At first glance, private equity (PE) and venture capital (VC) firms look alike: they both represent firms that invest in companies and exit when the time is ripe and they can make good returns. But there are differences – they buy stakes in companies of different types and sizes, make different levels of investments, and take different percentages of equity in the companies.
PE firms almost always buy established companies that are not doing so well. They improve the operations of the ailing companies, turn them around, and offload their stakes to make good profits. VC firms, on the other hand, identify start-ups or other companies that have potential or need money, invest in them, and share revenue or sell their stake.
PEs almost always take a majority (going up to 100 percent) stake and invest around $100 million in the companies they buy. Since these companies are already well-established, there is a relatively limited risk.
In comparsison, VCs take on substantial risks. They may invest about $5 million or higher, only in start-ups, which may or may not thrive.
Investopedia points out that while PEs can buy companies from any industry, VCs often restrict themselves to a more restricted set of industries – dominated by technology, biotech, and clean technology. While the former use both cash and debt in their investments, the latter use equity only.
Hedge funds (HF), on the other hand, are the odd one in the pack. They aim to provide the highest returns to their investors in the least period possible and therefore mainly invest in highly liquid assets, so that they can cash in on a profitable investment and move on to another opportunity that is equally or even more appealing. HFs invest in anything from stocks and bonds to commodity futures and currencies.
PEs are more likely to attract investment bankers, while VCs draw a variety of professionals such as business development experts, product managers, consultants, former entrepreneurs, and even bankers, explains mergersandinquisitions.com. But PEs bring in their operating partners from a pool of senior managers with substantial experience in various industries, not just investment banks.
At the interviews, PE recruiters focus on the number of deals you have been involved with and how good you are with financial modeling. VCs tend to examine your networking qualities, understanding of markets, and ability to bring in deals. Interviews at technology VCs are often less technical than PE interviews and are much more informal. But VCs from biotech, healthcare, and clean-tech may come up with technical questions. It helps if you have strong opinions about industries that are likely to do well and companies that are worth investing in.
Larger PEs use the on-cycle recruiting process (see our article “A guide to PE careers”), which is faster and highly structured, while smaller PEs and VC use the longer-drawn-out off-cycle recruiting. During on-cycle recruiting, PEs bring in bankers from large banks who want to make the switch to large or mid-size PEs. VCs use off-cycle recruiting, taking many weeks to evaluate and shortlist candidates.
The bigger, well-known VCs use headhunters. The smaller VCs are less likely to use them. VC recruiters look for much the same attributes in a candidates as PE recruiters: communication skills; ability to source investments; and good deal-experience.
There are three entry points into VCs: pre-MBA, post-MBA, and senior level. At the pre-MBA entry point, bankers with good deal-experience, strategic consultants, and professionals with business development experience are preferred. At the post-MBA level, you need to have gone to a top school. At the senior level, experience in big company is valued: for example, say, the head of sales at an elite tech firm. A referral from your boss or colleague will help you to get into a VC. Also, your cultural fit in the VC is an important hiring consideration.
If you’re a science major or engineering graduate, you can get into a VC if you have some experience in investment banking or consulting or have done an MBA from a top school. Read – How to get venture capital jobs.
As for HFs, an MBA from a top school is just one necessary qualification. What could add points to your candidature is pre-MBA experience in an HF, investment bank, or PE firm. And, of course, networking skills are very highly prized.
What do you need to get into a PE? You must be working in a bulge bracket bank or an elite boutique in the ideal industry group, you must have attended a top undergrad school, and you should have a high GPA.
What do you do if you don’t have all of these? You have to take to networking aggressively and use the off-cycle recruitment process.
The skills that PE recruiters look for are analytical ability, background in banking, consulting, or corporate development; talent for research; knowledge of financial modeling; and knowledge of various industries.
As for VCs, people from varied backgrounds get a look-in. You require good deal-experience, good communication skills, and the ability to source investment opportunities. It helps if you have sound knowledge of technology/biotech or healthcare fields and can convince the company that you are interested in various industries, including start-ups.
On the other hand, HF recruiters look for candidates with knowledge-based skills (such as knowledge of financial instruments, markets, and risk assessment) and personal skills (such as good communication, team work, and risk-taking ability). Read more on how to get Hedge Fund jobs after MBA
PEs and VCs try to find their deal-makers from the same pool of candidates: investment bankers. Bank work involves firm valuation, which is an important procedure that helps PEs reassure themselves that they are making a good investment.
PEs and VCs hire experts in particular industries consulting or working full-time with them. They may also recruit from top management consulting firms to improve the quality of their investments. HFs recruit sell-side equity researchers who can value public companies and debt.
Whether it is a PE or HF, analysts aim at getting to partner level and earn carry. To go higher up the ladder, analysts need the ability to source good deals, have strong relationships with investment banks to get financing, and the ability to recruit good management for portfolio companies. Networking is the most important talent for these three tasks. In the initial period, you may only need to be good at analysis, but as you go higher, networking assumes more importance.
The time-frames in PE and investment banking for promotions are roughly the same. At hedge funds, you can never say when your elevation to a senior position—say, from senior analyst to portfolio manager—will happen.
A PE analyst can expect to work 70 hours a week when there are no deals to be closed and 100 hours when there are. There’s not much to choose between the lifestyles of a PE analyst and investment banker in terms of hours at their desks.
At VCs, the hours are shorter than they are at banks. People get to do 60-hour weeks and take weekends off. However, the hours grow longer when there is a deal to conclude. But as there are more people working in a bank and less in a VC, the camaraderie in the latter is not just as much as it is at banks.
At HFs, work revolves around market hours and can be more consistent unless the company has a culture that encourages workaholics. Sixty-80 hours is normal (50-70 hours, according to another source), unless there are deals to be pushed through. The quality of life is “more exciting and entrepreneurial” than it is at an investment bank, according to an HF headhunter. However, the story is somewhat different at HFs that cover foreign markets: for example, employees of HFs in the US covering Asian markets may certainly have to burn some midnight oil.
Here are some MBA jobs with the best work-life balance.
PE work is not much different from investment bank work. The focus is on deal transactions. The tasks include sourcing deals, forecasting returns, meeting bankers and private lenders for debt financing, reviewing legal documents, closing deals, coordinating funds flow, assisting the CEO/CFO with financial reports, and preparing the company for sale when financial targets have been achieved, notes buysidefocus.com.
The different between PE and HF work is that there are no transactions in the latter. HF analysts focus on building industry knowledge, conducting company research, forecasting financials, and making investment decisions.
In work and culture, PEs resemble investment banks—the hours are long, there’s a lot of coordination on deals, and much technical analysis on Excel. VCs involve more networking and meetings, but the hours are kinder and the workplace is more relaxed. In both, you evaluate investment opportunities, accepting very few and rejecting most.
PEs obviously pay much higher since the funds that they manage are bigger and the management fees higher. The three components of salary—base salary, bonus, and carried interest—are higher in PEs than in VCs.
First-year associates in a PE firm in the US may earn $200,000-$300,000 (as of 2017), while in a VC firm they may get 30-50 percent less, notes mergersandinquisitions.com. Junior-partner-level pay may be $400,000-$600,000 at a larger PE firm. At large and extremely successful VC firms, a junior partner can hope to earn $400,000-$600,000.
Salaries at PEs and HFs are more or less the same. The average base salary in PEs and HFs is equal to third-year investment banking analyst pay, around $90,000-$100,000. However, the bonus in both could be more than that in investment banking. While a third-year investment banking analyst could receive $90,000-$100,000 in cash bonus, a PF or HF analyst could get more than $100,000 in bonus.
Compared with HFs, pay in PEs is more stable and consistent, since PE investment holding is longer (three to five years) compared with HF holding (three months to three years). Bonus compensation in an HF could vary widely depending on the fund’s performance and yours.
A blog on emolument.com says PE and VC firms pay 30 percent better than HFs at the analyst or associate level. The pay difference at director level may be $110,000, with PEs trumping HFs. In addition, carried interest and co-investments take the PE/VC pay further up in senior positions.
In London, the total annual earnings of an analyst is around $125,000 at a PE/VC compared with just under $100,000 at an HF; around $200,000 for an associate in a PE/VC compared with over $150,000 for HF associate; around $400,000 for a VP in a PE/VC compared with just over $300,000 for HF VP; and nearly $450,000 for a director in a PE/VC compared with around $325,000 for a HF director.
It is more difficult to go from a VC to a PE than the other way around. This is because VC work tends to be more specialized. Junior PE and VC professionals stay in their funds and earn experience, and then go for an MBA and join another company. Banking recruits in PE usually do not go back to banking but join HFs or go off the beaten track. After a VC job, many consider becoming an investor or launching a start-up.
Exit opportunities for an HF analyst are substantially less: you could either stay and get promoted, you could join another closely related fund, or you could go to b-school. This is because hedge funds look for people with very specific experience, and exit opportunities are rather limited.
If you are good at deal management, relationship building, company research, and financial modelling, PE or VC will suit you quite well. But if you would rather follow company trends and valuation and do research, it should be hedge funds.