Private equity is an area of the finance industry that involves firms making investments in private companies, or companies that aren’t traded on the public stock market. The investment into private companies is referred to as private equity, and private equity firms are the companies that make these types of investments.
In this guide, we’ll cover:
What Is a Private Equity Firm?
Private equity firms control private equity funds and use this money to buy out or purchase a majority stake in a private company. They then sell the company or its shares for profit, usually after restructuring and improving its profitability.
Private equity firms often specialize in specific sectors, such as health care, technology, or real estate. Within the firm itself, there are limited partners and general partners:
- Limited partners are individual investors, pension funds, and institutional investors. Limited partners have majority ownership in the fund, but are protected from losing more money than they invested.
- General partners, or the firm itself, are the ones who make decisions about where, when, and how to invest capital from limited partners. General partners only own a small percentage of the fund, but they take on the full liability if their investment decisions don’t work out.
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How Firms Make Money
There are three types of investments private equity firms typically make:
- Venture capital: investing in a start-up or early-stage company
- Growth equity: investing in the growth of a company at its’ middle stages
- Buyouts: purchasing a mature company entirely
These are long-term investments, and firms can sometimes wait 10+ years before realizing any actual returns. But outside of these returns on investments, private equity firms make money through a fee structure.
Firms often charge their limited partners a management fee equal to 2% of their assets under management (AUM), or the amount of money the limited partner has entrusted to the firm. Firms then take a performance fee, usually around 20% of the revenue from an investment.
Where Do Firms Get the Money to Invest?
The money firms use for these investments comes from a variety of sources. Limited partners can be endowments, independent wealth funds, or individual investors. But, much of the money that comprises a private equity fund comes from pension plans — specifically public pension plans.
Many public pension plans are underfunded, so in an attempt to ensure they can pay their beneficiaries, these public pension funds invest in private equity. According to a study from the National Association of Investing Companies, nearly half of all funding for their member companies came from public pension plans as of November 2021.
>>MORE: Learn if finance is a good career path.
Careers in Private Equity
In a private equity firm, you can either work on the investing side or in a more support-focused role behind the scenes.
Investing Career Path in Private Equity
Working on the client-facing, investing side of a firm is a relatively straightforward progression: You start as an analyst and work your way up to partner.
As entry-level positions, sometimes called junior associates, analyst roles typically involve a lot of learning and helping higher-ups. Analysts often review data, draft financial models, and create presentations.
With more independence, senior associates often handle deals entirely on their own, from start to finish. Senior associates also have the responsibility of generating new business.
Vice President (VP)
The role of VP is less data-focused, instead prioritizing client relationship building, negotiating, and networking.
Directors are primarily responsible for fundraising, closing deals, and handling more overarching company decisions.
A partner is the face of the firm, responsible for building relationships with clients, negotiating deals, and increasing funding. Additionally, partners often need to invest their own funds into the firm.
Support Careers in Private Equity
A private equity firm is the same as any large organization: it needs people who manage the business itself and staff any offices. These types of roles include:
- Administrative assistants
- Data engineers
- Human resources
>>MORE: 20 Popular Careers in Finance
How to Get Into Private Equity
Breaking into the private equity world is not easy — most firms want people with a strong finance background, preferably a Master of Business Administration (MBA) or a master’s degree in finance.
A common pathway into private equity is to start as an investment banker for a few years. Much of the day-to-day work in investment banking directly translates to the required skills for private equity. This includes things like financial modeling, working in Excel, and creating PowerPoint presentations. Private equity firms are relatively small, though, so the competition is tight.
Private equity is a highly sought-after role for many people in the finance industry. And for good reason: these firms don’t deal in small change, and those high-dollar-amount deals typically equate to big salaries and bonuses. Moreover, the deals in private equity are only getting bigger. According to a report from Bain & Company, private equity buyouts in 2021 totaled $1.1 trillion — double that of the previous year!
Ultimately, you need the right skills to make it in private equity. Start learning some of these necessary skills today with Forage’s Investment Banking Skills Passport.
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