“I knew pretty early on that I wanted to be an investor…” – a candid insight into how a banker made the transition to private equity
Nordbridge: What attracted you to Private Equity?
Candidate: I knew pretty early on that I wanted to be an investor and the initial thought of it came to me whilst I was at university and pursuing a different path. I read Ben Graham’s “Intelligent Investor” when I was 19 and that book captured my interest. I gradually moved on to reading everything I could about Warren Buffett (particularly via his shareholder letters) while I was in banking and it was then I really decided to pursue a career as an investor. It struck me as being an intellectually challenging career, with great variety (given the number and types of businesses you look at), as well as appealing to my (unhealthy!) competitive instincts!
While in banking I worked on a number of transactions with financial sponsors; their approach to unpicking businesses and getting under the hood and working out the nuts and bolts of a business’ underlying economics really resonated with me. I read everything I could about private equity funds: their approach to investing, the types of returns they produced, and what an entry-level role would involve.
All of these things convinced me this was the career for me. To me, private equity seemed like the best of all these worlds, combining all the things I was interested in: getting close to a business’ operations, thinking deeply about buyout analysis and capital structure, and the entrepreneurial nature of finding and sourcing interesting deals.
Nordbridge: How did you decide which funds you were interested in?
Candidate: This can be surprisingly challenging; it’s quite difficult to do this outside-in, based on only a desktop analysis as a lot of the funds appear quite similar, especially when compared with other funds in the same bracket i.e. large cap, mid to large cap, mid-cap etc. Initially, you will probably have an instinctive interest in the funds that have big brands.
In reality, you only begin to truly understand the subtle differences when you have many, many conversations with individuals who work in the industry and, sometimes, only when you yourself end up working in the industry (though it’s often too late by that point!).
As such, I’d encourage prospective candidates to actively network as much as possible – especially within the class of analysts/associates who have recently left your institution and have conversations with people you really trust who can give you an honest and uncensored account of what the institution is like.
After some time, I managed to narrow it down to a few essential characteristics: I wanted somewhere that was large-cap, had an exceptionally strong and consistent track record (it’s amazing how many candidates don’t really do their homework on this), a European and global focus, a collegiate culture and where I thought I would have the opportunity to become the best investor I could possibly be. It’s actually interesting how many funds get struck off the list when you realise they don’t satisfy such simple criteria!
Nordbridge: How did your time in banking prepare you for the transition?
Candidate: In my view, banking only gets you 30-40% of the way there. It gives you the basic technical skillset: accounting, valuation, modelling etc. but in reality you only get to understand these things in a haphazard way as your work load is very much deal / role dependent. You might find that after 2-3 years in banking, there are still significant holes in your skill set that you have to spend the time outside of work filling. What banking is perhaps most successful at doing, is instilling in you some of the essential qualitative traits that you need to be successful in private equity: exceptional attention to detail, the capacity to work extremely hard and a cool head under pressure.
Beyond that, I think any individual who is serious about moving needs to invest significant time and effort into enhancing the technical side of things and also to get into the habit of thinking in depth about the businesses you encounter and what drives their economics.
Nordbridge: What obstacles did you face when making the move between banking and private equity?
Candidate: As well as the practical obstacle of getting out of the office for interviews without being noticed (I suggest you try and schedule them for as early as possible in the morning!), there is the simple fact that making a move requires a massive time commitment, one that most people simply aren’t willing to make.
When I say time commitment this refers to the amount of preparation that is required in order to be a successful candidate; most people think that a scattergun approach to interviewing with minimal preparation and just getting lucky will be enough. This strategy is probably successful for 1 in every 100 candidates! If you are serious about moving, you have to take time out of your schedule and make sacrifices.
Separately, the period from thinking about moving and commencing interviews to actually moving can take anywhere between 4-8 months, with variables such as recruiting timelines, the need for people and your own job driving the amount of time ultimately required.
Nordbridge: How did you prepare for interviews?
Candidate: 90% of candidates don’t appreciate how much preparation is actually required. You might think that being successful in an interview is a God-given right given your previous track record of success and based only on a test of your intellect, but in reality interviewing is a skill and it takes practice. I like to break the skill set down into the following buckets: technical / banking skill set, consulting skill set, understanding of investment theory, motivations, and, my favourite, brain-teasers / mental arithmetic. Taking each of these in turn:
Technical / banking skill set: you should know accounting, valuation and LBO fundamentals inside out. This means being able to answer questions like what impact an accounting transaction will have on the 3 statements or being able to do a paper LBO. You should also have built out your own LBO template (both cash flow and 3 statement) and be able to rebuild it in 30 minutes. Do it 10-15 times and see how much better you get.
Consulting skill set: this is probably where bankers fall down most. Much is made of understanding the Mckinsey / Bain / BCG thought process in breaking down a business. Google people like Victor Cheng who will help you understand what’s required. You should be able to answer questions about market sizing, be able to apply simple frameworks such as Porter’s 5 Forces or profitability frameworks. Note that some interview processes will only focus on these things and not ask you to build a model. In essence, try and work out what it is that makes one business a high quality one and another a poor one, and why it might be a successful buyout candidate.
Investment theory: this requires being able to answer questions about whether you invest now (not a problem if you don’t do so) and where you would invest if you had $100k; $1m; $1bn. Have some sensible and well thought through examples up your sleeve.
Motivations: these are the bread and butter questions such as “why investing? Why private equity? Why this fund? Why not a start-up or a hedge fund?” Take the time to think deeply about these, write your answers down and memorise them. You shouldn’t even have to think when asked these questions in an interview context.
Brain teasers / mental arithmetic: there are plenty of books and apps out there that can help you get better at this. Be methodical, as it doesn’t take much time out of each day to improve. Spend 20-30 minutes a day doing a couple of brain teasers and rapid fire mental arithmetic. It’s amazing how much you will improve after a week/ month.
All of these things you can prepare outside of interviews and knowing your stuff will take a lot of the nerves out of the equation when it comes to the interview. You can be asked about literally anything, but you’ll find after time and practice that the questions all boil down to the same subjects.
Nordbridge: What did you find the most challenging element of the interview process?
Candidate: By far and away, taking knock backs. If you’re reading this, you’re probably someone who has sailed through university with excellent grades and you’ve gone through the motions to get a job in a prestigious banking or consulting firm. You may not be used to failure, and the reality is you will probably mess up at some point in the interview process. This can be hard to take, especially when you are not used to failure.
Successful interviewing is not necessarily about how intellectually able you are, it’s more about whether you have the patience, resilience and street-smarts to learn and apply the unique skill set that is acquired to get the right job for you.
Nordbridge: If you could do it again, what would you do differently?
Candidate: I’m pretty happy with the way I approached it as I got to where I wanted to end up. If anything, I wish I had moved earlier on as an analyst!
Nordbridge: What do you think is the most common reason candidates don’t succeed in an interview?
Candidate: Undoubtedly lack of preparation; this is by far and away the most common factor. It is hard work taking the time to prepare when you get home from the office at 11pm or are working successive weekends on the trot. The last thing you want to do is practice building an LBO template or do a consulting case study. Decide early on whether this is truly for you and whether you are willing to make the commitment.
Nordbridge: Did you have any funny moments when you interviewed?
Candidate: I had a few instances when interviewers simply didn’t show up and nobody decided to inform me. I also got asked some odd questions like “what my mother would say about me if she was in the room?”, “what my friends are like?”, “whether I was single / in a relationship / married etc?”. But all of these were asked in good nature, and sometimes funds are really trying to find out about your background, your mindset and whether you have the EQ (and not just the IQ) to be successful in the job. In time, you’ll find that high EQ is a much bigger determinant of whether you will be a successful investor: if you have a few extra points of IQ, I suggest giving them back in exchange for better EQ..!
Nordbridge: What lessons have you learnt since joining a private equity fund?
Candidate: This job is intense and incredibly demanding. It requires exceptional hard work, dedication and resilience. You have to get used to a lot of deals not working out; in reality a fund only does 2-3 deals a year on average. You might look at 10-15 things and not a single one of them ends up working. It takes tenacity to work through this and end up with a successful deal. And it’s only then that the real hard work begins, to see it through the 3-5 year investment hold and exit the deal.
If you want to be successful, you have to be in it for the long-term; it will take 10+ years to build a track record as an investor in your own right and it is most definitely not something you can do overnight. Separately, the responsibility levels go up exponentially compared to banking; hardly anyone checks your work and mistakes can be costly!
Nordbridge: What skills have you had to develop more since leaving banking?
Candidate: Being able to present successfully in front of your investment committee has definitely been one I’ve had to develop. Your investment committee will likely have people who have been investing for 20-30 years who know what’s relevant and what isn’t and can quickly pick up whether what you are saying is, excuse my language, BS! I always take at least 2-3 hours before every investment committee to rehearse my presentation and to think about possible questions I might receive and their answers.
I’ve also had to learn to be patient: it takes time and a track record for people to value you, and it might be difficult to see where this comes from when you work on 10 things that all end up in the can!
Nordbridge: How does your role differ?
Candidate: The best analogy is that you have to get used to being analyst, associate, VP, ED and MD rolled into one. There is a real jump in responsibility. I am frequently in meetings with banks or consultants or with management teams where I am expected to lead the meeting despite being, by far and away, the most junior person in the room.
You have to get used to being in situations where you are not comfortable and uncertain of the right answer. It sometimes feels like it takes an uncommon amount of common sense; you have to use your intellect to work your way through a problem methodically and logically when it is your responsibility (and not someone above you!) to have the answer. But you also have to know when to reach out for help!
Separately, the stress is different: you are no longer completely sleep deprived and churning out pitchbook after pitchbook with cut and paste slides: you are really judged and valued on the quality of your work and not the quantity. Mistakes in this job can be very, very costly and the standard required is always analytical perfection.
Nordbridge: How much of an impact have various industry changes had on your role?
Candidate: I would say two changes have had an impact. First, the nature of LP co-investment has changed, such that you will find yourself on a deal with a counterparty that is one of your LPs who is investing directly alongside you; you have to get used to dealing with these counterparties – some will be good, some will be truly awful…
Secondly, private equity has become somewhat commoditized and increasingly institutional. The competitive dynamics on a deal are perhaps much stronger today than they were 10-15 years ago. As a result, getting a deal successfully over the line now requires a truly differentiated and original angle from the GP. As an associate at the bottom of the rung, you might think that it’s not your place to comment on this; in reality, senior people really value the fresh insights that an untainted / unjaded thinker who is often closest to the numbers and the detail can come up with in a deal. You simply can’t be afraid to voice your opinion.
Nordbridge: What are your five key tips for someone looking to make the move?
Candidate:
#1 Prepare
#2 Don’t forget #1
#3 Really think carefully about why you want to do this; people will pick it up very quickly if you are not committed and don’t have a convincing case. An interviewer who has met with 30-40 people will very quickly figure out who is a legitimate candidate and who is not.
#4 Network as widely as possible – find someone to help you practice with your interviews. If you are a banker, find a consultant and practice consulting case studies. If you are a consultant, find a banker who can help you learn how to model etc.
#5 Did I mention #2?
Nordbridge: Any other points you would highlight?
Candidate: Decide very early on if you are willing to make the commitment to do this. I’d advise you to decide even as early as when you are approaching the end of your first year in your job. You may not know for certain and actually you might not ultimately convert into role. But the skills you learn in preparing for it will put you in the best place possible to find the job that is ultimately right for you, even if in another career path.