Careers in Finance: What you need to know about Private Equity
What is Private Equity?
Private equity is an alternative investment class and it consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be used to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet. Different strategies are used by Private equity firms to handle investments in different entities and they involve Venture capital, Growth capital, Mezzanine financing, Leveraged buyouts and Distressed financing. These strategies allows for clear and organized investments into various portfolio companies with different financing needs which is advantageous to the P.E firm as it sees that funds are allocated judiciously.
Private equity investment comes primarily from institutional investors and accredited investors, who can dedicate substantial sums of money for extended time periods. In most cases, considerably long holding periods are often required for private equity investments in order to ensure a turnaround for distressed companies or to enable liquidity events such as an initial public offering (IPO) or a sale to a public company.
What does a private Equity professional do?
At the basic level, the Private Equity Analyst or P.E Analyst is a person who does research and analysis of private companies. Financial modeling techniques are used by the analyst to determine the merits and demerits of investing in the stock of private companies. They perform due diligence, financial modeling and valuation of the companies where investors are willing to invest.
Private Equity Job Description
The private equity analyst provides analytical and asset valuation support for the company’s Private Equity and Trading groups. The analyst provides input for strategic development and acquisition opportunities within the specific industry. He/she develops and implements specific hedging strategies for various regions to maximize profits and minimize price volatility. A detailed review of the financial statements of the company under consideration is undertaken by the PE analyst.
The main objective is to determine whether an investment by the private equity firm in the company would further the investment intentions of the firm or not. Effective management of industry-specific trading activities to ensure compliance with the company’s financial, risk, and strategic objectives are part of the job description too. The private equity analyst has the function to review and process potential new private equity investment opportunities.
The analyst conducts in-depth research, monitors portfolios, reports development and monitors business growth. Further, if the intention of the private equity firm is to change the capital structure of the company through its investment, then the work of the analyst involves assuming a set of financial variables and preparing financial scenarios.
The Private Equity Career Path
The private equity career path and hierarchy vary from firm to firm, but here’s a representative example:
- Analyst
- Associate
- Senior Associate
- Vice President — Manager of Deals.
- Director or Principal — Generator and Negotiator of Deals.
- Managing Director or Partner — Fundraiser and Chief Representative.
Private Equity Analyst
Private Equity Analysts are most times hired directly out of undergrad with/without previous full-time experience.
They work on the same types of tasks as Associates: deal sourcing, reviewing potential investments, monitoring portfolio companies, and fundraising, but they complete fewer projects independently from start to finish. For instance, an Associate working on a deal might build the entire financial model and coordinate the due diligence process, including speaking with lawyers, auditors, consultants, and other parties to get answers. But an Analyst on the same deal might help only with specific tasks such as setting up conference calls, sifting through data, and assisting the Associate with certain research or documents.
Private Equity Associate
Private Equity Associates must be able to lead deal processes from start to finish without step-by-step instructions. They spend their time on sourcing — generating new deal ideas — as well as financial modeling and due diligence for active deals, portfolio company monitoring, and even some fundraising. The P.E Associate role is an evolution of the Investment Banking Analyst role, so you still spend a lot of time in Excel, PowerPoint, and data rooms — but you have more responsibility and must act more independently in those tasks.
Private Equity Senior Associate
“Senior Associate” and “Associate” are nearly the same. The work is not much different, but Senior Associates move closer to the VP-level, where they have more “manager” responsibilities.
Private Equity Vice President (VP)
In private equity, Vice Presidents are “deal managers.” They need to convince the senior team members — Principals and Managing Directors — that they know what they’re doing so that the senior staff trusts them to manage deals. VPs also lead and mentor others on the team, work more directly with clients, vet transactions, and lead due diligence and negotiations. The VP role may sound similar to the Associate role, but it is very, very different. Soft skills start to matter far more at the VP level, and you need to be a good talker and presenter to advance.
Private Equity Principal or Director
You can think of Principals as “Partners in training.” They have a lot of decision-making power, but they don’t have the same type of ownership in the partnership that the MDs/Partners do. Principals leave most of the deal process management to the VPs and Associates and get involved when deals are nearing the finish line, and critical negotiations are required. They also spend more time on sourcing deals and fundraising, and they are often the ones who convince business owners to consider a sale in the first place. Principals also act as the go-between between the deal team and the MDs/Partners.
Private Equity Managing Director (MD) or Partner
Partners or Managing Directors are the king of the hill. They spend their time on fundraising, deal origination, and “fund representation,” which could mean attending events and conferences, speaking with Limited Partners (LPs), and doing everything required to boost the firm’s brand name and reputation.
They still spend some time reviewing deals, but they are less involved than the Principals unless it’s an extremely important deal. Unlike the other roles here, this one depends 100% on human relationships. That makes it the toughest job because it’s much harder to address LPs concerns and convince them to invest in your new fund than it is to write an Excel formula or lead a deal process.
Private Equity is a lucrative career option in Finance; it requires massive amount of capital, a health risk appetite, patience and managerial expertise to increase the prospects of sustaining or creating value with a company. It is also highly rewarding as it provides a steep learning curve to both entry-levels and professionals in the industry via exposure to diverse transactions and deal executions all in preparation for higher career advancements.
By Eze Kenechukwu, for THE FINANCE HUB.
