What Is Private Equity
Private equity is a type of private capital investment which is concerned mainly with ownership capital or shares that are not publicly listed or traded. It is usually established through private equity firms and often times has to do with the buyout of or investment in companies.
Today, private equity firms are some of the most powerful and influential players in the finance industry and many investors are clamoring for private equity investment opportunities.
Investors create private equity by raising capital from other investors and then using that money to invest in private companies.
That capital is put to a variety of uses ranging from straightening out balance sheets to mergers and acquisitions, research and development, and for use in special projects like the development of a new product or service.
One of the main uses of private equity is buying out companies that are struggling financially and then either helping them turn things around with financial and managerial restructuring or partitioning them off and selling them for a profit.
This is called equity investment management.
Pension funds, government organizations and private companies all invest in private equity.
But only when they have access to a large amount of capital because, typically, minimum investments in private equity range from the mid $200,000 to several million dollars.
As a result, most of those involved in private equity are either accredited and or institutional investors.
From Seed To Maturity
New companies need funds for different purposes at different times. Venture capital firms may fund various needs or concentrate on specific stages. The seed stage, often a ventures initial funding, provides money for product development, developing a business plan or conducting market research. The seed investment is generally relatively small.
The next stage, known as early-stage investing, focuses on companies in development. The operation possesses a feasible product or service, and this larger amount of money is intended for starting up the business. When venture capitalists invest money, each investment is designated as a letter series, starting with Series or Round A and progressing to the next letter with the following investment.
Late-stage venture capital investment involves maturing companies with a track record of growth and revenue generation, even if they do not yet prove profitable.
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Disciplined Due Diligence
Our investment approach is based on a disciplined due diligence process that measures risk while identifying the catalysts for increased value. We engage only in friendly transactions and work with talented management teams to achieve positive results.
When we partner with a business, we focus on building it to last. Our staying power, drawn from the scale and breadth of the platform weve grown over 35 years, helps our companies withstand market cycles and succeed for the long term.
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Investment Banking Vs Private Equity: Lifestyle
People also like to argue that the lifestyle in private equity is better, meaning that you work less than investment banking hours.
Therefore, you get more of a social life, and you can make plans and take weekend trips.
If you look at the average PE firm, this is true: you wont be at the office as much as in investment banking, where 70-80+ hours per week are still the norm.
That said, it is not the case at the mega-funds , where hours can be even worse than in banking.
Also, regardless of the firm size, if youre working on a deal thats nearing its final stages, expect late-night and weekend scrambles and just as much stress as in IB deals.
The main advantage of private equity is that you dontpitch for deals in the same way, which means you dont waste time and effort creating pitch books and revising them 578 times.
Finally, keep in mind that better hours doesnt mean a 40-hour workweek it just means, for example, 55-65 work hours per week rather than 70-80.
Investment Banking Giants And Boutiques
Goldman Sachs, one of the worlds largest investment banks, notes its work on any given day may involve refinancing an outstanding bond, creating a subsidiarys initial public offering or advising a company on a cross-border merger. Goldman Sachs notes its investment bankers help clients solve critical strategic and financial challenges.
Along with investment banking giants such as Goldman Sachs, JP Morgan, Citigroup, Morgan Stanley, Credit Suisse, Deutsche Bank and others are the smaller, boutique investment banks. These boutique banks concentrate in one area of investment banking and generally work with mid-size firms, leaving huge companies to the industry behemoths. Well-known boutique investment banks include Lazard and Blackstone.
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Private Equity And Institutional Investors
Many private equity funds depend on institutional investors for their capital. Such institutional investors may include the pension funds of public-sector employees, nonprofit and university endowments, government-owned investment funds and funds contributed to by high net-worth individuals. Private equity funds often deliver superior investment performance, drawing these institutional investors.
Private equity funds might own a company and work with management for periods ranging from three to seven years. At that point, the fund decides on an exit strategy, which is either taking the company public or selling it privately for more money than was invested. The sale profits go to the fund investors.
Although private equity funds deal only with private companies, the companies in question may not start out that way. Private equity firms may obtain control over a publicly traded company and then delist it from stock exchanges. Private equity investors look for underperforming companies they can turn around. Businesses under the control of private equity funds are known as portfolio companies.
What Do Investment Banks Do
There can sometimes be confusion between an investment bank and the investment banking division of a bank. Full-service investment banks offer a wide range of services that include underwriting, M& A, sales and trading, equity research, asset management, commercial banking, and retail banking. The investment banking divisionIBD – Investment Banking DivisionIBD is an acronym for the Investment Banking Division within the overall investment bank. IBD o carry out capital raising of a bank provides only the underwriting and M& A advisory services.
Full-service banks offer the following services:
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Types Of Private Equity Strategies
Private equity firms use different strategies to invest in a company, as long as it has the potential of returning profit. A private equity investment can be in the form of a buyout, growth equity, or venture capital.In this section, youll get a brief analysis of these types of private equity investment strategies, how they differ, and how they relate to the overall goal of a private equity company.
Most private equity investments are buyouts, as they give the firm the most control over their investment. As the name suggests, a buyout occurs when a private equity firm buys a majority stake in a public company to delist them from stock exchanges, effectively taking them private.
There are two major types of buyouts: leveraged and management buyouts. In a typical leveraged buyout, some of the acquired company assets become part of the investment capital. If the company makes profits in the future, part of the profits will be used to service the loan.
Management buyouts, on the other hand, dont use the assets of the acquired company. Current stakeholders can cash in on their shares from the revenue generated for the acquisition, making for a complete takeover of the company.
Leveraged buyouts are less risky to the private equity investors but are generally disliked by stakeholders in the acquired company for obvious reasons.The private equity firm can make business-oriented changes after the buyout to ensure the profitability of its investment.
- Venture Capital
Why Work In Private Equity
If you got the Why private equity? question in an interview, youd probably say that you love investing and operations, and you want to build value for companies over the long term.
But in real life, most people are drawn to private equity because it offers high salaries and compensation, somewhat better hours than investment banking, and more interesting work.
Some people also enjoy the excitement of working on large deals and interacting with the best and brightest, as well as understanding company operations in more depth.
Unlike investment banking, exit opportunities are not a major reason to go into private equity because PE itself is viewed as an exit opportunity.
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Elite Boutique Investment Banks Vs Top Private Equity Firms
The peculiarity with elite boutique investment banks is that they are very comfortable at giving raise as they try to get the best and retain their brightest.
So, does the Apollo pay better? Certainly. But, when compared to an elite boutique the compensation package of an Associate at Moelis may very well be higher than one at Apollo.
Understanding The Private Equity Due Diligence
Before deciding to invest in or buy a privately held company, there is an extensive private equity investment due diligence checklist to go through.
Here are some of the categories that need to be researched:
- âIntellectual Property: copyright, trademark, patents, and trade secret documentsâ
- Contracts and Agreements: copies of renewable supply/services, mortgages, joint venture projects, marketing projects, professional providers, retirement pension plans, and lease agreementsâ
- Corporate Documents: corporate by-laws, minute books, treasury shares, dividends plans, and stock books and ledgersâ
- Employee Benefits: copies of safety and hazards reports, non-government regulatory agencies, licenses, permits, and material safety data sheetsâ
- Financial Information: copies of current large contracts, projected financial information, sales reports, and yearly financial statements and more.
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Connected To Secure Maximum Value For Private Equity
As a leading provider of investment banking advisory services for private equity, we remain extremely active in the market, spotting trends and identifying opportunities that will benefit our clients. We are part of the fabric of the industries we serve, and we develop deep relationships to understand investment strategies and focus. Our bankers form a close-knit team that works together seamlessly, sharing information, relationships, perspectives and ideas across groups and regions to seek maximum return on our clients investments.
Why Not Hedge Funds
This is a pretty common follow-up question. Its actually pretty easy to answer. You should use the differences between private equity and hedge fund investors to frame your response.
Private equity investors control their portfolio companies. Hedge funds dont. So you can be an active investor that actually add value to portfolio companies rather than a passive one.
Private equity investors work with portfolio companies over the long-run, often 5-8 years. Hedge funds investments can be as short as a few weeks. So private equity teaches you the art of long-term view. Private equity also gives you the ability to work closely with the company over an extended period of time.
Private equity investors can conduct in-depth diligence on the company with private information. The company usually opens its books and let the investors evaluate all aspects of its operations. Hedge funds investors, on the other hand, can only do their research based on public information. So you can say that you want to work in private equity instead of hedge fund because youll be able to understand the companies you invest in much better than public investors.
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A Simple Private Equity Example
Heres a simple Private Equity for Dummies example
Imagine that you and your friends went to all your contacts, asked for money, and then decided to become home flippers by buying homes, fixing them up, and selling them at higher prices.
You keep some of the profits for yourselves in exchange for operating the business, but you give the majority back to your contacts for providing the bulk of the required money.
Thats what private equity firms do, but on a much larger scale and for companies rather than houses and with the backing of institutional investors rather than friends and family.
The job is part fundraising, part operational management, and part investing.
Why Not Fund Of Funds
This is a rare follow-up but easy to tackle.
Fund of funds usually invest in private equity funds but they can sometimes also co-invest with private equity firms in LBO deals. What this means is that they will invest alongside the private equity firm when theyre doing a buyout. A portion of the equity check that will finance the buyout will come from the fund of funds.
So the interviewer is asking why not go to a fund of fund, where youll also be able to invest in companies. You learn to analyze not only traditional companies, but also private equity firms as well.
But the catch here is that evaluating corporate opportunities is not their specialty.
How it works in practice is that the private equity firm will lead the deal process. Theyll be the one that coordinate all the due diligence work streams, arranging debt financing with the banks, etc. They are at the frontline of the work and pass their diligence findings to the fund of funds. Its rare to see a fund of fund lead a private equity deal.
So there are a few things you can say.
First, you can say that youre more interested in investing in corporations rather than funds. So you want to spend most of your time analyzing companies instead of private equity funds.
Second, you can say that you want to work in private equity because youll gain much more exposure to the deal process. Youll learn significantly more by being at the frontline of the due diligence work.
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Private Equity Interview Questions Financial Modeling Case Studies
As part of the interview process, you may be asked to complete a case study, either in the office or at home, after the interview. Be prepared to do it right then as part of the interview. If the interviewer says they want you to do it as a take-home assignment, look the case over carefully and ask any questions you need to in order to make sure you understand it all properly,
Case studies are a great way for PE firms to quickly get a full picture of your financial modeling skillsFinancial Modeling SkillsLearn the 10 most important financial modeling skills and what’s required to be good at financial modeling in Excel. Most important skills: accounting and valuation skills. Its one thing to be able to talk about modeling and another thing to actually have best practices when it comes to building models in Excel.
Examples of case studies include the following:
- Finish a partially completed LBO model
- Build a full model from scratch
- Assess a deal in a completed model
The best way to prepare for case studies is by ensuring you have extremely strong financial modeling skills and brushing up with Financial Modeling Courses if necessary.
Do You Move To Pe Because Work Hours Are Better
In most cases, all my friends have better hours. The exception is my 1-2 colleagues who went to the mega shops. I would say the mega shop colleagues actually have worse hours than IB! Let me be clear by what “better” means though. This forum tends to have a misconception of the “better hours” theme. I still work hard. It’s a job in high finance. I believe the better hours really are a result of more autonomy and my work not being client driven. I have more control over the timing so I can manage life better. No more of the surprise 8pm deck that needs to get done for a client by tomorrow afternoon to discuss the mega deal that will never happen.
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Why Not Venture Capital
Both PE & VC invest in the equity of private companies, but with some major differences. Similar to the way you would answer why not hedge funds, you should frame your response based on these differences.
Private equity invests in established businesses with a proven track record. Whereas VCs invest in early-stage companies. So youll be working with companies that are in completely different stages of their lifecycle.
Because venture capital invests in early-stage companies, these investments have higher chances of failure. Venture capitals investment style is to invest in a whole bunch of companies with a small equity check. Many will fail, but all they need is one company to be a home-run, and that one successful investment will carry the fund. So you can argue thats not the type of investment style that you want to develop.
Private equity firms often acquire the entire enterprise. Venture capital firms acquires only a portion of the equity ownership. So you have more control in private equity and can be more involved with the operations of your portfolio companies.
Private equity investments usually involve debt financing. Debt financing often make up over 50% of the total funding sources. Venture capital investments are usually all equity. So youll gain exposure to both credit and equity. As a private equity investor, youll learn much more about credit than you will in venture capital.
Bottom Line: What To Choose
Inevitably, someone will ask for a bottom line which industry is better? Unfortunately, Its not possible to say in absolute terms whether investment banking or private equity is the better profession. It depends on the type of work that you ultimately want to do and the lifestyle/culture and compensation that you desire.
You can go into private equity if:
- You want to work on long-term investments, and you like structure, process, and relationship-building.
- You love building value for companies
- Youre analytical, but you dont like math enough to be a quant, and you want a variety of day-to-day work.
- You are on the risk-averse side
You can opt for hedge funds if:
- You are extremely passionate about the public markets and investing, and you want to spend the bulk of your time coming up with ideas and making investments.
- You have a math, engineering, or computer science background, and you want to use it in a technical role.
- You like regular, predictable hours and a consistent location with less frequent travel.
- You dont mind the random/unpredictable advancement process, and you can tolerate significant uncertainty.
- Youre very certain that you want a long-term career in investing, and you have no interest in joining a normal company or doing something outside of finance.
- You like playing with market volatility
Join investment bank if:
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