Private Equity - Industry Overview

PRIVATE EQUITY / VENTURE CAPITAL The past few years have seen the emergence of private equity as a rapidly growing and visible asset class with fundraising peaking in 2000 for both venture capital and buyouts. As a result, many new private equity funds formed and existing funds expanded dramatically, prompting considerable career interest amongst MBAs. While a greater number of employment opportunities were created within the field, the industry remains nonetheless an evolving cottage industry without an established path to entry. Given that most private equity funds are comprised of less than 20 investment professionals, employment opportunities remain limited. The heightened interest in the field combined with the limited number of openings and fragmented set of firms consequently make the private equity job search one of the most challenging for the MBA, necessitating a tremendous amount of independent commitment, research, focus and effort. Private equity is a broad term referring to investments made directly into predominantly private companies. In return for a financial investment from a private equity fund, the target company cedes a portion of its ownership. The two most common categories of private equity are venture capital and leveraged buyouts. In basic terms, venture capital funds invest in smaller, high-growth companies whereas leveraged buyout funds invest in larger, established, often troubled companies that need to be restructured or redirected. Other sub-categories of private equity are: distressed investing (purchase of firms in bankruptcy), and mezzanine funding (can be second stage venture capital financing or subordinated-debt financing). Private equity is a subset of the alternative-asset investment, which is a broader group of non-traditional investment classes that large institutions (especially pension funds) invest in to round out their portfolios. Other major categories of alternative investments include hedge funds and principal real estate investing. Private equity funds are typically structured as limited partnerships and raise dedicated pools of capital from a variety of institutions for the purpose of investment. In return for making investments in high-risk companies, they aim to generate superior returns to those available from other investment strategies, such as public securities investing. Beyond providing capital to the target companies, private equity funds involve themselves significantly in the operations of these companies by providing assistance in a broad range of areas, from financial management and reporting, marketing, technology, strategy and recruiting. It is important to note that private equity funds take a long-term view of their investments and often remain invested for three to seven years. Ultimately, private equity investors are in the business of making illiquid, long-range bets. These funds range the gamut in size, orientation and strategy with a large number of both specialized firms and generalist funds. Also a number of large investment banks run proprietary internal private equity funds (typically called “merchant banks”). Although fundraising was strong until 2000, fund formation slowed considerably starting in 2001. This slowdown was driven by poor returns on expensive investments made during the “bubble” and (on the buyout side) difficulties raising adequate amounts of debt capital. Given what some consider substantial overcapacity in the industry, many expect consolidation in the number of venture capital and buyout firms over the next few years 1/17/2009 1 of 7 FUNCTIONS/TYPES OF POSITIONS Positions within private equity funds are largely focused on the investment side of the business where professionals are involved in identifying, evaluating, structuring and negotiating investments, as well as in monitoring performance and providing assistance after an investment is made. Titles, in order of seniority, commonly include: General Partner/Managing Director, Principal, Vice President, Associate and Analyst. Most newly minted MBAs are typically hired as Associates or Senior Associate. TOP HIRERS AT WHARTON Private Equity 3i Group Abraaj Capital Limited Advantage Partners Inc. AEA Investors LLC AIF Capital AIG Highstar Capital, L.P. Allianz Capital Partners American Capital Strategies Apax Partners Apollo Advisors Arlington Capital Partners Atlas Ventures Bain Capital BC Partners Blackstone Private Equity Group BTG International, Inc. Burrill & Company Camden Partners Care Capital The Carlyle Group Citigroup Alternative Investments Group Clearview Capital, LLC Collinson Howe & Lennox Comcast Interactive Cordova Ventures Council Ventures Crestview Partners Cross Atlantic Capital Partners Darby Overseas Investments DN Capital Dolphin Equity Partners Eureka Growth Capital Graham Partners, Inc. Greylock Ventures GSC Partners Harding Group H.I.G. Capital Ideal Ventures Management LLC J.F. Lehman & Company J.P. Morgan Partners JLL Partners Johnson & Johnson Development Corp. Lake Capital LightSpeed Venture Partners LLR Equity Partners Lone Star Fund Mellon Ventures Milestone Advisors New Vantage Group PA Early Stage Parallax Capital Management Permira Advisors L.L.C. Prism Capital Providence Equity Olympus Partners Onex Corporation Quad-C Management, Inc. Quadrangle Group LLC Quaker BioVentures Sequoia Capital Soros Fund Management LLC SR One/GSK Sterling Venture Partners SV Life Sciences Summit Partners Texas Pacific Group Thomas H. Lee Partners L.P. TowerBrook Capital Partners, L.P Trivest Partners, L.P. Tribeca Group Veronis Suhler Stevenson Partners LLC Vestar Capital Partners Warburg Pincus White & Case LLP Zon Capital Partners 1/17/2009 2 of 7 INTERVIEW PROCESS The larger independent funds (with 100 investment professionals or more) are becoming regulars on campus, as are those funds affiliated with institutions or corporations (such as Goldman Sachs' Private Equity Division). Since the average fund is considerably smaller, hiring needs will be infrequent and largely addressed through the existing relationships and connections of the funds’ partners. It is therefore essential that you independently contact those funds in which you have an interest. Rigorous networking through Wharton alumni or alumni of your former employer is undoubtedly the best way to get started. Roughly 70% of positions within the private equity industry are filled directly by the funds themselves, 10% through professional recruiters, 10% through hiring on business school campuses and the balance through advertising and other methods. The interview process is far less organized and systematic than in other industries, such as investment banking or consulting. In general a top-tier MBA is a pre-requisite for a position at a good private equity firm (i.e. it is a threshold) and most of your interview will focus on your relevant work experience and investment acumen. While you may encounter some questions regarding why you want to work in private equity, given the high level of interest in the field, this will often be taken as given. Instead, interviews typically focus on why the firm will benefit from hiring you, and will generally be a grueling and long process. You should expect to be tested through case interviews, where the interviewer will be assessing the way you think and trying to gain a sense of your business judgment. You may even encounter some highly technical deal processing questions (e.g. “how do you amortize financing fees”). If there are deals or case assignments on your resume, be prepared to speak about each extensively (including some sense of the metrics/financials involved). There will also be an equal focus on softer, interpersonal assessment, namely determining who you are as an individual. As a rule of thumb, leveraged buyout funds will focus on analytical and deal processing capabilities while venture funds will focus on vision or creativity combined with commercial instincts and your ability to network. Contacts, contacts, and contacts are the key to a successful private equity job search. Although there is no foolproof method, one should start by speaking to classmates, searching alumni databases, and searching the web. FAQ for Private Equity Interviews Personal background:  How did you come to our firm?  What is your background? Explain your resume (EVERYTHING is fair game).  What are your interests outside of school/work?  Why did you choose your college/major?  Why did you leave your job for your MBA?  What have you learned in business school?  Why are you switching careers?  What are your long-term career goals? 1/17/2009 3 of 7 Interest in private equity:  Why are you interested in private equity? LBO vs. VC?  What is your experience/familiarity with venture capital/LBOs?  How is your experience in (banking, tech, consulting, etc.) relevant to private equity?  What do you think the role of a private equity investor is?  Do you prefer a certain stage of investing? Why or why not?  Do you prefer a certain industry sector? Why or why not? Which industry?  Do you think venture capitalists should be generalists or specialists?  Would you rather work at a small fund or a large fund? Why?  Do you prefer corporate/strategic investing or LP investing? Why?  Have you considered joining a start-up or operating company?  Are you interested in working for one of our portfolio companies? Why or why not? Understanding of the industry:  What trends have been developing in the private equity industry?  What do you think are compelling industry trends for a potential investment?  How do you source investment opportunities?  How do you evaluate an investment opportunity, especially a private investment?  What do you look for in a business plan?  How do you evaluate a management team?  What do you look for specifically in a CEO? A CFO? A COO?  What are the characteristics of a good entrepreneur?  How would you describe the investment/due diligence process?  If you were presented a management team’s financial plan, what analysis would you perform?  How do you value a company? Specifically, discuss why one technique may be a more accurate assessment of value than another?  Discuss capital structure. What are the appropriate multiples of senior debt, subordinated debt and equity for a manufacturing company?  What are some appropriate financial covenants that a bank/sub. debt lender would expect?  What kind of financial model would you present to a lender group? A subordinated debt group? Possible equity co-investors?  What are some of the possible ways for a company to increase cash flow aside from revenues?  How would you monitor an investment in a portfolio company?  How would you evaluate a follow-on investment in an existing portfolio company?  How familiar are you with negotiating term sheets?  If I wanted to protect my downside, how could I structure an equity investment?  What are the most important elements in a term sheet? Why?  How do you exit an investment? Why?  What are some of the methods you could use to find acquisition opportunities for a portfolio company?  How do you reject a deal?  How would you confront your boss if you disagreed with his/her conviction on a deal?  What do you think makes a good investment?  What qualities characterize a good investor?  What are the skill sets you think are necessary to be successful in private equity?  Do you have any investment recommendations?  Tell me about an investment you have? Why did you invest and when will you sell it?  Have you looked at our website? Which investments do you like the most/least? Why?  What do you think of our portfolio? What might you have done differently? 1/17/2009 4 of 7  I am looking at a deal in the (telecom, healthcare, financial services, industrial, Internet, etc.) industry that is in the business of _____. How would you go about evaluating this deal? Do you think it is a good investment? Why or why not? What else would you need to know? Relevant experience:  What did you learn at your former employer (if experienced in PE)?  Why not go back to your former employer (if it is another PE firm)?  What is your experience with entrepreneurs?  What is your experience with senior management?  Discuss a poor management team that you have worked with. What have you done about it?  What is your experience with lawyers, bankers and other board members with respect to private equity investing?  Discuss your deal experience. How many deals have you done? What was your responsibility in each of those deals?  Which portfolio company at your former employer was your favorite? Why?  What type of problems have you found when reviewing business plans? How did you address them?  Describe a deal that fell apart?  Is there a deal you think should have been approved but wasn’t? Why? Fit with the firm:  What do you look for in a private equity firm? Why our firm?  Do you have a geographic preference? Why or why not?  What is an ideal job for you?  How well do you perform in unstructured environments?  What is your management style? How do you manage analysts, peers, partners?  What is your negotiation style?  Discuss a situation in which you thought you negotiated successfully.  Discuss your communication skills.  How entrepreneurial are you?  How are you different from your peers at Wharton and the other top business schools?  Why should we hire MBAs instead of promoting our junior associates?  How will you contribute to our investment efforts?  What value would you add as a board member of a portfolio company?  Why should we hire you?  What would your friends say about you?  Who do you respect/admire the most? Why?  Any questions for us? INDUSTRY RESEARCH Lippincott Library Databases  Business & Industry  Factiva  EDGAR Database  Galante's Directory of Private Equity Funds (not available online)     Hoover's Online Lexis-Nexis NVST.com. Standard & Poors 1/17/2009 5 of 7 Periodicals  American Venture Magazine  Buyouts  The Daily Deal  European Venture Capital & Private Equity Journal Industry & Interview Guides  Wetfeet.com  Vault.com  MBA Jungle  MBA-Exchange    Journal of Private Equity Private Equity Analyst Venture Capital Journal Industry Books  Angel Financing: How to Find and Invest in Private Equity by Benjamin & Margulis  Art of M&A: A Merger, Acquisition, Buyout Guide by Reed & Lajoux  Barbarians At The Gate by Burrough  Barron’s Dictionary of Financial and Investment Terms by Downes & Goodman  The Big Deal by Wasserstein  Buyout: The Insider’s Guide to Buying Your Own Company by Rickertsen  Confessions of a Venture Capitalist by Quindlen  Done Deals by Gupta  Eboys: The First Inside Account of Venture capitalists at Work by Stross  Private Equity and Venture Capital: A Practical Guide for Investors and Practitioners by Lake  New Financial Capitalists by Baker & Smith  VC Way: Investment Secrets From the Wizards of Venture Capital by Zygmont  Venture Café by Esser  Venture Capital and Private Equity : A Casebook by Lerner  Venture Capital At The Crossroads by Bygrave & Timmons  Venture Capital Cycle by Gompers & Lerner Email News  PE Week Wire, daniel.primack@thomson.com  VentureWire Alert, djnewsletters@dowjones.com  TheDeal, Dealwire Websites  AssetNews.com  Careers in Business  TheDeal.com  Garage.com  InvestorLinks.com  Investor Guide  Money Tree Report  New York Business Forums  New York Venture Group  Next Wave Stocks          Phoenix Group International Privateequity.com Privateequityweek.com Private Equity Central Venture Capital Online VentureDirectory.com Venture Economics Venture One-VentureSource VentureWire.com 1/17/2009 6 of 7 Other Resources - Directories of Private Equity Funds  Pratt's Guide  Venture Capital Journal Newsletters  Buyouts (published by Thompson Financial)  Private Equity Analyst (published by Asset Alternatives) 1/17/2009 7 of 7