What is Private Equity?

June 05, 2024

Today, in 5 minutes or less:

👉️ Upcoming events

👉️ Management Consulting session takeaways

👉️ Unpacking Private Equity

👉️ Coach spotlight

👉️ Content picks of the week

👉️ Job board + StepStone exclusive Investment Banking jobs

Upcoming events

📢 Intro to Private Equity (June 9th, RSVP 👉️ here)

📢 Intro to Big 4 Accounting (June 26th, RSVP 👉️ here) ⭐️ NEW

🔑 Takeaways from our Intro to Management Consulting event: why students fail to land the role

  1. Cannot complete case studies beyond basic frameworks (need to think outside of the box)

  2. Lacks synthesis in communication

  3. Low GPA

  4. Lack of extracurricular leadership

  5. Lack of clear answer for why you are interested in consulting and the firm

Naoya has helped over 25+ students land top consulting jobs. Want to learn how Naoya can help you?

So, what is Private Equity?

Ever wondered how small companies become big names in the market? That’s where Private Equity (PE) firms come in.

Imagine this: You're the owner of a thriving local tech startup, envisioning it as the next big disruptor in the industry. Private Equity firms could be your pathway to success, injecting capital for growth, providing strategic direction, and refining your product to capture a larger market share.

In simple terms, the aim of a Private Equity firm is to leverage its resources and expertise to propel existing businesses to greater heights.

Now, let's delve into the private equity career path.

Meet the players

In the private equity world, firms are typically bucketed based on the size and nature of their investments. Here's a breakdown:

Mega Funds: The Heavy Hitters of Private Equity

Meet the mega funds—the heavyweights of private equity, handling billions of dollars in assets. These giants dive into massive buyouts and investments, aiming for big-name companies with a strong market footprint. They're famous for pulling off mammoth deals worth billions and offering hefty strategic and operational backing to the companies in their portfolio.

Examples: Blackstone, KKR, The Carlyle Group, Apollo

Middle-Market

Middle-market private equity firms are dedicated to elevating business by fine-tuning operations and making strategic acquisitions. They generally invest in companies valued between $100 million and $1 billion. The middle market is known for offering a balance between risk and return, with ample opportunities for value creation.

Examples: Audax Group, GTCR, HIG

Lower Middle Market

These firms set their sights on smaller companies, usually valued between $10 million and $100 million. Picture family-owned businesses or startups in need of a boost to expand, get their management on point or break into new markets. Lower middle market firms roll up their sleeves, diving into the nitty-gritty of a company's daily operations to fuel growth and transformation.

Examples: Gryphon Investors, The Riverside Company, NewSpring Capital

Why do companies partner with Private Equity?

🏦 Access to capital: 

When companies need a financial boost to expand, acquire, or turn things around, they often turn to private equity for support.

Example: A renewable energy startup secures a significant investment from a private equity firm, empowering it to expand production and launch its green technology on a larger scale.

🧭 Strategic guidance:

Private equity firms don't just bring money to the table—they bring a wealth of strategic know-how, helping companies fine-tune their business models, enter new markets, and grow efficiently.

Example: A manufacturing company partners with a private equity firm experienced in global expansion to diversify its products and enter international markets successfully.

🗺️ Operational expertise:

Private equity professionals roll up their sleeves, diving deep into operations to optimize processes and drive performance.

Example: A struggling retail chain undergoes a turnaround led by a private equity firm, implementing operational improvements and increasing profitability.

💰️ Owners want to cash out:

Sometimes, owners are ready to move on, and private equity steps in, providing an exit strategy while keeping the company on a growth trajectory.

Example: The founders of a boutique hotel chain retire, and a private equity group acquires a majority stake, allowing them to exit while ensuring the brand’s growth.

What are some of the different areas of private equity?

🎯 Buyouts

Buyout firms focus on acquiring controlling stakes in companies. They work to restructure and improve the acquired company, ultimately selling it at a profit.

🌱 Growth equity

Growth equity firms fuel the expansion of promising earlier-stage companies, providing both cash and strategic guidance.

🔧 Distressed investing

Distressed investing entails the acquisition of undervalued companies or assets experiencing financial distress, with the aim of turning them around and achieving profitability.

📈 Fund of funds

Instead of betting on single companies, fund of funds (FoF) spread the risk by investing in a group or portfolio of private equity funds.

What’s the typical path to private equity?

Investment Banking to Private Equity

In the past, the classic route to Private Equity often involved a stint of 2-3 years in Investment Banking post-graduation, followed by a leap into private equity. Analyst roles in Investment Banking are prized for their exposure to financial modeling, deal structuring, and due diligence—skills that private equity firms look for in their own employees.

Straight from Undergraduate

Recently, there has been a noticeable shift as Private Equity firms actively seek talent straight out of undergraduate programs. While less conventional, this trend reflects a broader spectrum of backgrounds entering the private equity arena, demonstrating a demand for individuals with strong analytical capabilities and strategic insight. This trend is expected to gain momentum in the years ahead.

Coach spotlight

On Sunday, June 9th, StepStone is hosting a free Intro to Private Equity event. Led by one of our coaches, Derek L., a former Global Infrastructure Partners analyst, networking guru, and experienced mentor. As a University of Pennsylvania student, Derek successfully navigated undergrad recruitment to land a top Private Equity role out of school. He also has a passion for mentorship and has mentored over 25 students in landing various roles.

Want to learn how Derek can help you land a job in Private Equity?

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