PRIVATE EQUITY / VC OVERVIEW
Private equity is one of the highest profile sectors in the financial markets and has a significant impact on the economy. Only 25 short years ago, however, private equity was little more than a niche player making modest moves amongst the giants of Wall Street. Private equity has since grown into a major global sector with $686 billion invested at its peak in late 2007.
In ideal circumstances, private equity funds will invest in companies who are under-performing by taking over management, aiding in the development of new products or technologies, and/or strengthening its capital base. Once this is done, the fund will attempt to 'turn them around' and sell their stake at a large margin for profit at a later time, usually in the public markets. In some situations, the funds will do what is known as 'asset stripping' where they will break up a company for its assets and sell them separately in order to make a p ...More »
Positions in private equity typically fall under one of four categories: number crunching, appraising and executing deals, originating deals, and in support roles such as marketing, human resources, and finance 7.
Those who go down the 'number crunching' road are often employed through a two-year contract and function to analyze and potential accounts of the companies which their employer is looking to invest in, and build complex financial models. These models are then used to calculate the worth of the companies being considered and, in some case, assist in the forecasting and transaction modeling 7. Often times, these Analysts work with the Lawyers to undertake the due diligence that will allow deals to work properly 7. Once these Analysts have done their part, the models are now analyzed by others, usually with more experience, who will make decisions regarding the worth of the company and the advantages and disadvantages in investing in ...
STRATEGIES IN PRIVATE EQUITY
In an ideal circumstances, private equity funds will make money by investing in companies who are under performing, attempt to 'turn them around', and sell their stake at a large margin for profit at a later time, usually in the public markets 1. In some situations, the funds will do what is known as 'asset stripping' where they will break up a company for its assets and sell them separately in order to make a profit on them 1.
In order to move forward without as much credit from the large banks since the credit crunch starting in 2007, many companies are now trying to put a higher percentage of their own money into deals or even trying to buy smaller components of public companies rather than purchasing the entire organization 1.
Generally, the private equity industry utilizes one of four different types of strategies: Venture Capital, Leveraged Buyout, Mezzanine, and Secondaries/Funds of Funds investors.
Often times, priva ...
1) http://www.efinancialcareers.com/ (careers in financial markets 2008-09)
2) https://www.glocap.com/publications.jsp: Zoia, A. & Finkel, A.; " Getting a Job in Hedge Funds: An Inside Look at How Funds Hire"
3) University of Michigan "Office of Career Development Career Path: Investment Banking/ Private Wealth Management/Research/ Sales and Trading/ Financial Derivatives and Risk Management: Steps for Developing a Career in Securities; 4/13/2005 (Found on 7/18/2009)
11) Bierman, Harold (2003); Private Equity: Transforming public stock to create value; John Wiley & Sons.
Most private equity funds are not large in terms of the number of employees. Most funds employ no more than 30 people on staff. However, total profits, even in "smaller" firms, can be make in excess of $1.5 billion. Most of the employees (the Principles, Originators, and even the Appraisers and Executors) tend to share in the profit and carried interest, although the more junior number crunchers usually need to work their way up the ranks in order to bring home the large compensation packages 7.
Compensation in the private equity arena is extremely competitive and rewarding. Private equity companies do not employ even a fraction of the number of employees some large investment banks do, and those who do gain entrance earn astonishing amounts of money 1. According to one article noted in The Wall Street Journal prior to the sub-prime mortgage crisis, of the 11% of students who were accepted from a Harvard MBA program into a private equity company, they earned median base salaries of $125,000 with a median bonus of $77,500 in their first year 5. Although many factors will influence median salaries, including company size, experience levels, education, and geographical area, some general trends have been found for various positions in private equity. At the senior level, private equity professionals can make a large salary. According to salary.com, the median total reward for a professional who is a tier 1 private equity professional is $105,105 and a tier 3 private equity takes home a median of $204,143. One article examined the salaries for Analysts in the private equity arena within some of the major employers, revealing average salaries for first year associates ranging from $86k - $172 and an average of $98k to $256k for third year analysts6.
Private equity companies tend to hire MBA candidates for most positions 2. This being said, there are many situations where candidates are brought into private equity from the investment banking sector and, at times, consulting training programs, but there is often an expectation for those candidates to work toward their MBA at that point 2. This is known as the pre-MBA hiring program where private equity firms often hand select qualified candidates for these programs by seeking out those who are just completing two year programs from some of the larger investment banks 2. This career path is extremely competitive and really only available for the highest achievers in those programs. Interestingly enough, more hires are made this way than they are for candidates who have already completed all of their schooling. Still, many candidates decide to pursue the MBA prior to working in the field. Those who are successful in this category have often shaped the ...More »