Private equity (PE) is an area of the financial services 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.
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 private companies. These firms often restructure the companies they invest in and improve profitability.Then, the firm sells the company or its shares for profit.
- 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 are the ones who make decisions about where, when, and how to invest capital from limited partners. They represent the firm itself. 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.
How Firms Make Money
Private equity firms typically focus on one of three types of investing strategies:
- 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
When a PE firm invests in a company, it’s making a long-term investment. Firms can sometimes wait 10+ years before realizing any actual returns.
Outside of returns on investments, private equity firms make money through a fee structure. Firms often charge 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.
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Where Do Firms Get the Money to Invest?
The money PE firms use for investing 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 of the world’s public pension plans are underfunded, so in an attempt to ensure they can pay their beneficiaries, these 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.
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 private equity firm is a relatively straightforward career progression: You start as a private equity 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. These financial analysts review data, draft financial models, and create presentations.
Associate and Senior Associate
With more independence, senior associates 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.
Director or Managing Director
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 typically 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, and it needs people who manage the business and its offices. These types of roles include:
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Private Equity Salaries
Private equity is a highly sought-after role for many people in the finance industry. And for good reason: PE 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!
Estimates from Glassdoor place entry-level private equity analyst salaries around $92,200. However, salaries in PE ultimately depend on the company, the types of deals it makes, location, and other forms of compensation, like bonuses and commission.
>>MORE: Check out some of the highest-paying careers in finance.
How to Get Into Private Equity
Education and Background
Breaking into the private equity world is not easy — most firms want people with a strong finance or business 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. Private equity firms are relatively small, though, so the competition is tight.
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Prospective private equity analysts can make themselves more marketable by getting certifications that prove specific skills. Some of the best options include:
- Chartered Financial Analyst (CFA): This certification is often required in investment banking, and it’s a tough credential to earn. Not only does a CFA designation show high-level investment and finance skills, but it shows tenacity and motivation — both skills vital in private equity.
- Chartered Private Equity Professional (CPEP): This certification shows you understand private equity inside and out and is perfect for those early in their career who want to solidify their expertise in PE early on.
- Certified Public Accountant (CPA): Passing the CPA exams is no easy feat, but the in-depth business and accounting knowledge CPA’s have is crucial in PE.
- Chartered Alternative Investment Analyst (CAIA): While many finance certifications can show a deep understanding of investing, the CAIA is designed to prove expertise in alternative types of investments, such as private equity, venture capital, or commodities.
- Certified Financial Planner (CFP): The CFP designation is applicable to a variety of careers in finance, but in PE, having a CFP shows strong money-management skills. When restructuring or restrategizing a company, PE firms need people who can watch the finances closely and plan ahead for any changes to the micro- and macro-economic environment.
To be successful in private equity, you need hard skills in finance and business, like:
- Familiarity with financial modeling
- Understanding of the various business valuation methods
- Knowledge of how to calculate core metrics, like compound annual growth rates (CAGRs)
- Proficiency with Microsoft Office programs like Excel and PowerPoint
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However, you also need interpersonal and soft skills to work in private equity. PE is a business built on networking and relationships. Being able to communicate effectively, think critically and analytically, collaborate with others, and pay close attention to detail is vital at all levels of private equity.
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