Exit opportunities can be confusing. You’re around 22 – 25 years old, have spent the last few years living and breathing IBD, and have probably had very little, if any, time to give some real thought into what you want to do next. If you’re anything like I was, you’re also growing more and more desperate to make a move, any move, out of banking. My initial motivations behind choosing to pursue private equity were (in all honesty) not too thought out either, but in retrospect, I genuinely cannot think of a better fitting role and career path for my background and personal interests. My reasons for staying in the industry 5+ years later can hopefully provide you with a helpful perspective in terms of whether or not private equity is the right next step for you.
So let’s start with the basics– what do you actually do as a private equity associate? As a member of the investment team, you will play an important role in analyzing perspective investment opportunities and taking a stance on if the team should allocate time and resources into further pursuing an acquisition, whether they should eventually submit an offer, and if so – at what valuation. People often think of the job as very modelling heavy, and while that may be true, in my opinion, it’s generally the least challenging and sometimes, one of the more mechanical aspects of the role.
The bulk of the heavy lifting actually comes into play on the commercial side. Sure, the numbers need to make sense – but you are ultimately projecting forward the business performance, and as anyone with sell-side experience will know, you can always force the numbers to “make sense.” In the PE world, you aren’t selling anything nor are you blindly using management estimates. In fact, you will learn to generally distrust sell-side and management numbers entirely.
You will build a 3-statement operating model which reflects your belief on how the business will look 5+ years from now. This requires a deep understanding of the macroeconomic environment, the market in which the target company operates in, the competitive dynamics surrounding your target, and the impact and likelihood of any potential growth opportunities or other changes in general business strategy. Developing a viewpoint on these factors can be complex, and will require extensive due diligence requiring you to first-hand see and use the product or service, work with management, understand and interpret the expert opinion of third-party advisors, and assess what model inputs to sensitize (and by how much) in down-side and risk scenarios.
The commercial perspective is personally my favorite part of private equity – and why I struggle to see myself pursuing a non-investing career path. Learning about the ins and outs of a number of often entirely different industries keeps things interesting for me. If you’re intellectually curious, private equity is a great opportunity to develop a breadth of deep knowledge and get exposure to different business models, strategies, and even geographies and people. I also love to ask questions and to think in contrarian ways. As an investor, you’re ultimately going to have to put your money where your mouth is, so thinking “outside the box” can be really helpful in terms of envisioning the impact of different scenarios on your target business. As an added bonus – this part of the job will often involve a lot of travel! Personally, I love breaking up the novelty of office life by travelling for site visits and management meetings – but again, this isn’t necessarily a plus for everyone.
With that said, modelling will be an important and significant part of your job. You will need to be comfortable building clean models with flexible inputs that can be altered as the team conducts diligence. Sometimes you will get more or less information than you had hoped for, meaning you may need to rebuild the methodology in which you use to build up to different revenue or cost items. And of course, you will eventually need to use your operating model to derive a viewpoint on valuation and on investment returns.
Outside of the commercial work, more senior associates and VPs are also responsible for negotiating legal documentation. While sometimes tedious, this is an extremely important part of an investment professional’s role. The advice and perspective of your lawyers will be heavily utilized, but nothing in PE is ever taken at face value. At the end of the day, your lawyers are not investing alongside you, and you are ultimately responsible for insuring strong fund performance for your LPs. What this means is that you will need to go through the legal documentation yourself and make judgement calls while utilizing the advice of your lawyers. Developing effective board control, strong legal protection, and aligned incentives with management and other stakeholders can make or break a potential transaction. While I initially found the legal front challenging to understand and complex to navigate, it’s turned out to be another part of the job that I now really enjoy. Legal negotiation can feel like a complex maze or a game of chess – it requires an ability to assess different potential scenarios and how those can impact one another and ultimately your ownership and return potential.
The last part of the job worth highlighting is the portfolio management side. This is what happens post-execution. Once the target company is acquired, the private equity firm will work alongside the management team to develop and execute business strategy. The level of investment team involvement here will very much depend on the fund you join – some are more hands-on operationally while others may have a separate portfolio management team that will step in at this point. Most of the day-to-day work will be the responsibility of management, but the investor will often be involved in more significant strategic decision making such as senior level hiring, new product launches, geographic expansion, or M&A activity. As a senior associate or VP, you will often have the opportunity to hold a observer seat on your portfolio company’s board. Partners will generally have actual board positions as well, something I find really exciting when thinking of my long-term career as an investor. The good news here is that if you want to be more operationally involved, you can target a PE fund which will allow you to get this sort of exposure. If you don’t find the operational side as interesting – there are plenty of funds where the investment team will be less involved on this end as well.