Go to PE/VC from sell-side research?

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numi

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Hi all,

I was wondering if you or anyone you know has made a transition to PE/VC from sell-side research. If so, what skills and knowledge from sell-side research did you find were most relevant to PE/VC?

I realize that there are more people in PE/VC that have banking or consulting backgrounds, though I am trying to understand whether it's truly because they have a more applicable background, or because sell-side analysts just tend to go to the buy-side or non-sellside corporate finance instead. I think it's a bit of both, but would be interested to hear what some of you others think.
 
I know quite a lot of people who have done it. In fact, of the PE people that I know, far more came out of sell side research than out of the corporate finance/m&a side.

Sell side research is a better background for PE than traditional banking is - doing deals is easy, justifying them is the challenge. People coming from the research side have the experience in looking at industry trends, and evaluating them from a quasi-unbiased perspective.
 
Ted, thanks for the quick feedback -- I remember we had discussed this topic briefly sometime ago, and good call regarding the ability to understand market and industry trends.

Perhaps we can also consider what it takes to transition to a more *junior* role in PE, since I generally assume that associate analysts will be brought in as PE associates at best. As such, a large part of their PE role, as you know, revolves around modeling and valuation, and I don't think my skills in these areas are as developed as bankers who have the same years' experience in the industry.

Assuming that the sell-side research person is trying to transition into a top PE fund, what else do you think one needs to do in order to position oneself during recruiting in order to surmount the shortcoming of not having the same type of valuation and due diligence experience as bankers?

Also, what other research-related skills do you think are most transferrable in addition to the market/industry experience? Obviously that's the big bulk of it, but I'm also wondering about the value of other experiences. Some other skills that I'm thinking about include the ability to build fully-integrated market models, having an extensive list of client and industry consultant contacts, experience interacting with sales force and clients, and working with the bankers in vetting potential investment banking transactions.

I'd love to hear your thoughts on this. Thanks in advance.



Edited 2 time(s). Last edit at Monday, September 25, 2006 at 01:42PM by numi.
 
My experience is that the modeling required of PE associates is relatively minor. It really isn't rocket science, and you probably have a strong enough background to do it, assuming you understand IRR and cash-on-cash hurdle rates. The model is usually pretty simple, and either the company fits or it doesn't.

Most of what you're doing as an associate is making the investment case for the investment committee. A lot of that has to do with thinking critically about the market and the company - things that I think you do more of than a standard IB analyst would. Most of them are farming out the diligence process to somebody else (big 4, etc.) anyway - the associate is a data analyst and aggregator, more than anything else.

I don't really think you need to do any special positioning in the recruiting process. They are already explicitly looking for people with research backgrounds. In fact, I know a few funds that have a strong bias against IB analysts because of the "just do the deal" attitude that they bring with them. You are who you are - and that should be good enough.
 
Fair enough -- I can definitely see how understanding market and industry drivers would be relevant as far as making the investment case. However, what about understanding aspects of financing? The transactional experience is another reason I suspect bankers are more of the cookie-cutter fit for PE -- and a good reason at that.

In other words, as much as the investment case is concerned, I can definitely see how a sell-side research analyst can apply much of his own analysis or vetting skills to the due diligence process in PE. However, research folks don't have experience with deal execution, and even though you say the modeling in PE isn't rocket science, PE analysts still have to model the transaction before sinking hundreds of millions of $$'s into the deal.

I see where you're coming from in that modeling is just one component of the job, but I would still be concerned about how to better position oneself against the myriad of M&A and leveraged finance bankers who actually have the transactional experience. Do you think this is even something to worry about, or do you think someone from sell-side research would help the PE firm likely to fill an unmet need (since, as you mentioned earlier, many firms are still looking for research folks)? And as a follow-up, do you think a sell-side research analyst should focus on the industry and company analysis skills that they actually have, and worry less about the transactional experience that they lack?

Thanks in advance for your help, once again. If anyone else has comments or suggestions, please feel free to chime in on the discussion.



Edited 1 time(s). Last edit at Monday, September 25, 2006 at 05:10PM by numi.
 
I wouldn't worry about the lack of transaction experience. Transaction experience is over rated. It's something your going to get just from being there. As far as the modeling is concerned, sure, you, the associate are going to build the model, but it's going to be vetted by everybody up to the VP before it gets signed off on. These guys are incredibly sharp - if there's something wrong with the model, they'll know it almost instantly. It's literally a case where, when you look at the same model with different assumptions, day after day, you know what the outcome will be, and it's just a check-off to get the actual model done.

I don't think a sell-side analyst should focus on their industry experience, unless it's a fit for the private equity fund (i.e., you're an analyst in a sector that the PE fund focuses on). Then you should. They want you to know the industry.

I would completely not worry about the transaction experience. I wouldn't even bring it up. The deal is the easiest part of the whole process.
 
<<I don't think a sell-side analyst should focus on their industry experience, unless it's a fit for the private equity fund (i.e., you're an analyst in a sector that the PE fund focuses on). Then you should. They want you to know the industry. >>

Ted -- great suggestions. One last question about what you mentioned -- assuming that the sell-side analyst is being screened by a PE firm that does NOT focus on the industry that the sell-side analyst covers -- say, a generalist analyst/associate position at a large PE firm. In that case, what would be the best way to convey that one's knowledge of markets would be transferrable to PE? I'd like your feedback on how to position and convey this meaningfully, as opposed to making some generic statement about how sell-side experience in one industry can be directly applicable to all others (unless you think this is true, which I do not...at least not in an immediate sense).

I ask this because I'm concerned that a PE interview could potential play out as follows:

PE GUY: So, what can you bring to our PE shop?

SELL SIDE RESEARCH GUY: Well, I have several years of experience on the sell-side covering the *large-cap chemicals* industry, and I had gained significant knowledge and traction in this space through building relationships with with company managements, doing proprietary field research, vetting potential banking transactions, and proactively covering the broader market and business trends in this field. I plan to draw upon these experiences and apply this knowledge to PE.

PE GUY: OK, so can you apply your analytical skills in helping me evaluate this potential buyout opportunity in *small-cap biotech*? Please give us your investment recommendation, too.

SELL-SIDE RESEARCH GUY: Biotech...jigga wha? Fen-phen is totally like a thing of the past, dude.

================
OK, so maybe the above example is a bit far-fetched, but can you see where I am coming from? Obviously the sell-side analyst would have to make a point that he understands market dynamics and valuation trends, but if he's interviewing for a PE position that's in a different industry than the one he covers, it might be tough to make a compelling statement. Would like to hear your thoughts on this. Thanks



Edited 3 time(s). Last edit at Monday, September 25, 2006 at 06:09PM by numi.
 
If you're in for a generalist role, you have to completely play down whatever sector expertise you have - it's irrelevant. You have to play up what you do every day; your ability to look at masses of publically available information and synthesize it down into what's important. What the PE associates job essentially is is to write analyst notes for the investment committee. You need to show how effectively you can do that on your own.

The biotech example would never play out like that - you're not expected to know things you don't. They might say: "We have a potential investment in a small biotech company, how would you approach that?" and your answer would be something like: "I'd start with a comprehensive look at the industry, identify the company's place in the industry and its prospects, and use those assumptions to drive the model to base investment decisions on."
 
Good discussion here...

Numi:

I can't be all that helpful because I don't work at a mega-fund, which I think is what you're looking for, but I'd say that "fit" is going to be a much bigger issue than technical. I mean, all the guys interviewing for these places have top schools, top groups at top banks, etc. You've already got that too, so I'd focus on getting them to "like" your personality. They will see the intelligence/initiative, if they're good interviewers, and if they're not you don't want to work there anyway. What I'm trying to say is that, IMO you'll have solid enough responses to the "skills" questions already.

I agree with Ted about the modeling/transaction comments also.
 
Numi,

It sounds like you should have a really good shot at grabbing an opportunity in PE/VC.

I don't work in PE/VC or banking, but I can tell you what I witnessed at a discussion/conference that had a panel of PE/VC partners. After the conference ended, all of these people that had "ideas" swarmed on these guys with "questions" and were clearly hoping that these guys would just hand over $5mil to get their company off of the ground. I say "questions" because from what I was hearing, these guys were actually telling these partners their life story and their deep thoughts on high finance. After this long-winded stream of conciousness, this guy finally says something to the effect of "how do you forecast what could happen 4 quarters from now?" The PE partner's response was a very confident "At PE Advisors, we have wall street equity research analysts that help both the entrepreneur and our fund with these forecasts. We have a guy that came from XYZ bank, and I'm confident that he knows what he is doing."

But, XYZ bank was a 2nd tier bank (a good one, but not bulge bracket by any means). I understand that this isn't very compelling evidence of PE funds taking in analysts, but I thought you would like to hear the story.

Here is what I did take away from this: one should definitely only go into PE/VC if they truly have a calling. Even if I could get in the door, I don't think I would make it in this field. These guys were getting mauled by all sorts of people that I wouldn't necessarily talk to in real life. And a lot of them were not serious business people, but rather, pipe-dreamers. I said to my wife "well, a lot of these guys might think they are entrepreneurs, but, they should look into getting a haircut." You definitely wouldn't make it in the PE/VC world with that attitude.

I think Ted touched on this one before. If you have a true calling in this arena, then you will be able to sort through the good and the bad, and enjoy what you are doing. If you are chasing PE/VC because it is hot, then you will likely get a lot more with the territory than most people bargian for.

[By the way numi, when I say "you," I don't mean numi. I am sure that you are not a chasing something that is hot and have looked into this. I was just touching on the fact that a lot of people chase the next hot thing.]
 
VOBA -- good points. Like Ted mentioned, it's probably best to go in and highlight the skills that one has rather than the skills one lacks -- a good basic strategy for all interviews, but definitely applicable to interviews at the top PE shops. If they wanted a top M&A or LF banker, they could easily find one anyway.

finance_machine -- that's an interesting anecdote. Thanks for sharing -- it's definitely useful to hear an account of how sell-side analysts apply their skill sets towards PE. For the record, I've heard the same thing about other top PE shops, where they're more concerned about how you think and the way that you can apply your knowledge of covering a particular space. It's practically a given that the folks coming from M&A or LF will have more relevant transactional experience, but from what I've heard, sell-side research analysts that have made some good proprietary calls and who have seen a lot of deal flow in their coverage universe could be a good fit, particularly because they understand the industry and the business strategy. That said, it's certainly a less natural transition from research than from banking or consulting in my view, but that shouldn't stop anyone from trying.

As you said, there are a lot of people who want to get into it just because of the hype, and that's all fine and well. However, I'm definitely going to look at all aspects of things before considering any type of career change, though I have to admit that part of my recent fascination is because I have a bunch of friends in finance or consulting that will be leaving for PE soon. Anyway, what it's worth, I'm not looking to make a change in the immediate future, either -- just trying to think ahead and examine all the possibilities.

Thanks all for your feedback. If anyone else has thoughts, please chime in -- would be interested to hear thoughts from someone with PE or VC background. Also, I'm sure I'll be speaking with more folks in PE going forward and will be happy to keep you guys updated on my findings.



Edited 2 time(s). Last edit at Tuesday, September 26, 2006 at 04:14PM by numi.
 
Numi, what is it about PE/VC that appeals to you?

PE and VC sound interesting to me too, but it seems that you've given it some specific thought and I'm curious what you've concluded so far.
 
Numi,

Have you seen this blog?

http://equityprivate.typepad.com/ep/getting_in/index.html

The above is a link that talks about this guy's experience getting in to Private Equity. It gets pretty detailed about the financial modeling he did for his interview (see the feb 21st entry). There is a lot of other interesting anecdotes in the blog as well.

hope this helps!
 
bchadwick -- i will when i have more time. seriously jammed with work today.

nh1977 -- thanks for the link -- where did you find it? there's definitely some excellent information here, not to mention that i love the writer's style of prose. i am bookmarking it for further reading when i have time. btw, what is your background? just curious.
 
nh1977 Wrote:
-------------------------------------------------------
> Numi,
>
> Have you seen this blog?
>
> http://equityprivate.typepad.com/ep/getting_in/ind
> ex.html
>
> The above is a link that talks about this guy's
> experience getting in to Private Equity. It gets
> pretty detailed about the financial modeling he
> did for his interview (see the feb 21st entry).
> There is a lot of other interesting anecdotes in
> the blog as well.
>
> hope this helps!

Very well written, and quite enjoyable to read.
 
Two things stand out from the suggested blog:

1. Networking gets you your job & the job will come from weak associations (people who know people you know). If there were people within your network with your desired jobs, your quest would be over.

2. Regardless of the humorous tone of the article, the author did know a bit about different scenarios & how to model them. You can't learn them over a weekend & successfully apply them. Chance favors the prepared mind (Louis Pasteur)
 
Numi,

I found it while looking at leveragedsellout.com (another good website, by the way..there's some funny stuff on there). Anyway, it's got links to other blogs, all which have their own links to other blogs, etc. There's a lot of good ones out there. Mark Cuban, the owner of the Dallas Mavericks, has got a blog too.

I'm in the valuation group of one of the large accounting firms. We value businesses, intangible assets and derivatives for financial reporting and tax purposes, ie. mark to market, FAS 141, 133. I've been doing this for about 2 years, and I'm considering a transition to sell side research after I pass level 3 of the CFA (I've passed 1 and 2). I've been reading your advice about sell side research and it's been helpful, so thank you. Just curious, do you see many people from accounting firms making the transition in to sell side research ?
 
abacus wrote:
"1. Networking gets you your job & the job will come from weak associations (people who know people you know). If there were people within your network with your desired jobs, your quest would be over. "

I hadn't read the site, but this is clearly an oversimplification -- networking is critical, no doubt, but your quest would be far from over -- networking gets your foot in the door but doesn't make you a shoo-in anywhere. However, I guess the point is that most people have enough trouble getting their foot in the door to begin with, so it definitely pays to know people.

nh1977 -- I wouldn't say I have seen that many make transitions from accounting to sell-side, but it can be done and I think that the facility with numbers is a valuable attribute. I know a few people on the sell-side with prior accounting backgrounds and they say it has helped.
 
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