When you begin your journey towards private equity, it is extremely easy to quickly get lost along the way. Given the speed of the process, the late nights, and the general intensity, you tend to rush through a lot of things that are important because you feel a somewhat perpetual sense of urgency through the entire process. Don’t get me wrong, I am very happy where I am and how I ended up here, but I think that if I were to do the entire recruiting process over again, I would pay extremely close attention to the job descriptions that are shown to you by the headhunters and cross reference that to independent research or other quality resources like OfficeHours blog posts. While you are often going to be shown generic descriptions of the role like “modeling” and “financial analysis” these are pretty vague, catch-all terms that could realistically mean a lot of things in private equity. One essential element of the job that I never saw in the description but drives a large proportion of the work you do and the way you think in your role is how prevalent consulting tasks are.
Yes, I know, everyone likes to give consultants a hard time about how they are paid to give their opinion and make a market look as attractive as possible for their clients and to a degree, I still agree with this (a little). During my stint in private equity, I started to understand how large a role the skill sets consultants possess contribute to all parts of the private equity investment process, and I definitely think this is something that is overlooked when I was considering the industry. Of course, financial analysis and modeling will always be the bread and butter of any private equity associate role but everyone can model. It is a commoditized skill that generally won’t drive superior investment results. One thing that isn’t commoditized is the thought that goes behind the assumptions in your model. This is where I think the consultant skill set shines. What consultants lack in terms of financial skills and intuition they more than make up for in terms of understanding a market, sizing a market, and analyzing the competitive forces at play in a market.
When you are coming up with an investment thesis, you need to understand your market in extreme detail. Your understanding of a market, its growth rate, and its level of penetration will drive how you think about the various assumptions that go into your model and what kinds of returns you can predict. Before even considering how a market grows, you need to think deeply about how big the market of the company you are targeting is and consider the specific share of the market you could realistically target. You need to critically assess the potential universe of buyers of your product and service, what these buyers have as existing options, and how your service offers differentiation and how that differentiation will lead to modest or meaningful growth. Consultants deal with these issues every day during client projects and market research and so this transition is likely much easier for them, and a strong point for differentiating the way they consider investments.
Believe me when I say that this is an unnatural skill for most former investment bankers. In banking, our bread and butter is putting together pitch decks, finding statistics, helping build models, and crafting marketing materials. We are transaction-focused; we are the marketing and execution guys. We don’t have to think too deeply about the market our asset operates in, since realistically you are under the command of your MD who generally knows about the space and will likely have buyers and relationships lined up anyway.
In a fully-investment facing role, you need to think deeply about a company in a multitude of ways and if you are targeting growth-oriented companies, you will need to think about the market your target company operates in even more. In addition to the skills you picked up in banking to execute the deal, you need to be able to drive the process of understanding where a company sits in the market and how your perception of that company’s positioning makes it a positive or negative investment. In my opinion, this is a fundamental shift in the way you should be thinking about any asset, and it is something that I think very few bankers possess, aside from after they have prepared well for their private equity case studies and deal walk-throughs (even then it is not as refined as it needs to be to go through investment committee). This isn’t to say banking is bad, it is just that it helps you refine a very particular skill set needed in private equity, and a private equity role requires a breadth of knowledge and approach.
Another consulting-related item that I hardly thought about before moving to private equity was the fact that you often are designing surveys for customers and speaking to current and former customers about their experiences with the product in question. In the consulting world, this is very common to do when you are doing targeted research on a particular market and your client has a request to become better acquainted with the market landscape – however, from my experience, it bleeds over into the private equity world and navigating the process of creating good questions to ask these resources was harder than expected since your questions are not totally financially-related as they were in banking. It’s a small point but one I did not expect before coming in, nor have the experience to think about critically when beginning my role.
Listen, I think business intuition comes with time and practice, but I think market sizing and understanding a market is something that is taking me a lot longer to come to terms with than I ever thought before this job. I fully did not consider that it takes more than an economist or research article to get an idea of what makes a market. That being said, would I go back and become a consultant? No – that is just a personal opinion. I found that the financial modeling, marketing, and process skills were something that needed to be brute forced into my brain and something that I thought I lacked from the start, but if private equity is your goal, I thoroughly would reconsider whether or not market work and the associated diligence that comes with it is something you want to be focusing a large part of your time and energy on. I know it isn’t something that is always advertised, but I find it to be a crucial element of the job and one to really consider.
To wrap up, I am not saying that everyone should ditch banking and go to become a consultant. If you do, that is fine and you will certainly pick up some pertinent skills. However, from a very general and traditional viewpoint, going from banking to private equity is still a far more efficient way to break into the industry. This doesn’t mean it is impossible for consultants to break in, many do but they are often left to select shops that are a bit more open minded, which limits your scope of options.
I just think there is a lot more overlap in the type of work you do than I previously thought and would generally want to advise folks to consider this point prior to making the switch over; it makes up a lot of your work and thought process.
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