But just like superhero movies, career advice works best when it’s a trilogy – so we’ll complete this trilogy with how to start a venture capital firm.

Starting a venture capital firm is less of a bad idea than starting a PE firm or hedge fund, but it’s still not a great idea for most people.

The biggest issue is that venture capital is best at the end of your career, not the beginning or middle.

The second biggest issue is that there are many ways to invest in startups and growth companies these days, so hardly anyone “needs” to start a VC firm to do it.

And if you think starting your own VC firm is “easy money,” please stop reading this article and seek psychiatric help immediately:

What is Venture Capital?

This article assumes you already know what venture capital is, how to get into venture capital, venture capital careers, VC interview questions, etc.

If you don’t know these points, please read this coverage first because I’m not re-explaining them.

Many of the requirements for starting a VC firm are similar to the ones for starting a PE firm, so I will focus on the differences here.

Why Do You Really Want to Start a Venture Capital Firm?

The other day, a friend forwarded me this tweet from Pieter Levels on X (Twitter):

I agree with his general point that there’s a lot of BS in the VC/startup ecosystem, with many people claiming “fake successes.”

However, he’s wrong about the specifics, from the management fees to the way carried interest works, but we’ll get to that later in this article.

I’m highlighting his tweet because it illustrates how many people think about starting a VC firm: You sit back, listen to startup pitches, pick the winners, and make millions of dollars as mermaids serve you piña coladas on a tropical island.

Nothing could be further from the truth.

Venture capital is a tough business, and it’s a high-paying, cushy job only for people who entered the industry decades ago and have advanced to the top.

OK, So Who Can Start a Venture Capital Firm?

There are exactly two types of candidates with a good background for starting a VC firm:

1. Experienced professional VCs at the Principal, MD, or Partner level with solid investment track records, good relationships with Limited Partners, and unique insights into specific industries, geographies, or deal types.
2. Successful startup founders with a solid history of angel investments who understand startups’ operational and financial sides.

Startup founders tend to be weaker with “LP relationships” but stronger with “building and supporting startups,” while it’s the reverse for professional VCs.

This is why it’s best to have at least one Partner when starting your fund – you want someone who can complement your strengths and offset your weaknesses.

If you do not fall into one of these categories, it is unlikely that you will be able to raise enough capital to start a substantial VC fund.

How to Start a Venture Capital Firm, Part 1: Raising Capital

It is still difficult to raise capital, but it’s easier than PE/HF fundraising because you need less to start a venture capital firm.

So, you don’t necessarily need to focus on institutions capable of writing very large checks, such as pensions, endowments, or funds of funds.

It’s easier to get meetings and quick responses from LPs such as high-net-worth (HNW) individuals and smaller family offices, so this is good news.

Before doing anything else, you must decide on your fund size and team size, which depend on your strategy and the number of portfolio companies you plan to invest in.

To keep things simple, let’s assume that you want a portfolio of 25 startups and you plan to invest in seed rounds for an average of $2 million per startup.

These will be software startups that need less initial capital than hardware, energy, or biotech startups.

So, you’ll need 25 * $2 million = $50 million in committed capital.

Assuming you charge a 2% management fee, that is $1 million in annual fees to cover overhead, salaries, and other expenses…. which is not that much.

After paying for rent, accounting, legal, IT, compliance, etc., that amount might cover:

• Two Partners (yourself and someone else) who both earn compensation well below market rates, such as in the low hundreds of thousands per year.
• One Associate to do the grunt work. This person will also earn well below market rates.

You might now say, “Wait a minute. If there’s not enough money to go around, why not raise a larger fund, such as a $100 or $200 million fund?”

The short answer is that raising $100 – $200 million as a first-time VC with a limited track record is very difficult.

According to Carta, even back in the frothy markets of 2021, the median first-time VC fund size was just above $10 million. Only 8% of new funds had $50 million or more:

But let’s assume that you’re OK with all of this, including the smaller fund size and the limited fee pool to cover overhead and salaries.

To raise this $50 million in capital, you’ll need the following:

• Team: It is usually a bad idea to start a VC fund with only one Partner (yourself). You usually want at least two Partners, even for a $50 million fund, and you should have a history of working together.
• Startup Investment Track Record: Speaking of track records, you must show evidence of successful startup investments, such as a few exits at decent multiples (5 – 10x+) over the years. If you don’t have this, work at an established VC firm or do your own angel investing until you do.
• Highly Specific Strategy: The market is so flooded with VCs now that it’s not enough to say you’ll invest in “vertical SaaS” or “AI-enabled services.” You need to be much more specific regarding geography, strategy, sub-vertical, and more.
• Sourcing Methods and “Access”: The returns in venture capital are very skewed toward the tiny number of companies that hit it big, which means that sourcing is critical. You need to be plugged into the startup ecosystem to find these companies, and all potential LPs will ask about your access to the best deals.
• Personal Contribution to the Fund: Limited Partners will expect you to contribute 2 – 3% of the total capital, so if you and your Partner are not comfortable writing a check for $1.0 – $1.5 million for this $50 million fund, you should reconsider your plans.

The number of LPs varies, but according to the Carta data, most first-time funds have between 51 and 100.

That translates into a lot of meetings with family offices, wealthy people, and institutions; if you assume a success rate of 10%, you’ll need hundreds of meetings to win the commitments for your first VC fund.

You might be able to reduce the required meetings by focusing on groups that can write larger checks, but it will also be harder to get commitments from them.

How to Start a Venture Capital Firm, Part 2: Paperwork and Legal Structure

Much of this is the same as the paperwork and legal structure required to start a PE firm, so I won’t repeat everything here.

Funds are Limited Partnerships or Limited Liability Firms, and the firm is structured as a Limited Liability Company (LLC); a separate LLC is also formed for the General Partners in each fund.

You’ll need all the usual documents, such as the Limited Partnership Agreement, the Offering Memorandum, the Compliance and Risk Guidelines, etc., and you’ll need to spell out the management and performance fees, the hurdle rate (if applicable), your investment targets, and your distribution policy for the LPs.

The paperwork may be simpler for small VC firms than PE firms due to the smaller deal sizes, less capital, and lack of control over portfolio companies.

So, you might be able to finish everything for reduced legal fees, though it still won’t be “cheap” – perhaps a few hundred thousand rather than $1 million+.

How to Start a Venture Capital Firm, Part 3: Hiring a Team

If you’re raising a “micro” VC fund, such as one with $1 – 5 million in capital, the team will consist of yourself.

A management fee of 2% * $5 million = $100K per year barely covers overhead, so it’s not enough to hire employees.

For something like a $50 million fund, as in this example, the team might consist of yourself, another General Partner, and maybe a junior employee.

For a much bigger fund, such as a $200 million one, it might consist of 3 Partners and 5 – 6 junior employees (and everyone will still earn below-market rates).

The most important points in team composition are access to good deal flow and Limited Partner relationships.

The “classic” split allows one Partner to focus on fundraising and LP relationships and the other on sourcing.

If you have three Partners, the third might focus on operations for portfolio companies.

LP relationships are especially important in VC because it can take 10, 12, or even 15+ years to exit certain portfolio companies, so you’ll need to raise another fund based on preliminary results from your current fund.

You must convince the LPs to take a “leap of faith” based on your first few years, including significant unrealized gains on your top investments.

The LPs (should) understand the nature of startup investing, but it can still be an uphill battle, especially with less experienced individuals or family offices.

The rest of the team doesn’t matter that much for a first-time VC fund.

You want Associates and staffers who understand your industry and the basics of VC deals, such as cap tables, SAFEs vs. convertible notes, etc., but specific technical skills are less important than in PE because early-stage deals are simple.

Because of your limited fee pool, you may have to recruit “non-traditional candidates” to fill these roles, i.e., you won’t be picking from IB Analysts in the Goldman Sachs TMT group.

Instead, you’ll have to look for career changers who might be interested in VC, such as product managers at tech companies or professionals in business development, corporate finance, or related roles.

How to Start a Venture Capital Firm, Part 4: Surviving, Investing, and Growing

You are not just “investing” within your new VC fund but also running a small business.

That means the usual headaches with HR issues, audit/finance/tax/legal issues, brand representation/PR, portfolio companies, and LP complaints.

On balance, HR and employee issues are smaller factors here because team sizes are smaller.

But portfolio company issues and LP relations will take up more time.

Portfolio companies will consume more time because early-stage startups are always several steps away from death and need help with sales, marketing, recruiting, engineering, and more.

Also, a $200 million VC fund will have more portfolio companies than a $200 million PE firm because each deal is smaller, and VCs must invest in dozens of startups to have a solid chance at a single “home run.”

LP relations are tricky because of the issues discussed above: The exit time frame is long, you need to “sell” your next fund based on preliminary results, and you may be dealing with HNW individuals who don’t understand these issues.

How to Start a Venture Capital Firm, Part 5: Realistic Compensation

Given the time, effort, and money required to raise a single VC fund, you might be wondering about the realistic compensation.

Continuing with this $50 million VC fund example, let’s say that you and your Partner contribute $1.5 million total to the fund ($750K each).

With the assumptions above, you might earn a base salary of $250K per year.

After taxes in a place like California, this might be ~$160K per year, so you’ll need almost 5 years to earn back your initial contribution before even factoring in living expenses.

Also, this 2% management fee will scale down after the first ~5 years; the total fees over 10 years of a VC fund are usually ~15% of the committed capital, or $7.5 million here.

The bottom line is that for a single new VC fund, your salary from management fees mostly just covers your contribution to the fund.

The real upside from VC investing comes from the 20% performance fees (carried interest) if your portfolio companies do well.

So, let’s say that your fund performs well and returns $120 million over 10 years for a 2.8x multiple on the $42.5 million of invested capital (deducting the $7.5 million in total management fees).

Before you earn anything, the LPs must first earn back their full $50 million (yes, they are repaid for both the management fees and the invested capital).

The remaining amount is then split 80/20 between the LPs and you, so you earn 20% * ($120 – $50) = $14 million.

This is split between you and your Partner, so you each earn $7 million over this period (again, assuming the base salary just covers your living expenses and personal contribution).

That sounds great, but remember the following:

• This was over an effective 12-year period if you account for the time spent setting up the firm and doing the initial fundraising, so it’s more like ~$583K per year for you.
• Most VC funds, especially first-time funds, do not earn a 2.8x multiple—the average multiple is closer to 2x (source). Plenty of funds do not even return 1x, so the GPs earn nothing!

So, the optimistic case for a single $50 million startup VC fund is earning a net amount in the mid-six figures on an annualized basis; the realistic case (2x multiple) is earning ~$300K per year annualized.

This is not great annual compensation for senior-level professionals, so raising additional, larger funds is the usual solution.

This works if you keep posting solid investment results and have the resources and skills to raise funds.

If not, you can always find a new job after a few years of the VC game… which leads us into the final point here:

How to Start a Venture Capital Firm, Part 6: Exit Opportunities

The good news is that if your startup VC firm does not work out, you have more options than someone whose PE firm or hedge fund did not work out.

You could easily join a startup in a finance/fundraising role, go to a tech company in a finance role, or join a larger, established VC firm.

You will probably not be able to “try again” if your firm failed due to poor performance, but if you wait long enough, there may be exceptions.

And if you want to keep investing in startups, you can do so via angel investments, syndicates, or within a larger VC firm.

Final Thoughts: Does It Ever Make Sense to Start a Venture Capital Firm?

The previous articles on starting a private equity firm and hedge fund attracted many negative comments, as readers accused me of being too pessimistic.

But I stand by my comments that starting your own firm is not a great idea for most professionals in these industries – although there are cases where it can work out well.

With startup venture capital firms, the problem is different: There are now so many ways to invest in startups that you don’t “need” to launch a VC fund to do it.

In my opinion, it does not make sense to put in the time and effort of launching a “micro” VC fund with $5 or $10 million in capital.

It’s too difficult to operate with a fee pool that low, and you’ll have more upside by joining an established firm.

Starting a VC firm makes sense in two main cases:

1. You have a long track record at an established VC firm, and now you want to branch off with your team and do something new because of disagreements about strategy or economics at your existing firm.
2. You don’t “need” the money and are doing it for other reasons, such as wanting to launch new startups or advise them after a successful track record in executive roles.

Alternatives to Starting Your Own VC Firm

If your goal is to “invest in startups,” “advise startups,” or “earn money by working with startups,” there are dozens of alternatives that make more sense than starting a VC firm:

• Start angel investing via sites like Angel List to build a track record with small amounts of capital.
• Invest in a VC fund as a Limited Partner.
• Invest in startups as part of a syndicate, either in real life or via online groups.
• Become a startup advisor or “fractional employee” and help with financing and fundraising in exchange for small equity grants.
• Join an established VC firm and work on sourcing, due diligence, and operations.
• Work at a fund of funds that invests in VC funds and makes occasional co-investments.

The point is that starting a VC fund is like a hammer, and not every problem is a nail.

If you cannot clearly articulate why you want to start a VC fund rather than pursue one of the alternatives above, you need to reconsider your plans.

And please, do not start a VC fund because you think you’ll earn $2.5 million in management fees “forever” in exchange for no work.

The post How to Start a Venture Capital Firm – and Why You Probably Shouldn’t appeared first on Mergers & Inquisitions.

“Help! I hate this job. How can I move from wealth management to investment banking? I’ll do anything!”

The good news is that it is possible to do this.

The bad news is that it may be extremely difficult to near impossible unless you get a top MBA.

It’s arguably the most difficult “front office to front office” transition within finance, so you should probably start by considering why you want to make this switch:

Why Switch from Wealth Management to Investment Banking?

We cover many of the trade-offs in the earlier wealth management vs. investment banking article, but in short:

1. Investment banking has better exit opportunities at all levels.
2. The work might not be for you, even if you’re good at it – for example, maybe you find deals far more interesting than building a client book or managing their portfolios.
3. The average compensation in investment banking is higher (yes, top wealth managers can earn millions per year with great hours, but we’re talking averages).
4. It’s easier to grind your way up in IB without being “good” at the core skills of winning clients and closing deals; these skills matter as you become more senior.
5. Many people find wealth management work boring or repetitive and do not like the heavy sales/cold-calling aspects.

The problem with this list is that only #1 (exit opportunities) and #2 (the deal work in IB being more interesting) are good reasons to move into investment banking, specifically.

If you want higher compensation, the ability to advance without being great at sales, or more interesting work, many other options are far more accessible.

For example, corporate banking would satisfy many of these goals.

The compensation ceiling is lower than in IB or WM, but it’s still quite high (mid-to-upper-six figures), and recruiting is much less competitive than IB.

So, this career transition is a bit like the “age and investment banking” question: Unless you need something very specific, there are probably better ways to achieve your goals.

The 3 Basic Pathways from Wealth Management to Investment Banking

If you are dead set on aiming for an exit opportunity only investment banking offers or you really want to work on deals, maybe this transition makes sense.

If so, there are three viable times to do it:

1. Right After an Early-University Wealth Management Internship – It’s feasible to switch at this point because you don’t have much experience, and you can spin the WM internship as you “wanting to learn the finance industry” or work at a large bank.
2. After Your Final Internship in University – This one is a lot more challenging because banks do not hire many full-time Analysts outside their internship programs.
3. From a Full-Time Wealth Management Role – This one is even more difficult because wealth management is not a common source of lateral hires, as the skill sets are quite different. So, you’ll usually have to take more of an indirect path through several other “hops” if you do this.

There isn’t much to say about Case #1 because it’s a variant of the standard “How to Get an IB Internship” plan – start early, earn high grades, and network/prep aggressively.

It helps if you can get one additional, more relevant internship besides your first wealth management one, but it’s not necessarily required if the rest of your profile is good.

The other two cases require more explanation:

Switching Into IB After Your Final Internship in University

We published a great story from a reader who made this last-minute switch.

This story is older, but the strategies and tactics are still very relevant.

In short:

1. You need to start preparing and networking by the early-to-middle part of your summer internship to have any shot at full-time IB roles.
2. Focus on locations outside major financial centers and smaller banks, as the “intern quality” will vary a lot more, creating opportunities for you.
3. Bankers will not care about your WM experience at all, so you need to point to specific M&A or financing deals that have interested you and the additional work you’ve done to learn more.
4. Be prepared with “Plan B” options because this strategy depends heavily on a favorable deal/hiring market combined with underperforming interns in smaller offices.

Your “Plan B” options could be anything discussed in the lateral hiring article: Big 4 roles, independent valuation firms, corporate banking, corporate finance, corporate development, credit analysis, real estate lending, etc.

You will encounter the same objection repeatedly if you use this strategy:

“If you’re so interested in investment banking, why didn’t you do an IB internship instead of a WM internship?”

You can answer this objection and tell your story using two main approaches:

1) Say You Missed the Recruiting Cycle – For example, say that you became interested in finance and deals midway through your second year of university, but due to the very early start dates, this was too late for most internship recruiting in the U.S.

You applied for different roles at banks and felt this internship was your best option because it would allow you to gain client experience and learn how large banks operate.

2) Say You Became More Interested in IB During Your Wealth Management Internship – For example, say that you were advising clients whose portfolios included companies involved in deals, and you became more interested in deal execution from that.

If you’re at a target school with on-campus recruitment, option #1 will probably work best; if you’re at a lesser-known school, option #2 may be better.

Your odds with this strategy are not great, but if you’re willing to do a ridiculous amount of networking and interview prep in a short period, sure, go for it.

The transition only gets harder and more expensive if you wait, so it’s better to put in the time and effort earlier in your career.

Moving from a Full-Time Wealth Management Role Into IB

This is a very, very, very difficult transition.

I have covered finance careers for ~20 years, and I can think of exactly one person who has made this move directly.

The skill sets and cultures are too different, and it will be tough even if you aim to move from a bulge bracket wealth management team to a regional boutique investment banking team.

That leaves you with two main options:

1. Move Into a Less Competitive Deal-Related Field and Lateral Into IB – See the options above in Case #2.
2. Complete a Top MBA Degree – This is always an option, and all the standard tips apply: Apply and accept admissions in the first round, start preparing very early, and consider a pre-MBA internship to maximize your profile.

The MBA route is very expensive and time-consuming but also offers a higher success probability if you can get into a top program.

Also, it works best if you’re in the “sweet spot” of around 3 – 5 years of full-time work experience.

If you have 10+ years of wealth management experience, bankers will question your motivations for switching now (why didn’t you do it in Year 3 or 5?).

Common Challenges in All Wealth Management to Investment Banking Transitions

Regardless of your path and timing, you’ll have to deal with similar challenges in making this move:

• Bankers will always look down on you because many don’t consider wealth management a “real” finance role – even though some wealth managers earn more than bankers.
• You will probably have to take a step down in firm prestige/reputation because even with other roles in between, the perceived gap between WM and IB is still quite large.
• Avoid “prerequisite”-type stories to explain why you took the WM role because wealth management is not a stepping stone into anything else. Stick to the “missed IB recruiting” or “became interested in deals after doing WM” options.
• Expect to be grilled on the technical questions because bankers will be skeptical of your motivations. There are so many articles, guides, and resources about IB interview questions that you have no excuse to be caught unprepared.
• Avoid mentioning the parts of WM you don’t like, such as sales or cold calling, because it is much better to point out the additional skills in IB you want to gain over what you learned from WM.
• You need to go beyond your WM experience for your “Spark” and Growing Interest because bankers will not care much about what you did on the job. You need to point to significant efforts outside your day job to make these convincing.
• Give yourself ~6 months if you’re trying to leave a full-time WM role – If you can’t even get solid responses from your networking efforts to steppingstone roles, such as corporate banking, consider a top MBA in the future.
• If you do an MBA and don’t win an IB offer from that, aim for corporate development at a normal company or one of the other “Plan B” roles mentioned above. Your odds aren’t great if you end up here, but there’s always a chance if you can gain some post-MBA deal experience.

Final Thoughts on Moving from Wealth Management to Investment Banking

This is probably the most difficult transition of all the “front office to front office” moves in the finance industry, so you must think very carefully before investing time, money, and effort.

People sometimes claim that sales & trading or equity research to investment banking are difficult, but they’re much easier than moving in from wealth management.

The key point is that you shouldn’t do this because you dislike X, Y, or Z aspects of wealth management.

If that is your only motivation, there are dozens of other options in tech, finance, and related fields.

For investment banking to make sense, you must either want to work on deals because they interest you or because you need IB for a specific exit opportunity that is not otherwise available.

But if you understand these points and all the factors working against you, this transition might be worth the extreme effort required.

The post From Wealth Management to Investment Banking: How to Make the Leap appeared first on Mergers & Inquisitions.

This article will focus on careers and recruiting, while the accompanying YouTube video will discuss the technical/modeling aspects in more detail.

And yes, coincidentally, we have a new Project Finance & Infrastructure Modeling course.

This article is a sample/excerpt/preview from the full course:

Project Finance vs. Corporate Finance: The Video and Files

You can get the presentation, the simple Excel file, and the video version of this article below:

• Project Finance vs Corporate Finance – Presentation (PDF)
• Simple Project Finance Excel File (XLSM)

Video Table of Contents:

• 0:00: Introduction
• 1:22: Part 1: The 2-Minute Summary
• 3:47: Part 2: Assets and Legal Structures
• 4:59: Part 3: Time Frame and Model Structure
• 6:17: Part 4: Debt Usage and Terminal Value
• 9:25: Part 5: How the “Deal Math” Works
• 12:21: Recap and Summary

What is Project Finance?

Project Finance Definition: “Project Finance” refers to acquisitions, debt/equity financings, and new developments of capital-intensive infrastructure assets that provide essential utilities and services.

Sectors within infrastructure include utilities (gas, electric, and water distribution), transportation (airports, roads, bridges, rail, etc.), social infrastructure (hospitals, schools, etc.), energy (power plants and pipelines), and natural resources (mining and oil & gas).

Many of these assets last for decades, have stable/predictable cash flows, use substantial Debt (50 – 60%+ of the total price), and use sized and sculpted Debt.

The term “Project Finance” at large banks refers to a group that operates like Debt Capital Markets or Leveraged Finance but for infrastructure rather than normal companies.

However, many people also use the term more broadly to refer to equity, debt, and advisory for infrastructure assets.

Like groups such as Leveraged Finance, DCM, and Direct Lending, the bulk of the analytical work involves assessing the downside risk.

In other words, if you lend $500 million to fund a new offshore wind development, what are your chances of losing money?

What if there’s a budget overrun or construction delay? What if market rates for electricity fall?

You’ll assess these questions and then indicate the terms you’d be comfortable with, from the Interest Rate to the Tenor (loan life) to the covenants (e.g., requirements such as maintaining a minimum Debt Service Coverage Ratio of 1.50x or 2.00x).

Project Finance vs. Corporate Finance: Careers

From a career perspective, “corporate finance” roles are generalist and exist at normal companies, investment banks, and many investment firms.

“Corporate finance” is a broad term that could refer to anything from managing a company’s internal budget (e.g., in FP&A roles) to advising clients on M&A deals in investment banking.

The unifying factor is that you work at the company level in corporate finance.

Even if you’re budgeting for a specific division or creating forecasts for one segment, your work affects the entire company.

By contrast, Project Finance roles are more specialized and “siloed.”

You analyze specific assets that operate independently, and if something goes wrong with one asset, the lenders only have a claim on that asset and its debt due to the special purpose vehicle (SPV) created for each asset.

You may still consider the entire portfolio when making decisions, but there’s less of a direct connection than in corporate finance roles.

One way to think about these roles is this analogy (if we limit “corporate finance” to just deal-based roles such as investment banking and private equity):

Infrastructure Investing : Project Finance :: Private Equity : Large Bank Lenders

If you view it this way, the comparison is as follows:

• Pay tends to be lower in PF/Infra roles because the targeted returns are lower, the upside is more limited, and many funds are smaller than traditional PE firms. Expect a ~20-30% discount to compensation in traditional IB/PE roles.
• The hours in PF/Infra are better because there’s less “hustle culture,” deals are sometimes simpler to evaluate, and senior bankers are less likely to abuse junior staff.
• The skill set in PF/Infra is more specialized because modeling Power Purchase Agreements (PPAs) for a solar plant doesn’t translate that well into valuing a consumer/retail company.
• Stability is higher in PF/Infra roles because the underlying assets are essential, and the holding periods are very long.
• The exit opportunities in PF/Infra roles are more specialized, and moving to a generalist role would be difficult after significant time in the field. Credit, lending, and corporate development roles at client companies are possible.

Project Finance vs. Corporate Finance: Recruiting

We’ve covered investment banking recruiting, private equity recruiting, and even “corporate finance at normal company” recruiting many times on this site, so I’ll refer you to those articles.

The big difference in Project Finance is that they strongly prefer candidates with credit experience in LevFin, DCM, mezzanine, direct lending, and related fields.

You can win PF roles right out of undergrad, but recruiting for undergrads and recent graduates is less common and structured than in fields like investment banking, corporate banking, or wealth management.

And if you do this, you’ll probably need highly relevant internships, such as ones in credit, energy, renewables, or other infrastructure-related fields.

Interviews are more specialized, and you can expect everything from infrastructure modeling tests and case studies to questions about the deal execution process.

Because most of these assets are private, finding substantial information for deal discussions can be very difficult.

Therefore, you’ll probably have to focus on high-profile assets that operate more like normal companies, such as large airports – or research funds or large companies in the sector.

You should also expect technical questions about concepts unique to Project Finance, such as Debt sizing/sculpting based on future cash flows and how to use Goal Seek and VBA to resolve circular references in models.

See the sample Excel file included here for very simple examples of this.

We don’t have space in this article to cover technical questions, but we may publish a separate feature on this topic.

Project Finance vs. Corporate Finance: Financial Modeling

Here’s a chart summarizing the key modeling and analytical differences:

Types of Assets and Legal Structure

The “Types of Assets” category should be obvious if you’ve made it this far in the article.

The Legal Structure category is important because the special purpose vehicle around an infrastructure asset reduces the risk for the owner.

The Debt is also non-recourse, which means the lenders can seize only the collateral if something goes wrong.

So, the asset is “isolated” from the rest of the company, and the lenders cannot seize other assets if something goes wrong with the one specific asset they’ve funded.

Lenders see this feature not as “risk reduction” but “risk reallocation” – to them.

This is partially why they often require strict covenants linked to numbers like the Debt Service Coverage Ratio (DSCR), defined as Cash Flow Available for Debt Service (CFADS) / Debt Service.

(Debt Service = Interest + Scheduled Principal Repayment; CFADS = EBITDA – Cash Taxes +/- Change in Working Capital – Maintenance CapEx +/- various Reserve line items.)

For example, a relatively safe asset, such as a power plant that sells electricity according to fixed rates and escalations, might be subject to a 1.50x minimum DSCR on the Debt used to fund the deal.

In other words, lenders want a 50% buffer to ensure the asset always has enough cash flow to pay them – and that’s for a “safe” asset!

In riskier verticals, such as mining, the required DSCR is much higher to account for the added risk of commodity prices.

Time Frame and Model Structure

The time frame and model structure also differ in Project Finance.

Since many of these assets last for decades, you could potentially set up a financial model that extends 20, 30, or even 50+ years into the future.

This would never happen in corporate finance because forecast periods rarely extend beyond 3 – 5 years.

The cash flows of normal companies are less predictable, so it’s rarely worthwhile to go far into the future.

Even if you create a far-in-the-future forecast for a tech startup that takes 20 years to reach maturity, the distant forecasts will become less detailed.

Technically, you can set up a 3-statement model for both corporate finance and Project Finance deals, but it’s far more common in corporate finance.

Normal companies have significant overhead and are so affected by timing differences in cash receipts/payments that it makes sense to track these items in detail on the Income Statement, Balance Sheet, and Cash Flow Statement.

For Project Finance, though, cash flow is king.

Yes, assets like toll roads, wind farms, and lithium mines have full financial statements, but you mostly care about the cash flow – the amount available for Debt Service and the amount remaining to distribute after Debt Service:

Building a full 3-statement model does not add much because most line items outside the PP&E, Debt, Equity, and Cash are small.

There are usually supporting schedules for the CapEx, Debt Service, Reserves, and other elements, but these are separate from the financial statements.

Debt Usage and Terminal Value

In a standard leveraged buyout model, the Debt funding is usually based on a multiple of EBITDA or a percentage of the Purchase Enterprise Value (i.e., the value of the target company’s core business operations in the deal).

Lenders lend based on a company’s recent and near-term performance, not what it might look like in 5 or 10 years.

And in the final period of an LBO model, you assume an Exit Value for the company, which is also based on an EBITDA multiple.

This Exit EBITDA Multiple is based on the company’s performance at that time, such as its growth rates, margins, and Return on Invested Capital (ROIC).

Outside of LBOs, this Exit Value or Terminal Value concept is widely used in other corporate finance analyses, such as the DCF model.

The assumption is that the company will continue to operate “forever,” or at least for many decades, even if it no longer grows substantially.

In Project Finance, the model setup and underlying assumptions are completely different.

First, while the Debt could be based on an EBITDA multiple, it is often sized and sculpted to match the asset’s future cash flows.

In other words, the initial Debt balance is linked to the Present Value of the asset’s cash flows over the Debt Tenor and the type of “coverage” or “buffer” the lenders want.

Here’s an example in the simple model:

Meanwhile, the Terminal Value or Exit Value may not exist for infrastructure assets because they have limited useful lives and cannot operate “forever.”

For example, energy assets such as solar plants, wind farms, and nuclear plants eventually wear down and stop producing energy in an economically feasible way.

And something like an oil/gas field or gold mine will eventually run out of economically feasible resources to extract.

Including a Terminal Value may still be reasonable in some contexts, such as if the asset lasts for 30 years and you plan to sell it in Year 10.

However, if you do that, the Exit Multiple should be lower than the Purchase Multiple to reflect the shorter useful life (and it should be linked to the estimated remaining cash flows).

Most Project Finance models assume the holding period equals the asset’s useful life, meaning the cash flows stop after ~20 – 30 years.

Wait, How Does Project Finance Math Work?

Reading this description, you might think:

“Wait a minute. How can infrastructure private equity firms earn acceptable IRRs if there is no exit value or the exit value is greatly reduced? That’s a critical part of any LBO model.”

It’s a 3-part answer:

1. Expected returns are lower – They’re often in the high-single-digit-to-low-double-digit range (e.g., an equity IRR of 7% to 13%).
2. There’s substantial leverage in each deal – It’s not unusual to use Debt for 50 – 60% (or even more) of the purchase price or development costs.
3. High margins and cash-flow yields make the math work – Many infrastructure assets have EBITDA margins of 50 – 60% or higher, with cash-flow yields above 10%. At these levels, the equity IRR can also be above 10% without an exit if the holding period is long enough.

Point #3 is never true in corporate finance because ~99% of companies do not have margins or cash-flow yields in these ranges.

Therefore, leveraged buyouts of traditional companies depend on making the company more valuable, repaying Debt, and exiting for a higher value.

But Project Finance deals are more about paying the right upfront price, using the right amount of initial Debt, and not screwing up the asset’s mostly-predictable cash flows.

Project Finance vs Corporate Finance: Final Thoughts

With the hype over EVs, renewables, and the “energy transition,” Project Finance has become a hot field.

While there are some downsides, such as lower pay and more limited exit opportunities, I think it does have more growth potential than traditional IB/PE careers at this stage.

Even the private equity mega-funds agree about the need to move into new areas: Rather than doubling down on standard leveraged buyouts, they’ve been expanding into private credit, infrastructure, and other fields.

In a world of 5%+ interest rates, the traditional LBO might not be a grand slam anymore – but a power plant could always be a solid double or triple.

The post Project Finance vs. Corporate Finance: Careers, Recruiting, Financial Modeling, and More appeared first on Mergers & Inquisitions.

We kept getting messages from students and clients like the following:

“I’m currently working at a Big 4 firm and haven’t gotten many responses to my applications for traditional PE roles, but several value creation teams have invited me in for interviews.

Are these good opportunities? What should I expect? And are they worth doing over traditional PE deal-based roles?”

These are great questions, so I’ll cover them in this article, starting with what the team does:

What is “Private Equity Value Creation?”

Private Equity Value Creation Definition: The PE value creation team, also known as the operations, portfolio operations, or portfolio resources team, aims to make private equity firms’ portfolio companies more valuable by improving their revenue and profit margins.

If you Google this topic and look at the results, you’ll find articles and discussions about LBO models and points like the returns attribution analysis:

This type of “value creation” measures the returns sources in a buyout deal: Debt paydown vs. multiple expansion vs. EBITDA growth.

However, the “private equity value creation” team isn’t about spreadsheets but rather implementing changes that improve the company.

They aim to boost the company’s EBITDA not by making more aggressive assumptions in Excel but by taking real-life steps to increase revenue and cut expenses.

You can think of it like “Consulting, but with less ‘planning’ and more ‘doing.’”

The team structure varies widely, but upper-middle-market firms and mega-funds tend to have dedicated operations teams, while smaller firms combine their operations and deal teams.

Sometimes, it’s more like “in-house consulting” for portfolio companies with specific problems, and in other cases, the value creation team reviews every company and applies a specific set of steps to improve efficiency.

These value creation teams tend to hire two types of candidates: Seasoned executives for Partner-level roles and management consultants for junior-level positions (typically from the top firms of McKinsey, Bain, and BCG, known as “MBB”).

They may occasionally hire from corporate development and corporate strategy teams, but they would prefer to hire candidates in operational roles at their own portfolio companies.

For example, a VP of Business Development or Partnerships at a portfolio company might be a strong candidate for the value creation team at the PE owner.

What Does the Private Equity Value Creation Team Do in Real Life?

The work in these value creation roles spans a wide range, but it could include:

• Revenue Growth: Increase prices for unprofitable customers or fire them; implement up-sells or subscription plans to boost annualized recurring revenue; expand into new markets or geographies; monetize currently unused IP; tweak the sales and marketing strategies to win higher-ticket accounts.
• Margin Improvement: Outsource or automate more functions; cut unnecessary R&D spending; fire underperforming salespeople; reduce wasted marketing budgets; reduce the company’s rent by consolidating buildings/locations.
• People: Hire more experienced managers; improve the recruiting and onboarding processes.
• IT: Digitize old-school businesses that are still behind or improve the tech for more modern firms.

Management consultants recommend some of these; the operations team implements them.

The value creation team does not necessarily execute bolt-on acquisitions because the deal team is usually better equipped there (value creation will handle post-deal integration).

Also, the value creation team does not necessarily do much due diligence, even if it’s operational in nature.

This is more the responsibility of the deal team at many firms, but there is some variance based on how closely integrated the teams are.

The optimistic take on this work is that many companies are run inefficiently, and they benefit from these improvements.

The pessimistic take is that many PE firms use “value creation” as an excuse to underinvest and optimize the company for a short-term exit.

For example, many of the big tech private equity firms have been accused of doing this and creating worse long-term outcomes for companies they once owned.

Why is PE Value Creation Suddenly “Hot”?

Going back to the value creation definition above, two out of three returns sources in most deals – debt paydown and multiple expansion – will not work as well in the future.

When interest rates were at ~20% in 1980 and fell substantially over the next few decades, virtually all financial assets benefited: Corporate bonds, equities, and private equity.

Private equity firms didn’t have to do much to “buy low and sell high” because they could count on valuation multiples increasing over time.

The global demographic profile was also favorable, with the world population nearly doubling between 1980 and 2020, technology and outsourcing made many products cheaper, and inflation and energy prices were mostly low/stable (see more in this article).

However, we’re now in a completely different macro environment.

Many countries now have declining populations, inflation is higher and less stable, and interest rates are higher and unlikely to fall to 0% again – so PE firms cannot just bet on higher multiples for their portfolio companies.

Instead, they need to turn to EBITDA growth to earn high returns, which means using value creation teams to boost revenue and cut costs.

How to Recruit for Private Equity Value Creation Roles

Recruiting for the value creation teams happens on an “as needed” basis, so it’s much closer to the off-cycle private equity recruiting process.

These teams like to recruit consultants from the top firm (MBB), but as mentioned above, some people also get in from Big 4 consulting roles, corporate development/strategy, and operational roles at PE-owned portfolio companies.

These teams do not seem to recruit many people with a traditional investment banking background, presumably because bankers are clueless operationally.

You can contact the standard group of PE headhunters or even consulting or executive-level headhunters, but in most cases, it comes down to networking with the “Operating Partners” and other team members directly.

There are some industry conferences and events, such as the “Operating Group Partners Forum,” but these are more for senior-level hires.

Interviews are like management consulting interviews, with a mix of fit/behavioral questions, resume walkthroughs, and consulting-style case studies.

They’ll also create case studies on the spot where they give you basic information about Portfolio Company X and ask how you might improve it.

You can’t learn about each portfolio company before the interview, so the best method is to practice many cases across varied industries, focusing on growing revenue and improving margins.

Private Equity Value Creation Careers: Are You a “Second-Class Citizen?”

Each PE firm runs its operations team differently, but the short answer is:

• It is far from a “back or middle-office job,” as some people claim.
• However, it is still a rung or two below the deal team in terms of perception and compensation (see below).

The problem is that operational improvements can improve deals and boost returns, but they’re not necessarily required.

On the other hand, if a PE firm pays the wrong price or structures a deal incorrectly, it might fail regardless of any operational improvements.

Therefore, the deal team at the PE firm will always be viewed as “more important.”

Sometimes, the operations team is a bit of a ”whipping boy,” blamed when things go poorly but not given proper credit when they go well (similar to CFO roles).

All that said, joining as an Operating Partner after a previous executive career is a pretty good deal; you work normal hours, do interesting work, and can still earn a lot.

Joining as an Associate or something else midway up the ladder is a bit murkier.

First, depending on the firm, the promotion/advancement opportunities may not be clear.

There may not be a real path to the Operating Partner level unless you gain executive/operational experience at a normal company after working in the value creation team.

If you want to move up the ladder directly, you’ll have more luck joining a firm with “specialist” operational teams where a specific person handles a single task like supply-chain optimization.

The main advantages of a value creation career at the junior level are:

• You get better hours (50 – 60 per week) than in standard PE or consulting.
• You travel less than in consulting.
• You earn higher pay than in consulting and get to do more interesting work.

Private Equity Value Creation Salaries and Bonuses

You should expect a 10 – 20% discount on traditional private equity salaries and bonuses.

As of 2024, that means something like these numbers at a mid-sized fund:

• Associate: $200 – $300K depending on the firm size.
• Senior Associate: ~$400K.
• VP: ~$500K.
• Principal: ~$600K + $2 – 4M carried interest over fund life.
• Operating Partner: ~$1M + $4 – 6M carried interest over fund life.

Sources: The Heidrick Private Equity Compensation Report and The Operating Partner.

There are a few nuances here as well.

One point is that not all firms have strictly defined hierarchies for the value creation team, so these specific titles may not always be used.

Also, at some firms, the Operating Partners get carried interest in the entire fund-wide pool, while others grant it on a deal-by-deal basis, which could be good or bad.

Exit Opportunities from Private Equity Value Creation Roles

So, if you want to work on deals in private equity, can you start in the value creation team and move over?

Well… don’t get your hopes up.

In theory, it’s possible, but it’s not that likely unless you’ve had deal experience in a previous role, such as investment banking or corporate development.

It’s the classic chicken/egg problem: They want people with deal experience, but you must be in the team to get that experience.

The main promotion path in the value creation team is not always clear, so the path into other groups at the PE firm is even less clear.

The most likely exits are to operational roles at portfolio companies, management consulting, corporate strategy, or consulting at other firm types, such as the Big 4 (i.e., reverse the entry points into value creation).

All that said, the job can still be useful if you want to move into the PE investing team eventually, especially if you’re coming from a non-finance background.

It’s just that you’ll need to get deal execution experience first to maximize your chances.

Final Thoughts: Is Private Equity Value Creation Worth It?

Returning to the original question, private equity value creation roles can be good opportunities, but I wouldn’t recommend them over deal-based roles for most people.

It’s best to think of them as “upgraded consulting,” with higher pay, better hours, less travel, and more interesting work.

PE value creation is not “middle office” or “back office” work, but it’s also not exactly on par with the deal team, especially at the junior levels.

You must also be careful with the specific firm because there are huge variances in the work, pay, promotion, and hierarchy – far more so than in deal-based PE roles.

If your long-term goal is to get into traditional private equity and you get an interview with the value creation team, sure, take it.

But if you have other opportunities that would give you real deal experience, even if they’re not official IB / PE roles, I recommend them over value creation in most cases.

It’s sort of like venture capital careers: Nice for a short stint, but much better as a long-term job at the end of your working life rather than the beginning.

Resources to Learn More About Private Equity Value Creation

If you want to learn more, here are a few links:

• Value Add PE – Great case studies of how PE firms turned around portfolio companies, but most are paid.
• Private Equity Funcast Podcast – There are a few episodes on value creation; I didn’t find them terribly insightful, but you might learn something.
• The Operating Partner – Solid articles and interviews with people in the industry.
• From Consulting to Private Equity: How to Make the Leap

The post Private Equity Value Creation: Equally Viable Alternative to PE Deal Teams? appeared first on Mergers & Inquisitions.

You can read about it in various threads on Wall Street Oasis, Reddit, eFinancialCareers, LinkedIn, and more, so I won’t repeat the full details here.

In short, this banker was an Associate in the FIG team at Bank of America and had a very accomplished track record before joining the firm.

“Official” news sources are trying to spin this as a death from natural causes, but it seems clear that over-staffing and consecutive 120-hour workweeks were the immediate cause.

Unfortunately, this is far from the first time a tragedy like this has happened.

Back in 2013, an IB intern died under similar circumstances, and many other banker/trader deaths have made the headlines over the years.

Oh, and then there’s my story – how I crashed my car into a tree after working crazy hours – and eventually quit the industry to start this site.

I’ll give my thoughts on this entire incident below, post the donation link for this banker’s family, and explain why the industry needs to change:

My Quick Thoughts on the Situation

My brief thoughts are:

• First, if you can donate even a small amount to his family, you should do so via this link. I just donated $1,000, which you can verify via the “Donors” link on the page. Bill Ackman also donated.
• Tragedies like this show that the culture in investment banking hasn’t changed that much, despite banks’ claims that they are “trying” to improve things.
• I do not have a legal background, so I can’t comment on whether the senior bankers involved have criminal liability – but I assume there are some grounds for a lawsuit.
• No one should ever work 120 hours in a week, let alone for 4 consecutive weeks. Please quit immediately if this is your job.
• The apparent cover-up / censorship here is also quite disturbing (mainstream media ignored this for days until Reuters / Yahoo Finance picked it up, and the Co-Group Head at BofA seemingly deleted his LinkedIn profile).
• The “crazy hours” in investment banking are mostly unwarranted and reflect poor senior leadership, bad project management, and misplaced priorities.
• Banks are destroying their reputations with their failed cultures. They must change in a big way to attract better candidates and remain competitive with tech and consulting.

Why the “Long Hours” in Investment Banking Are Mostly Unnecessary

I’ve covered the topic of investment banking hours several times before, and I previously explained them like this:

• Yes, IB hours are quite long…
• …but people also tend to exaggerate how much they’re “working” vs. “at the office waiting.”
• The hours are long because clients pay huge fees and have high expectations, work demands are unpredictable, it’s difficult to divide up labor on deals, and there’s a “culture” around personal sacrifice.

All these factors still play a role, but after seeing many of these stories, I’ve changed my mind about the hours.

In my opinion, 90% of these cases of long/deadly hours are caused by poor management and senior bankers forcing junior bankers to do pointless work.

This gets especially bad whenever deal activity declines and MDs go “on the hunt” for new fees.

It often looks like this:

• Managing Director (MD): “Hmm… how can I generate more fees… I know, let’s pitch companies A, B, and C on unlikely deals X, Y, and Z.”
• Analyst / Associate: “OK, what do we need for the pitch books?”
• MD: “Hmm… well, you’re not busy right now, so let’s make it a 100-pager. Get started ASAP!”

Effectively, the MD pushes pointless work onto the juniors because he believes they’re not “fully utilized.”

Of course, not all bankers do this; many of the sane ones know you can’t just push employees to work 16 hours per day forever.

In this case, the “overwork” seems to have happened due to a set of live deals, which might seem more reasonable at first glance.

But the problem is that in this context, many senior bankers, especially less experienced ones, believe they must “overdeliver” for the client to justify their fees.

This results in unnecessary presentation turns, re-run analyses for no apparent reason, and endless back-and-forth over minutiae in the Fairness Opinion and other documents.

Most clients do not care about these points and barely even read the documents.

Unfortunately, though, this way of thinking is so ingrained into the culture that it’s difficult to convince bankers that these efforts are pointless.

Why Bankers Can Band Together to Change Things

I’ve seen many online reactions to the effect of:

• “No one will protest because banks don’t care and will never change their cultures.”
• “If junior bankers protest, someone else will take their jobs since dozens/hundreds of people compete for each IB Analyst / Associate role!”

I believe these reactions are quite wrong.

When junior bankers have complained in the past, banks have changed things.

For example, complaints in the early 2010s resulted in “protected weekends” for Analysts.

In 2021, after the infamous “Goldman Sachs” presentation went viral, banks raised base salaries and changed their staffing and work-from-home policies.

These changes don’t always last, but even temporary relief is better than nothing.

Technically, yes, dozens or hundreds of candidates might apply for each available role in investment banking, but this figure is deceptive because many of these candidates are unqualified.

Although the IB job does not require much intellectual prowess at the junior levels, it’s still quite difficult to find good, reliable staff who will stick around for even 1-2 years.

Any idiot can change the font color on slides, but few people can juggle tasks from five clients, accurately complete analytical work, and work long hours for months.

So, junior bankers can force changes if enough of them band together and protest.

It’s Not 2004, 2014, or 2021 Anymore: Banks Need to Change

So, now to the punch line.

In my view, banks are living in the past and are quite delusional about the career opportunities now available to the top undergrads and MBAs.

The truth is the industry has never really recovered from the 2008 financial crisis in terms of inflation-adjusted pay and prestige.

Before 2008, banking jobs paid so much more than consulting, tech, and other roles that junior bankers would put up with anything to get in.

Also, it was easier to use IB roles to win private equity and hedge fund jobs, as recruiting started later, and there was less competition.

After 2008, pay went down across the board for all finance roles.

But throughout the 2010s, banking jobs were still perceived as higher-paying and more desirable than most alternatives – and they were often the “prerequisite” for other fields.

As I wrote in a recent update of the bulge bracket banks article, though, these points are less true today.

Tech firms have caught up, and plenty of Product Manager and business/strategy roles pay quite generously; engineers also earn a lot more than they did 10-15 years ago.

Consulting is still lucrative with better hours, and many hedge funds and PE firms now recruit candidates directly out of undergrad.

At the Managing Director level, as the Wall Street Journal has noted, pay has stagnated for the past ~20 years:

You could even argue that pay has declined because bonuses were paid in 100% cash ~20 years ago, while significant percentages are deferred or stock-based today.

Given the stagnant pay, increased competition, and continuously terrible work conditions, banks need to drop their incompetent management and sadistic cultures.

Some people will see stories like this and not care, but many smart students will ask themselves whether it’s worth it anymore.

I’ve also heard from senior bankers that new hires’ technical skills and overall competency have declined over time.

When you think about the past few years, it’s easy to understand why this happened:

• Hyper-accelerated recruiting prioritizes students who start early rather than ones who are good at the job.
• During COVID, banks over-hired and brought in far too many unqualified people, all to close a few more SPAC deals (ugh).
• Work conditions are still so bad that junior bankers die on the job.
• The exit opportunities, while still good, are less certain, and you no longer necessarily “need” IB to win some of them.

Returning to the original topic of this article, I can’t say whether the senior bankers on this Associate’s team should go to jail.

However, they should be held accountable for something – whether that means getting fired, demoted, or barred from working for a period.

More broadly, banks need to hold themselves accountable instead of complaining about declining candidate quality.

If they want candidates with stronger technical skills, stop recruiting students ridiculously early in university and give people time to learn the technical concepts.

If they want dedicated employees, create a better work environment led by competent management.

If they can’t offer outsized pay packages anymore, offer other benefits that make up for it.

And please, stop killing junior bankers with pointless work and consecutive 120-hour workweeks.

The post The Tragic Investment Banker Death: Should Senior Bankers Go to Jail for Killing Their Junior Staff? appeared first on Mergers & Inquisitions.

Also, getting into a top MBA was so much of a hassle that few people wanted to apply for something else before the program began.

But then recruiting moved up, the MBA process became more structured, and now we have 4-year-olds aiming for “Target Kindergartens” so they can eventually get into investment banking ~15 years in the future.

Due to this “early prep” craze, pre-MBA programs of all types have become more popular.

Many incoming MBA students now wonder if they should complete them in addition to their normal internship(s).

I’ll answer these questions, but, as usual, we need to start with some descriptions:

What is a Pre-MBA Internship?

Pre-MBA Internship Definition: In a pre-MBA internship, an incoming MBA student works for a few weeks in a structured setting at a large company or in an unstructured setting at a smaller firm and uses the experience to boost their chances of winning formal summer internships the next year.

There are three main categories of pre-MBA programs, which the MIT page on the subject describes quite well:

1. Internships – These meet the definition above. They’re like traditional summer internships but often shorter and completed at smaller companies.
2. “Programs” – These are more like spring weeks in the U.K., where you attend a few days of events and workshops and get fast-tracked for first-round interviews if you do well enough.
3. Diversity, Equity & Inclusion (DEI) Events – These are like the “programs” above but provide underrepresented minorities (URM) with the chance to get fast-tracked for initial interviews. I do not want to wade into the DEI debate here, but these can be excellent for winning interviews if you legitimately qualify for them.

These pre-MBA programs are the most prominent in consulting, finance, and technology, which makes sense since most MBA students target these industries.

You can find companies that offer these pre-MBA internships on the websites of MIT and Wharton: Bain, BCG, McKinsey, LEK, Kearney, PwC, Deloitte, Amazon, and Google.

The deadlines vary, but most are in the April – May range, right before your pre-MBA summer.

Interestingly, there are not many investment banks on these lists.

Evercore has a “pre-MBA diversity program,” but GS, MS, and JPM only appear to offer “fellowships” or “early insight student programs” without specific details attached.

We’ll return to this point later, but in finance, it’s more common to do a pre-MBA internship at a small VC/PE firm or boutique bank rather than a bulge bracket bank.

These pre-MBA internships give you an advantage because MBA-level hiring is still based largely on work experience before your degree.

Yes, the top schools like to claim that you can use an MBA to “reinvent yourself,” but this is a bit of a stretch for many industries.

Management consulting firms like to hire candidates from diverse backgrounds, but for tech and finance roles, you have a big advantage with relevant work experience.

So, by completing a pre-MBA internship, you:

1. Potentially fast-track yourself for a real summer internship the next year if you’re doing this at a large company or via a diversity program.
2. Gain experience you can leverage when you apply to other firms (if you’re interning at a smaller firm).

Companies like pre-MBA internships because they get free or cheap labor from eager/motivated students, and they can hire back the ones who perform well.

Oh, and the DEI programs let these firms boost their diversity stats and appear more inclusive.

Do You “Need” a Pre-MBA Internship?

There’s no universal answer because the usefulness varies widely based on your previous career, diversity profile, post-MBA goals, and internship type (small vs. larger firm).

My general views are:

• If you are a URM, apply immediately for all the diversity programs you qualify for. These will give you a big advantage in virtually any field if you perform well.
• If you are making a “hard pivot” career change, such as engineering to investment banking, pre-MBA internships are very useful but not necessarily required.
• Pre-MBA programs at large companies tend to be more common and important in tech and consulting; internships at boutique firms (via networking) are more common in finance.
• Outside the diversity programs, the 3-day pre-MBA events are rarely worth it. It’s tough to spin a 3-day event as an “internship,” and you normally want something more substantial to list on your resume.
• Pre-MBA internships are arguably the most useful in eliminating certain careers from your list. There’s no better way to understand a job than to work in the field for 1-2 months!

Here are a few examples of when these internships are useful or not useful:

• Startup Engineer to Tech or TMT Investment Banking: A pre-MBA internship at a boutique VC/PE firm, bank, or search fund would be very useful here. You’d learn some required skills and get solid talking points for your “story.”
• Big 4 TAS to Investment Banking: It’s not worth it here because Transaction Services is closely related to IB and uses many of the same skills.
• Energy Consulting to Asset Management: Consulting is closer to finance than engineering, but a pre-MBA internship would still be useful because AM firms recruit relatively few MBAs and normally want people with finance experience.
• Healthcare Corporate Finance to Healthcare Investment Banking: If you worked as an FP&A Manager at Pfizer, for example, and now you’re targeting IB roles, a pre-MBA internship is probably not worth it. FP&A is a bit removed from IB, but it’s still a “finance role,” so you won’t necessarily get a huge story or skill-set benefit.

You should also keep in mind whether your desired move is plausible.

For example, if you have no finance experience, it is highly unlikely that you will get an offer at a multi-manager hedge fund or private equity mega-fund after the degree.

A pre-MBA internship won’t bridge the gap because you don’t have the full-time work experience or investment track record to be competitive for these roles.

However, you might be competitive for investment banking, asset management, or consulting roles, and a pre-MBA internship could help with those.

How Do You Apply for Pre-MBA Internships?

At the large firms, it’s easy: Go to your MBA program’s website, look up the opportunities, and submit your applications well before the deadlines – ideally, as soon as they open.

If you’re targeting an informal venture capital internship, private equity internship, or search fund internship, focus on smaller, local firms.

For private equity, anything with under $1 billion in AUM should be fine (i.e., below the normal “middle-market private equity” cut-off).

For VC, firms with under ~$200 million or less in their current fund are appropriate (if you can’t find this information, maybe target firms with under $500 million AUM total).

And for boutique banks, find firms that advise on deals worth less than $100 million.

You will have to complete extensive outreach to win offers at these firms, and you can use the cold-email templates on this site to get started.

To find these firms, you can start by searching on LinkedIn and other job boards; Google Maps is surprisingly useful in many regions as well.

Your pitch should be something like this:

• You’ve previously worked in Industry X and are an incoming MBA student at School Y who wants to transition into Industry Z.
• You’ve prepared independently, including studying the technical skills and building/researching [Models, stock pitches, sample portfolios, etc.], and you’re confident you can add value or save time for the team.
• You’re looking for a pre-MBA internship but can also work part-time in the first year of your program.

Timing is critical for these informal internships because you must start looking several months in advance.

For example, you should ideally start your search for summer 20X5 internships before the end of calendar year 20X4.

That means you need to win admission in Round 1 to have a good shot at these roles.

You can start later and still get an internship, but it will be more stressful, and your chances will be lower.

In interviews, be prepared for the usual range of technical and behavioral questions and even stock pitches, case studies, and modeling tests, depending on the firm type.

Yes, there’s a lot to worry about, but all these assessments will be required if you apply for official internships and full-time jobs in these fields.

It’s just that you’ll need to learn the skills more quickly in this case.

With case studies, stock pitches, and modeling tests, focus on breadth over depth.

For example, if you’re targeting PE internships, don’t spend 10 hours building a hyper-advanced LBO model with PIK Interest, bolt-on acquisitions, and a dividend recap.

Instead, pick a single company and give yourself 1-2 hours to assess it and build a simple model.

Since they could ask for almost anything in an interview, it’s best to practice simple models and pitches for a wide range of companies.

What Should You Expect If You Win a Pre-MBA Internship?

There’s not much to say about the 3-day internships; expect to shadow people, attend networking events, and… network.

With the longer-term internships, you’ll help the full-timers with industry research, sourcing deals/ideas, building pitch books, or evaluating due diligence.

Do NOT expect a lot of “real work” – they’ve hired you because they need help with repetitive, time-consuming tasks.

Your goal is to learn the job, see if it’s right for you, save them time, and pick up talking points you can use in your story later in the year.

Also, do not expect much of a salary – they might pay you a small stipend to cover expenses or a modest hourly amount, but it will be far lower than actual job earnings from post-MBA roles.

How Do You Leverage Pre-MBA Internships?

Pre-MBA internships are helpful mostly if you complete one and then stick to that industry, such as a PE/IB internship, followed by full-time recruiting for IB roles.

It won’t be especially helpful if you do a PE internship but then change your mind and interview for product manager roles at Big Tech firms.

Once you finish, you should immediately incorporate the internship into your story and ask the senior people at your firm for additional referrals.

The MBA-level recruiting process for investment banking at the top schools is very structured and consists of on-campus events followed by coffee chats with bankers, invite-only events, and real interviews.

A pre-MBA internship won’t guarantee that you pass all these steps, but it will be quite important in your story, and you’ll sound more convincing in these initial events.

So, Should You Do a Pre-MBA Internship?

I’d sum it up like this:

Advantages

• They can be great for narrowing down your post-MBA career options.
• They’re very helpful if you’re making a big career change and need more relevant resume experience (especially for tech and finance roles).
• If you are an underrepresented minority (URM), these opportunities can be game-changers, and you should apply for them ASAP.
• You don’t need great qualifications or experience to win informal pre-MBA internships; you can do it with enough networking hustle and your school’s brand name.

Disadvantages

• You could pigeonhole yourself because by completing a pre-MBA internship, you’re committing to one specific field – not great if you change your mind.
• There’s a huge variance in individual internships in terms of recruiting effort, pay, and on-the-job tasks.
• Most pre-MBA roles at small firms will not convert into formal summer internships or full-time offers.
• You could burn out if you go straight from your full-time job to this internship to the MBA program – which might hurt your recruiting chances.
• Networking for these roles may be difficult if you’re an international student or you’re changing locations to attend the MBA program.

I realize that previous coverage on this site has implied that pre-MBA internships are required or critical, but I don’t think that’s true.

It’s more accurate to say that they can be very helpful for certain candidates but are never required; most people who win IB summer offers don’t have this experience.

If you have questions about whether a pre-MBA internship is worthwhile for you, comment away.

The post The Full Guide to Pre-MBA Internships: Are They Worth It? appeared first on Mergers & Inquisitions.