Private Equity: The double-edged sword

The private equity series is a collection of articles written by Quentin, who moved from consulting to private equity through Movemeon. We distribute our content (like this article) on Linkedin. Follow us and never miss out on insight, advice and events. Or you can register to gain access to our weekly newsletter.

You can find the other articles of the series here:

• All private equity funds were not created equal
• When to look for the boarding gate?
• 29 questions you should have answers to before accepting an offer
• 12 usual activities of a private equity associate
• 9 principles to break in

I would like to pursue this series of posts on private equity by debunking a myth which represents private equity as a ‘graal’ with only advantages compared with the life in consulting. Although life as a private equity professional can be considered as a ‘step forward’ in many respects, several aspects of the job may be worth considering before making a move to a fund (more on this in this article). The list is split into three categories: ‘pluses’, ‘equals’ and ‘minuses’.

PRIVATE EQUITY WINS

• Compensation. The package is often designed to attract investment bankers, who are better paid than strategy consultants. As a consequence, you should expect a significant increase in your total compensation package, up to 100% in some cases. Larger funds are usually more prodigal – the assets under management per head ratio grow with the size of the fund – but this tends to come with a heavier workload as we will see later on.
• Ownership. The role of a consultant is by definition to provide advice on a (most often) narrowly-defined topic. This role can be frustrating given that (i) the consultant usually does not know whether his recommendations were ultimately implemented or taken into consideration and (ii) the consultant cannot address an area for improvement outside the scope of work, no matter how promising and easy to sort out this area could be. Conversely, the private equity professional adopts a holistic view of the company and pragmatically works with management teams on the points which offer the best return on investment (both time and money). Incentives (through carried interest and management equity) should be designed in order to align interests.
• Adrenaline. Linked to the point of ownership, closing a deal which you have owned is much more rewarding – many professionals mention the ‘adrenaline shot’ – than closing a consulting project whose future is uncertain.
• Relationship with management. As a consultant, the management team is your client, and you need to seduce the team to rally them to your cause at the beginning of the project (otherwise you may face endless pushback to get the data you crucially need for your analysis) and to try to sell a follow-on project (ideally a massive implementation work) once the project is over. This partly explains why many talented Principals fail to make it to Partner: the nature of the job changes, from project manager to business development agent. Commercial considerations may consequently have an impact (even unconsciously) on the quality and conclusions of your work – if you solve all the issues in Phase 1, what will you work on in Phase 2? The private equity approach again goes ‘straight to the point’. During my 2 years at TowerBrook, I have never produced any PowerPoint document for discussions with management – back of the envelope calculations and Excel spreadsheets were all we needed.
• Timeframe. Consulting projects are squeezed into 4 to 8-week periods, a timeframe which is often too short to fully explore the issues in-depth and build truly open relationships with your counterpart – who often ends up the project half-traumatised by the speed of change and permanent sense of urgency. Private equity firms hold companies for 4 to 7 years and can thus enforce a slower pace – losing a day or a week is less crucial. The quality of relationships naturally improves as a consequence.
• Multitasking. Consultants work on one project at any given point in time, whereas private equity professionals frequently cover 2 or 3 portfolio companies – sometimes even more. In the latter case, you can pick your battles and produce the effort where the reward exceeds your cost (i.e. your salary). Conversely, consultants need to fill their diary even during project downtimes, which can give rise to low-value-added tasks – a waste of the consultant’s time and the client’s money.
• Exposure. As a shareholder representative, you benefit from even wider access to senior management compared with your strategy consulting experience – when you are a junior in consulting you mostly interact with mid-management, in private equity you can navigate throughout the organisation. Private equity also introduces you to Board meetings, whose dynamic generally represents a good learning experience.
• Exposure (cont’d). Being a strategy consultant enables you to meet a lot of individuals, but 90% of those individuals will be co-workers with the same type of background, the same concerns and the same professional aspirations as you. Trying to broaden your network beyond this circle is very often difficult: you do not have the time and little to offer to your prospective interlocutors. On the contrary, private equity is all about networking so you are encouraged to meet bankers, consultants, managers etc. and possibly source your own deals from day 1. Not only does it make the day-to-day experience more enjoyable, it also enables you to build an ‘intangible asset’ you will be able to use all your life.
• Career path. In big established consulting firms the career path is well established and predictable and everyone can expect to make it to Partner if his individual performance justifies it. In private equity, the performance of the fund as a whole, which you do not have full control on by definition, also drives career tracks. In one hand, a growing fund (in terms of assets under management) will need to reinforce its human structure and may create early opportunities for promotion. On the other hand, senior positions in a stable or declining fund are most often already filled by the ‘first wave’ of professionals. Given the low churn in this industry, a junior joining one of these firms will struggle to make it to the top – hence thorough due diligence is key prior to joining the firm, see one of my earlier posts on the topic.

PRIVATE EQUITY AND CONSULTING ARE EQUAL

• Variety of topics. Large consulting firms will provide juniors with an unchallenged width of experience. Within the first two years of your career, you could work on a reorganisation for a bank, on a strategic review for an oil producer, on a pricing project for a food retailer and on a supply chain mission for an automotive manufacturer. In private equity, you may end up investigating more opportunities but will only focus on a handful. Each individual should assess which approach better suits him.
• Level of issues. In both cases, you will deal with high-level strategic issues as well as operational concerns.
• Learning curve. Both environments offer an amazing learning experience with very few equivalents. Strategy Consulting will provide you with the tools to think about an issue, perform the relevant analysis and formalise and communicate recommendations in a simple but convincing way. Private equity will confront you with the real life of business and will overlay financial considerations – companies can only exist if they make a profit, there is no way around it.
• Travel. Travelling Monday to Thursday as a consultant is not fun, but private equity professionals are also very often on the road. Trips are usually shorter and more frequent, which means that you will probably spend more nights home but you may end up more tired.
• Work/life balance. In strategy consulting, you should expect to work relatively hard but the workload tends to be relatively smooth over time. In private equity, you can have very quiet periods followed by very intense weeks when your team is working on a deal. The ‘peaky’ nature of workload is similar to the one investment bankers face.
• Opportunities. Both worlds open a vast array of opportunities, although within slightly different worlds – consulting is more generalist and corporate-orientated whereas private equity tends to form a ‘self-contained’ world.

STRATEGY CONSULTING WINS

• Job stability. As mentioned earlier, in strategy consulting, if you do your job properly, you can build a career with high certainty. In private equity, external elements interfere.
• Chemistry. Consulting firms are made of hundreds of consultants, so the absence of ‘chemistry’ within a project team is not a big issue – the lineup will be reshuffled for the next project. In private equity, the team is rather small – 30 investment professionals at most, with a median of 5-6 – so the ‘human factor’ is key. The sword is double-edged: it can make your experience really great but could also spoil it in a very short timeframe.
• Variety of task. In strategy consulting, projects may have very different objectives and as a consequence, the approach the team will adopt and the nature of your own work as well as the tools you will use may completely change from one project to another. Conversely, the private equity ‘toolbox’ is more limited, although a good professional will learn to apply this toolbox to a wide range of industries and contexts.
• Training. Formalised training is something you will not get in private equity, so I strongly encourage you to make the most of the very well-conceived training modules during your life as a strategy consultant – even if it means waking up an hour earlier on a Friday to have time to finish your presentation before heading to the training room. Similarly, very few private equity firms have a culture of systematic, open and honest feedback as developed in many consulting firms. You should be even more proactive to ask for advice and guidance if you want your private equity career to be a success.

Again, this list only represents my perception based on my own experience and the numerous conversations I had with industry insiders. Each individual will have his own view, and each fund will offer its own ‘package’, hence I am obviously open for comments – comments which you can formalise by sending me a message on Linkedin.

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