When it comes to the private-equity industry, there is a gulf between perception and reality. The perception of the business has largely been driven by the aggressive coverage devoted to its biggest players. There is the Blackstone Group’s Steve Schwarzman, whose over-the-top 60th birthday party thrown at the market peak in early 2007 became a symbol for the excesses of the new Gilded Age. And then there is Kohlberg Kravis Roberts & Co.'s Henry Kravis, star of the bestselling 1992 book "Barbarians at the Gate," a gripping narrative of the firm’s takeover of RJR Nabisco.
While Schwarzman and Kravis’s firms still stand at the top of the industry and are the subjects of much of the media’s coverage of it, there is much more to the private-equity business than just these two masters of the universe.
At its core, private equity firms raise money from large institutional investors, use that money to buy companies (along with borrowed money), try to improve them, and then hopefully sell them for a profit. These transactions -- known as "leveraged buyouts" -- are at the core of a private-equity firm’s business.
Industry data provider Preqin tracks 4,500 firms that employ a total of about 65,000 people. “These firms constitute the ‘core’ of the industry,” writes Preqin in its 2009 Global Private Equity Review. "Beneath this layer lies a further tranche of smaller firms that will invest generally smaller amounts of capital, raising funds from private sources, including friends and family.”
But over the past decade, these firms have grown into diversified alternative-investment firms with hedge funds, real estate arms and fixed-income units. Assets under management have reached $2.5 trillion, according to Preqin. Those assets are spread across a wide range of investment strategies, from buyout to venture capital to distressed to property to infrastructure funds.
WHERE THE ACTION IS
It’s no secret that along with the rest of the financial services industry, private-equity firms are struggling. The lending markets are tight. Battered institutional investors are making raising funds treacherous. And the deals that were done during the market peak are now sucking wind.
But, in terms of their relative health compared to other financial institutions such as, say, hedge funds -- their cousins in the struggling alternative-investment arena -- private equity is in decent shape.
Unlike hedge funds, which allow investors to withdraw money in as little as 45 days, private equity has long-term lockups, meaning that investors’ capital is tied up for a decade or longer. One buyout executive recently called private-equity’s business model "the triumph of long-dated capital." So all things being equal, a private-equity gig has more job security than a hedge-fund one.
That said, job opportunities in private equity have diminished, as firms such as Blackstone and the Carlyle Group have had layoffs. The fund sizes going forward will be smaller, meaning that the firms will have fewer fees to pay people, and won't require as many bodies to staff deals. And it's a thinly staffed industry to begin with.
But in terms of where the most opportunities are in private equity right now, one word comes to mind -- distressed. Distressed investing is a broad term encompassing a variety of strategies, including buying companies out of bankruptcy or acquiring companies by purchasing their debt. If you’ve got expertise in bankruptcy law or in the fixed-income markets, this could be a good time to explore this area.
Steve Schwarzman spent the early part of his career at Lehman Brothers. Henry Kravis, Bear Stearns. Cerberus Capital Management LP’s Steve Feinberg, Drexel Burnham. Okay, okay, before you say, "So you mean you have to start out at a collapsed financial firm," the traditional career path to private equity is clear: Start off at an investment bank.
Indeed, most of the hires at the large private equity firms are made straight out of Goldman Sachs Group Inc. and Morgan Stanley’s financial analysts programs.
Of course, there are many other less predictable routes into private equity. Corporate lawyers who have billed thousands of hours structuring leveraged buyouts have made the transition to doing deals. There are also a fair number of management consultants that have infiltrated the industry. Bain & Co., for instance, has long been a pipeline into private equity heavy Bain Capital LLC.
Another route would be to gain substantial industry experience in an area in which private equity firms invest. These firms will often poach top industry executives from their companies and bring them on staff for their industry expertise. For example, Michelle Guthrie, the former CEO of STAR, News Corp.’s Asian entertainment unit, is now a managing director at Providence Equity Partners LLC, a large media-focused private-equity firm.
That said, a common thread emerges in conversations with private-equity professionals about who will excel in their business. The first are those with strong analytical skills who can penetrate balance sheets and cash flow statements. The second is people with operational experience who can swoop into a company, identify the problems, and work toward fixing them.
GETTING THE JOB:
Three words: networking, networking, networking.
Those who have their eye on landing a job in private equity should position themselves in a way that connects them with the firms for whom they hope to work. If you’re a banker, angle toward getting assigned to covering private-equity firms, who are known as “financial sponsors” in the banking world. If you’re a lawyer, get yourself assigned to work on a leveraged buyout deal. If you’re a management consultant, try to work on a company that’s private-equity owned.
Although the industry has expanded and become more institutionalized, job opportunities in private equity are not often posted through traditional channels. Instead, the best bet is to milk your network to get your foot in the door. Private equity is always going to be a hard-to-break-into, informal business.