This post was originally published in 2010.
This ongoing blog column Private Equity Insider is for Pepperdine Business students who have chosen Finance as the emphasis of their studies and who are interested in the musings of a fellow classmate regarding the world of high finance, alternative investments, and most specifically private equity firms.
It is my thought that all business school students are driven forward by a fierce, innate longing to succeed at the highest possible level; including those who attend a private, Christian university nestled in the green hills of Malibu, California. Our will to win is no less than that of the students who brave the winters of Cambridge to attend class at HBS or squeeze through the crowded streets of New York to get to Columbia. I write to you based on that belief. It is also my belief that if you do not have an Ivy League degree or a father who’s Rolodex reads like a Who’s Who List of Wall Street; you will need to pack your toolkit with something else: information and relationships. I have tasked myself with getting information to you through the Graziadio Voice student blog; the relationships are then up to you.
My quest will begin right here in California as I look to meet with the principals of some of Los Angeles’ finest PE firms. Then, I will interview analysts; those who are in the position some of us would like to inhabit post-grad school (albeit briefly if you are truly ambitious). Subsequently, I will give you an inside look at what it is like to 1) manage and 2) work for a private equity firm.
First, you may ask, “∫What are the benefits of private equity?” I can only give you an outsiders’ perspective currently, but I will do so nonetheless.
- The business model is simple…buy the company, correct the issues of the company, grow the company, sell the company. The fun is in all that must be done to move through that process.
- Even in the current economic environment, top tier private equity firms control a good deal of money; they still have the capacity to close deals and grow their investment funds…and the reality is that in a thriving market, virtually no company is out of their reach.
- By virtue of being a private entity, PE firms do not have to maneuver to meet quarterly earnings estimates, as to not upset the market; they don’t have to play to Wall Street analysts or the media. They simply have to manage the cashflow of the companies in their portfolios. This gives them the freedom to take bold action that would cause incredible consternation for a public company, but make sense for their end game.
- Lastly, management (of target companies) is compensated based on true performance. Each company in a PE portfolio is made to operate like a well-oiled machine. Each of those companies’ managers pay is directly correlated efforts to move the company to its maximum level of efficiency and profitability. As such, all are accountable and properly rewarded for their respective efforts.
- Another advantage of their private status is that these firms can compensate their own employees as they see fit without exposing them to rousing public disapproval. Subsequently, this end of the finance world attracts some of the brightest in the industry. Not a bad bunch to pal around with.
So, over the next several months before my graduation from the Graziadio School of Business, I hope to take you on a journey– a journey to the glitzy, fast-paced, take-no-prisoners world of private equity.
Until next time…stay focused.
The Pepperdine Private Capital Market Project is ongoing research at the Graziadio School lead by finance professor John Paglia and investigating lending and investing behavior across private capital markets. This fall’s first study report found private equity professionals have among the highest expectations of ROI despite a challenging economic outlook.
Download the report for more key findings or participate in the industry survey at http://bschool.pepperdine.edu/privatecapital.