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Private Equity

Overview

In its broadest sense, private equity is an investment derived from a nonpublic entity, or private company. These investments differ from those in publicly traded companies that allow investors to purchase shares of stock. Private equity (PE) is much bigger; these investors don’t just invest in stock—they buy entire companies.

In modern private equity, a pool of capital is created from private investors, ranging from university endowments and pension funds to hedge funds, Wall Street investment banks, and high-net-worth individuals. The managers of these private equity pools, or funds, then put that capital to work, generally by purchasing private or public companies, “fixing” them so they generate more revenue, cash, and earnings, and then “flipping” them by selling the improved company to another buyer or taking it public on the equity markets.

Private-equity firms invested $644 billion in U.S.-based companies in 2016, according to the American Investment Council. That year, the top 10 states in terms of investment were Texas, California, Massachusetts, Florida, New York, Pennsylvania, Illinois, Georgia, Ohio, and Colorado. 

Private equity investments aren’t just about buying and selling companies, however. Many private equity firms invest in debt, helping a company salvage itself by loaning it money in exchange for an equity position or another form of return. Some private equity firms target funds at startup companies—these are called venture capital firms, though a diversified private equity management company will often include venture capital activity alongside acquisitions and debt purchases. Venture capital investments are often made in exchange for equity in the private company that the firm hopes will turn into big profits should the startup go public or get sold.

The majority of private equity firms are headquartered in the United States, but opportunities are found throughout the world (especially in Europe). Approximately 4,590 private equity firms have headquarters in the United States. Eight of the top 10 firms in terms of fundraising totals are located in the U.S., according to Private Equity International, a global news service that focuses on the PE industry.

Since the early 2000s, private equity funds have grown tremendously. In June 2017, private equity firms worldwide managed $2.83 trillion in assets, according to The 2018 Preqin Global Private Equity & Venture Capital Report, up from “only” $716 billion in managed assets in December 2000.

Naturally, when dealing with billions of dollars and major corporations, private equity firms need a wide variety of talented employees. And that’s where you’ll come in. Private equity firms employ some of the most experienced talent in corporate America, and their personnel needs are as broad as they are deep. Whether you’re fresh out of undergrad or a seasoned corporate veteran, chances are you can find a home with private equity firms. And in doing so, you’ll have a hand in making billions for your investors while guiding large corporations, and the thousands of people they employ, through major changes and improvements. General partners (which are often the owners of the firm), researchers, and analysts are the major players in this industry, but firms also need sales, legal, compliance, marketing, investor relations, and office support workers. Those with bachelor’s degrees can qualify for administrative support and other entry-level jobs at private equity firms, but top-level PE careers require an MBA. The industry is also seeking workers with degrees in law and accounting, as well as in engineering and science-related fields. 

Uppers
  • Excellent pay. In 2014, private equity professionals with an MBA received average earnings (base pay plus bonus) of $296,155, according to the 2015 Private Equity and Venture Capital Compensation Report. Those without MBAs received $264,464. But keep in mind that most new hires don’t make that much money. You’ll start in the $100,000 to $120,000 range—which is no small potatoes.
  • Strong employment outlook. Job opportunities for financial analysts who work for securities, commodities, and other financial investment and related firms are expected to grow by nearly 37 percent from 2012 to 2022, according to the U.S. Department of Labor, or much faster than the average for all careers.
  • Opportunities for experience. If you work at a “generalist fund,” you’ll get the chance to learn about a wide variety of industries—from pharmaceuticals and Information Technology, to oil exploration, consumer goods, and air transportation. You can continue to be a generalist throughout your career or develop specialized knowledge of a particular industry that will increase your marketability with specialty PE firms or hedge funds and investment banks.
  • Opportunities to transform a company. If you work in a high-level position, you’ll get the chance to use your expertise to improve a company and make it a more attractive candidate for an IPO or a sale.
  • Stimulating work environment. You’ll be close to the action as your firm makes deals and buys and sells companies. Your colleagues will be well educated and creative, and each PE project provides a different set of challenges that you must overcome.
Downers
  • Tough to break into the industry. It’s hard to land an entry-level job unless you attended a top-tier college or have related experience in the hedge fund or investment banking industries. Many top firms require applicants to have an MBA (or be pursuing an MBA).
  • Occasionally repetitive job duties. Private equity firms are often small, so you may find yourself taking on the same responsibilities over and over again. Yes, they’re responsibilities worth millions, but they can also be monotonous.
  • Limited opportunities for advancement at small firms. The guys sitting at the very top of the firm aren’t going anywhere—their names are figuratively, if not literally, on the door of the company. So your chances of advancing at your firm may be low—but you can always start your own firm or move into a career in the investment banking or hedge fund industry.
  • Sometimes-stressful work environment. The breakneck pace and crisis management required of many private equity employees may wear thin. Even the most jaded Wall Street operator will cop to wanting to spend more time with his or her family after a while.
  • Not much diversity. Women hold only 11.7 percent of senior-level positions in private equity firms as of March 15, 2015, according to Preqin (an alternative investment research firm)—a percentage that’s significantly lower than their representation in the overall U.S. population. Ethnic minorities are also vastly underrepresented in the PE industry.    
  • Negative view of the industry by the public. Get ready to take some heat from your friends and family. Critics of private equity firms believe that PE firms are bad for companies and employees in the long run—causing massive job losses. The Private Equity Growth Capital Council counters that “the direct investments made by private equity firms have a multiplier effect as the companies in which they invest hire workers, invest in research and development, and pursue new innovations and products. In short, private equity investment drives significant economic activity and growth.”