eFinancialCareers

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

Private equity funds are funds that invest in the equity (ie, shares) of companies that are not listed on stock exchanges. There are two broad categories of private equity investors: venture capital funds and buyout funds.

Venture capital funds typically invest in one of three industry sectors: IT, telecommunications, and life sciences. Unlike buyout funds, which usually invest only once, venture capitalist funds will typically participate in different rounds of financing. For example, ‘seed investors’ invest at the start of a company’s life, whereas ‘late stage’ investors invest shortly before a company floats on the stock market.

Unlike venture funds, buyout funds almost always put their money into established businesses. They also use debt to finance some of the transaction, invest more money than venture capitalists, and usually have control of the company they’re investing in – whereas a venture capitalist will only own a part share.

There are several types of buyout transaction. These include:
• MBO – Management buyout. This is when the team of executives who are already managing a particular company decide to buy it from the current owners.
• MBI – Management buy-in. This is when a team of managers from another company buys a rival from the same sector.
• LBO – Leveraged buyout. All buyouts are leveraged (ie, they involve debt). Leveraged buyouts are simply distinguished by the fact that they are initiated by buyout firms themselves – or by companies who are trying to sell a division – rather than by teams of managers. Buyout funds typically use a company’s assets as collateral for loans to finance the deal. This means that companies that already have high levels of debt are usually unattractive to private equity investors and won’t be buyout targets.

Once a buyout fund has acquired a company, it may then borrow additional large sums secured against the company’s assets and use some of that money to pay itself a dividend before it sells the company to a trade buyer or floats it on a stock exchange.

While private equity funds pride themselves on their ability to turn around struggling companies and sell them at a profit, detractors of private equity argue that the industry has a damaging effect on the companies it comes into contact with. In some cases, for example, companies previously owned by private equity investors have been left struggling to service high levels of debt.

Buyout funds also have a bad reputation for ‘asset stripping’ – namely buying a company and selling off its assets or individual operating units at a profit.

Key players

The private equity market is dominated by the big American funds, such as the Carlyle Group and Kohlberg Kravis Roberts.

This said, funds with European roots, such as the UK’s Permira, CVC Capital Partners and Apax Partners, made it into the top 10 of global firms in 2007, while firms such as Stockholm’s EQT Partners and Paris-based PAI Partners made it into the top 50.

Top five global private equity firms 2007
Capital raised over past five years
Carlyle Group: $32.5bn
Kohlberg Kravis Roberts: $31.1bn
Goldman Sachs: Principal Investment Area $31.0bn
Blackstone Group: $28.4bn
Texas Paciic Group: $23.5bn
Source: Private Equity Intelligence

Roles and career paths

There are two main entry points to a career in private equity or venture capital: two to three years after university, after spending time in strategy consulting, investment banking (in other words M&A or leveraged finance) or accounting; or, after an MBA. It’s impossible to get into private equity straight out of university: 3i says it only hires people with three to five years’ experience.

Private equity professionals start out as number crunchers, scrutinising the accounts of companies a fund is thinking of investing in. Thereafter, they become principals – appraising whether a deal is worth pursuing and arranging all the legal affairs if it goes ahead. At the top of the hierarchy are the originators, usually the fund’s partners, who sniff out deals for the fund to work on and oversee everything.

Pay

Senior private equity professionals make most of their money out of carried interest – or 'carry'. This is equivalent to around 25% of a fund’s profits above a specified amount and can be very lucrative. A handful of partners and principals could easily share $200m every six years or so when large funds are closed.

A junior (analyst) in a private equity fund can expect to make a salary of £36k-£50k, with a bonus of anywhere between 40% and 80%. In continental Europe, an associate with a minimum of five years’ experience can earn €60k-€80k, with a bonus of around €30k, says recruitment firm Robert Walters.

Skills

If you want to work in private equity or venture capital, you’ll need to be in the top 10-15% of your academic and professional peer group. You’ll also need to be numerate, entrepreneurial and have good ‘soft skills’, such as an ability to negotiate.

“Firms look for the brightest, most energetic people,” says Timothy Mahapatra, head of European private equity at Deloitte & Touche LLP. “You will be stretched to the limit both intellectually and in terms of your propensity to work.”

Heather Kleeman, staff director at Cinven, says you’ll need to be a leader with attention to detail. “We look for people who can lead the decision process as well as execute it,” she explains.

Click here to read the profile of an MD in private equity.

Click here to find out about global trends in the private equity sector.