Abstract
Fresh graduates in finance and MBA always seek for opportunities to build a lucrative career in private equity and venture capital because a career in private equity investment is challenging with a high growth prospect and broad scope of career expansion. However, many other different career options as interesting as private equity and venture capital are there in the investment space including venture capital investing, private equity investing, corporate finance, private equity real estate, leveraged buyout (LBO), fund of funds investing and investment banking. The essay below has given details about each of these career options highlighting the required credentials for each of these career paths, simultaneously, showing whether or not the job market is expanding or not.
Introduction
Careers in private equity and venture capital are the most sought after career among MBAs and people with finance background. There is nothing wrong in it. In fact the opportunities for growth, remuneration and responsibilities are much higher than most of the other career paths. However, private equity and venture capital are not the only option for finance graduates and people with finance backgrounds. There are many different career options which are equally challenging and interesting like private equity career. Some of the interesting career options in the investment space include venture capital investing, private equity investing, corporate finance, private equity real estate, leveraged buyout (LBO), fund of funds investing and investment banking. This essay will provide a brief background of each of the career options, highlight the academic and experience requirement for each of those career paths and show if the job market in the chosen fields is growing or not.
Private Equity Investing
Private Equity Investing attracts the best brains of the market. This area always lured the best students from colleges and universities to join private equity firms. Private equity firms are becoming more and more important with every passing year. Private equity is an activity by which a private entity or individual purchases partial or total equity of a public or private company making it unavailable to the public stock market (Grace, 2007). Although venture capital and private equity careers can sometimes be put in the same league but mostly it is not. Private Equity Investing generally deals with buying and selling of stakes in existing companies whereas venture capital investing only concentrates on small, new and early stage companies.
Private Equity Investing are of many types. For example, a private equity investor may require to get into a negotiation of a leveraged buyout of a financially stressed company. A person who is working as a private equity investor also should be adept in purchases of public company stakes and investments in private companies. Private equity firms like Blackstone, KKR and TPG are one of the best in these kind of investments. However, apart from the big private investment players there are smaller private investment firms where the investment sizes are not as big and in most cases partial equity investing. There are two distinct layers in this type of organizations. The first layer is called the “limited partners”. These are entities or individuals who supply capital to the private equity investing firms. Then the second layer is called “general partners” (Grace, 2007). These people are the brain of the organization. A career in private equity firms equates to becoming one of the brains of the firm and utilizing the capital invested by the limited partners in such a way that the return is maximized with optimal risk.
Private Equity Investing career can start at any level. A fresh undergrad with high quantitative abilities can directly join a private equity firm and start his career in this area as an analyst. Typically in such cases an entry level analyst is responsible for the spreadsheet analysis of potential investment options, industry research, preparation of data for senior partners and fundamental macroeconomic parameter research and due diligence activities in research. At this level the work is detailed and fully analytical. If a person does not like numbers then this is definitely not the career path for him. At the next level private equity investing associates, who are often hired from MBA schools or people with many years of experience, are responsible for interacting with the potential stakeholders of a deal, talk to the bankers of the financing options and work with consultants to see if all the aspects of an equity investment deals are covered. This job requires industry knowledge and analytical skill. However, people skills are equally important to become a successful private equity investor. Although the private equity careers took a nosedive after the 2008 financial crisis but it bounced back quickly and the number of career opportunities in this field is growing at a very healthy rate now.
Private Equity Investing – LBO
Leveraged Buyout (LBO) is a specific form of private equity investing. Although by definition it is a private equity investment field but from the career perspective it is a lot different than the normal private equity investment in a public or private company shares. LBO transactions normally target companies that are not doing financially well or have fallen in some disfavor. In case of an LBO buyout the LBO investor needs to check what could be the stable cash flow out of the distressed entity which can be used to pay out debts. In case of a LBO the investor also needs to see that it gets a controlling position so that the investor can influence the board to take major decisions for the firm which the investor is trying to buy. LBO valuation requires knowledge about earnings before interest and tax , amortization, depreciation, tax, short and long term debts and free cash flow situation of the entity. The fundamental finance knowledge required to handle an LBO investing is more than a normal private investing analyst. It is very rare that a fresh graduate will be able to directly get into an LBO investor role. Generally people with many years of private equity background are offered the role for LBO investor. This is a area which is growing at a very high rate. The number of jobs created in last 4-5 years in this area is very high and it will continue to grow at a high rate in the near future as well. The career as an LBO investor is much more stable than a standard private equity investor.Private Equity Real Estate.
Real Estate is a giant of an industry. This industry touches our everyday life like nobody else but still the careers in this industry are very less visible. In fact the financial career in Private Equity Real estate market is not even talked about during the discussion upon the private equity investment opportunities. Majority of the real estate careers are related to development and services but there is an investment component to the real estate industry which is equally important. Many private investment firms specialize in making investment only in real estate business (Carberry, 2006). Even in some cases private equity firms only concentrate on a particular geography. Private equity or LBO is different than real estate. This is a type of investment which may bear fruit immediately or may not bear fruit until 20-30 years. Unlike valuation of company assets which mostly depreciates in value, in real estate industry the investor needs to find out what will be the possible appreciation of a land or a building/house in next few years. This calculation is based on the industry knowledge, local knowledge and often macroeconomic indicators which only an expert eye can pick. This is an industry suited for people who aspire after finance careers but are also passionate about real estate. This is an industry which is volatile and so is the job market. Unlike a corporate finance or LBO career which often sees steady growth, real estate investment careers can see meteoric rise or fall.
Fresh graduates with strong analytical skills or finance background can join as real estate investment analyst. Generally people with 2-5 years of experience get into more senior roles and can get into positions where they can make decisions about actual buying and selling of real estate properties.
Venture Capital Investing
Many of us have the dream of owning our own company or nurturing companies which have the potential to become a huge success in coming days. Venture capital investment careers to some extent fulfill that dream of ours. A venture capital investing firm provides capital to a venture capitalist (an entrepreneur) to start a company and then provide required financial assistance during its early stages (Dixon, 2009). This kind of career provides a person with great autonomy, flexible work schedule and satisfaction of helping a new venture to start. Venture capitalist generally plays the role of a mediator between the fund owners and people requiring fund (Greathouse, 2012). The first and foremost a venture capitalist investor should have is the eye to find and separate out new businesses and business ideas which have the potential to succeed in future. Secondly, venture capitalist also should be able to guide a company through its early stages to a successful exit.
Anyone with or with a financial background can start a venture capital career. To start it the only thing required is the seed money or an institution which will provide the seed money. However, starting a VC firm from scratch is a very big challenge. Joining a VC firm is much easier. Fresh graduates can join VC firms as an analyst. People with 5 years’ experience or a MBA degree can get into VC firms as associates. However, in both the levels the independence of decisions in making and choosing a company for investing is not there. However, with time and good performance an associate can become a principal or partner within a small timeframe. At that level, VC investors actually can take their own decisions about investments. People with successful VC ventures, even if they are small ones, are preferred by the established VC firms as associates or principles (Dixon, 2009).. The number of venture capitalist companies is not many and the number of people willing to join is a lot. This makes this career path very hard to pursue. Only the very best and very innovative people get a head start as a venture capital investor.
Corporate Finance
Corporate Finance is a very popular career path for finance students. Companies in general make money from doing business. Some companies make a lot of money. In some cases, companies make losses and require money to be freed from its operations to run the business. Until and unless the money is not well managed the company cannot stay in the business for a very long period. That is where the corporate finance people pitch in. A career in corporate finance will require a person to help find money for the company to run the business, make acquisitions, grow the business for the company, manage any cash on hand and plan for the financial future of the company. Corporate finance is a career which is available across all types of companies. Small to large, all sized companies require corporate finance people. Corporate finance people have a job which is of high responsibility from the company perspective and requires quick problem solving and decision making skills.
Corporate finance includes two key functions; finance and accounting. Corporate accountants balance the accounting books, track revenue and expenses, pay the bills and execute payroll. They are responsible for compiling all the data to come up with the company’s financial statement. Corporate finance people on the other hand analyze the use of capitals to come up with the means to effectively utilize the capital. These people are also advisors to the top management on the matters like project cost, capital investments and financial structuring of deals. Although corporate accountant and corporate financiers have very different role but both perform almost the same operations at high level. Essentially the corporate level of accounting budgeting and forecasting is almost same as financial analysis and projections. Apart from accounting, project planning and cash management, corporate finance people are also responsible for efficient tax management for a company.
Corporate finance job requires strong analytical and quantitative skills. If someone has a knack of using numbers to understand and analyze patterns which can influence business then they will be of great value in corporate finance career. Corporate finance people should be creative in finding out novel ways to efficiently utilize the capital but more than that they should excel at giving strong attention to detail. To make wise business decisions, one needs to understand the business and have interest in the business. Corporate finance professionals not only need to look at the internal financial practices but also should look at market conditions, economic trends and government regulations to become successful. Typical corporate management positions are general accountant, internal finance auditor, divisional accountants, tax analysts, treasurer, cash manager and corporate development and strategic planning.
An MBA with lot of courses in finance, accounting and economics will certainly help in starting a career in corporate finance. A degree like CPA or CFA will also help in starting your career in corporate finance. However, if you are in the middle of your career and it is not in finance then you need to find out some mentor in your company or get into intra company corporate finance training. If you have investment banking background then also it is possible to get into corporate finance directly. With a number of years of experience in corporate finance it is easy to get into a corporate finance analyst role for a specific industry or company or domain.
Fund of Funds Investing
Fund of Funds is a financial area gaining popularity with every passing year. Some of the Fund of Funds (Hedge Funds) receives hundreds of queries from job seekers and students about careers in fund of funds every day (DeChesare, 2013). Fund of funds allows the investor to diversify risk through appropriate and varied asset allocation in a variety of fund categories. All these investments are ultimately wrapped into one fund known as the fund of funds. Fund of funds are also called portfolio. Fund of Funds are excellent career path for core financial people who are more interested in financial fundamentals and number crunching. People skill requirement in this kind of job is minimal (Adams, 2013). The pay scale for the fund of funds managers is very high and in fact it is more than that of private equity investors on an average. Fund of funds are a relatively new concept for many financial firms but still many of the fund of funds are operated by small companies. It is not easy to get into a fund of funds investor job. In most of cases fund of funds managers and investors are those who have relevant industry experience of many years. Although the job market was battered during the 2008 recession but fund of fund investor jobs are still one of the highest paying and one of the most sought after in the finance industry. Unlike other finance jobs it is almost impossible to get into a fund of funds investor job directly from a campus. People with experience are preferred over fresh graduates.
Investment Banking
Investment Banking is well known as one of the most rewarding careers in finance. However, it is also well known that investment banking is also a highly stressed career path. If you do not love to be a investment banker it is highly advisable that you stay out of it. The burnout may grip you in no time. Investment bankers help companies, banks and governments issue securities (Dumon, 2012). It also helps investors in buying securities from the market. An investment banker also manages assets, provides financial advice to firms and trades in securities. Goldman Sachs, Morgan Stanley and JP Morgan are few of the topmost investment bankers in the world. An investment banker needs to wear many hats. Unlike other finance jobs where analytical skills along with a deep knowledge of one particular finance area is often enough, an investment banker needs to have knowledge on securities and trading, merger and acquisition process, asset valuation, underwriting and investment analysis process. Investment bankers often act as a mediator between investors and the issuers of securities. Apart from in-depth understanding of a variety of financial areas an investment bank, an investment banker needs to have high level of inter-personal skills as well. Investment banking analysts are recruited from MBA and financial institutes directly. These fresh graduates work with senior partners in the investment banking process. Even within investment banking, students can choose careers in mergers and acquisitions, investment banking (securities transactions) and sales and trading (capital markets) (Dumon, 2012). There are very few big investment banking firms but there are lot of small to medium sized investment banking entities. It is advisable that if a person cannot grab an investment banking role in a big company early in his career, there is no harm in joining smaller investment firms. In most of the cases bigger investment firms recruit people with experience.
Conclusion
Most of the financial investment careers, discussed in this essay, are extremely challenging. As they are challenging they attract the best of minds across the universities and industry. Over the years the most smart and talented MBA students from the best management institutes have chosen financial investment as their career path. The most popular among all of the investment career options is private equity investment. Private equity investment careers are challenging, growth prospect is high and the scope is also broad. Other private equity options like real estate investment and leveraged buyouts are also good career options. However, the scope is not as broad as the general private equity market but offers far better stability. With a little bit of finance background and analytical mind, anyone from no experience to very high level of experience can join the private equity career bandwagon. Fund of funds manager or investor career option is good for those with some industry experience. It is almost impossible for any fresh graduate to get into fund of funds role. The scope is still limited but the job stability is more than private equity careers. Investment banking is one of the most difficult career paths in finance. It is a domain in which a person not only requires great finance skills in diverse finance areas but also requires great inter-personal skills. The number of companies offering investment banking positions is less and hence there is a huge competition in the job market. Once someone gets a head start in this career path, then the growth potential in this domain is more than any other domain. Corporate finance is a domain relatively less stressful than the other finance career paths. This career provides great in-depth knowledge of a company or a industry to the person pursuing it. Finally, Venture capital career option is the most sought after but the scope is less. The number of venture capital firms is very less and so the opportunities are less. However, this is a career path which, if pursued properly, provides a great job satisfaction.
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