Private Equity – Career Path, Salary and Best MBA (2024)

The fundamental tenants of Private Equity – venture capital, growth capital, distressed assets, and leveraged buyouts can be traced back to the origins of capitalism, with Massachusetts Bay Company often quoted as the first example of a large-scale firm amassing capital to build railways lines. More formally, The Bessemer Trust had a structure like a PE firm during the 1910s. The founding of 3i in 1945 was the first formal establishment of a PE firm.

In this in-depth analysis of the Private Equity Industry, Career Paths, and Post-MBA Opportunities, we cover:

• Evolution of PE Firms
• How Private Equity Works
• Education, Temperament and Certificates for Private Equity Roles
• Roles and Responsibilities - Private Equity
• Best MBA for PE Career

Evolution of PE Firms

The need for PE firms began when the US economy was struggling in the 1890s. When the government couldn’t bankroll the Steel industry, JP Morgan established the U.S Steel in 1901 by merging Carnegie Steel, Federal Steel, and National Steel Company. The $1.4 billion capital raised to facilitate the merger could now be seen as the firm major PE deal, turning US Steel into the first billion-dollar company in the world. However, regulatory pressure drove JP Morgan & Co. out of the market, forcing it to choose the role of a depository bank over an investment bank.

First Venture Capital Fund

The concept of a PE firm remained dormant for four decades before the emergence of Venture Capital to fund microprocessors revived the need for growth capital. John Hay Whitney, the Founder of J.H. Whitney & Company, pioneered the concept of ‘Venture Capital’ by funding young entrepreneurs who didn’t pass the credit criteria set by Banks of the time. This novel concept has powered Google, Apple, Amazon, Intel, and Facebook - to name a few technology leaders that are thriving from the unique funding ecosystem.

First Leveraged Buyout

Although initially PE firms broadly managed Venture Capital, Malcom McLean – the pioneer in Containerization is credited with the first leveraged buyout (LBO) in 1955 when he navigated a regulatory restriction by selling his trucking company and acquired Pan-American Steamship and the Waterman Steamship companies with a carefully structured deal. The transaction leveraged the target company’s cash and assets to meet the debt incurred with the buyout. The deal set a playbook for LBO that continues to power the Private Equity industry.

Private Equity Industry and Post-Pandemic

The Private equity industry peaked in 2005 with a whopping 35% IRR (average annual return generated by an investment)) but soon, the financial crisis of 2008-09 followed. Ever since the IRR percentage has been fluctuating between 10-20% until the pandemic hit. Despite the lockdowns and shift in customer behavior, the Private equity industry picked up and posted a 9.4% growth in 2021, whereas the average year-on-year growth was only 4.3% from 2016 to 2021.

Deloitte forecasts global private equity assets under management (AUM) to reach US$5.8 trillion by 2025. Although deal values are on the rise, buyout returns have been trending downward over the past 30 years. These are signs of a maturing market. It is predicted that the bottom quartile of the firms will choose to exit, and the largest private equity firms will continue to grow.

North America, the largest private equity market, accounts for half the market, but Asia commands a lead in the global private equity market in terms of growth. The industry has faced its fair share of criticism for drying out company resources to meet buyout targets. However, PE firms’ strength lies in raising massive funds during crises. During the 2008 Financial crisis - global private equity groups could raise $2 trillion. The companies receiving the support of PE firms performed better than their counterparts during that period.

How Private Equity Works

Private Equity firms, also known as buyout firms, are known for their characteristic of buying out business, not by spending the entire amount but by dividing the control over assets between them and the original owners. Of the total capital required to acquire an asset, the portion other than what is invested comes from bank loans where the collateral would be the assets of the company up for acquisition.

A private equity firm is initiated by General Partners, who accumulate funds by seeking limited partners (high net-worth investors, institutional investors, or pension funds). The fund raised is then used to acquire companies, manage and expand the brand, and eventually sell them to generate profit.

Why Private?

"Private" equity goes by the name because the companies managed by private equity firms operate as private companies at the beginning or turn private as a result of the buyout transaction.

Role of the General Partner

The general partners diversify the total funds into different portfolio companies. The greatest barrier to entry for firms is the fundraising market. Usually, firms with an established set of general partners and track records find it much easier to attract repeat investment from limited partners and new investors. Historically, private equity firms’ returns have been higher than public companies. However, according to the Bain & Co report, the trend has converged, closing a three-decade gap in performance.

Return on Investment - Private Equity

The lifecycle of private equity firms to realize investments and return funds invested to their limited partners is 7-10 years. The initial 3-5 years were spent on fundraising and investing in value-adding changes in the firm as per the General Partner’s consensus. During this period, the lifecycle trend is denoted by the J-curve effect, when there are high fees and negative returns, but over time, as the investment capitalizes and if investments are successful, the tail-end shows an upward trend.

The private equity investors seek leverage buyouts as the investment turns profitable, foregoing control of management. In more advanced stages, companies can even have the management buyout the company.

Education, Temperament and Certificates for Private Equity Roles

Private equity requires high IQ and EQ, comparable to Investment Banking.

Financial modeling, analysis, critical thinking, risk assessment, and sales skills covering communication, negotiation, and active listening skills are in high demand. As with Investment Banking, roles in Private Equity do require long, tedious hours, multitasking, and working under pressure.

Education pre-requisites for Private Equity are not clearly defined, but due to the competitive nature of jobs and high payout ($120,000 to $200,000), a degree from a reputed university is non-negotiable.

Each PE firm has its specific requirements.

For example, an Analyst role at Carlyle Global Private Equity requires an undergraduate degree in Business. The candidate must also have a minimum of 2 years of experience working in Investment Banking, or Management Consulting, ideally with experience in Private Equity, Venture Capital, or Corporate Strategy.

An Associate Role at The Blackstone Group requires candidates with a graduate degree or CPA certificate and 4+ years of experience with the Big 4 and tax experience in Private Equity, Investment Partnership, or Fund-of-fund.

Education: Regardless of the specific demands, Undergraduate degrees in Finance, Business, Accounting, or Statistics are valuable to stand out.

Series 7 and Series 66: For the sales-oriented roles in private equity, a Series 7 and following that a Series 66 license, granted by the Financial Industry Regulatory Authority (FINRA) and the North American Securities Administrators Association (NASAA), respectively, are mandatory.

Chartered Private Equity Professional (CPEP): The United States Private Equity Council (USPEC) offers a Chartered Private Equity Professional (CPEP) certificate through 4 different tracks showcased in the table below. Only a handful of top US and Canadian schools - Harvard, Wharton, NYU Stern, Chicago Booth, McGill, University of Tennessee, and the University of A&M Texas provide the collaboration.

Roles and Responsibilities - Private Equity

The hierarchy of private equity roles depends on two factors - years of experience and responsibility.

Entry-Level: Entry-level pre-MBA Associate roles are designed for undergraduates who have previous strategy consulting (rare cases) or investment banking experience (higher probability of selection) for 1 or 2 years.

Generalist vs. Specialist (Entry Level): Candidates with knowledge and experience in business strategy, finance, and accounting have a higher chance of success. The current recruiting trend is to hire generalists over specialists in early roles to include a breadth of experience in management.

Analyst

The Private Equity Analyst is an entry-level role with a basic salary of $100,000 to $150,000 and limited incentives due to limited responsibility.

Responsibilities: The scope of the role is primarily financial modeling, research into the portfolio company profiles (not only potential investments but also whether investment should continue or should the firm exit), fundraising, and managing stakeholder relations.

Associate

The Private Equity Associate is the first post-MBA role for career switchers with a salary range of $150K to $300K

Responsibilities: An Associate is responsible for deal sourcing, due diligence, fundraising, and assessing the portfolio company’s performance.

Senior Associate

The Private Equity Senior Associate role requires several years of experience in private equity or an MBA from a top-tier school (possibly a returnee who’s been promoted) with a salary range of $250,000 to $400,000, depending on the firm size and performance. However, promotion opportunities are usually limited. For this reason, many Senior Associates switch firms, and some even switch industries.

Responsibilities: Same as the Associate, but a Senior Associate works closely with the VP and takes on more managerial responsibilities.

Vice President

The Vice President role requires 10-12 years of experience with a total salary range of $350,000 to $500,000, where nearly 50% are in bonuses. However, the duration with the firm matters much more than any of the previous roles and plays a factor in securing bonuses.

Responsibilities: At this level, there is a drastic shift in the profile. Soft skills are given higher precedence than technical know-how. As the Vice President, deal management, negotiation, presentation, and people skills are vital to the bread and butter of the private equity firm.

Director/Principal

Director or Principal-level roles typically require around 15 years of experience with a salary range of $500,000 to $800,000.

Responsibilities: As a Director, the person has limited involvement with the deal initiation phase. They are mostly involved when critical negotiations for deal sourcing and fundraising.

Managing Director or Partner

At the top of the pyramid, MDs/Partners are usually expected to invest their personal wealth into the fund. The remuneration is highly variable, from $700,000 to $2 million.

Responsibilities: Managing Director or Partner becomes the face of the firm at conferences, boosting the company’s brand, reviewing deals, and spend considerable time & effort in attracting Limited Partners.

Best MBA for PE Career

By Function: The best MBA for PE placements by function are Harvard, Wharton, and Chicago Booth, fetching the largest percentage of graduates hired. Stanford, representing 15% in Private Equity, is the leader with a record $190,000 median base salary. Other schools have combined private equity function with related finance functions (marked with *) such as venture capital.

Bonus: Columbia’s graduates acquired the highest median sign-on bonus of $70,000 for PE function.

By Industry: Harvard, Stanford, and Wharton are the top 3 leading business schools by the percentage of graduates hired in the Private Equity industry.
Stanford graduates acquired the highest median base salary, median sign-on bonus, and total salary of $225,000.

MBA Electives for Private Equity (Top Business Schools)

Stanford offers the largest variety of courses in private equity compared to Wharton, Harvard, and Columbia. Stanford’s courses also offer industry-specific knowledge of private equity in Healthcare and Biotechnology.

Columbia’s course, A Strategic Marketing Approach to Private Equity in Emerging Markets, offers students the opportunity to broaden their horizons of utilizing the best practices of the mature North American markets and contrast them to the fastest-growing private equity market, Asia.

Although most schools have student-managed funds catered to providing investment banking and asset management skills, Harvard is the only school to provide an experiential learning course in Private Equity.

Is a career in Private Equity Right for me?

If you want to find out (based on your career goals, funding options, personal preferences, and ROI goals) – subscribe to F1GMAT’s Career Planning Service.

You can initiate a conversation with me – Atul Jose (MBA Admissions Consultant/Author/Editor), by connecting through LinkedIn.

References

1. A Short History of Private Equity

2. Private Equity Market - Overeview

3. Public vs. Private Markets

4. Private Equity - Mid-Life Crisis

5. Lifecycle of Private Equity

6. Blackstone - Private Equity

7. Global Private Equity

8. TPG

9. Neuberger Berman Annual Report

10. EQT Group - Half-Year Report 2021

11. KKR - Investor Day Transcript (2021)

12. History of PE and LBO Business