It is every investment bankers dream to land a job on the buyside. Private equity is one of the most (if not the most) common exit opportunity for investment bankers. The thought of more pay, less hours and more meaningful work causes a lot of investment bankers to want to make the jump after a few years as an analyst.
Almost all young investment bankers fresh out of college have the herd mentality. Everyone hates on the investment banking lifestyle and laughs at you if you even consider staying on as an Associate. The buyside is where the herd wants to go. It is very hard to deviate from this mindset and do something different when almost everyone around you wants to do it.
1 Why private equity?
1.1 Benefits of a career in private equity
1.2 Downsides of a career in private equity
2 Private Equity Interviews
3 Private equity career trajectory
4 Example of how private equity firms get paid
5 Private equity carried interest
6 Private equity bonus structure
6.1 Analyst salaries and bonuses ($75-95K Salary + $50-75K Bonus)
6.2 Associate salaries and bonuses ($115-125K Salary + $100-200K Bonus)
6.3 Senior Associate salaries and bonuses ($150K Salary + $150-$250K Bonus)
6.4 Vice President salaries and bonuses ($150-$175K Salary + $200-300K Bonus + Carry)
6.5 Principal salaries and bonuses (All-in $500K-750K+ Carry)
6.6 Partner salaries and bonuses
7 Middle market versus mega fund private equity salary and bonuses
8 Top Private Equity Firms
9 Hedge fund versus private equity versus venture capital
10 Take a Private Equity and LBO Modeling Course to Ace the Job and Interviews
Why private equity?
Now there is a reason most people want to break into private equity. If you land a good job at a good private equity shop right out of investment banking, you are guaranteed to have close to seven figures saved in the bank by the time you are in your early 30s (unless of course you have a gambling addiction or waste your money on watches, cars, or other expensive items).
But money shouldn’t be the sole reason why you want to do private equity. You can make a similar amount in your 20s if you stayed in investment banking. Investment banking compensation is not all that different than private equity (at least at the junior and mid-levels). The real difference comes in when you become more senior and start to get carry in the fund. More on private equity bonuses below.
If it is not for the $$$ then why should you do private equity? Please don’t say it is because you want more “operational” experience. If your answer is that you want more operational experience, then you probably won’t get a job in private equity. The life of a private equity associate is not all that different than life as an investment banking analyst. Most of your job will be sitting in front of your computer modelling, working with your deal team, sitting in on management meetings, and calling up bankers and other parties needed to complete a deal.
If you want more operational experience, then go join a startup, small business or some managerial position in the corporate role.
Benefits of a career in private equity
- Money – Pay is top notch for someone who is in their 20s.
- Interesting work – get a dive deep into understanding the fundamentals of businesses, industries, competitors, growth prospects, etc.
- Long-term investment focus – This is the big difference between private equity investments and hedge fund investments. You hold your portfolio companies for 5+ years typically, so you think more about the business’ fundamentals in the long run and less about quarterly earnings.
- Strategic thinking – While you don’t get direct exposure to the operational side of the companies you invest in, you do get exposure to the overall growth strategy and management plan. Investments in private equity are all about having multiple ways to win, either through driving overall organic growth through capturing market share, increasing customer’s share of wallet or inorganic growth through add-on acquisitions.
- Proven investment style that has delivered consistent returns over the long run – while this has been true in the past, who knows if it continues to stay true in the future given how much money has flooded the industry.
- Exit opportunities – if you ever wanted to switch careers down the road, there are a ton of different career paths you could choose.
Downsides of a career in private equity
- Little work / life balance – wait I thought everyone goes to the buyside to work less?? Wrong. Good chance you’ll end up working more than you used to on average (unless you join a middle market private equity shop that has good culture/hours)
- Stress – unlike a corporate job where everything moves at a snail’s pace, everything moves very quickly whenever you are trying to make an investment. Just like in investment banking, whenever you are in the middle of a deal, expect to work around to clock to meet deadlines.
- Not creating anything tangible – you can’t believe how many people after working a few years in private equity complain about how they aren’t fulfilled at their jobs. A lot of people want to work directly on building a business, creating something of value for people. Once you save a lot of money, you start to question what is it that you really want to do in life (read why I quit a 500k/year job). In private equity, you are just a capital allocator, picking and choosing where to invest money.
Private Equity Interviews
To land a job in private equity you must start preparing very early on when you start your job in investment banking. On-cycle interviews begin just a few months into your first year in banking. Read the most common private equity interview questions and make sure you are well prepared before talking to recruiters.
Private equity career trajectory
The career path in private equity is very similar to investment banking.
- Analyst (2-3 years)
- Associate (2 years)
- Senior Associate (1-2 years)
- Vice President (3-4 years)
- Principal (3-4 years)
- Partner (endgame)
Example of how private equity firms get paid
General rule of thumb is that firms with more assets under management (AUM) pay substantially more than smaller AUM shops. There is so much economies of scale in private equity. You can manage more AUM, but not have to hire as many employees. There are $10Bn private equity firms that only have 40-50 employees.
The economics of a private equity firm are extremely lucrative. Most funds these days charge 1.5% management fees annually and 20% carried interest. This means that for a $1Bn private equity fund, they clip $15MM in fees annually right off the bat to fund operations and then keep 20% of the profits.
There is usually a 6% hurdle before a fund can take any cut of the profits, but then there is a catch up where the private equity firm then gets the rest of the profits to get their 6% before splitting the remainder 80/20. All in, the math on the carried interest usually works out to be an 80/20 split of the profits.
Private equity carried interest
Think about how crazy these economics are. A $1Bn private equity fund will have about 15 employees: three Partners, three Principals, three Vice Presidents three Associates and a few people in back office. Assuming the fund makes a 2.0x return on invested capital, then the profits of the fund are as follows:
In a firm of 15 people, 12 of them get some percentage of the carry. A vast majority of the money goes to the partners of course. The Principals / VP get a good slice and the Senior Associates / CFO get a small cut. There is a reason why private equity partners are extremely wealthy – notice how crazy the amount of money they get if the fund does well.
Now usually carry doesn’t get paid out until a fund exits a deal and makes a good return. Private equity funds are usually ~8 years long (4 years investment period 4 years harvest), so you could go years without receiving a carried interest payment.
That said, if you stay at a fund for a long time, you can get carry in multiple funds that overlap with one another.
Private equity bonus structure
Given private equity funds also charge a management fee, annual bonuses are still paid to their employees. Using the example above, a 1.5% management fee is $15MM a year in revenue for the fund which only has 15 employees. That is $1MM in revenue per head every year right off the bat.
Even if the fund makes no money on its invested capital, everyone at the firm is still extremely well paid. Sounds unfair doesn’t it? But that is just how it is given private equity firms have done very well over the past 40 years. Of course, if the latest fund doesn’t generate a good return, then it will be extremely hard to raise another fund.
Here is the breakdown in annual compensation at each level in private equity:
Analyst salaries and bonuses ($75-95K Salary + $50-75K Bonus)
- Most private equity firms do not recruit analysts out of undergrad, but there are some that do. Expect pay to be similar to slightly lower than investment banking compensation at the analyst level. At this level, bonuses are standardized and there won’t be more than a 10-20K difference just like in banking.
Associate salaries and bonuses ($115-125K Salary + $100-200K Bonus)
- People who break into private equity usually join at the Associate level after doing a few years in investment banking. The Private Equity Associate position is what most investment bankers dream of. Breaking into the buyside is all junior bankers ever talk about.
- Expect compensation to be in the ~$250K range for most private equity associates. Depending on how big the firm is, you could get paid more. A lot of the “mega funds” like KKR, TPG, Blackstone, Apollo, etc. pay $325K+ all-in after just two years in banking.
Senior Associate salaries and bonuses ($150K Salary + $150-$250K Bonus)
- After two years as an Associate, you become a Senior Associate. You will be ~26-27 years old and start contemplating whether this is what you want to do for the rest of your life. This is when most people leave the industry, either because they couldn’t make it to the Vice President level, want to switch careers to corporate or hedge fund, or they go back to business school (you should really think about whether B-School is worth it).
- Expect pay in the mid $300K range all-in at most places and in the $400K+ range at mega funds. At some places, especially at the smaller shops that can’t pay high cash compensation, you will start to get a little bit of carry in the fund. Don’t expect it to be a meaningful amount at this level, especially because it takes a long time to vest.
Vice President salaries and bonuses ($150-$175K Salary + $200-300K Bonus + Carry)
- If you make it to the Vice President level at a good private equity firm, then the compensation can start to get extremely lucrative. If you break into the buyside after a few years of banking and climb the private equity ladder, you could become a Vice President by the time you are 28/29 at the earliest.
- Compensation at these levels really varies widely depending on the fund’s size. At a decent $2Bn+ fund and good fund performance, you should expect ~$350-$500K in cash compensation and a potential $2-3MM in carry over 4-8 years if the fund makes a good return (but again, don’t rely too much on the carry as it takes a long time to vest and is not guaranteed).
Principal salaries and bonuses (All-in $500K-750K+ Carry)
- If you think making it to Vice President is very hard, imagine trying to make the next leap to the Principal level. Usually those who reach this level have a ton of deals under their belt, know what they are doing, and have relationships where they can start sourcing deals themselves.
- Even though your cash compensation at the Principal level seems to be an insane amount of money, your carry has the potential to be even more ridiculous. If the fund has a good performance, expect your carry to be ~$5MM at the smaller funds to ~$10-15MM at the larger shops.
Partner salaries and bonuses
- This is the end game. Unless you joined a large fund that has a lot of room for upward mobility, it is extremely hard to reach the partner level. This is true for any industry of course. To become partner, you have to prove that you can source good deals and have a good track record of performance. Once private equity professionals reach closer to the top, they team up with others and start raising their own funds.
- Compensation at the Partner level is literally all over the place depending on the fund size and performance. This is where you can make F**K You kinds of money.
Middle market versus mega fund private equity salary and bonuses
Like I mentioned before there is a big difference between what you can get paid at a middle market private equity firm versus a mega fund. At the Associate level, it is ~$100K difference in compensation. At more senior levels, it becomes an even bigger difference especially because the carry at a larger fund is much more meaningful.
If you wonder why that is, it is entirely because of the economies of scale in this business. The size of a fund can get bigger and bigger without having to add as many employees. You usually just go out and chase bigger deals. If you do the carried interest math shown above on a $10Bn fund, you can see how much more money a large fund can make.
So bigger the fund = higher pay. That said, don’t expect the lifestyle to be better. Expect to work a lot more on average at all the mega funds versus middle market.
Top Private Equity Firms
The best private equity firms are the ones that have a successful track record across multiple funds. To learn more about all the top funds and the advantages and disadvantages of working at a mega fund vs. a middle market fund, read List Of The Best Private Equity Funds To Work For.
Hedge fund versus private equity versus venture capital
If you want about the differences between all the various buyside jobs, then read the Differences Between Private Equity, Hedge Funds and Venture Capital. In terms of compensation, it is somewhat similar across all the industries. Most operate under a 2/20 model these days, except the 2 is now going down to 1 or 1.5% given how crowded the industry has become.
Out of all the different buyside jobs, private equity provides the most stable compensation structure where you are guaranteed a set bonus each year. If you read my article on Hedge Fund Salaries and Bonuses, you will see that hedge fund pay is extremely volatile and completely dependent on a fund’s performance.
I know multiple hedge fund analysts who did not get paid more than a base salary of $150K because the fund did not have a good year. Of course, at larger funds, this isn’t much of an issue as the management fees cover some level of bonuses for all employees.
Venture capital is similar to private equity, but don’t expect compensation to be as lucrative as private equity or hedge funds unless you are at one of the top shops.
Don’t pay too much attention to compensation
Even though this article talks about how lucrative a career in private equity is, don’t pay too much attention to it. At the end of the day, if you don’t like what you are doing, you will not be successful at it and you won’t make it to the top.
A life in private equity is still one that is very stressful and where you have to sacrifice a lot on the personal side to do well.
There is a misconception that always goes around junior bankers that think the buyside is the promise land where you work less, work on more meaningful things, and get paid more. Yes, you will get paid more especially once you reach VP/Principal level, but you will also continue working a ton.
So be prepared to make the work/life sacrifices necessary if you want to make it big in private equity. Sure, there are a lot of lifestyle middle market private equity firms out there, but at the end of a day, investing money will always be stressful and hours will continue to be long especially when in a middle of a deal.
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