eFinancialCareers

A sector to aspire to after a few years’ experience.

Private equity and venture funds exist to help raise money for companies by offering cash in return for an ownership stake. As a result, they become co-owners or even sole owners of the companies in which they invest.

In an ideal situation, they invest in an underperforming company, turn it around and sell their stake at a profit some years later. However, they also occasionally engage in the unpopular practice of asset stripping, or breaking a company up and selling its assets to make a profit.

The money invested by private equity funds is frequently used for management buy-outs (MBOs) where a company, or a division of a company, is bought by its managers. Alternatively, it may be used for a management buy-in (MBI), where managers from outside take over a company.

‘Venture capital’ and ‘private equity’ are often used interchangeably. But, strictly speaking, venture capital refers to the provision of funds for new and fast- developing businesses, while private equity is more usually associated with MBOs and MBIs.

Trends

Private equity is big business. Research by the magazine Private Equity International suggests the industry globally has raised US$551bn in capital over the past five years – with the biggest funds such as Carlyle Group, Kohlberg Kravis Roberts (KKR) and Goldman Sachs Principal Investments each raising more than US$30bn each.

And it’s getting even bigger. 2005 was out-gunned by 2006, as the value of all European private equity deals rose another 40% to €178bn, according to data provider Initiative Europe.

At the same time, deals are getting bigger and funds are getting larger. In 2006, the value of the average European buyout was €136m, up from €117m in 2005. And in April 2007, Goldman Sachs Principal Investments revealed it had raised the largest buyout fund ever – US$20bn.

The good times look set to continue, with private equity participating in some headline deals in 2007, such as US giant KKR’s US$450m investment in the Boots chain. However, success brought some unwanted attention, with bosses heavily criticised in the UK for paying too little tax and for taking a short-term approach to their investments in order to enrich themselves.

The credit crunch has also created uncertainty for the private equity industry, with many banks unable to sell on the loans they made to clients to help finance deals.

Key players

Major US funds such as Carlyle, KKR, Goldman Sachs Principal Investments (part of the bank) and Blackstone increasingly dominate the private equity industry in Europe. However, funds with European roots such as Apax Partners and Permira also made it onto the top ten in 2006.

Roles and career paths

People who work in private equity benefit from the kind of job security most investment bankers can only dream of. But don’t count on finding a job easily – the industry hires very few juniors and none straight from university.

There are two main entry points to private equity or venture capital. First, two to three years after university, having spent time in strategy consulting, investment banking (in other words M&A or leveraged finance), or accountancy (deal-based disciplines only).

Second, within two to three years of graduating with an MBA and having spent time in one of the industries mentioned above.

Occasionally there is a later entry point, when a fund needs a senior expert, for example an experienced industrialist to help shape the portfolio companies, or a specialist leveraged financier to help structure the best debt packages at the investment stage.

Venture capital funds typically hire people from high-tech industries, finance-related or consulting jobs. Entry-level staff are typically number crunchers who scrutinise the accounts of companies in which a fund is thinking of investing.

On the next rung are principals, who appraise whether a deal is worth pursuing and, if it is, do anything from arranging legal documentation to negotiating the right price. Originators are usually a fund’s partners who find new companies to invest in. They oversee the deals and make the most money if an investment is sold at a profit.

Pay

Private equity is a long game, but very lucrative. The most senior people make most of their money out of carried interest – or ‘carry’. This is equivalent to around 25% of the profits above a specified rate and can be very lucrative – particularly on very large funds, where a handful of partners and principals could easily share US$200m every six years or so when funds are closed. Pay at junior levels is, predictably, less generous, but still not to be sniffed at. A junior (analyst) can expect to make a salary of £45k to £55k, plus a 40% to 80% bonus.

Skills

To work in private equity, you’ll need to be an academic and professional wunderkind; ideally in the top 10% to 15% of your peers. And don’t think you’ll be able to walk-in fresh from graduation.

“Raw graduates don’t get into private equity, almost never. After university you need to spend time in accountancy, M&A, strategy consulting or leveraged finance, probably around two to three years. Then you can try to interview for private equity,” says Walker Hamill’s Guy Townsend.

Private equity firms look for people who are highly analytical, commercial, team players, confident, outgoing – and a foreign language never goes amiss.

Most junior hires come from investment banking or strategy consulting and former bankers need experience in one of three areas: corporate finance and mergers and acquisitions; financial sponsors (dealing with private equity firms); or leveraged finance (funding involving a higher proportion of debt than usual).