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.

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.

Some argue that GE offers the best of both worlds: the opportunity to fund innovation and growth – as in venture capital – plus the ability to limit downside risk and invest in proven companies – as in private equity.

Others would counter that growth equity’s rapid ascent was mostly due to the easy money that persisted between 2008 and 2021.

With interest rates at ~0%, funds inevitably flowed into anything with “growth” in the name – regardless of its real growth potential:

What is Growth Equity?

Growth Equity Definition: In traditional growth equity, firms invest minority stakes in companies with proven business models that need the capital to expand; some firms also use “growth buyout” strategies, which are like traditional leveraged buyouts but with higher growth potential.

Most of the confusion around “growth equity” comes from the fact that it includes two different strategies, and many top firms use both.

Here are the main differences:

1. Strategy #1: “Late-Stage Venture Capital” – This is what most people think of as “growth equity.” This style is about purchasing minority stakes in cash-flow-negative-but-high-growth companies that want to scale and eventually go public or sell (think: Uber or Airbnb before their IPOs). Valuations are high, the returns depend on future growth, and deals are for primary capital, i.e., new cash the business needs. There’s usually a long list of previous VC investors as well.
2. Strategy #2: “Growth Buyouts” – This strategy is more like traditional leveraged buyouts because the PE firm acquires a much higher percentage of the company (or even majority control). Most companies are already profitable, the potential returns are lower, and there’s usually a large secondary component (i.e., the Founders sell some shares to take money off the table, but “the company” doesn’t get any of that cash). Debt financing is much more common, and the GE firm is often the first institutional investor.

Over time, many traditional growth equity firms have shifted to the “growth buyout” category as their assets under management have grown.

Most of this guide deals with the “late-stage VC” strategy, as dozens of other articles cover private equity strategies such as leveraged buyouts and traditional private equity.

The Top Growth Equity Firms in Each Category

If you asked the average person to name the “top” growth equity firms, you’d probably get a list like the following:

But there’s a bit more subtlety because these firms operate in different categories:

1) Primarily Late-Stage VC Deals – Examples include a16z Growth, Battery, Bessemer, Sequoia Growth, and Technology Crossover Ventures (TCV).

Most of these firms started out doing early-stage VC deals and still invest across all company stages.

2) Primarily Growth Buyout Deals – Firms like Accel-KKR, Great Hill, Mainsail, PSG, Spectrum, and TA Associates go here.

Many of these firms use debt to fund deals, and they complete bolt-on acquisitions for portfolio companies.

3) Mix of Late-Stage VC and Growth Buyout Deals – General Atlantic, Insight, JMI, Stripes, and Summit are good examples.

4) Private Equity Mega-Funds with Growth Teams – TPG Growth is the most famous example, but you could also add the growth teams at Advent, Bain, Blackstone, Permira, Providence, and Warburg Pincus (note that these are not all “mega-funds” according to our definitions).

You could keep going and add plenty of names.

For example, Susquehanna Growth Equity is another great firm, but it doesn’t use the traditional LP/GP structure, so I’m not sure where it fits in.

Similarly, SoftBank has played a big role in growth equity (for better or worse…) but it’s the investing arm of a corporation, not a standalone PE/VC firm.

Many other well-known VCs have also raised growth equity funds, including Benchmark, Kleiner Perkins (KPCB), and NEA.

Why Did Growth Equity Get So Popular?

The main factors were:

1. The Rise of Tech and Software – Since so many growth equity deals involve technology, the sector’s rise over the past 10 – 20 years also drove a lot of growth equity investing.
2. Companies Began Staying Private for Longer – A long time ago, startups went public within a few years of raising VC funds (see Google, Cisco, etc.). In the 2010s, startups began to postpone their IPOs, but they still needed funding.
3. Tech Industry Maturation – As the technology industry matured, companies generated more predictable cash flow, but they still needed capital to scale.
4. Loose Monetary and Fiscal Policy – The quantitative easing (QE) and zero-interest-rate policies (ZIRP) that existed in most countries between 2008 and 2021 spurred a lot of “growth investing,” as established/sleepy firms like Fidelity suddenly became interested in riskier investments. Many hedge funds also joined the party.

From a career perspective, growth equity appealed to many bankers and consultants who didn’t want to be “pigeonholed” in venture capital (limited exit opportunities) or suffer through “banking hours” once again in private equity.

Growth equity offered a compromise: Modeling and deal work, networking, and shorter hours than most PE roles.

Growth Equity vs. Venture Capital vs. Private Equity

This section will focus on Strategy #1 (Late-Stage VC Investing) because Strategy #2 is nearly the same as what most middle-market private equity firms do, but with higher-growth companies.

Official descriptions usually cite the following points to explain how growth equity firms differ from VC and PE firms:

• They acquire minority stakes in companies (like VC and unlike PE).
• They invest in revenue-generating companies with proven business models (like PE and unlike early-stage VC).
• They aim for cash-on-cash multiples between 3x and 5x rather than the 5x, 10x, or 100x that VCs target and the 2x – 3x that many PE firms target. The targeted IRR might be in the 30 – 40% range.
• They earn returns primarily from growth via acquisitions and organic sources.
• They do not use debt since they only make minority-stake investments. However, they often invest using preferred stock with liquidation preferences attached to limit their downside risk (similar to VCs).
• The average deal size is bigger than early-stage VC but smaller than many PE deals; the $25 – $500 million range might be the norm for U.S.-based firms.
• The main risk factor in deals is executing the growth plan, not default risk due to debt (PE) or product/market risk (VC).

Growth equity firms could invest in any industry but tend to be skewed toward technology and TMT, with some exposure to consumer/retail, healthcare, and financial services.

The specific growth strategies used by portfolio companies could include almost anything, but a few common ones are:

• Paying for employees, buildings, and equipment to enter new geographies or markets.
• Developing new products or services.
• Scaling a company’s sales & marketing by hiring more sales reps.
• Completing bolt-on acquisitions that will boost the company’s revenue and cash flow.

On the Job: Growth Equity Careers

Unsurprisingly, growth equity careers are a mix of private equity careers and venture capital careers.

Let’s run down the average tasks an Analyst or Associate completes each day at a “Late-Stage VC” firm to demonstrate this:

• Sourcing: As in VC careers, there’s a lot of emphasis on “sourcing” or finding new companies to invest in (read: cold calling and emailing). Deals and business strategies are less complicated than in PE, so finding great companies is a competitive advantage.
• Financial Modeling: Like private equity, 3-statement models are common, as are valuations and DCF models, but LBO models are less common since not all deals use debt. Like venture capital, cap tables, liquidation preferences, and primary vs. secondary purchases come up frequently (plus, SaaS metrics, SaaS accounting, and so on).
• Portfolio Companies: You probably won’t interact with management teams quite as much because your firm won’t own controlling stakes in all its portfolio companies. You may still help with operational issues, but it’s harder to “force” companies to change in a specific way.
• Due Diligence: For similar reasons – minority stakes rather than control deals – you won’t devote quite as much time and effort to due diligence in deals.

If you do the math, you’ll see that something doesn’t add up because the modeling, deals, and due diligence are less intense than in PE, but you also work longer hours than in VC (50 – 60 hours per week up to 70 – 80 when a deal is closing).

What accounts for the difference?

At some firms, the answer is “a lot more sourcing.”

But at other firms, you might spend more time on market/industry research or get more involved with portfolio companies.

The overall career path, tiles, and promotion times are like the private equity career path, but compensation is usually lower (see below).

Growth Equity Recruiting: Who Gets In, and How Do They Do It?

The recruiting differences vs. other fields of finance are as follows:

1) Candidate Pool: Growth equity is open to a wider pool of candidates than PE roles, but not as many as VC roles. Many people still get in from investment banking and management consulting, but some also get in from VC and finance-related jobs at startups. Also, you can get in more easily from a middle-market or boutique bank.

That said, you are still highly unlikely to win growth equity offers from something like engineering at a tech company or brand advertising.

Even product management is questionable – it can work for VC roles, but probably not for GE since you need more technical skills.

Finally, you can get into GE directly out of undergrad, but it’s less common than in IB/PE, and it’s not necessarily recommended because many of these roles are “sourcing heavy.”

2) Process: At most firms, the process is closer to off-cycle private equity recruiting, where you must proactively network to find roles. The biggest GE firms and the PE mega-funds still use on-cycle recruiting, but

3) Technical Skills: People often claim that growth equity interviews are “less technical,” but this is not universally true. You could easily get asked to complete an LBO modeling test, a 3-statement model, or a DCF, and standard IB interview questions and VC interview questions could come up.

Obviously, you’ll need these technical skills if you join a team that does “growth buyout” deals.

But even if you apply to a late-stage VC team, they might still give you a modeling test to weed out candidates.

Growth Equity Interviews and Case Studies

The main question categories in interviews are:

• Fit/Background – Expect to walk through your resume, explain “why growth equity,” why this firm, your strengths and weaknesses, and so on.
• Technical Questions – Everything is fair game (see above).
• Deal/Client Experience – You should review your 2-3 best deals and say whether you would have done each one, with “growth” as the key criterion.
• Firm/Portfolio Knowledge – You need to know the firm’s investment thesis, strategies/verticals, and have a rough idea of its portfolio companies. To save time, focus on 1-2 specific companies and do enough research to discuss them in-depth.
• Industry/Market Discussions – Rather than trying to “learn” the entire SaaS, AI, or hardware market, focus on one specific vertical (e.g., the top 2-3 companies, your #1 investment pick, the growth drivers, the risk factors, and the overall outlook).
• Mock “Sourcing” Calls – The firm could also ask you to role-play a call with a prospective portfolio company by introducing yourself, asking key questions, and requesting a follow-up conversation.
• Case Studies – Most GE case studies are either 3-statement modeling variants or open-ended market-research case studies, but anything is fair game (paper LBO models, simplified or full LBO models, etc.).

An open-ended case study might give you a few pages of information on a company and ask you to draft an investment recommendation.

To do this, you will have to research the company’s market size, competitors, growth strategies, and strengths/weaknesses.

We don’t have a direct example here, but the VC case study on PitchBookGPT gives you a flavor of what to expect in a qualitative case.

For a modeling example, see our growth equity case study based on Procyon SA.

Compensation and Exits

These two points depend on whether you worked on growth buyouts or late-stage VC investments.

In growth buyout teams/firms, compensation at larger firms is generally a 15 – 20% discount to private equity compensation.

So, if an “average” PE Associate earns $300K – $350K in total compensation, the average range might be closer to $250K – $300K at a growth buyout firm.

However, note that the mega-funds might still pay about the same because they may align compensation across groups.

If you work for a smaller, late-stage VC fund, expect compensation closer to normal VC levels (maybe the $200K – $250K range, though it’s hard to find specific data here).

Fund sizes are smaller, portfolio company exits takes more time, and performance is less predictable, all of which account for the lower pay.

On the other hand, some firms pay “sourcing bonuses” if you contact enough companies, and they may offer co-investments in certain details, so there are ways to increase your pay as well.

As far as exit opportunities, you could move into standard private equity if you worked on growth buyouts, but this is much more challenging coming from a late-stage VC role.

Other opportunities include other GE firms, VC roles, startups/portfolio companies, or an MBA.

You wouldn’t be the best candidate for most hedge fund roles (traditional PE is better), but corporate development might be possible, especially if you had IB experience before entering growth equity.

Pros and Cons of Growth Equity and Final Thoughts

Summing up everything above, here’s how you can think about growth equity:

Pros

• It’s more accessible than traditional private equity roles.
• You potentially make a high impact from day one since much of the job involves finding new companies to invest in.
• You work with more “exciting” companies since your goal is to find and accelerate growth.
• Compensation is solid, especially in growth buyout teams, though it is usually a discount to traditional PE (albeit with better hours).
• There’s a good mix of exit opportunities spanning VC, PE, and operational roles.

Cons

• Some firms require extensive sourcing, including pressure to meet specific call targets, which many people do not like.
• You have limited control over portfolio companies due to the minority stakes, which means you can’t necessarily “change” specific things.
• It doesn’t necessarily offer a net advantage over joining a traditional VC or PE firm because each benefit has a drawback (e.g., shorter hours but lower compensation).
• Growth equity is highly cyclical – more so than early-stage VC or traditional PE – since late-stage funding tends to dry up quickly in down markets.

The last two points here are the most serious ones.

Even in a terrible market, plenty of early-stage VC deals still happen because people are always starting companies.

And while PE firms are less active in poor markets, they can still work on their portfolio companies, make add-on acquisitions, and pursue asset sales or divestitures.

By contrast, many growth equity firms get stuck in “no man’s land” because they write large checks but may not have majority control to implement big changes.

Growth buyout teams get around this issue if they do > 50% deals, but in many cases, you’d be better off going to a traditional PE firm first to gain a broader skill set.

If you like it, you can always shift to GE or VC afterward, as it’s much easier than the reverse move.

That said, growth equity can still be great for the right person – if you understand that combining two industries means you get the best and the worst of each one.

The post Growth Equity: The Child Prodigy of Private Equity and Venture Capital, or an Artifact of Easy Money? appeared first on Mergers & Inquisitions.

Partially, it’s an issue of accessibility: Everyone understands what happens to the stock price if a company beats earnings…

…but few people understand what it means if a company is set to violate a debt covenant on page 214 of its credit agreement.

But a few other reasons also explain why fixed income often gets overlooked: the unstructured recruiting process, fewer job openings, and the “cushiness” of senior-level roles.

For the right person, though, fixed income research can be even better than equity research, whether you’re at a bank, an asset management firm, a hedge fund, or a credit rating agency:

What is Fixed Income Research?

Fixed Income Research Definition: In fixed income research, finance professionals analyze companies’ debt issuances and make pricing and investment recommendations based on their outlook for each one.

The confusing part is that fixed income research exists at banks (“sell-side roles”), buy-side firms such as asset managers and hedge funds, and even credit rating agencies, and each one differs.

Also, it can be quantitative or fundamental – or both! – and different teams specialize in different instruments (investment-grade, high-yield, distressed, structured, sovereign, emerging markets, etc. – see the fixed income trading article for the full list).

We can’t possibly cover them all in one article, so this one will focus on fundamental research at banks, primarily for investment-grade and high-yield bonds.

All the top investment banks and multi-manager hedge funds have fixed income research, and so do the top asset managers and credit firms: PIMCO, Brookfield (Oaktree), Fidelity, BlackRock, Wellington, Blackstone (GSO), Octagon, Ares, and so on.

And the credit rating agencies (S&P, Fitch, Moody’s, and Morningstar DBRS in distant 4^th place) specialize in fixed income research.

Each role has common analytical elements, but the specifics and deliverables differ (e.g., a credit rating vs. an investment recommendation).

Equity Research vs. Fixed Income Research

The key difference in fixed income is that you focus on the downside case rather than growth:

• What are the chances the company will violate one of its covenants?
• Could the company default on one of its issuances?
• What if there’s a recession or a slowdown in global trade?
• If the company liquidates, which lenders will get their money back?

The fixed income market dwarfs equities in terms of market value and trading volume, but that does not necessarily translate into “more jobs.”

Liquidity is also more limited, and more trading is still done over the counter (OTC) rather than electronically.

And there is sometimes less turnover because senior staff tend to stick around longer.

Common Myths About Fixed Income Research

Some people claim that there’s more of a “macro focus” in fixed income research or that it’s more “quantitative” than equity research (i.e., closer to the work at a quant fund).

The problem is that these claims only apply to certain groups.

For example, if you focus on investment-grade bonds, you will focus more on macro factors because investment-grade companies rarely default.

Therefore, movements in interest rates drive bond prices more than other factors.

And if you’re in a “quant credit” group or something similar, sure, you could use statistics to analyze bonds rather than traditional 3-statement and cash flow modeling.

However, many fundamental roles within FI research still relate to the financial statements, debt analysis, and company-specific factors.

What Do You Do as a Fixed Income Research Analyst or Associate?

As in equity research, “Analyst” is the senior role, and “Associate” is the entry-level position.

Confusingly, there are also different “levels” within these, such as VP-level and MD-level Analysts.

Many of the work tasks are quite similar:

• You normally get assigned 1-2 industries and cover a specific set of companies; you’ll create or update a 3-statement model with support for credit features for each company.
• You split your time between new bond issuances and existing ones, similar to “initiating coverage” vs. “existing coverage” in ER.
• You cover quarterly earnings and send updated models and notes to clients and other teams.

The differences vs. equity research lie in the details:

• Financial models focus on the downside scenarios and analyze each issuance separately: the Yield to Worst, Yield to Maturity, Recovery percentages, and the default risk.
• The output is more about the credit stats and ratios (Debt / EBITDA, EBITDA / Interest, etc.), the appropriate debt vs. equity mix, and additional capital needs over the next few quarters.
• You may have to cover dozens of issuances, meaning you cannot spend that much time on a single company or bond.
• The legal side is quite important because you must read the debt agreements to understand each issuance’s covenants and other terms.
• Quarterly earnings calls and management interaction are a bit less important because it’s not always practical to participate when you cover 50 companies; also, events outside of earnings calls can sometimes be more meaningful for bond prices.

An Example Fixed Income Research Report

You can find fixed income reports on sites like Moody’s, Fitch, and S&P, but these tend to focus on the credit rating process instead.

So, I’ll share here an old report issued by Goldman Sachs on J.C. Penney.

Due to the age and the fact that J.C. Penney later declared bankruptcy, I don’t think this is particularly sensitive (but I may still remove it if it becomes an issue).

You can see that the “investment recommendation” is quite different:

The model includes different scenarios, but they’re not the typical Bear / Neutral / Bull cases used in equity research.

Instead, the scenarios are based on the company’s prospects: Liquidation vs. going concern vs. debtor-in-possession financing (see the restructuring IB article for more about these):

Throughout the report, there’s also a discussion of liquidity triggers rather than traditional catalysts – because they’re concerned about how events will affect the company’s ability to repay or refinance its debt:

Recruiting: Who Gets into Fixed Income Research?

As with equity research and hedge fund roles, there are two main options for breaking in:

1. Complete the CFA, get fixed income-related internships, and start working directly in FI research, either at a bank or a buy-side firm.
2. Do something else in finance first, such as corporate banking, capital markets, or a credit rating agency role (any job with the “Credit Analyst” title works). Sometimes, fixed income traders even get in (depending on their desk and role).

The hiring process is random and unstructured with no real “cycles” (unlike recruiting for IB and PE roles).

Some of the biggest asset managers, such as BlackRock and Fidelity, offer internships and entry-level roles in fixed income research, but they are incredibly competitive to win.

Banks do not appear to offer many internships in this area, so if your goal is a bulge bracket bank, you’ll likely have to work in other credit roles first and network your way in.

Fixed Income Interview Questions and Case Studies

To get an idea of interview questions, please review the articles on corporate banking, credit hedge funds, and distressed debt hedge funds because the topics covered are similar.

A few examples:

• Markets: What’s the 10-year U.S. Treasury yield at? What about gilts (U.K.), bunds (Germany), or Japanese government bonds (JGBs)?
• Bond Prices and Yields: What’s the difference between the Yield to Maturity, Yield to Call, and Yield to Worst, and how do you use them in real life? What might cause a bond’s price to change?
• Bond Math: How can you approximate the Yield to Maturity? What about the duration and convexity? What does duration mean intuitively?
• Rates: Is the “risk-free rate” truly risk-free? If so, how could you still lose money by investing in a 10-year government bond in a “safe” country?
• Rate Changes: If interest rates are set to rise over the next year, how would you structure your portfolio? Would investment-grade or high-yield bonds show more of an impact?
• Bond Types: How are corporate bonds different from government bonds? How would you analyze them differently?

If you get a case study, the most likely task will be to read 2-3 pages about a company and its bond issuances and make an investment recommendation on a specific issuance.

If it’s a high-yield or distressed bond, they could also ask you for a specific price target or a recommendation with credit default swaps (CDS) included, as in the report above.

Since the default probability is so low for investment-grade bonds, much of it comes down to macro factors, relative value, and portfolio “fit.”

For example, maybe a company has a 5% bond due in 10 years and a 6% bond due in 1 year.

Neither one is likely to default, but the 6% bond doesn’t necessarily “win” because:

• If you believe interest rates are set to drop substantially, you could earn a higher yield if you buy the 5% bond, wait for the rate drop, and sell it before maturity because it’s more sensitive to interest rates.
• The 1-year maturity for the 6% bond is quite short, and it may not match your overall portfolio’s duration target.

You must also consider these issuances vs. those of similar companies: Is 5% or 6% a good deal? Can you find lower/higher yields in the market?

The top mistake in these case studies is not picking a specific issuance to invest in, especially if the company has a wide range of bonds with different maturities.

Fixed Income Research Salaries and Bonuses

There isn’t much information about salaries and bonuses, but for sell-side roles, you should expect a discount to equity research compensation.

If ER Associates initially earn $150 – $200K for total compensation, FI Associates might start in the $100 – $150K range.

In equity research, some MD-level “Analysts” could potentially earn $1 million+ from their base + bonus, but the pay ceiling is lower in most fixed income roles.

Expect something more in the “mid-six-figures” range (though there are exceptions for top-performing groups and Analysts).

In buy-side fixed income research roles, Analysts can earn $300K+ depending on the firm and their seniority, and the PMs above them can earn a multiple of that (again, depending on the firm type and performance).

The Hours and Lifestyle in Fixed Income

The good news is that the hours in fixed income research are generally better than equity research because there’s less of a need to follow earnings calls closely or issue new reports constantly.

Since you cover so many more names, it’s more about forming an overall view of the market and your coverage universe.

So, expect something closer to a “normal” workweek, such as 50 – 55 hours, spiking a bit when a major event occurs.

And at buy-side firms such as asset managers, plenty of fixed income research professionals work 40 – 50 hours per week and have relatively low stress levels.

Fixed Income Research Exit Opportunities

Most people in research want to work at hedge funds, so let’s start there.

Hedge funds are more plausible if you focus on high-yield or distressed issuances because few HFs invest in investment-grade bonds, and the skill sets differ.

However, you’ll also be up against bankers who worked in groups like Leveraged Finance and Restructuring, so hedge funds are not necessarily a “sure thing.”

Traders have a big advantage when recruiting for global macro hedge funds, but you don’t have quite the same advantage when applying to credit-focused HFs.

You could also move into equity research or investment banking, especially if you focus on groups where credit is extremely important (e.g., power & utilities, FIG, or industrials).

Distressed private equity is theoretically possible if you find a firm that operates more like a hedge fund, but it’s not especially likely.

The most likely outcome is that you’ll continue working in credit-related research roles at a bank or an asset manager.

Exits like traditional private equity, corporate development, and venture capital are unlikely because you need deal experience.

Final Thoughts: Is Fixed Income Research Worth It?

Summing up everything above, here’s how you can think about fixed income research:

Pros:

• The work is arguably more interesting than equity research, at least if you cover high-yield or distressed issuances.
• It can be a nice “second step” after a role like corporate banking, capital markets, or a credit rating agency if you want to improve your profile for buy-side roles.
• It is very cushy at the top, as senior-level staff can earn into the mid-six-figures (or higher) with less stress than IB/PE-style jobs.
• You can move around to plenty of other credit-related roles.

Cons:

• There’s little turnover, which means that recruiting has a very high “luck” component.
• Exit opportunities exist, but they’re narrower than IB/PE exits because you do not work on deals.
• The work can get repetitive, especially if you focus on investment-grade issuances.

• Compensation is often a discount to equity research and “equities in general” (but there’s lots of variance for different firm/fund types, performance, etc.).

It is a shame that fixed income research gets overlooked, but it’s also understandable.

That doesn’t make it a bad area to get into – but if you do, be prepared to stay there for a long time as you grind your way up.

Hopefully, that Senior Analyst above you will retire one day.

The post Fixed Income Research: The Overlooked Younger Brother of Equity Research? appeared first on Mergers & Inquisitions.

The issue isn’t so much that they’re bad by historical standards, but that they rose sharply due to inflated deal activity in 2020 – 2021 and then fell just as sharply.

I’ll provide commentary on all this, including bank and group-specific differences, but let’s start with the cold, hard numbers:

Position Title	Typical Age Range	Base Salary (USD)	Total Compensation (USD)	Timeframe for Promotion
Analyst	22-27	$100-$125K	$140-$190K	2-3 years
Associate	25-35	$175-$225K	$225-$425K	3-4 years
Vice President (VP)	28-40	$250-$300K	$450-$650K	3-4 years
Director / Senior Vice President (SVP)	32-45	$300-$350K	$550-$750K	2-3 years
Managing Director (MD)	35-50	$400-$600K	$600-$1300K+	N/A

NOTE: All numbers are pre-tax for New York-based front-office roles and include base salaries and year-end bonuses but not signing/relocation bonuses, stub bonuses, benefits, etc.

These are all ranges: roughly the 25^th percentile to 75^th percentile across the “large banks,” with some adjustments (see below).

And yes, I’m aware that the elite boutiques paid above these ranges.

Now to the commentary and bank-specific differences:

What Happened to Investment Banker Salaries and Bonuses Last Year?

In short, it was another terrible year for all the sectors this site covers: M&A, capital markets, private equity, commercial real estate, venture capital, and more.

The Investment Banking scorecard from Dealogic with deal volume by region spells it out:

• Higher interest rates.
• Persistently sticky inflation.
• Geopolitical uncertainty (Ukraine, the Middle East, China, etc.).
• Increased antitrust and regulation, which killed several high-profile mega-deals, such as Adobe / Figma.

And there were a few additional factors this past year, such as the regional banking crisis prompted by the collapse of Silicon Valley Bank and the UBS acquisition of Credit Suisse.

The bottom line is that tech and finance companies continued to be quite cautious, which hurt deal activity and hiring across the board.

Many of these firms over-extended themselves during COVID, had a bad hangover in 2022, and hadn’t quite recovered by 2023.

Specific Trends in Investment Banker Salaries and Bonuses

From compensation reports, news stories, and online discussions, a few trends stood out this year:

1) Firm Variance – While base salaries were similar across firms, there were huge differences in bonus levels.

I normally don’t like to single out specific firms, but I’ll do so here:

• Bank of America awarded terrible bonuses to Associates (and presumably VPs and up).
• And William Blair also paid far below the normal bonus ranges due to over-hiring and a focus on the wrong deal types (e.g., SPACs, technology, and financial sponsors).

Meanwhile, most of the elite boutiques did great!

PJT Partners paid well above the standard ranges for Associates and VPs, and Centerview and Moelis were also quite generous.

Most of the bulge bracket banks, ex-BofA, were in the middle of this range: down from last year, but not a complete disaster (the same applies to middle-market banks and firms like RBC).

2) Individual Variance – Within specific banks and groups, the variance between top, middle, and bottom-bucket pay seems to be growing.

If you go back 5-10 years, the percentage difference between each level was not necessarily massive.

Now, however, scenarios like this are more common:

• One Year 1 VP: $275K base; bonus is 65% of base.
• Another Year 1 VP: $275K base; bonus is 30% of base.

They are paying a lot more attention to individual contributions and teams, especially for Associates and VPs.

3) Bonuses Follow Hours – Although the elite boutiques paid more than the bulge brackets this year, there was a “catch”: the hours were also much longer.

For example, some Associates at “not so busy” large banks were working 50 – 55 hours per week over the past year – not even close to normal investment banking hours.

But at firms like PJT or Moelis, it was not unusual to see 70, 80, or even 90-hour workweeks, which explains why some bonuses were 2-4x higher.

I point this out because while there has always been some correlation between deal flow, hours, and pay, it was less direct in previous years, and bonuses varied far less.

—

I’ll go level by level and explain some of these trends in more detail, but here’s a quick reminder of the main compensation components:

Investment Banker Salary and Bonus Levels: The Main Components

For most bankers, there are five main components to “compensation”:

1. Base Salary: This is what you earn via paycheck or direct deposit every two weeks. These numbers tend to stay the same for years and then move up periodically, at least at the Analyst and Associate levels.
2. Stub Bonus: Since Associates graduate from MBA programs and start working in the middle of the calendar year, they receive “stub bonuses” for their first ~6 months on the job. These are typically low percentages of Year 1 base salaries, such as ~20%.
3. End-of-Year Bonus: You earn this after your first full year of work. Analyst bonuses are almost always 100% cash, but a percentage will shift to stock and deferred compensation as you move up. For example, Associates might get 10 – 20% deferred, VPs might get 20 – 30% deferred, and MDs might get 30 – 50% deferred.
4. Signing/Relocation Bonus: This applies to Analysts and Associates who graduate and accept full-time offers; like the stub bonus, it’s usually a low percentage of the Year 1 base salary.
5. Benefits: Finally, you’ll get health insurance, vacation days, and participation in the firm’s profit-sharing or 401(k) retirement plans. In places like Europe, this one mostly takes the form of “more vacation days” since healthcare is government-funded.

Investment Banker Salary and Bonus Levels: Analysts

Based on payouts in mid-2023, Analyst pay has held up fairly well.

I listed $190K as the top of the range above, but plenty of Analysts earned above that, especially Year 2 Analysts at places like Guggenheim, Moelis, Perella Weinberg, and Evercore.

Year 3 Analysts are not that common anymore because banks changed the promotion schedule, but anyone on a $125K base salary should have easily cleared $200K as well.

Year 1 Analysts, on the other hand, were closer to $150K in total compensation, with a fair number of reports in the $130K – $140K range.

(This is why I used $140K for the bottom of the range rather than $150K.)

Overall, it was a ~5% drop; not terrible when you consider deal activity.

The real issues at this level were that:

• Overall hiring was awful, with plenty of layoffs.
• Return offer rates from internships were low.
• And the timing for internship recruiting got even more ridiculous.

Investment Banker Salary and Bonus Levels: Associates

There was a massive spread at this level, with Year 1 Associates at some elite boutiques earning bonuses that were 100%+ of base salaries (i.e., nearly $400K in total compensation) and others at closer to ~50%.

The news was even worse at firms like William Blair and BofA, where bonuses were only ~25% of base salaries in some cases.

Most other bulge brackets were in the middle of this range, with bonuses in the 50 – 70% range depending on your bucket, group, and year number.

Investment Banker Salary and Bonus Levels: Vice Presidents

The spreads for Vice Presidents were even wider; I found minimum total compensation of ~$325K all the way up to a maximum of ~$900K.

It’s such a wide range that it’s almost comical, and I’m not quite sure what to say.

I estimated $450K – $650K total compensation for the 25^th to 75^th percentiles above, and I think that is true for most of the bulge brackets.

However, plenty of elite boutiques paid well above this, with many reports of $700K+ or even $800K+ in total compensation.

Interestingly, the percentage of deferred compensation also varied a lot at this level, with the biggest banks being more conservative.

Investment Banker Salary and Bonus Levels: Directors

I have almost no data here, so I extrapolated and assumed a ~7% drop over the numbers from last year.

Directors can still earn a lot, but outside the EBs, they were mostly in the mid-to-high-six-figure range.

Investment Banker Salary and Bonus Levels: Managing Directors

Whenever deal activity plummets, Managing Directors absorb the brunt of the damage, and the same thing happened this year.

You can read all about MD pay on Bloomberg or Financial News, but the short version is that many MDs’ bonuses were down 15 – 20%.

That means that many MDs this year earned closer to $500K than $1+ million.

It’s completely plausible that some VPs and Directors out-earned MDs simply because their bonuses are not linked quite as directly to closed deals.

Regional Differences and London Numbers

Usually, Arkesden and Dartmouth issue good reports on London, but I couldn’t find anything updated for this past year.

But once you factor in the USD/GBP exchange rate and the always-lower pay in London, it’s reasonable to expect at least a 15 – 30% discount on all these numbers.

efinancialcareers has a report from October that shows these pay ranges:

• Analyst: £100K – £130K GBP ($126K – $163K USD)
• Associate: £180K – £250K GBP ($226K – $314K USD)
• VP: £240K – £330K GBP ($301K – $414K USD)

I am “rounding” these, and I have no idea how accurate the numbers are, but there isn’t much else out there.

Similarly, I have nothing on Asia, Australia, or other regions aside from the Bloomberg article with a few scattered references.

So, What Does This Mean for Future Investment Banker Salaries and Bonuses?

I made a simple prediction in last year’s bonus report:

“In the future, I expect compensation to continue to fluctuate significantly from year to year, so you should expect less of a ‘straight line’ in your career and earnings.”

And I stand by that prediction – as we’ve now seen the impact of two bad years in a row.

I do expect an improvement in 2024 because capital markets and M&A activity are starting to pick up in most regions.

Companies can only be cautious for so long, and most “deal slumps” only tend to last for a few years.

That said, I am still less optimistic about deal activity and bonuses than other sources (e.g., executives at elite boutique banks) for a few reasons:

• Inflation and interest rates are both structurally higher and are unlikely to return to “2010 – 2019 levels” anytime soon.
• Antitrust and regulation will continue to limit the biggest deals. We’re now in a very different legal environment, and some bankers are still in denial.
• Demographics will soon become a problem in many countries (South Korea is disappearing!), and growth in emerging markets will not make up for it on a per-capita basis.

So, assuming an uptick in deal activity and no major disasters, I could see a modest bump in bonuses this year – perhaps a 10 – 15% increase.

But if you’re expecting 2021 bonuses anytime soon, you’d have better luck with a DeLorean time machine.

For Further Learning

Finally, if you’re not deterred by these lower bonuses and you’re still committed to breaking into IB as an Analyst or Associate, our friends at Wall Street Mastermind might be able to help you out.

They’ve worked with over 1,000 students to help them secure high-paying investment banking jobs out of school (and internships while in school), and their coaches include a former Global Head of Recruiting at three different large banks.

They provide personalized, hands-on guidance through the entire networking and interview process – and they have a great track record of results for their clients.

You can book a free consultation with them to learn more.

The post 2024 Investment Banker Salary and Bonus Report: The Ugly, the Ugly, and the Ugly appeared first on Mergers & Inquisitions.

It’s one area where people on both sides tend to talk past each other:

• Bankers say that wealth management roles pay less, offer less interesting work, and lack good exit opportunities.
• Wealth managers say that investment banking requires crazy hours, has mostly dull work, and is ridiculously competitive to get into; also, the “compensation ceiling” may be similar in both fields, so why kill yourself in banking?

The truth is that both claims are correct but incomplete.

To illustrate the problem, I’ve created two “career ladders” for these fields:

Now let’s dig in:

Wealth Management vs. Investment Banking: Job Functions

Wealth managers advise individuals on their investments and may provide other services, such as tax and estate planning.

These individuals are usually “high net worth” (HNW), meaning an average of $5 – $10 in assets, but it could be as low as $1 million. And wealth managers at large banks may advise people with as little as a few hundred thousand to invest.

Some of these client differences relate to the distinction between private wealth management and private banking; for more on that, you should review the the private banking article.

By contrast, investment banking is more about advising companies on transactions such as M&A deals, equity and debt deals, and restructuring.

In wealth management, you advise the same clients over long periods, but in IB, you hop from deal to deal – though some groups do operate on more of a “client service” model.

When a deal becomes “active” in IB, you dive into it and go in-depth into all aspects, from the financials to the buyer/seller outreach to the presentations and more.

You can think of it like this:

• Wealth Management: Broad and long-term/continuous client coverage.
• Investment Banking: Deep and short-term coverage (just until the deal is done!).

There is some overlap because at the large banks, wealth management clients often get early/privileged access to investment banking products, such as upcoming IPOs, equity/debt offerings, or new investment products.

The Nature of the Work: Markets, Analysis, Sales, and Interpersonal Skills

Wealth management (WM) requires broader knowledge of the financial markets since you may have to advise clients on everything from their portfolio allocations to upcoming tax changes.

(Note that the scope is more limited in “pure” WM roles; you’ll do more non-portfolio work in private banking.)

Wealth management also requires more sales and interpersonal skills even at the entry level because it is a sales job from Day 1 – and you need to start bringing in clients early to succeed.

There’s much less technical work because your analysis tends to be very high-level. Think: benchmarking portfolios rather than modeling companies.

You will very rarely get exposed to the type of financial modeling that bankers complete: 3-statement models, DCF models, M&A models, LBO models, and so on.

Investment banking eventually turns into a sales job, but only when you reach the VP level or above (roughly 7-8 years into the IB career path).

At the Analyst level, it’s more about grinding away in Excel and PowerPoint.

As you move up in the early years and become an Associate and early VP, it turns into “project management” and making sure your team delivers.

Knowledge of the financial markets is helpful, but you don’t need it like wealth managers do because you just need to understand the deals you’re currently working on.

One final note is that in wealth management, there’s a split between relationship managers and investment professionals.

This split doesn’t exist in quite the same way in IB, so you can get a very different experience in WM depending on your role.

Recruiting in Wealth Management vs. Investment Banking

You should know all about IB recruiting from reading this site, but it’s insanely competitive and starts very early.

To get an IB internship that leads to a full-time return offer, you need to get “pre-internships” in Years 1 – 2 of university, prepare for recruiting by the middle of Year 2, and do a good amount of technical prep – while earning high grades and doing something to make yourself look interesting.

If you miss undergrad recruiting or change careers, you can also get into IB via lateral hiring or from a top MBA program, but these paths take more time (and money!), and your odds are not spectacular.

By contrast, wealth management is much less competitive to get into.

If you have good sales skills, you could break in with a middling GPA (3.0 – 3.5) and without a target school or great internships.

Like any sales job, they hire lots of candidates because it’s impossible to know in advance who will succeed.

The philosophy is to hire many candidates and let them “sink or swim.”

Interviews are broader than IB interviews and require knowledge of asset allocation, economics, and and financial markets, but far less specific technical knowledge.

For example, they might ask you how to use a DCF, what bond yields are, or the trade-offs of debt vs. equity – but but they won’t ask you to build a DCF model or calculate Unlevered Free Cash Flow.

As with the job itself, the theme is breadth over depth.

Wealth Management vs. Investment Banking: Careers and Promotions

At a high level, the IB and WM career paths seem similar: it might take 10 – 15 years to reach the top (Managing Director), and you start out doing analytical work but shift to sales as you advance.

However, the “sales shift” starts much earlier in wealth management, as it’s pretty much a sales job from Day 1 (with some analytical work mixed in).

The first few years are very tough because you start from nothing – but if you build a decent book, the job gets easier since you’ll have consistent revenue from long-term clients.

By contrast, the first few years in investment banking are tough in a different way: tons of work, crazy hours, and an unpredictable schedule.

You don’t need to be good at sales to make it to the VP level; you can grind your way up if you’re good enough at executing tasks and following instructions.

To advance and move beyond the VP level, you do need sales skills, which not everyone has – this is why the more analytical candidates often leave for private equity and hedge funds in the early years.

Investment banking careers are also less stable than wealth management ones, and mid-level bankers often get laid off because they’re expensive and do not yet directly generate revenue.

I would summarize the careers like this:

• IB: Tough-but-grindable early years; the mid-level roles become less stable and require more real-world skills to advance.
• WM: The early years are painful because you need real results to advance, but it gets easier as you move up and gain “sticky” long-term clients.

Wealth Management vs. Investment Banking: Compensation and Hours

Salaries and bonuses change each year and depend on the firm and group, but in both careers, you’ll start in the low-six-figure range (e.g., $100K to $200K) and advance from there.

Expect something on the lower end of that range for WM roles at large banks and something in the mid-to-upper-end (or above) for IB roles.

At the mid-levels, VPs and Directors in IB also earn significantly more than the equivalent positions in WM (it’s maybe a ~30 – 50% discount in WM).

At the top, MDs in wealth management can theoretically earn $1 million+ year, just as many investment banking MDs do.

However, it might be more realistic to expect “high-six-figure pay” if you make it to that level and have a good base of long-term clients.

There’s less money to go around because the fees are lower, as most groups charge 0.5% – 1.0% on assets under management (AUM).

Investment banks also charge fees in that percentage range, but they’re charged on deals worth hundreds of millions or billions of dollars.

Some wealth managers eventually amass $100+ million in assets under management, but it’s a very slow process, and there’s a limit to how much in AUM any one group can manage.

As a result, the dollar volume of fees ends up being higher for a similar headcount in investment banking.

Compensation is also more individualized in wealth management, especially as you advance – if your clients generate significant fees, you should still do well even if others in your group perform poorly.

This is not the case in IB until you reach a very senior level (for more on all these points, see the article on investment banker salaries).

Finally, the hours are significantly better in wealth management because you don’t do that much work outside of normal business hours.

So, you won’t pull all-nighters to finish pitch books, and you won’t be called in over the weekend to make last-minute changes to a model.

It’s usually a 50-hour-per-week job, which is significantly better than the 60, 70, or 80+ hours required in IB.

The Top Firms in Wealth Management vs. Investment Banking

Most people would say the top investment banks are the bulge brackets and elite boutiques, at least for entry-level roles.

They do larger, more complex deals and offer better experience, compensation, brand-name recognition, and exit opportunities.

Even as you advance, there isn’t necessarily a reason to leave one of these firms and move to a smaller one outside of very specific lifestyle/personal issues.

In wealth management, some people argue that it’s best to start at the bulge bracket banks for the brand name, compensation, and network…

…but they might also say that the better long-term roles in the industry are at the pure-play firms and boutiques, especially on the “private banking” side.

These firms tend to work with higher-end clients, and the work tends to be more varied and interesting, with less cold-calling and cold-emailing to chase leads.

I could not find data to confirm this one, but I would also assume that the compensation ceiling is higher at these firms because they do not necessarily use a standard fee schedule.

Wealth Management vs. Investment Banking: Exit Opportunities

There are some huge differences here, and it’s tough to argue with the quality of investment banking exit opportunities: private equity, hedge funds, corporate development, corporate finance, venture capital, startups, equity research, and more.

It offers the broadest set of possible exits within the finance industry if you leave early (in your Analyst years).

As you advance, your exit opportunities narrow because PE firms and hedge funds don’t want to pay for expensive VPs or Directors with no direct investing experience.

The corporate finance/development options and a few others remain, but you’re unlikely to exit into a PE mega-fund – or any sizable PE firm – as a seasoned VP in investment banking (for example).

The exit opportunities in wealth management are much more limited because it is an exit opportunity.

In other words, people don’t go into WM to leverage it into another job: They go in it to build up a client book and eventually earn a high income with a good lifestyle.

If you decide it’s not for you, you might be able to move into investor relations, fundraising, or sales jobs, but deal-based roles are highly unlikely.

Even hedge fund and asset management roles are unlikely unless you’ve had a lot of experience analyzing individual companies or doing very technical analysis.

You might have a shot at sales & trading if you’ve had experience with relevant products, such as FX hedges for international clients, but even that is a stretch.

Final Thoughts on Wealth Management vs. Investment Banking

The basic issue is that investment banking “wins” for entry and mid-level roles due to the higher optionality, higher pay, and the ability to grind your way up the ladder.

Yes, IB is far more difficult to get into, and the hours and lifestyle are much worse – so these points count against it.

But if you’re an ambitious student or you’re early in your career, you shouldn’t care too much about these issues.

At the top levels, WM and IB roles are arguably similar, and wealth management might even offer advantages in terms of reduced stress and shorter hours.

But it’s tough to get there, and the burnout/quit rate is very high.

In the past, many students used WM roles at large banks to get solid brand names on their resumes and become competitive for IB internships.

But I’m not sure how well this works anymore because of hyper-accelerated recruiting, at least in the U.S.

It would be smarter to get more relevant internships – anything involving deals, modeling, or individual investments – even if they’re at boutiques or other, smaller firms.

That said, I think the sheer hatred directed toward wealth management in some online forums is quite exaggerated.

From my perspective, yes, IB is “better” for most ambitious/analytical people, but not everyone has the same personality, skill set, or goals.

If you’re very sociable but not the most analytical person, wealth management could easily be a better option for you.

Similarly, if you do not want to work more than 50 hours per week, and you’re in it for the cushy lifestyle after 10+ years, wealth management could also be better.

But remember that it is a different career ladder – and you don’t want to change your mind and fall off when you’re midway up it.

For Further Reading

• From Regional Audit to Investment Banking: How to Break in *Without* the Big 4 Pedigree
• From Valuation Advisory to Investment Banking: How to Make the Lateral Leap
• How to Cold Email for an Internship: Investment Banking Cold Email Templates and Guide
• M&A Investment Banking: The Best Group Ever?
• How to Move from Accounting to Investment Banking and Leave the Audits Behind Forever
• From Wealth Management to Investment Banking: How to Make the Leap

The post Wealth Management vs. Investment Banking: Career Deathmatch appeared first on Mergers & Inquisitions.

The IB internship recruiting timeline is now so insane that even mainstream news sources like the Wall Street Journal are writing about it (“The Race Is On to Hire Interns for 2025. Really.”).

And yes, you read the news correctly: Banks like RBC, DB, Houlihan Lokey, Rothschild, and Guggenheim opened 2025 summer internship applications in calendar year 2023.

Admittedly, not all banks did this, and many bulge bracket firms will start in the normal time frame of January – March.

In practice, this means you must be on top of IB internship recruiting from Year 1 of university if you’re in the U.S.

I’ll cover the following points in this updated article:

How to Get an Investment Banking Internship: The “Ideal” Timeline in the U.S.

By the time internship applications open in Year 2 of university – whether that’s in the middle or beginning (!) of the year – you should have the following elements in place:

• A good GPA – at least 3.5 and ideally a bit higher.
• One (1) solid finance internship and one (1) student/leadership activity or two solid finance internships.
• A decent amount of networking completed with bankers (e.g., 30 – 40 coffee chats or informational interviews).
• And ~30 hours of interview prep, which you can stretch over 2-3 months or cram into a few weeks (your story, standard behavioral questions, technical questions, etc.).

To accomplish that, I recommend the following timeline:

How to Get an Investment Banking Internship, Step 1: Your First Year in University

You don’t necessarily need to pick your major at this stage, but I would recommend finance/accounting or something that will be useful for a wide range of jobs.

Think: Engineering, math, statistics, or something with elements of all these, such as “management science” or “operations research.”

Avoid options like sociology, art history, gender studies, etc., unless you’re at one of the top ~5 universities in the country (it’s easier to get away with irrelevant majors there).

Next, front-load your schedule with easier classes in your first year, such as language classes or university-wide prerequisites.

Earn a high GPA from these easy classes and save the hard, technical ones for later years.

Join 1-2 student groups that will help you network into finance roles, such as the student investment club or the business frat. You could also consider investing or case competitions.

Most importantly, you NEED to get a finance internship in your first year or in the summer after your first year.

In the past, you could wait until Year 2 for your first internship, but this is riskier today because applications keep opening earlier and earlier.

And yes, some banks will still start later, but you want to keep your options open so you can apply to as many firms as possible.

You probably won’t be able to get a “real” IB internship, but you can find some good alternatives:

• Search fund internships.
• Internships at local venture capital or private equity firms.
• Internships at regional boutique banks.
• Corporate finance roles at nearby companies.
• Wealth management.
• Corporate banking.
• Anything in real estate, such as brokerage, appraisal, or lease management.
• Big 4 or independent valuation firm internships.

There is no set process, so you’ll have to find people on LinkedIn, send them messages or emails, and repeat until you find something.

How to Get an Investment Banking Internship, Step 2: The Summer After Your First Year

Ideally, you’ll complete your first finance internship in this period (see above).

You should also start learning the technical side (accounting, valuation, and basic M&A and LBO concepts) and begin networking with alumni.

It might even be a good idea to start networking before the end of your first year so you have more time to follow up with alumni and set up calls.

This may sound unbelievable, but with recruiting moving up and start dates becoming more random, it is better to start too early than to wait too long.

If your internship has normal hours, you could target ~10 hours per week for networking + technical prep.

A good target might be to complete 20-30 coffee chats or informational interviews by the time your second year starts.

With the technical prep, the most important point is to learn by doing.

Yes, you can read guides, take courses, and watch YouTube videos, but you should also spend a few hours building simple DCF models or 3-statement models to learn the key concepts.

You will retain far more information if you practice with companies you’re interested in than if you passively consume content.

How to Get an Investment Banking Internship, Step 3: Your Second Year in University

This is where it becomes unpredictable because it depends on when banks open their applications, which seems to change each year.

Since you can’t know that beforehand, you should continue networking with alumni and preparing for interviews as your second year begins.

Weekend trips to places like New York or London can certainly help, but you don’t necessarily “need” them if you’ve been able to speak with many alumni already.

You’ll also have to consider your internship plans for the upcoming summer (after your second year) since they will appear on your resume/CV and in interviews.

I would refer to the “pre-internship” list above and focus on the area you’re most interested in.

If you don’t already have a “brand name” on your resume, aim for an internship at a large, brand-name company; if you do have that brand name already, aim for a highly relevant internship, such as one where you work on deals and value companies.

At some point in your second year, applications will open, and the recruiting process will begin – at least if you’re at a target school.

All you can do here is pay close attention to news alerts and job postings and be ready to pounce the moment applications open.

Some people recommend resources like The Pulse, the Adventis newsletter, etc., but I can’t personally speak to how useful or accurate they are for tracking the dates.

If you do well in HireVues and investment banking interviews, you might have something lined up by the middle to end of your second year.

How to Get an Investment Banking Internship, Step 4: The Summer After Your Second Year

You complete your second finance-related internship here.

Also, not all banks finish their summer internship recruiting by this stage, so if you haven’t yet found something, you might still have a shot.

Smaller firms tend to be a bit slower, so you could find some middle-market and boutique openings, even if the bigger banks are done.

Therefore, you can keep applying and networking – but your chances decrease the longer it takes.

How to Get an Investment Banking Internship, Step 5: Your Third Year in University

Some banks will continue recruiting even into your third year, so you might still be able to interview around.

But if you do not win an internship within the first few months, chances are that you won’t be in IB at a large bank for the summer before your final year of university.

What If You Start Late or Miss Application Deadlines?

The best “Plan B” options depend on how far off you are.

If you can plausibly get finance internships in a related area, such as corporate banking or corporate finance, you could potentially aim for a full-time return offer in one of those fields, work for a year, and then go for lateral roles in IB.

Similarly, if you can win an offer at a boutique bank or another smaller firm, you could take a similar approach and work there for a year and then go for lateral roles at larger firms.

But if the best you can do is something like wealth management, it will be much harder to make this move (you want something with more financial or deal analysis – for more, see our article on wealth management vs. investment banking).

You could also think about fields like equity research that are less structured and that might allow you to get in without a previous internship.

On the other hand, if you missed the deadlines because you were on a totally different path – such as engineering, marketing, or pre-med – you will probably need to pivot more aggressively with something like a Master’s in Finance degree.

You could also work for a few years and go the MBA route, but I do not recommend that for your immediate “Plan B” because it’s slower and more expensive.

How to Get an Investment Banking Internship at the MBA Level

At the MBA level, the timing is less frantic because banks cannot recruit until students arrive on campus.

You should still expect a quick start to recruiting and on-campus events once classes begin, but that has always been the case at this level.

We have an article on the MBA investment banking recruiting process, so please refer to that for more details.

In short, you still need to prepare for interviews and do some early networking, but the entire process is very structured at the top programs.

So, your candidacy is more about presentation, consistency, and ensuring you have a good enough background to be competitive.

How the Recruiting Timeline Differs in Other Regions

In places like London and Hong Kong, the process has moved up to earlier start dates, but it’s not as ridiculous as in the U.S.

So, you can afford to take your time a bit more and get internships in Year 2 (assuming it’s a 4-year degree – if it’s a 3-year degree, you need to move more quickly).

Applications usually open ~10-12 months before summer internships begin, so it’s less accelerated than the U.S. timing.

The Big 5 banks in Canada seem to be starting recruiting season earlier as well, but they’re more in-line with the start dates of the U.S. bulge brackets (well, except for RBC).

One difference is that there are more avenues into IB internships in regions like the U.K., such as investment banking spring weeks.

How to Get an Investment Banking Internship: What to AVOID

If you attend a good university, earn good grades, get 1-2 decent internships, and network/prepare in advance, you’ll probably be able to win an IB internship.

But you could also make plenty of mistakes that reduce your chances, so here’s what you should avoid:

First, it’s risky to transfer to a better university – even if you’re moving from an unknown state school to the Ivy League.

This strategy made sense for students at non-target schools a long time ago, but the new recruiting timeline makes it difficult to execute – as you won’t have much time to network with alumni or join student groups.

Second, do NOT take difficult classes in your first year. You cannot afford a lower GPA because banks use grades to weed out candidates.

Third, do not wait too long to start networking. If you wait until the middle of your second year, it might be too late!

Finally, do not focus on activities at the expense of internships. Yes, leadership experience is nice, and clubs can be useful for networking, but you will not make it far without internships.

Additional Reading About Internships

I’ve written a lot about IB internships over the years.

Here are the most relevant articles:

• How to Write a Finance Internship Resume with No Work Experience
• How to Cold Email for an Internship: Investment Banking Cold Email Templates and Guide
• No Investment Banking Summer Internship Offers: What to Do
• The Off-Cycle Investment Banking Internship: The Best Side Door into the Industry?
• How to Prepare for Your Investment Banking Summer Internship in Less Than 8 Hours (Excel, PowerPoint, industry knowledge, and networking)
• Investment Banking Internships: The Ultimate Guide (tips for the job and receiving return offers)
• How to Decide on Investment Banking Summer Internship Offers: Who Has a 97.5% Full-Time Offer Conversion Rate?

Finally, if you want to speed up your preparation process so that you can succeed in this hyper-accelerated recruiting timeline, our friends at Wall Street Mastermind might be able to help you out.

They can coach you through the process I laid out above step-by-step and remove the trial and error you would have to go through on your own otherwise.

Their team of coaches also includes a former Global Head of Recruiting at three different large banks, so you’ll know exactly what banks are looking for in candidates.

They provide personalized, hands-on guidance through the entire networking and interview process, and they have a great track record of results for their clients.

You can book a free consultation with them to learn more.

The post How to Get an Investment Banking Internship appeared first on Mergers & Inquisitions.

But the events of 2023, including the UBS acquisition of Credit Suisse and the rise of firms like Wells Fargo, Jefferies, and RBC, have shaken up the traditional list.

As of 2024, I consider the following to be the list of bulge bracket banks (note that the “potential” category is speculative and could include other, similar firms beyond the 5 currently listed there):

Sources: The list above is based on deal volume and fee data from Dealogic, the Financial Times, and Statista over the past few years.

What is a “Bulge Bracket Bank”?

Bulge Bracket Bank Definition: The “bulge brackets” are the largest global banks that operate in all regions and offer all services – M&A, equity, debt, and others – to clients; they work on the biggest deals (usually $1 billion+) and have divisions for sales & trading, equity research, wealth management, corporate banking, and more.

The name “bulge bracket” (BB) comes from the prospectus for an IPO or debt issuance, which lists all the banks underwriting the deal.

The larger banks play more important roles, acting as bookrunners or joint bookrunners, and earn higher fees.

Therefore, their names are in bigger font sizes on the cover page, so they appear to be “bulging out” next to the smaller firms:

Note that “bulge bracket” and “BB” are online terms; I don’t think I’ve ever heard anyone use them in a spoken conversation.

Similar to terminology like “target school,” it would sound weird to use these words in an interview or networking setting.

So, if you need to refer to these firms in real life, try something like “large bank(s)” instead.

Why Have the Bulge Bracket Banks Changed? What About Deutsche Bank and UBS?

The end of Credit Suisse in 2023 means that it’s no longer on this list.

It also means that UBS, which acquired CS, is more firmly in the “bulge bracket bank” category, even though people sometimes debate its status.

The full list changes over time because banks get acquired, go out of business, and change their focus – while other banks make acquisitions and grow organically.

For example, Lehman Brothers and Bear Stearns were considered bulge bracket banks before the 2008 financial crisis – but many people today don’t even remember them.

As another example, some argue that UBS should not be a bulge bracket bank because it has focused on wealth management and areas outside the capital markets.

However, the global IB fees over the past two years do not support that argument:

UBS cares less about investment banking than the banks above it, but it is still in the top ~7 worldwide for IB revenue.

Also, following the acquisition of Credit Suisse, it’s hard to argue that UBS is not a BB bank (similar to how Barclays’ acquisition of Lehman Brothers’ operations turned Barclays into an official bulge bracket).

Deutsche Bank is a trickier case because it now generates less investment banking revenue than firms like Jefferies, Wells Fargo, and RBC.

It also tends to work on smaller deals than the top ~5 banks.

Older bankers might still think DB is a bulge bracket, but I would put it in the “borderline” category as of 2024.

I’m still listing it because it was #9 by global IB revenue in 2021 and 2022, but I would not be surprised if it fell off this list eventually.

This does not mean it’s a bad place to work.

It’s just that it’s not in the same category as GS, MS, JPM, etc., anymore (to be honest, I don’t think it has been in that same category for at least 5-10 years).

Bulge Bracket Bank “Challengers”: Do Wells Fargo, RBC, or Jefferies Qualify?

Looking at these lists, you might think:

“Wait a minute. Firms like Wells Fargo, RBC, and Jefferies all have annual IB revenue between $1 and $2 billion, so they’re not that far from Barclays and Citi. What’s the difference?”

There’s no exact revenue cut-off to qualify for this list, but these firms are less diversified in products and geography, so we do not consider them bulge brackets (yet).

For example, Wells Fargo always does well in debt capital markets but much worse in M&A advisory and equity capital markets.

You can see this if you break out the performance by product area and select “Loans”:

Wells Fargo is usually in the top 5-7 worldwide for debt but ranks much lower in the other areas.

Also, it has less of a global presence, as it’s U.S.-based and executes mostly North American deals.

Meanwhile, a firm like Jefferies is more diversified with a bigger international presence, but it also works on smaller deals than most bulge brackets.

One interesting case is a firm like Mizuho, which acquired Greenhill in 2023 (note that the deal has not yet closed as of the time of this article).

Greenhill was formerly considered an “elite boutique,” at least by some people, so this deal could turn Mizuho into more of an investment bank and give it a greater presence outside Asia, which is why I listed it in the “Potential” category above.

That said, it will still be many years before anyone starts thinking of it as a bulge bracket firm (if ever).

What About the Chinese Banks, Such as CITIC, China International, and Huatai?

While some Chinese banks earn high global revenue from their IB activities, they have virtually no presence outside China.

Also, they are often strong in ECM or DCM but far weaker in areas like M&A.

Due to the current geopolitical climate, it’s highly unlikely that these firms will expand significantly beyond China anytime soon.

But in the distant future, sure, one or more of these firms might join this list.

Bulge Bracket Banks vs Boutique, Middle Market, and Elite Boutique Banks

In addition to the bulge bracket banks, there are other categories: middle market banks, regional boutiques, and elite boutiques.

Each has a separate article on this site; there’s also a summary of the top investment banks.

I’d summarize the differences for front-office investment banking roles as follows:

• Bulge Bracket vs. Elite Boutique Banks: Both firms work on large/complex deals, and you gain access to very good exit opportunities from both. You’ll get higher compensation at an EB, more interesting work, and more responsibilities, but you’ll also get a smaller network and a lesser-known brand name if you ever want to leave the finance industry.
• Bulge Bracket vs. Middle Market Banks: You’ll work on smaller deals, have more limited exit opportunities, and get less of a network and brand name at MM banks. But the compensation doesn’t differ much for entry-level roles, and it is more feasible to win offers, particularly if you are at a non-target school, have a lower GPA, or got a late start in the recruiting process.
• Bulge Bracket vs. Regional Boutique Banks: The differences above are even more extreme here. You’ll work on very small deals at most regional boutiques, have even less access to private equity and hedge fund exits, and get even less of a network and brand name. But you might also have a chance at these very small firms even if you’re not competitive elsewhere.

Based on these comparisons, you might think the bulge bracket banks “win” across all categories.

But that’s not quite true because it ignores a few important points:

1. The elite boutiques are arguably better if you want to stay in finance long-term due to the compensation and work differences.
2. It’s harder to win offers at the BB banks, and you need more upfront preparation and an early start in university (or a top-tier MBA).
3. In some regions, the bulge brackets are not the best because domestic banks are stronger. For example, the “Big 5 (6?)” Canadian banks dominate investment banking in Canada, and the top banks differ in emerging markets such as Brazil.

So, my advice here is simple: Get a realistic sense of where you’re competitive and focus on winning the best offer you can.

If that’s at a bulge bracket bank, great.

If not, go for smaller banks, do your best, and think about moving around once you have more experience.

Final Thoughts: Bulge Bracket Bank or Bust?

A long time ago, many university and MBA students assumed that bulge bracket banks were the “be-all and end-all” for careers.

While they still have advantages, it’s a murkier distinction nowadays.

The elite boutique banks (Evercore, Lazard, Centerview, etc.) are now strong competitors, and you could easily make the case for accepting an offer there.

Also, many private equity firms and hedge funds now recruit undergrads directly via Analyst programs, and if you can win an offer at a large/reputable firm, it’s quite a good option.

Finally, technology firms now offer lucrative jobs to engineers, product managers, and salespeople, so many students go the tech route instead.

The bottom line is that while the bulge bracket banks are still appealing, they are no longer the clear winner in the “Post-Graduation Career Olympics.”

This is especially the case with the changes over the past few years and the disruptions to the traditional list.

Here’s how I’d sum up everything above:

Advantages of Working in Investment Banking at the Bulge Bracket Banks:

• Brand Name & Alumni Network: Everyone knows your firm, which is helpful for finance and non-finance roles.
• Broad Exit Opportunities: You have good options for both finance and non-finance companies because of the brand, network, and access to recruiters.
• Larger, More Complex Deals: You’ll work with multi-billion-dollar corporations instead of family-owned businesses, so the analysis is often more in-depth.
• Compensation: You’ll earn more than you would at smaller firms but less than at the elite boutiques.

Disadvantages of Working in Investment Banking at the Bulge Bracket Banks:

• Extremely Competitive: To win offers, you must start early, ideally attend a top university or MBA program, and have excellent work experience and networking.
• Long Hours and Unpredictable Lifestyle: You won’t have much of a life for the first few years (even with “protected weekends” and other measures).
• Larger Teams: While the deals may be more complex, larger deal teams also mean that Associates and VPs may do more of the interesting work.
• Compensation: Higher percentages of compensation start to become deferred and paid in stock as you get promoted, and the absolute numbers may be less than elite boutique pay as well.
• Regional Variations: Finally, depending on your region, domestic banks might have better deal flow than the BB banks.

If you’re not sure of your long-term plans and you’re competitive for roles at the largest banks, sure, go for it.

But if you are more certain and you can win offers at the elite boutiques or buy-side firms, one of those could be a better alternative.

And if you don’t know where you have a realistic chance, go back to Square One and review our coverage of how to get into investment banking.

Final Note: Everything in this article refers to investment banking jobs. If you are interested in corporate banking, wealth management, IT, or other areas, the top firms and groups differ.

The larger banks still offer advantages over smaller ones, but the rankings change depending on your area of interest. We may cover these points in future updates (for more, see our coverage of wealth management vs. investment banking).

The post Bulge Bracket Banks: 2024 Edition appeared first on Mergers & Inquisitions.

1. Wait a minute, isn’t healthcare a risky/growth-oriented sector? Why do PE firms operate there? Don’t they need companies with stable cash flows?
2. In most of the world, healthcare is either government-run or a mixed public/private sector. Are there many private healthcare companies for PE firms to acquire?

The short answer to #1 is that healthcare private equity firms operate in specific verticals with stable-ish cash flows, such as healthcare services, nursing facilities, medical devices, equipment, and healthcare IT.

They do not invest in risky biotech startups attempting to cure cancer (at least not within their traditional PE portfolios).

On #2, the government controls healthcare in many countries, but not everything in healthcare – there are still private healthcare firms even in Canada and the U.K.

For example, Medicare in Canada does not always cover services like prescription drugs, eye care, and dentistry, so there is room for the private sector.

That said, there is far more healthcare PE activity in the U.S. since it has some of the biggest healthcare companies and less government control.

Before delving into these nuances, we should take a step back and define the sector:

Definitions: What is a Healthcare Private Equity Firm?

Healthcare Private Equity Definition: A healthcare private equity firm raises capital from outside investors (Limited Partners), acquires companies in the healthcare services, devices, and healthcare IT segments, and aims to grow these firms and sell their stakes within 3 – 7 years to realize a return on their investments.

This definition excludes life sciences and biopharmaceutical companies because they differ greatly from service and device companies.

These firms lie in the territory of life science venture capital firms that invest in high-risk, early-stage companies.

Some PE firms also invest in this vertical, typically via separate groups (see below).

If you compare healthcare to technology private equity, one of the biggest differences is that different verticals in healthcare are more like completely different industries.

Pharmacies are closer to retail companies; nursing facilities are like REITs or real estate; small physicians’ practices are like consulting firms; and HCIT companies could be more like software or IT services firms.

For more on this, please see our healthcare investment banking article.

Why is Private Equity Interested in a “Boring” Sector Like Healthcare Services?

This chart of PE deal activity from 2001 to 2022 in the Bain Capital Healthcare Private Equity report sums up the market quite well:

In short, healthcare had never been a huge sector for private equity, but activity ramped up in the late 2010s into the early 2020s, and it’s now one of the top industries by dollar volume (right after tech).

It appeals to private equity firms for a few reasons:

1. Stable/Predictable Cash Flows in Certain Sectors – While these companies do not necessarily have “annual recurring revenue” like a SaaS company, they often have government contracts or subsidies – which are highly likely to be renewed. For example, in the U.S., Medicare and Medicaid are the primary payers for nearly 80% of the residents in nursing homes.
2. Mispriced Companies and Assets – Some mature healthcare firms trade at low valuation multiples, often because the market misunderstands their contracts, revenue, or track record. PE firms view these companies as especially appealing since low multiples mean they can use higher debt percentages to fund the acquisitions.
3. Fragmented Markets with Many Add-On Acquisition Opportunities – Private equity firms have been snapping up specialist physician practices in the U.S. to consolidate their market power in specific regions. Critics would say they’re cutting corners, raising prices, and worsening patient care (see below).

Doctors often sell their practices to PE firms because it seems like a better alternative than being acquired by a huge hospital chain.

In both cases, the acquirer is likely to do something bad, but at least with the PE firm, there’s less bureaucracy.

A “typical” healthcare PE deal might resemble Cinven’s acquisition of SYNLAB, a medical diagnostic and testing provider in Germany:

This deal was done at a low 5.3x EBITDA multiple, mostly because the company went public during the COVID testing craze but fell off a cliff after the world moved on.

At the time of the deal, it was expected to grow sales at 3-5%:

Remember that PE deals do not require “growth.”

This deal works because SYNLAB can afford to take on a huge amount of Debt and can likely repay it quickly – since its EBITDA was depressed at the time of this acquisition.

Also, there are plenty of bolt-on acquisition opportunities in the sector, and if Cinven can grow it modestly and increase its margins a bit, the math works even with a lower exit multiple.

The Top Healthcare Private Equity Firms

If you want a good list of healthcare PE firms, check out the Healthcare Private Equity Association (HCPEA) “member firm” page here.

To be more specific, I would divide the sector into these four categories:

1. Mega-Funds and Large PE Firms – None of these firms specializes in healthcare, but they all have sector teams.
2. Upper-Middle-Market and Middle-Market Firms with Healthcare Teams – It’s the same idea, but they’re smaller and do smaller deals. Some of these firms might also fall in the “growth equity” category.
3. Healthcare-Only Middle-Market Firms – They tend to specialize in specific verticals, and many are in the “lower-middle-market” category.
4. Life Science and Biotech Teams – These are more on the venture capital side, but some large PE firms have internal teams that also do this.

Mega-Funds and Large Private Equity Firms in Healthcare

This list includes names like Apax, Bain Capital, Blackstone, Carlyle, EQT, Hellman & Friedman, Leonard Green, KKR, Thoma Bravo (for healthcare IT), TPG, and Warburg Pincus:

You might have noticed that Apollo is not on this list, even though they are considered a private equity mega-fund – because they’re less active in healthcare than the other firms.

Middle-Market (Upper/Lower) Firms with a Healthcare Presence

Starting with “larger firms” here, names include Audax, Court Square, Friedman Fleischer & Lowe (FFL), General Atlantic, Genstar, GTCR, Harvest, Kohlberg, Madison Dearborn, Nautic, New Mountain Capital, Nordic, Oak Hill, Summit Partners, TA Associates, Thomas H. Lee (THL), and Welsh Carson:

Smaller firms here with some healthcare focus include Arsenal, Gryphon, Vestar, and Vistria.

Dedicated Healthcare Private Equity Firms

Many of these firms are smaller or newer; names include Altaris, Avista, Chicago Pacific Founders, Consonance Capital, Cressey, Frazier, Gurnet Point, Linden, Patient Square, QHP (FKA NovaQuest), Varsity, and Water Street:

On the European side, you can add names like Apposite, Archimed, Astorg, G Square, GHO, and MVM Partners.

Life Science and Biotech Teams

Some PE mega-funds have specific teams that do VC-style investments; examples include Blackstone Life Sciences and Bain Capital Life Sciences.

Other firms that use a similar approach include Frazier, Hildred, Longitude Capital, QHP (FKA NovaQuest), RoundTable, and Vivo.

Some biotech hedge funds also do private placements for life sciences companies, which is effectively the same as VC or growth investing.

Examples include Baker Brothers, EcoR1, Perceptive, and Redmile.

Careers in Healthcare Private Equity

Careers in healthcare private equity have more to do with your firm’s size, strategy, and vertical focus within healthcare than anything else.

For example, if you’re at a firm that’s rolling up local pharmacies, it will be more like retail private equity, while healthcare properties or nursing facilities might be closer to real estate private equity.

Conversely, a smaller firm focused on life sciences or growth investing will be more like a VC role.

Your compensation depends mostly on your firm’s size and performance; healthcare PE pays, on average, about the same as any other PE firm or group.

In terms of mobility, you could easily join a healthcare investment banking team, move to a portfolio company in a corporate development role, or potentially even move into venture capital if you’ve had some life sciences exposure.

However, your chances of moving into early-stage VC are low unless you also have a serious science background, such as an M.D. or Ph.D. in biology.

You could also move into generalist PE firms or groups in other sectors, depending on your deal experience.

Can You Recruit into Healthcare Private Equity and Win Jobs?

As you’ve probably already guessed, there’s nothing “special” about private equity recruitment for healthcare firms or groups.

It’s still the same standard on-cycle or off-cycle process, and you might specify your group at the beginning or be placed after winning an offer, depending on the firm.

The two most common questions are:

1. Do you need healthcare deal experience in investment banking to have a shot at healthcare private equity?
2. Can you get in as an D. or Ph.D. based on your industry knowledge and scientific expertise?

The answer to question #1 is that healthcare deal experience helps and is strongly preferred, but it’s not “required” to get in.

Areas like healthcare services and medical devices are fairly generalist and follow standard accounting and valuation.

So, it’s not like real estate, oil & gas, or financial institutions, where you must learn a new set of jargon and accounting rules to have a good shot.

The answer to question #2 is “No, probably not” – if you have a pure medical or academic background, your chances of moving directly into healthcare PE are low.

These roles are for bankers and people with deal experience, such as corporate development professionals; firms care much more about your investment, financial modeling, and due diligence skills than your scientific knowledge.

If you have an M.D. or Ph.D., you should target life science VC roles, biotech equity research, or healthcare IB as a stepping stone.

In the recruiting process, you should expect the same private equity interview questions and LBO modeling tests, but often with a healthcare angle.

We don’t have a dedicated healthcare modeling course, but there are healthcare models and case studies throughout the others:

• Core Financial Modeling: There’s an LBO case study based on NichiiGakkan, a nursing facility company in Japan (deal led by Bain Capital).
• Interview Guide: There’s a DCF case study based on Attendo AB, a healthcare facility company in Sweden.
• Advanced Financial Modeling: There’s a case study on Jazz Pharmaceuticals if you’re more interested in that vertical.
• Venture Capital Modeling: There are examples of early-stage and pre-revenue biotech valuations here, including a Sum-of-the-Parts DCF for Ventyx.

The Outlook for Healthcare Private Equity and Possible Regulation and Crackdowns

Every sector has investment risks; for something like technology, most of these risks lie in the macro environment.

In other words, does paying 10x revenue for companies still make sense when interest rates are at 5%? What about when the IPO market is shut down and exits look uncertain?

For healthcare, most of the risks are regulatory.

Specifically, in the U.S., there have been dozens of stories about all the harm private equity does to the healthcare sector, such as this coverage from the NY Times.

Many people argue that PE firms buy up firms to maximize profits by raising prices and cutting costs and do not care about patient outcomes.

They make this argument in other industries as well, but it sounds much worse in healthcare because they argue that these issues are literally killing people.

This issue is now on regulators’ radar, and, like how they’ve cracked down on Big Tech acquisitions, they might also take a much stricter stance on healthcare.

Private equity has traditionally been lightly regulated because it’s limited to institutions and wealthy individuals, but that is starting to change because of its sheer size.

So, you are taking a risk if you join a group that focuses on roll-ups of doctors’ practices, pharmacies, or hospitals.

Areas like medical devices, diagnostics, or equipment are probably safer bets because these companies have a less direct relationship with patient outcomes.

Life science-oriented roles in VC and growth firms will also be fine because there’s always demand for new biotech and pharmaceutical products.

Final Thoughts on Healthcare Private Equity

Unlike tech, healthcare private equity has never been a hyped area; most people have neutral expectations.

That matches my verdict for the sector, which is also in “neutral” territory.

It’s nice because you can get in from various backgrounds and groups, you get a fair amount of mobility, and you can work in any vertical without becoming too specialized.

On the other hand, there’s also significant regulatory risk, at least in certain regions and for certain strategies, and I’m not sure the big increase in PE activity starting in the late 2010s is sustainable.

It’s not enough risk for me to recommend “avoiding” healthcare private equity, but it is enough to say that it’s middle-of-the-pack in terms of desirable PE sectors.

So, go for it if you have the interest and experience, and try to avoid those roll-ups of doctors’ practices and local pharmacies – or be ready to face the wrath of the regulators.

For Further Reading

I recommend these articles and publications if you want to learn more about the sector:

• Bain – Global Healthcare Private Equity and M&A Report (Google for the latest version)
• Leerink Partners – Podcasts and Research from a Top Healthcare Investment Bank

The post The Full Guide to Healthcare Private Equity, from Careers to Contradictions appeared first on Mergers & Inquisitions.