Careers in Finance 25/05: Private Equity
What is private equity (PE)?
Private equity (PE) refers to a type of investment in companies that are not publicly traded on the stock market. Essentially, it is when wealthy individuals or investment firms pool their money together to acquire ownership stakes in private companies. The goal is to help these companies grow and enhance their value over time. Private equity investors often collaborate closely with company management to make strategic decisions and optimize operations. Eventually, they aim to sell their stake in the company and make a profit. PE investments can be risky, but they also offer the potential for substantial returns. This investment approach is characterized by a more hands-on approach compared to traditional stock market investments.
How do PE funds work?
PE funds operate by pooling together capital from high-net-worth individuals, institutional investors, and organizations. These funds are managed by professional investment firms called private equity firms. The funds are typically raised through a limited partnership structure, where investors become limited partners and the private equity firm acts as the general partner. The general partner is responsible for making investment decisions and managing the fund. They identify potential investment opportunities, conduct due diligence, negotiate deals, and oversee portfolio companies. The fund's capital is then invested in promising private companies with the objective of generating long-term growth and profitability. The private equity firm actively engages with the management teams of these companies to enhance performance and increase value. Eventually, the fund exits its investments by selling the companies, often after a few years, aiming to achieve substantial returns for the investors.
How is PE different from listed funds management?
PE and listed funds management both involve investing client capital on their behalf into investment vehicles. PE, however, focuses exclusively on investing in privately held companies, also taking on a more active role in managing and improving the operations of the businesses they invest in. PE funds therefore generate returns more through active management and development of their investments’ operations, while listed funds managers do not have this control. Further, capital in PE funds is more illiquid, with investment exit opportunities only arising when the fund decides to sell their interests, often through an IPO.
What does a role in PE entail and what are recruiters looking for?
Due to the large often controlling interests PE firms take in companies, deal sourcing is a crucial activity particularly at the more junior analyst level. This involves identifying particular investment opportunities to target, while also undertaking due diligence on these such as reviewing financial statements and assessing potential risks. Deal execution on the buyside and sell side is thus also crucial, with senior firm leaders taking the lead to negotiate such transactions. On the investment management side, senior leaders particularly often work closely with portfolio companies to help them improve their operations and address inefficiencies. This can take the form of principals often serving on the boards of portfolio companies, alongside potentially working for more extended periods in their upper management.
Therefore, a key soft skill in PE valued by recruiters is interpersonal skills. Due to the close work PE professionals do with their portfolio companies, which makes the ability to build relationships and rapport with others, and thus cultivate positive working dynamics, critical.
Further to interpersonal skills, some other soft skills highly valued by recruiters include:
- Conflict Resolution & Compromise (portfolio company management and PE firm leaders may have different ideas, making compromise and conflict resolution skills quite useful)
- Creative thinking
- Networking (the ability to build connections in industries is invaluable, particularly in PE where new deals need to be continually sourced)
- Initiative
- Problem Solving
What entry level opportunities are there in PE?
PE is thus a great finance career pathway for those interested in both finding investment opportunities and resolving inefficiencies in companies. Graduate opportunities in PE are quite limited however, with many PE professionals often first entering traditional funds management at firms like Talaria Asset Management and River Capital, before eventually moving into PE.
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The views expressed within this article are those of the authors and do not represent the views of the Finance Student's Association. All images and references in this article are for fair and educational purposes only. The content in this article is not intended as legal, financial or investment advice and should not be construed or relied on as such.