Private Equity Associate & Private Equity Analyst

1. Definition of Private Equity

Private equity is an entity raising capital from outside investors, buying companies, and then selling them to make a return on investment. Private Equity firms work hard to operate and improve companies in the portfolio to increase the value of that organization before selling out. 

1.1 How does a Private Equity firm Work?

Limited partners (LP) are institutional funds – such as pension funds, endowment funds, insurance companies, etc – and high net-worth individuals that committed capital to that VC. 

General Partner is the one who raises funds for the firm, decides when and which companies to invest in, and chooses when to exit the investment. 

Private Equity firm will operate everything to select investing targets, protect and grow the investment   

Investment portfolio is the list of companies or start-ups that the fund is putting capital into. 

But how do they make money?

PE often charges management fees of about 2% of the fund. This fee will be used to pay for operating activities in the firm. 

After an investment is liquidated, around 20% of the return will become carried interest. Most of them will go to the General Partners. The rest will be shared among Junior Partners, Principals/VP and Post-MBA associates. 

80% of the return will be shared among Limited Partners according to their contributions.  

Those are just a short introduction about Carried Interest, please visit our articles about Private Equity Salary and Bonus, in which we explain in detail with a clear example how Carried Interest is calculated and divided between LPs and GP. 

1.2 Type of Private Equity funds

If we consider the firm AUM (Asset Under Management), there are 2 different firm types in Private Equity:

• Mega funds (MF): manage a fund valued above $5Bn. Some household brands are Blackstones, Apollo, Warburg Pincus, etc
• Middle Market (MM): other funds. Sometimes, MM can be splitted into Upper Middle Market (UMM) and Lower Middle Market (LMM). There is no clear definition between both. 

There are several fund types in Private Equity, and each firm type will make investing decisions depending on the state of the companies. 

– Distressed funding: This type of fund invests in underperforming companies to change the management and operations, or to make a sale of their assets for a profit. Assets can be physical machinery, real estate, or intellectual property, such as patents. After the 2008 financial crisis, there was an increase in distressed funding by private equity firms. 

– Leveraged Buyouts: This is the most popular type of private equity funds.  The funds focus on buying out a company with the intention of improving its financial health and business operation. After a few years, they resell it to realize a return on investment from an interested party. The funds often target the growing company rather than the start-up company.

– Real Estate Private Equity (or REPE): raises capital from Limited Partners and then uses this capital to buy properties, develop, and then sell them to earn the profit. The firms focus on commercial real estate like offices, retail, multi-family properties, hotels, rather than residential real estate.

– Fund of funds: This type of funding focuses on investing in other funds such as mutual funds and hedge funds. They offer a backdoor entry to an investor who cannot afford minimum capital requirements in such funds. The management fees in this type of funds is higher because they are rolled up from multiple funds and the fact that unfettered diversification is not sustainable in terms of returns.

– Venture Capital: Venture capital funding focuses on investing the capital to the startup and the small-sized enterprises, especially tech-companies. The capital usually comes from wealthy investors, investment banks, and any other financial institutions.  Since the invested companies are new, the chance to receive the investment returns is low for the investors. However, if the companies are successful, the tradeoff is potentially above-average returns. 

1.3 Top global Private Equity firms

Top Private Equity firms globally can be found via PEI300 Database. Among all of them, the most prominent brand names are Blackstone, The Carlyle Group, KKR, TPG and Warburg Pincus

2. Private Equity Associate and Analyst: Jobs, Salary and Bonus

2.1 Career path

In a PE firm, Analyst and Associates are the two main entry points. An associate can be promoted to Senior Associate after 2-3 years if that person owns an outstanding performance. Another way is to attend a prestigious MBA program, then come back to PE. 

2.1.1 Analyst

Analyst is the entrance position to Private Equity. Nowaday, Private Equity firms sometimes hire Analysts straight out of college with some roles but it is not the common pathway. Those bright candidates often got a Private Equity Internship before to land a job there right after college. 

2.1.2 Associate

The Associate will be involved in the “deal” work and lead the process from start to finish. They also handle some “non-deal” work including managing companies’ portfolios, screening for investment opportunities, and supporting the management team. Normally the involvement of an Associate in managing portfolio is less than a Senior Associate

A majority of Pre-MBA associates (especially in the US) are hired for a two-year to three-year program. At the completion of the program, associates are typically expected to attend a top-tier MBA program. 

Before we move to the next two levels: Vice President/Principal and Managing Director/Partner, we would like to compare between Analyst and Associate.

Comparison between Analyst and Associate:

Similarity:

The Job Descriptions of Analyst and Associate have several similar aspects such as dealing, reviewing potential investments and reviewing contracts, monitoring companies’ portfolios, and assisting with fundraising activities. They also work on financial modeling, coordinating the due diligence process including work with lawyers, auditors, and the other parties to get the insights.

Difference:

The exact differences between Private Equity Associates and Analysts heavily depends on the firm size. In some small PE firms with a flat organization structure, Associates and Analysts could perform the same jobs. However, in Upper Middle Market and Mega funds, Associates and Analysts will perform different scope of work.

2.1.3 Vice President/Principal

Vice presidents and principals manage the deal teams, cultivate and maintain relationships with investment bankers, consultants, potential companies and clients to generate investment opportunities and acquisition ideas. They also work with the senior partners of the fund on strategy and negotiations. Depending on the size of the fund, the salary of vice president/principal can be different. At this level, they also receive the carried interest which makes their salary higher. 

2.1.4 Managing Director/Partner

Managing directors and partners are the final decision makers in the Private Equity fund. They receive significant compensation, especially the carried interest in the fund. The managing director and partner directly manage the company’s portfolio and the target companies to make sure the investment is lucrative. 

2.2. Salary and Bonus

2.2.1. Salary structure

While the LPs earn most of the profit from the investment return, the GPs – the firm itself – gain by charging LPs the management fees, which is around 2% of the fund value. For example: if a firm raises $1bil, they will charge $20mil per annum as the management fee. The fee is used for covering the operating costs, including staffs’ salary, within the funds. 

2.2 Compensation structure

In private equity, the employees’ salaries are heavily weighted toward the bonus portion. The base salary is covered by the management fees or the deal fee, while the bonus comes from the investment return. In the investment returns, there are 3 components: individual/fund performance, co-investment, and carried interests.

Normally, carried interest represents a share of investment return paid to General partners (GP) in excess of the amount he or she contributed to the fund. Carried interest acts as a performance fee, meaning that the firm only receives carry if the investment’s IRR is higher than a committed return rate called hurdle rate. As carried interest is pretty complicated, we dedicate one whole session to talk about it. 

If you are so interested in Carried Interest Mechanist, you can read more on our Private Equity Salary and Bonus with a detailed example.

3. How to Get into Private Equity?

3.1 Typical roadmap in Private Equity:

For an overview of chance to get into Private Equity across career path and background, please visit our Wall Street Career Planning tool 

3.1.1 Investment Banking to Private Equity

This is the most common track to enter Private Equity. 

We will provide more insights about this path in section 3.2: Recruiting process. In brief, you can move from Investment Bank to Private Equity via PE on-cycle and off-cycle recruitment. 

In big funds, there are Associates and Senior Associates levels. Both On-cycle and Off-cycle recruitment are only for Associate vacancies and there is a different timeline for Post-MBA Associate. Although it is possible for a 2-3 years experienced Associate to be promoted to Senior Associate, it is pretty challenging if you don’t have an MBA degree.

Similar to Analyst vs Associate, the difference between Associate and Senior Associate varies by firm size.

3.1.2  Private Equity Internship to Analyst 

Recently, this track has become more popular with some Mega funds recruiting fresh graduates for Analyst positions. These tier 1 summer analyst internships at Mega-funds are limited and very competitive. Similar to Bulge Bracket internship application, you need to be a “superstar” with a stand-out resume (even target school might not make the cut here), relevant experience, ideally at boutique investment banks & small private equity funds , and super-smart networking to get into those limited internship interview slots. 

We put down the approximate timeline of all Summer Analyst programs, Full Time Analyst programs in the “Recruiting process” so that you can plan ahead your career. 

3.2 Recruiting process

There are 2 types of recruiting processes: The on-cycle process and Off-cycle process. We layout the timeline of those two processes below, from networking to on-boarding period, for your reference. 

We understand that the table contains a lot of information, which can be too overwhelming for any newcomers. Hence, here is an example of the Associate On-cycle recruitment from this timeline:

3.2.1 On-cycle recruitment process:

• Target:

The on-cycle process mostly targets Analysts at Bulge Bracket and Elite Boutique Banks for Associate positions at Mega-funds and Upper Middle Market funds. However, as the industry keeps growing, PE firms now also organize on cycle recruitment for Summer Analyst Program (i.e: internship) and Full-time Analyst Program. 

• Process: 

For Associate positions, the process can start as early as July to October, only a couple of months after Analysts at Bulge Bracket or Elite Boutique Banks start their jobs.  If you finish the process and you get the job offer, you can only start in the next 1.5 – 2 years. For example, if you get the offer in 2021, you will only start your PE career in 2023.

The headhunters have more power on the Associate On-cycle recruitment process compared to Off-cycle. After getting your CVs, the headhunters will contact you and set up a telephone interview. Some common questions in this interview could be: “Walk me through your resume?”, “Why Private Equity?”, “Why this firm?”, etc. If you can impress the headhunter, they will pass your CV to the firms. Hence, headhunters decide whether you can go to the next round. You would better show up well prepared and win them in the telephone interview. 

The PE firm will invite you to “a weekend event”, in which the most nightmare part of On-cycle recruitment happens. You will have four to five 30-minute interview sessions with people across levels in that firm. If you can pass, the firms will call you for an LBO model test. Finally, you will have the result on Monday.  

We also list down common asked questions in a PE interview in section 5: Prepare for the interview. You can visit there to prepare yourself ahead.   

For Interns and Analysts position: you can find the timeline in the “PE timeline table” above. However, always double check with your target firms because Interns and Analysts are not PE firms’ recruiting priority and the process can vary year by year. 

Interview process is not as exhausting as that of Associate and interview questions skew towards fit questions more than deal experience and case studies. 

3.2.2 Off-cycle recruitment process:

• Target

The Off-cycle process is applied for below situations:

1. Middle Market funds recruiting Associate positions, 
2. Positions in non-US markets,
3. Positions for non-experience in Investment Banks 

Among those 3, Middle market firm recruitment is the most common case. Therefore, we will focus on the process of (1). The requirement, timeline and process of (2) and (3) will depend on which exact position the firm is recruiting

• Process: 

The process of recruiting will start after the On-cycle process, from December to February. Successful candidates in this track will start 1.5 – 2 years later, the same timeline as On-cycle successful candidates. 

However, if you apply for any vacancy that firms need immediately, you can start instantly. Those recruitment timelines are more random throughout the year. 

The off-cycle recruiting process usually lasts longer, in which recruiters want to assess your “fit” and critical thinking abilities on deeper levels and they also require more thought and preparation of a real investment thesis. 

Headhunters have little power here but you can still try to reach out to them and check if there is any vacancy.

3.2.3 Summary of the key differences

3.3 Resume

Before writing your resume, think carefully about what will make your resume deal-oriented – in the below table, we score all the relevant experiences so that you can have a direction for your resume

If you can score 4 or 5, it means that you have a preferred experience for Private Equity. But what if you only get 1-3? Definitely, there will be more work to do with your resume but we will share how to twist that. 

• Step 1: Take a look at the current job description of Analyst/Associate/Senior Associate and pick the keyword when your target firm describes that position. 

Example 1

Both job description and actual work of PE’s Analyst and pre-MBA Associate are related to Investment Deal. Therefore, the key theme of the resume should be your Achievements/Involvement in Deal transactions, emphasizing on Due diligence, Financial Modeling or Market Valuation. 

Example 2

If you apply for Senior Associate positions, Deal experience is important but experience in managing companies, restructuring organizations, etc should be highlighted also because Senior Associates probably involve more in portfolio companies’ operation and management. 

• Step 2: Select your achievements/involvements that you can read 

There are some ground rules that you should follow here

1. You should choose 2-4 achievements under each position. Do not put only 1 achievement as it will raise the concern that you did not achieve much. There is one exception here: IB Analysts who have just started their jobs in the last 2-3 months.
2. Change any relevant word into “deal”, if possible. People who scored 1-3 in the table above often slip this rule but this principal can help them have a more PE-driven resume.  
3. In each achievement, remember to put the size of that deal, type of that deal, and your action/involvement.
4. The order of deal size, deal type and your involvement should be consistent across bullet points. We often recommend this order [Your action/responsibility][Deal size][Dealtype]. Consistency will help the hiring team catch up all the information quickly. 
5. Start your point with an action verb to get the attention and clearly express what you did 

Those rules will be beneficial also for anyone who owns a strongly related experience to private equity. 

3.4 Prepare for the interview

The interview process will include multiple rounds. Normally, Analysts and Associates will have 2-3 interview rounds; some firms even organize 4-5 interview rounds. Internship recruitment can be less heavy: only 1-2 interview rounds. 

First interview round is to screen the candidate profile by asking some fit/behavioural questions, such as Why PE? Why this firm? etc. For Associate recruitment, it will be conducted by headhunters via phone. For Analyst and Intern, it will be conducted by the PE’s hiring team. 

Other interview rounds will be conducted in-person and will skew towards technical questions, case study, deal experience, etc

3.4.1 What do recruiters evaluate?

Private Equity firms will evaluate your skills, your technical knowledge, and why you are interested in PE and investment deals. Many questions are designed to test these competences. Simply put, interview questions will be belong to 6 main categories:.

3.4.2 How to prepare and ace an interview

#1. For fit/behavior questions, this is the part where you tell your stories with interviewers. Thanks to these questions, recruiters will learn how your previous academic and work experience fits into the private equity and also strategies of the firm you apply for.  

The questions in the first place always surround:

• Introduce a little bit about yourself  / Walk me through your resume
• Some of your strengths, weaknesses
• Your achievements and failures
• Future plan and why Private Equity?

What you should prepare here are crafting your own stories (reflecting your achievements, past experience, transferable skills and leaderships), and backing up small personal stories to answer questions related to strengths and weaknesses. 

If you have some disadvantages in your profile such as low GPA, non-target background, fewer outstanding accomplishments, fewer finance internships, and etc., you have to prepare stronger responses to make up for these “real weaknesses”. 

#2. For technical questions, what you will be interviewed always sticks with accounting, finance, valuations, and practical deals. 

• Accounting: Financial statements (types of financial statements, links between different types of financial statements), revenues, operating costs, EBITDA, debt & equity, etc.
• Finance: Equity Investments (stocks), Fixed Income Investments (government bonds, corporate bonds, commodities, currencies) , Derivative Investments (options, futures, forwards, swap), etc.
• Valuation: Valuation metrics and multiples,  (Discounted Cash Flow, LBO modelling, etc.), knowledge about mergers and acquisitions, etc.

#3. Other non- technical questions: Beyond technical comprehension, private equity firms also want to test your knowledge about the market, practical deals and companies. Your work is to keep abreast of news about markets, imminent IPO, bond issuances, and mergers & acquisitions on a daily basis. They can also ask your opinion about the firm’s portfolio and what you will do accordingly. The questions largely depend on your experience on your profile. That means if you present your active involvement in transactions/deals, you might get many questions about it. Discussing the deals is considered the most challenging part in an interview. 

4. So Why Private Equity?

Compared to Investment Banking, Private Equity is more interesting to work for. It is not  all about buying and selling companies, you also have to manage and improve the operation of the companies. The bonus in Private Equity is more variable because you will receive both bonus from your performance and the percentage of investment returns. Getting to Private Equity is difficult, besides graduating from top university or being top employees in Investment Banks, you also need to have relevant experience such as working on deals. However, it’s worth a try, the more you prepare, the higher chance you have to get into Private Equity.