Wednesday, February 11, 2015

The Private Equity Analyst: Experts at Tedium

The Private Equity Analyst: Experts at Tedium

The New York Times reports today that junior analysts at investment banks are being poached by private equity firms for as much as $300,000 per year.[1]  We’re not talking about folks with an MBA.  These are people who are two to three years out of college.  As institutional investors pour more and more money into private equity, PE firms are scrambling to expand the ranks of analysts in order to process more deals.   Two to three hundred thousand dollars seems like a lot of money, especially when the average college graduate usually makes about $45,000 to $50,000.  However, when a PE firm is collecting 1.5% to 2% in management fees, analysts salaries are inconsequential.

I’m sure that the vast majority of these young analysts have near perfect grade point averages, and impressive sounding internships.  However, their intelligence is not the most critical part of their job as an analyst.  A private equity analyst has to excel at tedious and repetitive tasks.  With too much private equity capital chasing potential deals, the young analysts can expect to spend endless evenings putting together pitch books so their managing directors can try to woo companies.  While they’ll have to know something about building spreadsheets and models (high school algebra will suffice), their mastery of the cut and paste function in PowerPoint is more important.  At their prior job with an investment bank, they learned how to take other people’s insights and analyses and make them look pretty.  Because these folks have gone directly from college to an investment bank, they don’t know much about the industries they are analyzing, the projections they are making, or business in general.  

I have no doubt that a good high school student could function as a private equity analyst, because there’s little taught in college that has anything to do with the job.   However, because so much of private equity is an illusion, the Ivy League college degrees and varsity letters look very impressive in the appendix to one of those pitch books.   Moreover, the salaries paid to analysts are far less ridiculous than the compensation paid to the executives who run private equity firms.


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