eFinancialCareers

A sector to aspire to after a few years’ experience.

Like the capital markets divisions of investment banks, private equity and venture funds exist to help raise money for companies in need of cash. But while capital markets bankers do this by selling a company’s stocks or bonds, private equity funds do it by offering cash to companies in return for an ownership stake. As a result, they become co-owners, or even sole owners, of the companies in which they invest.

In an ideal situation, they invest in an underperforming company, turn it around and sell their stake at a profit some years later. However, sometimes private equity firms engage in the unpopular practice of asset stripping, or breaking a company up and selling its assets to make a profit – when they are perceived as 'predators'. The money invested by private equity funds is frequently used for management buyouts (MBOs), where a company, or a division of a company, is bought by its managers. Alternatively, it may be used for a management buy-in (MBI), where managers from outside take over a company.

'Venture capital' and 'private equity' are often used interchangeably. But strictly speaking, venture capital refers to the provision of funds for new and fast developing businesses, while private equity is more usually associated with MBOs and MBIs.

Trends

Private equity has been active in the Australian market for more than a decade, but mostly in smaller to medium-sized transactions.

In 2006, however, private equity emerged as a dominant force in corporate Australia and has been behind many of the biggest deals in the country, including an AU$18.3 billion offer for Coles Myer, which would have been the biggest takeover in Australia. Completed deals of note include the purchase of media assets from Australian billionaires Kerry Packer and Kerry Stokes, and the arrival of major international investors such as Kohlberg, Kravis & Roberts, Providence Equity and The Carlyle Group.

According to Thomson Financial, private equity deals accounted for 18% of M&A activity in the country in 2006, up from just 3% in 2004. This ratio is expected to grow further and many participants believe it could reach the 30% to 40% ratio being experienced in Europe and the US.

If you want to go into private equity, it’s also worth familiarising yourself with some of the criticisms levelled at the sector. One is that funds encourage companies they acquire to borrow excessively against their assets. If economic conditions deteriorate, there are fears these companies won’t be able to pay their debts. The Reserve Bank of Australia has raised concerns about high debt levels and the lack of transparency on deals.

Key players

2006 marked the first time major international private equity players such as Kohlberg Kravis Roberts, Blackstone, Bain Capital, CCMP and Carlyle Group expressed an interest in the Australian market, although most of these companies either have small offices in Australia or base their Asia-Pacific operations in Tokyo or Hong Kong.

The largest Australian-based private equity firms are CVC Asia Pacific, Catalyst Investment Managers, Pacific Equity Partners, Ironbridge Capital, Newbridge Capital and Champ Private Equity, each with more than AU$1bn of equity under management. Macquarie Bank also has a large private equity business.

Roles and career paths

People who work in private equity can make spectacular amounts of money. They also benefit from the kind of job security most investment bankers can only dream of. But don’t count on finding a job in the industry easily – private equity and venture funds hire very few juniors and none straight from university.

There are two main entry points to a career in private equity or venture capital:

1) several years after graduation, after spending time working in the 'real world'.

2) immediately after completing a Master's in Business Administration (MBA) course.

Private equity funds hire people straight from an MBA or with two to three years’ corporate finance or strategy consulting experience. Venture capital funds typically hire people from high-tech industries, finance-related or consulting jobs. Roxanne Matthews, a recruitment officer at 3i, says the company only hires people with three to five years’ experience.

Junior staff at both private equity and venture capital funds are typically number crunchers who scrutinise the accounts of companies in which the fund is thinking of investing.

The next rung in the hierarchy is comprised of principals, who appraise whether an investment deal is worth pursuing and, if it is, do anything from arranging the right legal documentation to negotiating the right price to ensure the deal takes place.

Originators are at the top of the tree. They are usually the fund’s partners, who, as the title suggests, originate deals – ie, find new companies in which the company can invest. They then oversee the deals and make the most money if one of the fund’s investments is sold at a profit.

Other jobs in private equity and venture capital are peripheral to the business of doing deals. One of the most important is investor relations, which involves communicating with investors and raising money for future funds.

Pay

Pay for senior people working in private equity and venture capital is generous. Partners make most of their money by drawing a joint 20-25% share of all the profits made by the fund, a form of payment known as 'carried interest' or 'carry'. A AU$500m fund can easily make AU$100m in profits over a six-year period and this might be shared between four or five partners in addition to a handful of principals.

According to a survey by Boss Magazine, the head of a large private equity firm might draw a base salary of AU$360k to AU$520k, but this is before bonuses. A director may receive a base salary of AU$250k to AU$280k, while an associate might receive AU$175k to AU$200k.

Base salaries for analysts working in private equity are between AU$80k and AU$100k, although bonuses can be nearly double that amount.

Skills

If you want to work in private equity or venture capital, you’ll need to be an academic and professional wunderkind; funds only accept the best.

• Greg Minton, a partner at Sydney-based private equity fund Archer Capital, says he is looking for a degree of entrepreneurialism in candidates. “You need to have a mix of strategic skills, operational understanding, an analytical mind and you need to be financially literate.”

• Patrick Elliott, co-founder of Next Capital, a Sydney-based private equity firm established in 2005, says: “Overall we are looking for candidates who think fast on their feet and creatively. People skills are needed to progress through to partnership. Their ability to sell to management, vendors and advisors pre deal and to influence management post deal is critical to the success of the fund and the firm. Even at the analyst level we are looking for people that have the right ‘soft stuff’.”

• Lori Sabet, senior vice-president at Carlyle, a large US private equity group, says most junior hires come from investment banking or strategy consulting. Former bankers need experience in one of three areas, Sabet says – either corporate finance and mergers and acquisitions, financial sponsors (dealing with private equity firms) or leveraged finance (funding involving a higher proportion of debt than usual).