Published in · 4 min read · Oct 22, 2019
When it comes to finance, “private equity” is most likely among the top buzzwords you hear floating around. But, do you even know what the buzz is all about?
According to Investopedia, private equity (PE) is “equity — that is, shares representing ownership of or an interest in an entity — that is not publicly listed or traded”. PE is a source of capital for investment, and is sourced from high net worth individuals (HNIs) and firms that:
· Buy shares of private companies
· Acquire controlling stakes in public companies, with plans to delist them and take them private
PE seems to require a lot of money.
That’s right! PE is based on directly investing in a firm. This would imply that if you are looking to get any significant level of influence over the operations of a company, you need to put up a large amount of capital. It is no surprise that the industry is dominated by large PE firms with deep pockets. There is no standard rule when it comes to the minimum amount of capital to be put up — it could vary from as little (!) as $250,000 to as much as millions of dollars, depending on the firm and the fund.
What is a PE fund, then?
A PE fund is formed when the partners at a PE firm collect money from a group of investors and put it all together to form a fund. The investors can be:
o Large institutions: banks, insurance companies, pension funds, and others
o HNI investors
So why would I want to invest in a PE fund?
Returns, of course! What attracts someone to the idea of investing in a PE fund are the impressive returns. These typically are far ahead of what you could make from the stock market.
When it comes to a PE fund, there are two types of partners:
o Limited partners: these are the investors in the firm, and their liability is limited to the amounts they have invested
o General partners: these are the investment managers, and their liability is unlimited i.e. they are liable to meet the obligations of the firm with their personal assets if need be
Interesting. Are there different types of PE funds?
Of course — what would a (PE) market be without choice? The common types of PE funds are as below:
Buyout fund
o Typically picks up a controlling stake
o May provide strategic and operational support
o Could ultimately sell the company to another investor or could take it public
o Makes money by unlocking or adding value and selling off once the valuation is high.
Venture capital (VC) fund
o Invests in startups with high potential for growth
o Could help a startup with structuring operations
o Often faces long lock-in periods for investment with the possibility of complete failure
Growth fund
o Invests in companies with proven business models and high growth potential
o Makes money by growing the business to its full market potential and then selling off its share at a higher valuation
Is it a good place to work?
Certainly, if you are up for long hours, high pressure, and competing with the brightest and the best for a job. Once you are in, the opportunities for learning are practically limitless.
A PE firm is typically significantly smaller than an investment bank; correspondingly, the hierarchy is much flatter. As an entry-level Associate or an Analyst, your work could have you regularly interacting with the Vice Presidents and Partners in your firm. Seeing a deal through from the beginning to completion can be truly satisfying!
What are the day-to-day tasks I will be handling?
A lot! These would include:
o Provide the Principals and Partners with the analytics required for an informed decision about a deal
o Tasks include preparing preliminary due diligence reports and modeling with growth forecasts
Must maintain up-to-date financials.
A confidential information memorandum (CIM) is a document an investment bank uses for data about new investment opportunities. You will need to screen CIMs for potential opportunities provide simple summaries for the senior team.
Associates need to assist with preliminary fundraising when new funds are being formed.
What skills do I need?
To land a job as a PE professional, you would do well to be good with:
· Business analysis: you should be able to evaluate companies as potential investments, both technically and intuitively. You must also be abreast of market and economic trends
· Technical skills: you should be good with financial, leveraged buyout (LBO) and mergers & acquisitions (M&A) modeling, as well as general financial analysis
· People skills: PE is very much a team effort, so you would do well to successfully interact with professionals within and outside your firm by using your skills in communication, negotiation, and networking
Should I get a certification?
Certainly! A certification is a great way to add to your credentials. A good choice is the Chartered Private Equity Professional (CPEP) certification from the United States Private Equity Council, or USPEC. Suitable for graduating students in finance, accounts, and business, as well as professionals already in the PE space, CPEP brings you up to the level desired by top-tier PE and VC firms.
In summary…
PE is certainly a great career option, highly recommended if you want to work at the top levels of finance and are up for challenging, high-pressure assignments with high rewards. Pick up the right skills and you are all set!
