Post-MBA Careers: Private Equity (PE) and Venture Capital (VC)

Sections in this article

Private Equity ↑ Top ↑

The term "private equity" (PE) encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assets such as corporate stock or bonds.

Confusing??

To understand the concept of private equity, it makes sense to delve into the history of private equity. The origin of private equity can be traced back to 1907, when Henry Phipps founded the Bessemer Trust, a "family office", to invest his $50 million in proceeds in private businesses and other exclusive holdings. In 1946, American Research and Development Corporation urged private institutions to set up funds for the soldiers returning from World War II. PE became an entity in the 1980s, with the success of Kolhberg Kravis and Roberts, a most sought after employment destination by MBA graduates.

The basic logic behind the emergence of PE funds is that publicly traded companies are often forced to concentrate more on immediate shareholder interests and short term returns. This often does not allow them to focus on long term achievements. This is where the PE comes into picture. PE funds raise money from various sources for a short period and then invest it in private equity of nascent companies or public companies with an objective of turning them around.

Thus venture capital, growth and mezzanine capital, angel investing, and private equity funds are typical forms of private equity

Venture Capital (VC) vs Private Equity (PE) ↑ Top ↑

Venture Capital is defined as funding invested, or available for investing, in an enterprise that offers the probability of profit along with the possibility of loss. The returns on VC investments are high, ranging between 20% to 50%.

A Venture Capitalist is usually an entrepreneur who puts his own available funding into a startup operation. Next, an angel investor may be convinced to contribute funding. Generally an angel investor is someone with spare funds and some personal or industry-related interest. Angels thus have an emotional outlook towards the investment whereas Venture Capitalists have a logical outlook.

Though there are very few and subtle differences between VC and PE, as an MBA graduate it does help if you know them.

Working in Private Equity ↑ Top ↑

Working in a PE setup has its monetary benefits which is the reason why there has been an exodus towards this career from the traditional finance jobs. The monetary benefit is in the form of profits that are distributed among the employees. This carried interest works to a substantial amount in case of successful PE acquisitions. However, there are various entry barriers for a career in PE. Firstly, PE firms usually value experience. Thus MBA graduates with little or no work experience might find the going tough. Also, though an MBA is preferred it is not a pre-requisite for a career in PE. Also high returns always come with high risk factors like constant change, high pressure and lack of work security.

Typical designations in a PE firm are ↑ Top ↑

An 'Associate' is an entry level position wherein a person would be involved in fund raising and deal making. In course of time, associate can aim for the position of a partner. : A partner in a PE firm has four major responsibilities: first, to manage the partnership and firm; second, to source deals; third, to oversee investments and finally, to partner relations. PE firms do not follow the typical organizational structure. There is thus scope for 'Individualism' and a chance at each person being 'his own boss'.

Skills Required ↑ Top ↑

The future of PE firms is expected to be bright. With the slowdown in the West, the South Asian markets are the best destinations for investment. Some of the prominent sectors that are attracting investors are Telecom, Tech Outsourcing, Life Sciences, Pharmaceuticals and Airlines. Growth options, lucrative career and monetary benefits are just a few of the benefits of the PE platter.