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Overview
Even if you’re an absurdly keen finance hotshot who reads all of the literature that is publicly available, there’s a good chance that you still won’t really be able to distinguish between what it’s like to work at the different private equity firms. Private equity firms, like most investment firms, prefer to operate in relative secrecy and tend to loathe any news articles that delve into any specific or useful detail, which makes it harder for candidates to do proper research.
Even if you’re in investment banking (unless you happen to be on the Sponsors team) there’s a good chance that you don’t have a strong opinion of how the different private equity firms differ from one another.
Having worked in the industry for a few years, here are the main criteria and characteristics I would think about when evaluating private equity firms. Our Private Equity Recruiting Course goes over how to prepare for the modeling and case studies asked in private equity interviews.
The best approach is always to talk to someone at the firm, but in the absence of establishing contact, here are some things to easily assess:
Fund Size and Investment Size
Fund size is really important because it impacts the kinds of companies you’re going to evaluate and invest in. Firms with similar amounts of money will compete with one another during buying processes. You can categorize different private equity firms by their fund size.
Mega Funds are the largest investment managers that have raised >$15B private equity funds. This category would include funds like KKR, Blackstone, Carlyle, and TPG. There’s no real cut-off for what constitutes a mega fund, but this is about the range in which you can reasonably deploy more than $1B of equity into an investment. This is the size you need to be if you want to think about taking large public companies private.
Below the category of mega funds is the Upper Middle Market, which is a broad range that typically refers to fund sizes >$5B. This would include funds like Berkshire Partners, American Securities, and ABRY. Most of these funds would typically deploy $200-$500mm per investment. This is large enough for PIPE investments in smaller public companies and also in the range for Series D / E type investments.
I would describe anything below this range to be Middle Market and Lower-Middle Market, to which there are even blurrier rules. I’ve seen some people define the Lower Middle Market as companies that have <$50mm in annual revenue.
There tends to be a blend between Middle Market and Growth Equity investing, which can sometimes be delineated based on the company’s business model. Growth Equity tends to invest in more revenue, growth-oriented companies, while private equity strictly speaking still invests in more cash flow-oriented businesses.
There are no hard and fast rules, but most funds (funds, not firms) hold between 10-20 portfolio companies, meaning that the average investment size you make is going to be directly related to the fund you have.
Looking at a real-world example, Onex Partners’ most recent fund is $7.15B, and they’ve stated a minimum investment size of $200mm, implying they could have a maximum of ~35 portfolio companies. I would guess their average investment size is higher and that they target around 15-20 companies to hold.
The amount of companies you can manage and invest in is directly proportional to your team size, so you can’t invest in too many businesses.
Industry Focus
The next thing that I think is really important to identify is the industry focus of each firm. Exactly when to specialize is a pretty philosophical question, but most people start to naturally specialize in an industry by their late 20s. It can be very hard to consistently make money unless you know an industry inside and out.
And when you’re recruiting for private equity, you have the option of pursuing a more generalist fund or a more specialist fund that only focuses on one industry.
Most private equity firms, especially the larger mega funds, are generalist funds that have different groups and industry verticals. Even if you go to a generalist fund, there is a good chance you will get dedicated to a specific team or end up repeatedly working with the same industry Partners anyway. Groups at private equity firms also tend to be geographically organized (e.g. technology teams tend to be based on the West Coast), so keep that in mind when you are recruiting.
If you have an existing industry preference or skill, positioning yourself for a specific industry can be very helpful. There’s so much competition for recruiting that it can make sense to craft a narrative around why a specific industry works better for you.
There are a lot of fantastic TMT funds, which makes sense because the SaaS business model is perfect for private equity. Firms like Silver Lake, Vista Equity and Thoma Bravo all focus on technology and consistently hire people during the on-cycle.
The consumer sector is another industry that has lots of great specialist-focused funds. Leonard Green, L Catterton and Sycamore are examples of high-quality consumer funds.
Investment Structure
When you think of private equity, you probably think more about traditional buyout, i.e. buying out entire companies and taking a controlling stake. In reality, however, private equity tends to involve a variety of different structures.
Most private equity firms are relatively straight shooters – lots of mega funds just stick with either buyout or some kind of preferred securities.
However, some firms are notorious for investing across the capital structure and even investing in debt. This kind of investing is sometimes characterized as Special Situations, Distressed Investing, or even Value-Oriented Investing.
A lot of these private equity firms look at companies that others ordinarily won’t. Perhaps these companies are on the verge of bankruptcy or are mismanaged. The goal of these private equity firms is to acquire companies at cheaper valuations and identify mispriced assets. These private equity firms may invest using more complex securities to protect themselves in the case of downside.
Apollo is perhaps the most famous and successful firm that uses this investing strategy. They have put up consistently stellar returns at the mega fund level by investing in exotic and hard to understand situations. Centerbridge, Cerberus and Searchlight are other notable players in this space.
As an associate, these firms tend to be significantly more complex and have a heavier focus on technical modeling. Expect these firms to have a higher technical standard when recruiting.
Fund Return and Growth
Truthfully, it doesn’t seem quite as important if you simply want to be an associate at a private equity firm en route to hedge funds or business school, but if you want to grow your career with a firm, its recent performance is an important thing to check.
Generally speaking, the easiest way to determine this is to check if a fund has continued to raise larger and larger funds. Just like how it’s sketchy if a company does a down-round, it’s generally a bad sign if a firm has raised smaller and smaller funds.
I would also do a quick gut check against the CalPERS database to see their recent returns.
Organizational Questions
The last thing I would do when evaluating a firm is to try to assess the organizational aspects of the company. Here are some final important factors to consider before you sign with a firm:
Attrition
Attrition is probably the easiest way to determine if a firm treats its employees well and if it is a desirable place to work. If a lot of Associates don’t finish their two-year programs and if barely anyone goes back after their MBA, there’s a good chance that the firm is kind of toxic.
I find that junior attrition speaks more to a firm being overly intense, while senior attrition speaks more to fund performance being poor.
Focus
Is private equity the firm’s focus? Some of the mega funds don’t necessarily prioritize their private equity platform and have shifted into becoming more like asset managers. If the leadership isn’t focused on private equity, it could impact your ability to climb the ranks down the road.
Co-invest, Carry
Co-invest and carry are two components of compensation that can contribute a lot to your compensation in private equity. Co-investing is essentially the ability to invest alongside the private equity fund, which can give you direct access to high-quality deals. Carry is the ability to earn part of the profits in a private equity fund.
Many firms do not offer their junior members co-invest or carry, so this would be a great sweetener.
When evaluating private equity firms, we would first recommend considering factors that will greatly impact the arc of your career and the kind of work that you do: investment size, industry, and investment structure. Then we think it is prudent to research the firm’s recent financial performance to understand the company’s growth trajectory.