Many investment banking analysts look toward private equity (PE) as the next step in their finance careers. Private equity firms are smaller than investment banks, so there are fewer jobs and higher competition for these positions. However, private equity firms have several advantages over other types of investment firms such as unorthodox investment capabilities.
Private equity firms hire their entry-level staff as associates and typically expect at least two years of experience as an investment banking analyst. Similar to investment banks, associates at private equity firms can work extremely long hours, especially during deal closings.
- Private equity (PE) investment involves acquiring private companies, improving their management and business model, and selling the companies for a profit.
- Private equity associates work closely with client firms or prospects to conduct due diligence in addition to monitoring the financial performance of companies in their portfolio.
- Associates often have an data-centric background, are well-versed in financial analytics, and have specific work experience in a given industry.
- Because associates often network and fundraise, successful private equity associates also have strong soft skills in communication, negotiation, and public speaking.
- Even with little to no direct private equity firm experience, associates often earn a six-figure income during their first year.
A private equity firm is an investment management company that finances companies not listed on public exchanges. High-net-worth individuals, institutional investors, or venture capital companies invest funds into a private equity firm with the expectation of capital growth. Pension funds, retirement funds, and insurance companies often invest with private equity firms, and the private equity firm generates income from fees charged to clients.
Some private equity firms are publicly traded. But those that are not publicly traded often face fewer restrictions and investment guidelines from regulators compared to public companies. This including reporting and operating requirements from the Securities and Exchange Commission.
Similar to the valuation or analysis of any company, private equity firms source and scour potential entities for investment. The firm analyzes the company's market presence, management, recent financial performance, areas of growth, and possible exit scenarios for the firm. Private equity firms invest capital by either buying a company outright or partnering with the company's management.
Once a portfolio company is acquired, private equity firms attempt to increase the value of the company by implementing new processes, technologies, or strategies to improve the efficiency and profitability of the company. Private equity firms are often not involved in the day-to-day operations of their portfolio companies, though the level of involvement may correlate to the size of the stake their company has in the business.
The ultimate goal of a private equity firm is to sell or exit their position with a profit. The firm's exit may not occur until years after the original investment. The exit may occur when the portfolio company is acquired by another company or if the portfolio company issues an initial public offering (IPO).
Notable private equity firms include TPG Capital, Warburg Pincus, Carlyle Group, Kohlberg Kravis Roberts, and Blackstone Group.
Private equity firms are generally much smaller than investment banks and have a correspondingly flatter hierarchy. Entry-level private equity associates can often work closely with firm principals and partners throughout the entire process of a deal.
Duties as a private equity associate can include the following:
- Analytical modeling: The primary function of the associate is to provide all analytics required for the principals and partners to make an informed decision about a deal. Common tasks include preparing preliminary due diligence reports and modeling growth forecasts.
- Portfolio company monitoring: Associates are usually assigned portfolio companies to monitor and must maintain up-to-date financial results.
- Reviewing CIMs: Confidential information memorandum (CIMs) are documents investment banks use to provide data about new investment opportunities. Associates receive the CIMs, screen them for potential opportunities that fit within the firm's framework, and provide a simple one-page summary for the senior team.
- Fundraising: When new funds are being formed, associates assist with preliminary fundraising while senior executives handle most of the relationship and client interface.
Most private equity associates stay in their positions for two to three years before being considered for a senior associate. Future roles at a private equity firm could also include Vice President/Principal before rising to Director/Partner.
Education and Training
Candidates should have an bachelor’s degree in an analytical major like finance, accounting, statistics, mathematics, or economics. Private equity fund management requires technical ability to analyze financial performance and to predict the value of a company given a set of predicted changes that are planned to be put into place. The basis of private equity investment is expecting to make a change in how a company is run and seeing more value in how that will happen than the present-day value.
Therefore, in addition to analytical skills, candidates are often comfortable with database tools like Bloomberg and modeling tools like Excel or Visual Basic. Individuals working in private equity often understand contract law as their role may include structuring complex investment deals or performing due diligence at closing.
Though not required, it may benefit candidates to be fluent in multiple languages if their firm will solicit deals from international companies. It is also advantageous to have specific industrial knowledge of a certain domain or field. This could include types of companies (retail, energy, technology) or geographical markets (online, local, or multinational).
Private equity firms typically do not usually hire straight out of college or business school unless the student has previous significant private equity internships or work experience. Firms often prefer candidates with a strong professional background in investment banking, corporate consulting, strategic consulting, or corporate restructuring.
Candidates for private equity firms also benefit from several specific soft skills. As meeting with bankers, investors, and other market participants is often central to their role, private equity firm workers are often comfortable with networking, negotiation, and communication. Candidates often present to internal management or external portfolio companies and must be comfortable with public speaking and presenting.
Salary and Compensation
In 2022, the average annual compensation for a Private Equity Associate with less than three years of experience was roughly $99,000. The nationwide average salary range was $54,000 to $180,000.
Those able to successfully make it in private equity will be financially rewarded. In 2022, the average total compensation range for a Vice President in Private Equity was between $90,000 and $439,000, with the average total compensation just under $194,000.
Total compensation varies widely because, on top of a salary, associates receive a bonus that reflects closed deals and income generated from deals. For entry-level associate positions, the bonus percentage is often a fixed percentage while upper-level managers may be rewarded higher bonuses with variable percentages based on performance.
Private equity firm employees may also be eligible to receive portions of carried interest (or "carry"). Carry is the firm's share of profits that flow from a portfolio company to the private equity firm. Carry payment distributions to employees are often tied to financial performance of the firm, and different employee levels within a firm typically receive different proportions of carried interest payments.
How Much Does a Private Equity Associate Make?
According to 2022 compensation data, the average Private Equity Associate's total compensation in the United States with less than three years of experience was just over $99,000.
What Are the Responsibilities of a Private Equity Associate?
A private equity associate may be involved in the entire process of sourcing, maintaining, and exiting an investment position. They may be involved in the due diligence process by analyzing a prospective company's market, operations, and long-term strategic outlook. They may monitor the ongoing financial performance of a portfolio company. They may assist with legal documentation for the acquisition or disposition of an investment position.
How Many Hours Do Private Equity Associates Work?
Smaller and mid-size private equity firms typically see employees work between 60 to 70 hours per week with potentially more hours as deals near completion.
What Does Working in Private Equity Mean?
Working in private equity means financing non-public companies and attempting to foster their success to generate your firm's investment growth. It entails the process of seeking out private companies to invest in, monitoring your investments in those companies, and strategically exiting your investment position to capitalize on investment growth.
The Bottom Line
Private equity associates participate in deals from the beginning to close. Entry‑level associates are an integral member of the team and need to have very strong analytical and leadership skills. Landing one of these sought-after positions is difficult. However, there is tremendous financial upside for individuals that successfully build a career in private equity.