While many are familiar with stocks and shares, which are publicly traded on stock exchanges around the globe, private equity is a type of investment that isn't as widely understood.
This term describes the direct financing of privately run companies by funds or investors. Companies of all sizes can access this funding.
Private equity provides businesses with the capital necessary to grow and handle change – whether that's restructuring or even a buyout.
There are three types of private equity:
- Venture capital – Funding specifically for small and new businesses.
- Buyouts – Usually associated with new ownership, this is the acquisition of a large number of shares, or definitive control of a firm that is more established.
- Special situations – 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).
Like any investor, the goal of private equity companies is to increase the value of their holdings.
Private equity finances businesses across all sectors and ages, from start-ups to more established operations that are in need of development.
Private Equity Firms
Many companies specialise in private equity. Some are run privately, while others operate as departments within much larger investment banks.
Each firm holds responsibility for the purchase and management of equity.
To support this aim, private equity firms normally sit on a company's board and take active management roles. In addition, they are always looking out for potentially profitable investments.
In practice, however, private companies typically reach out to them. When companies face tough times, such as a poor reputation and/or restructuring, they may seek the help of private equity organisations to overcome it.
With any investment comes an element of risk, and private equity is no exception. It's a high-risk venture that can generate outstanding returns.
Impressive successes in recent years, however, have resulted in the media putting the industry in the spotlight – casting it in a negative light for two reasons:
- Unmerited tax relief. Some private equity firms generate incredible profits annually. Despite this, the industry is entitled to significant tax relief.
- Ruthless cost-cutting. Struggling companies need to make tough choices to survive. Factories may need to be closed and workers made redundant to allow for financial recovery. Private equity companies handling special situations, such as buyouts or restructuring, are often blamed by the public.
Key Skills Required
For those choosing a private equity career path, there are a number of skills necessary to ensure long-term success.
Here are the key skills that professionals working in private equity should ideally possess:
1. An Eye for Detail
The devil is in the detail, or so the saying goes. Nowhere is this truer than in private equity, where the stakes are high, and accuracy and precision are essential.
A good eye for detail means that fine details are recognised and tracked – minimising the risk of mistakes.
Like any skill, it can be improved by developing a better understanding of the working environment, as well as allowing sufficient time to deliver high-quality work that has been reviewed prior to submission.
2. Critical Skills
Thinking critically allows situations to be evaluated thoroughly.
By questioning assumptions and arguments, fine details and trends can be identified easily, ensuring the best outcomes when making tough decisions or problem-solving.
Adopting a logic-based approach is key. Because options are reviewed and evaluated, it allows for an effective process of elimination.
In private equity careers, tools such as cost-benefit analysis prove useful when weighing up the pros against the cons.
3. Flexibility and Stamina
Private equity jobs are very demanding – especially as the momentum behind a deal builds as it races towards closure.
Flexibility and an unwavering commitment to the needs of the deal are key to success.
4. Effective Interpersonal and Communication Skills
The nature of private equity means that relationship-building is key.
Establishing and developing connections with clients helps secure new business, while doing so with colleagues is necessary to broker deals, lead teams and grow the company.
Interpersonal skills and communication skills are an asset to anyone considering a career in private equity. Employers are always on the lookout for candidates who are already putting these into practice, as it means they have the capacity to succeed.
What Is It like to Work at a Private Equity Firm?
This can be a hard question to answer as not all private equity jobs are created equally. For simplicity, it's easiest to split private equity jobs into two camps: front office and back office.
The demanding nature of front-office positions – including negotiating deals – means that back-office positions are the point of entry for most joining the industry.
Primarily administrators, those in the back office deal with accounting functions, manage spreadsheets or perform the legwork necessary to support deals being brokered by the front office.
Working hours are slightly better than investment banking. That is until deals reach crunch time, when workloads and hours can increase significantly to meet the needs of the deal.
On the whole, however, those working in the front office will be expected to put in more hours than back-office departments.
How to Start a Career in Private Equity
There are two main private equity career paths that candidates can follow:
- Working for a specialist private equity company;
- Working in the private equity department of an investment bank.
As mentioned above, private equity jobs can be split into front- and back-office roles. The high demands placed on front-office work means that experience is absolutely crucial. As such, those entering the industry typically do so via back-office administrative roles.
While private equity career paths are quite straightforward, the entry point into the industry can complicate things.
For example, if you were to enter private equity with two years' experience as an analyst for an investment bank, you can expect to enter private equity as an associate, before progressing to senior associate in two to three years' time.
It's important to bear in mind that private equity is considered as a destination position, rather than an opportunity to broaden a career.
In part, this happens as associates need to stick around to get the best rewards. Carried interest (the share of the profits from an investment paid to the private equity professional), which accounts for the biggest return, takes time to come through, so commitment is key.
Salary and Typical Career Development
When run well, private equity firms can be very financially successful. That high degree of success means that salaries across front- and back-office roles are good.
In the front office, nearly every member of staff can expect to earn more than £100K per year in salary alone. Performance-based bonuses (or carried interest) reward staff members involved in particular deals and can add up to much, much more.
According to experts, however, juniors shouldn't expect to see serious money until the end of their first decade. Plus, it's almost unheard of for graduates to enter the industry in a front-office position.
Associates will typically spend five years in that role before taking that experience to the next level as a senior associate.
After two years working in this tough front-line role, they can move up the ladder with a role as director or principal.
For those with even grander plans, such as becoming an MD or partner, it's possible – but it takes time. Expect to need around 10 to 15 years of industry experience.
Sometimes the move into private equity from investment banking isn't a good fit. When this happens, exit options are available. Some private equity professionals move on to join the boards of companies in their portfolio, when that investment is exited.
For those looking to work with smaller funds, an ACA qualification from a ‘Big Four’ accounting firm or strategy consultancy experience will do.
Importantly, the larger the fund, the more likely it will be to need additional qualifications, such as bulge-bracket investment bank M&A or leveraged sponsors experience.
For those ready to make the switch from investment banking, private equity offers substantial rewards.
However, it isn't necessarily for everyone. Before making a move, candidates should do their research, evaluate their skills and reflect on themselves.
The private equity career path demands an exceptionally high level of personal commitment.
With experts suggesting that candidates need a decade or more to reach significant levels of carried interest, it's worth exploring whether or not you have the determination and drive to meet that milestone.