists within an investment bank, generally performs the following roles:

• Purchasing and holding equity in companies
• Usually sitting on the board of companies and taking a management role
• Looking for new investment opportunities

Private companies will typically approach a private equity firm for investment, or in special situations, to recover a damaged business.

Controversy in the News

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Private equity firms have been the target of much negative media attention in recent years. This is primarily due to how lucrative private equity investment has been.

Two main reasons stand out for its media controversy, that being:

• Private equity firms receive generous tax relief from the UK government, despite the astonishing profits that they make.

• Private equity firms, in the case of a buy-out of a failing company, are often blamed for causing mass redundancies by closing factories and laying off workers in a bid cut costs and recover the company's financial strength. Private equity companies have been described as 'ruthless' with respect to their cost cutting methods.

Working in Private Equity

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There are two main career routes into private equity:

• Through a specialist private equity firm
• Through an investment bank's private equity division, if it has one

Working for a Private Equity Firm

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Private equity roles can be divided in front office and back office roles, much like in investment banking. In order to obtain a front office role, previous experience is always necessary. The standard of entry is very high. Two possible entry routes, particularly for smaller funds, is a ICAEW ACA qualification from a Big 4 accounting firm, or strategy consultancy experience. However, the larger the fund the more likely the preference for those with bulge-bracket investment bank M&A or Leveraged Sponsors experience. Graduate entry into private equity front-office is almost unheard of.

Back-office roles are primarily admin work. Most back-office roles will involve accounting or spreadsheet work, or providing support to front office staff during a deal.

The hours in a private equity firm are reasonable except where a deal is being carried out, in which case they can be substantially longer. Front office staff are generally required to work more hours than other departments.

Good private equity firms do very well financially. Consequently salaries are good. Rewards for front office staff are extremely substantial (almost all front office staff members will be earning at least a six-figure salary before carried bonus). A significant element of pay is performance based (eg. carry) and is related to the particular deals in which the staff member was involved.