Transcription
Many in the business world consider Investment Banking to be a sexy industry, but most Investment Banking analysts and some Associates actually want to leave banking to go to an even sexier industry, which is private equity. Private Equity is one of the Holy Grail industries in the world of finance, and that's the topic of today's video.
And so, going into today's agenda, we'll first be going over what private equity is, then go over the top funds, explain the hierarchy in a PE firm, discuss day-to-day responsibilities, and lastly, go over compensation.
Jumping straight into it, let's first go into what private equity is. Private Equity Funds are investment vehicles that raise capital from limited partners, or LPs, like Pension funds and endowment funds. Private Equity firms use these funds to buy, restructure, and or grow businesses, which are known as portfolio companies, or portcos. While PE firms implement a variety of strategies, private Equity firms are most known for conducting a type of transaction called the leveraged buyout, or LBO. An LBO is similar to buying a house. When you buy a house, you put down a down payment and take on debt via a mortgage, and over time, you pay off the mortgage to build up equity and hope to also sell for a higher price than what you bought the house for. In an LBO, you're purchasing a company instead of a house, and just like a down payment, you're putting in some cash, which is known as your sponsor equity, and then you fund the rest of the acquisition with debt. You then improve the business's operations in order to pay off as much debt as possible and sell for the highest price you can, with the ultimate goal of selling the company for an annual return, or IRR, of 15 to 20 percent.
Now that you know what private equity is all about, let's next go into the top funds in the industry. At the very, very top are the five Mega funds: Apollo, Blackstone, Carlisle, KKR, and TPG. And these funds have over 100 billion dollars in assets under management, or AUM. Individual fund sizes ranging from 10 to 20 billion dollars on average offer LPs a wide variety of investment strategies and industries, and invest billions of dollars into the largest companies and assets. The next tier doesn't really have a name, but they're really large PE firms that are just a step below Mega funds, and they include the shops that you see here. And these firms have AUMs in the tens of billions of dollars. They raise individual funds comparable to Mega funds and often compete with Mega funds on deals, but these kind of shops more so specialize in a specific strategy, industry, or asset class. Next on the list are Middle Market private equity firms, which tend to work on deals that are typically anywhere from a few hundred million dollars to a billion dollars, and these firms have a much more niche strategy and or focus on a set number of industries.
Now, if you're interested in breaking into any of these firms because you want to go into private equity, you're definitely going to want to check out this newly announced certificate program for private equity investing offered by Wall Street Prep and Wharton, which is where I'm currently getting my MBA. This program is sponsored by top firms like Carlisle and KKR, and is one of the first of its kind in which a leading business institution, Wharton, is partnering with the top financial modeling trainer, Wall Street Prep, to create a theory meets practice program. Over eight weeks and at a recommended eight hours per week, you can learn at your own pace through this online course that's taught by Wharton professors, Wall Street Prep's PE program director, and real PE investors, including Martin Brand, the head of North America PE at Blackstone, and David Rubinstein, the founder of Carlisle. And all these instructors will cover topics like the PE deal process, valuation, how to think like a private equity professional, and more. You'll also receive lifelong resources and support, including a certificate from Wharton you can add to LinkedIn and resumes, and an exclusive professional network of alumni from the program. This program will run two times a year, with the first run running from May 1st to June 25th, 2023. And be sure to use my code rare liquid if you're interested in this program because you'll get hundreds of dollars off, and I'll leave a link to all of this down in my description below.
Alright, now next, let's go into hierarchy, which varies by fund, but we'll discuss the most common one. Private Equity firms hire analysts straight out of the top undergrad programs, but not all firms do this, and it's a pretty rare and coveted position. More commonly, PE investors are hired as Associates from Investment Banking backgrounds, but the more consultative PE funds like Bain Capital and PE operations teams will also hire from Consulting backgrounds, typically from McKinsey, Bain, and BCG. After typically two to three years as an Associate, the two common paths are either to pursue an MBA or continue at the firm as a Senior Associate. Both options take approximately two more years, and then you move on to Vice President and above. VP, we have Principal, Partner, and Co-founders, completing the general hierarchy of most funds.
Next up, let's go into your day-to-day responsibilities in private equity. As a PE investor, you have five main responsibilities. The first of which is evaluating new investments, which involves reviewing confidential information memorandums, or CIMs, to conduct business and financial due diligence. Second is financial modeling, especially at the analyst, associate, and senior associate levels, and modeling tends to decrease beyond the VP level, which is when you'll be reviewing the models and final presentations. Third is putting together an investment thesis that details your rationale for a potential deal, and this could be in a Word doc, memo, or PowerPoint presentation, backed by lots and lots of numbers from Excel models. Fourth is sourcing, which involves finding new potential investments, and this becomes increasingly more important as you become more senior at the firm because your job is to bring in deals. Last but not least is monitoring portfolio companies, or portcos. After making an investment, PE firms need to make sure that their portcos are on track with their growth plans, and you often collaborate with the operating team to execute on the changes to the business.
Alright, lastly, let's go into what many of you consider the most exciting topic, which is private equity compensation. Compensation varies a lot depending on the firm, but most commonly, components of pay include base salary, a cash bonus you earn once a year, co-invest, which is the option to invest your money at your firm's fund and earn returns, and carry, which is a percentage of the fund's returns you earn. And the more senior you get, the more carry becomes a larger portion of your compensation.
Going into actual figures, first off are analysts. And I won't go through all the figures for every level here because you can just pause the video, but it is important to note that the range depends a lot on the size of your firm, and comp ranges from 135k to 190k. Next up are first-year associates, which, as a reminder, is usually two years after banking, and the range depending on firm size is 150k to 300K. And while a good portion receive the option to co-invest, most don't receive any carry. Then, after a few years, when you become a senior associate, those without MBAs earn total base plus bonus comp of 200k to 335k, while those who join after an MBA earn anywhere from 260k to 480k, and some funds at this level give carry. Next up are vice presidents, who earn anywhere from 270k to 495k in base plus bonus, and this is where carry really starts to become more of a significant portion of compensation, but it's much too variable for me to comment on. This is because carry will depend on the fund size, fund life, and vesting period, and there are also several restrictions like distribution schedules and clawbacks if you leave your firm early. After the VP level, there's not a lot of data because it's so variable, but it's probably going to be close to at least the high hundreds of thousands, if not a million plus dollars a year.
Alright, so that concludes my overview of private equity. Let me know if you have any questions down in the comments below. Also, feel free to check out my Instagram and TikTok if you liked today's video and content and you want more shorter form versions of this type of stuff. And lastly, I wanted to give you guys a reminder: if you're interested in breaking into private equity, check out the new offering from Wall Street Prep and Wharton. Think it's a pretty cool program, first of its kind, really, and I'll leave links to all of that in the description below. Thank you all so much for watching. Hope to catch you all in the next video. Thanks so much, and peace out.
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