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Breaking into PE is so difficult that you might get carried away when you get an offer, and accept it without thinking. To give yourself a reality check, get clear answers to questions about the size and positioning of the fund (e.g. Where does the fund invest?), about its track record (e.g. Has the firm raised more than one fund?), about its operating model, its people & culture, and the available compensation & career path. Considering all 29 questions below will help you work out whether the fund is really right for you.
Given the intense competition, receiving an offer to join a private equity (‘PE’) fund is quite a significant achievement and the temptation to accept the offer as soon as you receive it without having done any proper due diligence is thus huge. Overlooking this crucial step of the job hunting process can lead to serious disappointment in the future and the fast-moving private equity industry is no exception in that respect. Below are 29 questions that I think you should ask to ensure you make an enlightened decision.
Fund strategy & positioning
- How many funds and/or product lines does the firm operate? More and more PE firms are diversifying their activity to include hedge funds (i.e. public market investing) or debt vehicles. Each business line requires a particular approach and investment strategy. As a consequence, this can give you a feel for the variety of the work (in terms of investment type) that you will face. Beware though; like any organisation, a firm that spreads across too many lines is likely to feel a bit disorganised.
- Which kind of assets does the company invest in? They are primarily two types of assets in private equity: companies and infrastructure. Again, referring to the first post of my series, the nature of the work differs between those two environments.
- What is the fund’s investment strategy? Each fund will more or less strictly position itself within a spectrum going from ‘distressed’ (i.e. underperforming and close to bankruptcy) to ‘glamourous’ or ‘high-growth’ assets. The price paid but more importantly, the type of work and situations you will encounter will depend on the strategy. In a distressed fund, you should expect to be involved in heavy restructuring and cost cutting programmes. In growth context, you will spend much of your time finding ways to develop the business’ top-line.
- What is the size of the fund? What is the fund’s sweet spot in terms of enterprise value or equity cheque? As mentioned in the first post of this series, the type of work you will do will significantly differ if you join a small-cap (<$250m roughly), mid-cap ($250m to $1bn) or large-cap fund. The equity cheque (i.e. the amount the fund itself invests in a given company) is intimately linked to the fund size since a fund will typically make between 8 and 20 investments as well as to the enterprise value sweet spot since roughly 50% of the acquisition price will be paid by raising debt.
- Which stage of the company’s lifecycle does the fund invest in? As mentioned in an earlier post, private equity funds as a whole cover the entire company lifecycle, from birth (seed or VC) to maturity (LBO). You should expect VCs to be more ‘gut-feel’ based whereas LBOs require deeper due diligence and involve a significant amount of financial structuring (absent in VCs which very often can only raise equity).
- Where is the fund present? Where does the fund invest? In one hand, a global fund will limit country-specific risk exposure. On the other hand, the more global the fund, the more you will have to travel – especially if the office network is relatively loose, e.g. only one office to cover the whole of Europe. Practically speaking, geographical remit is defined in two ways. First, investors sign a term sheet which formally defines the areas where the General Partners (or ‘GPs’, i.e. the members of the private equity firm) can and cannot invest. Second, and more importantly, GPs have their own ‘comfort zone’, which is often a subset of the theoretically authorised area. This question is important for you as it will determine the amount of travel you can expect from this job as well as the extent of the cultural gap you may face when meeting with management teams.
- Which kind of industries does the fund invest in? The majority of funds are ‘sector-agnostic’ and will invest indifferently in all industries. Some (most often smaller ones) have specialised in one or a handful of industries, typically Retail or Tech.
- Does the fund do minority and/or majority deals? By definition, if the fund only does minority deals it will rarely be able to exert full control over the company and therefore you should expect more time to be spent on the due diligence – to ensure that the business ‘as it is’ is a good one. This situation is relatively rare in private equity as opposed to hedge funds.
- Is the fund committed or raised on a deal-by-deal basis? A committed fund will offer more stability and less dependence on market conditions. Furthermore, a firm seeking investor funding on a deal-by-deal basis may feel the pressure to invest on a regular basis in order to keep momentum with investors, even if the climate or the opportunities are not optimal.
- When did the firm raise funds for the last time? This question will give you a feel for the type of work you will be doing. If the fund is recent (less than 2-3 years), you should expect to spend most of your time sourcing deals and executing investments for this new fund. If the fund is older, portfolio management (‘harvesting’) should take a growing share of your bandwidth.
- Has the firm raised more than one fund? First-time funds can appear attractive because of their entrepreneurial nature and their subsequent potential. If the first fund is successful the second will be larger and therefore the team will grow, potentially creating ‘upward gaps’. However growth in private equity is more often achieved through external hiring rather than internal promotion, so you should always consider career upside potential with a bit of caution.
- How does the actual fundraising amount compare with the fundraising target? In the current environment, with liquidity being more than abundant, a fund not meeting its fundraising target has definitely run out of favour with investors and such a momentum is very difficult to reverse, so I advise you to stay away. Some funds exceed their target, but many will stop when they reach it in order not to overstretch their teams.
- How does the latest actual fundraising amount compare with previous actuals? Fund growth is a clear indicator of momentum and expected team size evolution. In particular, if the firm has been raising a decreasing amount of money, it means investors are less and less convinced and, unless the firm manages to come up with a series of mind-blowing investments, you should expect the trend to continue and therefore the team to keep shrinking.
- How have previous funds performed? Given the illiquid and long-term nature of private equity (funds have a 10-year lifespan), it takes time for struggling funds to be entirely wiped out of the market. An early indicator consists in benchmarking the latest funds’ IRR. If those IRRs are disappointing, it will only be a matter of time before investors are free to switch their funds to another destination.
- Has the fund made recent investments? A fund may decide to slow or fasten its investment pace depending on market conditions. However, a fund that has not put any money to work over the last 18 months is more likely struggling to source interesting deals and this should raise a flag.
- How fragmented is the Limited Partner (or ‘LPs’, i.e. investor) base? I am always concerned with ‘one-LP’ funds where one investor has practical right of life and death over the fund. I believe this not only creates uncertainty about the future of the fund in case of headwinds (both at fund and investor level) but also there is a risk of seeing the LP interfering with investment decisions (creating useless friction).
- How large is the firm globally? In London? A classic question. All funds started with very small teams and an entrepreneurial spirit, but some have grown so much that this early flavour may have disappeared quite significantly.
- Are there other offices? If so, where? Where are the headquarters? What is the role of London? The worst case for you is to join a US-based fund which considers London (and Europe in general) as non-core to their strategy and as such does not give you a lot of consideration and does not involve you in the investment decisions. Fortunately, London is a strong financial place and such situations are rare (at least rarer than if you were applying in Paris or Madrid).
- Are there investment committee members based in London? Building on the previous question, a negative answer will likely indicate that the office has been primarily set up to perform local sourcing and execute deals when told by the headquarters, which reduces the amount of autonomy you will enjoy and subsequently the interest of the job.
- How is staffing decided? Are there teams dedicated to particular geographies/industries/product lines? This question will help you assess whether you are going to develop a particular expertise or whether you are going to remain quite generalist. Both approaches have their own pluses and minuses, but in any case, you would like to ensure that your prospective employer does not plan to specialise you in an industry that you do not fancy at all.
- Is there a dedicated operations team? If so, how large is it, what are its remit and background? If an operations team exists, you should expect to be consequently less involved in commercial and operational aspects of the due diligence and/or portfolio management.
People & culture
- Where do people come from? PE professionals typically come from a mix of investment banking, consulting, accountancy / Transaction Services and Corporate. The way of approaching investments is influenced by this background.
- How would you define the fund’s culture? Some funds have an American culture, which as a Frenchman I would define as direct and energetic, others have a more British inclination, softer and possibly more political. This does not mean that one is generally better than the other but you need to make sure that the culture fits your own way of working and interacting with others.
- How many (net) additions to the team have there been in the last 24 months? In the investment team alone? With the ‘fund size evolution’ question, this should help you assess the momentum the firm is benefiting from. A shrinking team is almost always a bad sign – either the fund is losing momentum or it is struggling to attract talents to fill the gaps.
- How many people have left the fund over the last 24 months? If you exclude ‘defined-length’ contracts (such as Associates program), churn should be low: jobs in private equity are rare, and people tend to stick to their seat if their role is interesting and if they believe the firm has decent future prospects. If churn is high (let us say more than 30% of the firm was renewed over the last 2 years) this means that at least one of the two previously mentioned conditions was broken…
- Who are the senior sponsors of the fund? Each private equity fund is chaired and/or advised by highly-respected individuals within the investment industry. Such personalities act as a stamp of approval and tend to facilitate fundraising. Conversely, you should proceed carefully with not or weakly endorsed funds.
- Can I meet the rest of the team? Private equity firms are small companies and personal fit is even more important than in consulting – imagine that you will spend many years working with the same people on a series of projects. I thus encourage you to meet as many team members as possible to assess this fit.
Compensation and career path
- Who has access to carried interest? How is carried interest computed? Carried interest (i.e. the performance fee that general partners receive when their investments generate an IRR in excess of a certain threshold) amounts to a very significant share of your compensation, especially at senior level. Always useful to know when you will be entitled to receive a share of the pie. Most often carried interest is computed and shared at fund level; however, a few funds (e.g. CVC Capital Partners) are famous for their ‘deal-by-deal carry structure’.
- What is the typical career path? You need to understand whether there is a ‘glass ceiling’ that you will never be able to go through. Many US funds have formal fixed-term Associate programs which imply that you will need to leave after 2-3 years. Other funds may encourage investment professionals to leave once they reach a given tenure if there is no room for additional senior managers or partners. In any case, you should feel free to ask for specific examples.
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