Many investment banking analysts look towards 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 competition for these positions can be intense. 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.

Key Takeaways

  • Private equity (PE) investment involves acquiring private companies, often turning around their management and business model, and selling them for a profit.
  • Private equity associates work closely with client firms or prospects to conduct due diligence.
  • On the other hand, PE professionals must raise capital from outside investors, typically wealthy individuals or organizations.
  • Successful associates can earn six-figure incomes in a matter of years.

Private Equity

Most companies start out as private, but a public company can also sell out its public shares and go private if it finds the benefits to be greater. One of the biggest differences in private versus public equity is that private equity investors are generally paid through distributions rather than stock accumulation. Private equity investors usually receive distributions throughout the life of their investment. Private equity firms mostly buy mature companies that are already established. The companies may be deteriorating or not making the profits they should be due to inefficiency. Private equity firms buy these companies and streamline operations to increase revenues. Venture capital firms, on the other hand, mostly invest in startups with high growth potential.

Private equity firms mostly buy 100% ownership of the companies in which they invest. As a result, the companies are in total control of the firm after the buyout.

From the perspective of a nascent company, private equity often means having to please a smaller clientele. It also means fewer restrictions and investment guidelines from regulators including the Securities and Exchange Commission

Private equity firms attract capital from high net worth individuals as well as institutional investors like foundations, endowments, and pension funds. They invest the capital in privately held companies by either buying companies outright or by investing capital and partnering with the company’s management. Private equity firms make money from the fees they charge the investors and from the carried interest from investments. Notable private equity firms include TPG Capital, Warburg Pincus, Carlyle Group, Kohlberg Kravis Roberts, Blackstone Group, and Apollo Management. Most firms are small to mid-sized investment organizations that can range from hundreds of employees to a two-person shop. 

Job Description

Private equity firms are generally much smaller than investment banks and have a correspondingly flatter hierarchy. Entry-level private equity associates can work closely with firm principals and partners on every step of a deal. Associates can feel a great sense of satisfaction in seeing a deal through from its beginning to completion.

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 with growth forecasts.
  • Portfolio company monitoring: Associates are usually assigned portfolio companies to monitor and must maintain up-to-date financials. 
  • Reviewing CIMs: CIMs or confidential information memorandum 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 2-3 years before being considered for a senior associate. A successful career path at a private equity firm may look like the following:

Senior Associate (2-3 years)-->Vice-President/Principal (2-4 years)-->Director/Partner

Education and Training

Candidates should have a bachelor’s degree in a major like finance, accounting, statistics, mathematics, or economics. Private equity firms do not usually hire straight out of college or business school unless the student has previous significant private equity internships or work experience. The most important qualification to become a private equity analyst is 2-3 years prior experience as an investment banking analyst. Some firms also hire former management consultants. Getting an interview takes both a strong network in private equity and knowing the right headhunters. Most private equity firms use headhunters who serve as gatekeepers to these jobs.

Salary and Compensation

Total compensation varies widely because, on top of a salary, associates receive a bonus which reflects closed deals and income generated from deals. For entry-level associate positions, the bonus percentage is often a fixed percentage and less variable than it is for the upper-level managers.

  • First year associate: $50,000-$250,000 with an average of $125,000. An average first-year salary may be $81,000 with a bonus of 25-50 percent of base salary.
  • Second year associate: $100,000-$300,000 with an average of $135,000.
  • Third year associate: $150-$350,000 with an average of $160,000

The Bottom Line

Private equity associates participate in deals from the beginning to close. Even entry‑level associates are an integral member of the team and need to have very strong analytical and leadership skills. Because the work is satisfying and the financial reward is great, landing one of these sought-after positions is difficult. Starting as a summer intern is perhaps the most straightforward path but many associates also enter the field from investment banking or management consulting.