I have been reading about different post b-school careers. What is different about investment banking and private equity. I have read the subtle differences, (i.e. brokering deals vs. doing research for the PE firm), but in essence, it seems that an associate at both would do similar modeling of potential companies. Maybe it is salary, exit opportunities, etc., but I think I am missing something here. It seems that many people in IM and IB want to switch to private equity, and I don't really understand why.

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3underscore

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16 Jul 2010, 06:54

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It takes a certain type of person to raise seed capital - right now that would be really tricky. The offset is that by taking on the ugly side of raising capital you get in as a partner. Really though, raising capital can take years and take you away from the market. Best bet always seems to be taking seed capital from your past firm - many HF do this, but to get there you need to be pretty damn special.

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28 Jul 2010, 20:12

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Any thoughts on what the top life sciences/health care firms are?

3underscore

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29 Jul 2010, 07:38

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sid05

Any thoughts on what the top life sciences/health care firms are?

More VC than PE I think.

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29 Jul 2010, 07:52

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3underscore

More VC than PE I think.

Right, I didn't see an active VC-specific thread so I figured I'd pose the question here.

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29 Jul 2010, 18:59

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How does the salary even compare for an associate at a top BB ibd against one at a megafund?

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14 Apr 2011, 14:26

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Hi everyone,

Long-time lurker, hopefully can clear up the distinction a bit. Started as an analyst at a BB firm, pre-MBA associate @ PE, currently at H/S/W.

Investment banking is fundamentally a *sell-side* business. That is, they provide a service to corporations/sponsors (e.g. PE firms) etc. This includes M&A advice, equity/debt underwriting, research, sales and trading execution etc etc.

Private equity is exactly that. Private ownership in companies engineered typically through "leveraged" buyouts. It is what we call the "buy-side". Theoretically, the PE sponsor buys out the company, implements "structural" changes, and attempts to flip the company after a 3-5 yr timeframe in order to sell it for a profit. The operative word in that previous statement was "theoretically". In reality, nowadays what you see happening is PE firms buying out a company, doing a dividend recap while further leveraging up that company, firing workers, and then trying to sell the thing off to make a profit.

Alright now in terms of career, which one do you want to do? I just want to make one thing clear. A *lot* of people fetishize over PE, especially those who don't really understand what it is they do. Having done both Banking and PE, I can honestly say that I *prefer* banking. Why?

1) Compensation: The handful of megafunds typically do pay a bit more than the compensation to an IBD associate/VP etc. BUT, that implicitly factors in *carried interest*. Carried interest is essentially a co-investment at your PE firms fund. The problem with carried interest is that it may be worth a decent amount, ***or it can be worth nothing*** (see JC Flowers). In terms of cash compensation, the majority of middle-market PE firms pay essentially equivalent to what a BB-associate would make. So from a income perspective, neither IBD or PE will make you as rich as an entrepreneur, and in practical terms, progressing well in either will make you never want for anything.

2) Career Progression: Here's the main impetus behind my reasoning of why banking may be beneficial. IBD is a *sell-side* business. As long as you are essentially a good "sales-man", you are in a way your own little business within your bank. You can bring your rolodex with you anywhere, and be compensated for it. Additionally, there's no impediment to career progression. If you can get clients, you get promoted.

On the other hand, in PE, the key is since it is a *BUY-SIDE INVESTMENT BUSINESS*, no matter how "good" you are, you're not making the bulk of the money unless you put up substantial investment in the fund itself. I.e. You *must* risk your own capital in order to garner outsized returns. There is no reason for a PE fund to promote someone to "partner" *unless* they hold key relationships. The "technical" skills are the commodity - they can buy those off the labor market. The exception of course, is if you start your own PE fund... which again, comes down to pre-existing relationships.

3) Lifestyle: This is the only one where PE is a clear winner. Because you're on the buyside, you're not subject to the whims of the client (as you are on the sell-side). However, I want to add a caveat here. When you're on the sell-side, it's a fast-paced business where you need to make sure everything looks sharp in order to preserve your reputation and win clients. On the buy-side, you need to make sure everything looks sharp because you're risking $$$$$$$$ that belongs to your clients and your firm. The sell-side is more work, and in a sense, its very time consuming. But if you mess up a presentation, no one is losing hundreds of millions of dollars per se. On the buy-side, good luck if you get some numbers wrong.

Anyway, hope that serves a guide to non-finance MBA'ers out there. My hope is that everyone has a clear understanding of what PE is before automatically vying for it. Also one last note... with PE firms going public, expect returns to diminish and competition between firms to go up. Promotions to partner will be increasingly difficult as well.

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15 Apr 2011, 02:12

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Can a CFA help you land a job in PE?

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15 Apr 2011, 14:13

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PE firms are sort of agnostic to CFAs (i.e. does not matter either way).

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19 Apr 2011, 16:49

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3underscore

More VC than PE I think.

Right, I didn't see an active VC-specific thread so I figured I'd pose the question here.

https://www.fiercebiotech.com/special-reports/top-venture-capital-firms

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29 Apr 2011, 06:22

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CJH2015, thank you a lot.
Very valuable post.

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30 Apr 2011, 19:34

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CJH2015, thank you a lot.
Very valuable post.

Exactly.

Kudos.

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01 May 2011, 06:39

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CJH2015,
I would disagree regarding the compensation only.
If the salary is prorated for hours worked I think that IB salaries are much lower than those in PE.

Perfect007

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01 May 2011, 10:39

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This thread is very interesting and informational. I'd also like to see a discussion on Investment Management Vs Sales & Trading.

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04 May 2011, 15:37

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CJH2015

Nice summary, CJH. Kudos to you my friend. If I could write a Cliff's Notes of your PE/IBD description, I'd say that IBD is for salesmen with a limited appetite for risk. PE is for those confident enough in their valuation and transaction execution skills to risk their personal capital. And for the most part, I agree with everything you said.

However, folks interested in IBD/PE going forward will want to pay close attention to comp structure for bankers. Bankers are receiving less cash up front and more compensation in the way of equity grants which do not vest for up to three years. If you are a banker who receives half of his comp in equity grants, the total value of your compensation is now directly aligned with the success of your bank. In a sense, the banker is now in the same position as the PE guy. If the bank (fund) does exceptionally well, he can become fabulously wealthy. If his bank (fund) tanks, he'll be outside the subway with an empty cup asking for spare change. Therefore, the distinction that PE is for more risk-inclined individuals and IBD is for those who are more risk-averse may not be as accurate in the future.

...Thoughts from a former middle market investment banker.

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08 May 2011, 07:03

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ispasovski

Can a CFA help you land a job in PE?

I'm working at a PE firm and took the 1st level of the CFA. I decided not to proceed because the CFA is so public equity-focused (i.e. stocks). It's really good if you want to become a portfolio manager. Not so much for PE, IMO.

The first level was somewhat relevant to what I do since there's a bunch of basic accounting and economics. I would guess only about 10% of the second and third levels of the CFA would be relevant to what I do at the PE firm. Private equity can be very transactional work, especially at the associate/analyst levels. A lot of days it's almost like being a lawyer or paralegal. Other days it's like being a mid-level manager. The analytics part requires a lot of Excel. And succeeding in the field in a more senior role requires a lot of contacts. I don't think the CFA helps with any of those things much.

Again, just my 2 cents and I only work at one firm. Other firms may be completely different. And don't take this as a knock on the CFA, I think it's a great cost-effective way to approach more stock-focused careers.

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08 May 2011, 17:42

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That was very helpful to know -- thank you. What certifications would you recommend for PE then? What kind of training etc would you think would be helpful?

opus88

ispasovski

Can a CFA help you land a job in PE?

opus88

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08 May 2011, 18:28

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abhattac5

That was very helpful to know -- thank you. What certifications would you recommend for PE then? What kind of training etc would you think would be helpful?

I don't know of any good certification outside of an MBA or law degree (the work is very transactional so there is a ton of legal work). A CFA couldn't hurt, I just don't know if it's worth the amount of time it takes if you know you want to do PE.

In terms of training, there's a reason a lot of investment bankers go into PE. The work is very similar. PE firms and I bankers are just playing different roles in a deal. Management consulting also provides relevant experience.

If you're asking about more specific skills, financial modeling in Excel comes to mind. I think a lot of the rest of the training you would require depends upon the firm or your role.

A lot will depend on your background. It's not a field that is typically looking for unconventional applicants with non-standard experience. If you're looking to break into the field, my advice would be to look on LinkedIn for people with similar profiles to you who are now in the field. Ask them how they ended up where they did.

And again, keep in mind, I'm just one guy at one firm. Hope this helps.

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