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Should You Start Out In Private Equity or at a Hedge Fund Rather Than In Investment Banking?

“I read your articles on the myth of the buy-side job and why finance doesn’t guarantee you $10 million and your own beach in Thailand .

But I still want to do finance – I just don’t want to do investment banking. I’m an Economics major, I have a 3.7 GPA and I have no industry contacts.

Do you think I should start in private equity instead? How can I do it?”

This is a very common “strategy” I get questions about.

But is it a good idea?

The Usual Argument

Usually the logic goes something like the quote above – you want to do finance, but you want to skip all the grunt work, pitch books, and all-nighters .

Plus, the only reason to do investment banking in the first place is for the exit opportunities – right?

How do you get in?

Many places do some undergraduate recruiting and there are “Analyst” (just out of school) positions in addition to Associate positions (what you would get after working in banking).

And if you’re an “Analyst” no matter which type of firm you’re at, isn’t it better to skip straight to the finish line?

Elements of Truth

There’s some truth to this logic.

While there’s grunt work no matter what you do, there is less of it on the buy-side.

And coming from banking, there’s usually some lifestyle improvement – at least you have weekends now – unless you go to the biggest funds, where it’s exactly the same.

It’s difficult but possible to get into a lot of funds – mostly middle-market ones – straight out of undergraduate, so it’s more plausible than all the emails I get from high school seniors wondering how they can become Managing Directors.

The Catch(es)

But as always, there’s a catch.

Actually, multiple catches.

They’re not enough to make this strategy a flat-out horrible idea, but they are enough to make you re-consider whether you really want to do it.

Can You Even Do It?

Problem #1: Can you actually get into a PE firm or hedge fund straight out of undergraduate? Or if you’re in business school, can you go straight from your MBA to one of these fields?

Most of the time the answer is no .

The path into private equity is well-defined, and your chances aren’t good unless you’ve been a full-time investment banking analyst before.

At the bare minimum you need some type of finance internship (private equity is best but other fields can work) to have a fighting chance – without that, it’s a long-shot at best.

If you’re at the MBA-level, it’s very, very tough to pull off unless you’ve been a full-time investment banking analyst before business school.

Especially when the economy is bad, these firms are flooded with ex-bankers with solid deal experience… so if you don’t even have that it’s an uphill battle.

This doesn’t mean that you can’t get into PE or work at a hedge fund eventually – it’s just that it’s difficult if you’re directly out of school without any finance experience.

Pay – Not What You’re Expecting

Yes, there’s the potential to earn more on the buy-side because you’re an investor rather than a salesman – the key word there being “potential.”

If you move into PE or HFs coming from investment banking, you’ll get paid more once you take into account the bonus and carry potential .

But if you move in straight out of school – or from another non-traditional background – you’ll often get less than you would as an investment

banking analyst .

Two real-world examples of this:

  1. One friend did a PE internship his junior year, then went to a larger PE firm for his full-time job. His base salary was less than what banking analysts got, and the bonus was less as well. He did get some upside – like a bonus for any deal he brought in – but overall he made less than a banking analyst .
  2. Another friend moved over from equity research to PE and not only got paid less than a banking analyst, but was also “demoted” to an Analyst once again despite having several years of finance experience.

Don’t expect to make significantly more – or even the same amount of money – as you would if you had started off on the sell-side.

The long-term potential is higher, but it takes years to get there.

The Myth of the Buy-Side Job

Still one of the most commented-upon articles on this site, everything in The Myth of the Buy-Side Job still applies here.

If you think valuing companies, following the market, and working in Excel are boring, then you won’t like anything on the buy-side either.

Certain points in that article ring even truer if you move in directly from school – for example, you might work more as a private equity analyst than as an investment banking analyst .

Regardless of what your title is, you’re always ranked according to how much experience you have – so if it’s nothing, you’ll be below anyone with some experience.

The social aspect (i.e. Do you talk to people during the day or are you isolated?) might be better if you’re coming in with a “class” of others, but it’s still well below what you would get at a large investment bank – which hurts you both socially and for networking purposes.

What Exit Opportunities?

This is the most commonly overlooked drawback: your exit opportunities are more limited if you start out on the buy-side.

You can go from banking to almost any other finance role because it gives you the broadest skill set.

But as you move up, you become more and more niche.

And that “nichifying” process starts earlier if you skip banking altogether.

Do PE and you can move to other PE firms… work at a hedge fund and you can go to other hedge funds.

But the longer you do it, the more specialized you become – so if you haven’t worked on cross-border European telecom M&A deals between €500MM and €1B then you might be out of luck if you’re looking for something new.

If you know with 100% certainty exactly what you want to do in the future, go ahead and do it.

But if there’s any doubt in your mind, it’s better to start out with whatever gives you the most options.

So, Should You Do It?

The million dollar question: if you get the opportunity should you go to the buy-side rather than starting out in investment banking?

Of all the points above, the one on exit opportunities is the most serious. You can always make up for lost money or sneak in with the odds stacked against you, but you can’t erase experience from your resume .

So if you’re certain you want to be in one of these fields in the long-term, you have the means to get in, and you understand all the trade-offs, go ahead and do it.

But please, don’t expect to go from the mail room to Ari Gold just because you’re in a slightly different industry.

Category: Forex

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