My favorite segment of fiance is private equity and it is hopefully where I will work later in my career. Private equity is a firm that invests money into buying other companies with the goal of making them more valuable and then selling them for massive profits. I think of private equity as a perfect combination of finance and business management.
Private equity firms vary drastically between different companies. Some invest outside money and some just invest the money from their partners, but often there is a large amount of leverage used in their purchases. They also differ from firm to firm in their strategy. The basics are the same, buy a company or a piece of a private company and then sell it later on when it is more valuable. Some firms focus on companies that are really struggling; they will go in and buy it up, invest lots of money and talent, and then sell it once it is worth more. Some firms focus on bringing in new management or using the companies existing infrastructure to develop new products. Every firm has its own unique strategy to make money.
Here is an example of what a firm might do. Proof Labs is a private equity firm that focuses on taking a successful business and expanding its reach by making use of Proof Labs connections and expertise in market growth tactics. The firm is comprised of 4 primary partners than a large team. The partners will be investing $200 million of their own money and using debt for the remaining $100 million, making the total price of their target acquisition (Evian Water) 300 million. They buy 100% of the company and start by replacing the CEO and building out a new management team. Over the course of 6 years, Proof Labs works hard to make connections for Evian and get their water into more stores across the world. They were even able to use Proof’s favorite manufacturer and got costs down, increasing their margins. 7 years later Evian is valued at $700 million. Proof Labs sells Evian to Apollo, a massive private equity firm.
Understanding this example helps you to understand why PE is a combination of finance and business. Proof Labs would have done an intensive financial analysis of many firms and then built a highly detailed and ever-changing model of their plan for Evian. But there was also a lot of business management that was needed, while some PE firms take a hands-off approach many are actively trying to increase the value of their purchase.
A brief note on getting into PE. Private Equity, especially at a high level, is incredibly hard to break into. It is recommended that you start in investment banking and are a standout employee working on several deals, as private equity is heavily deal focused. Often times it is also recommended, especially to be a leader at a PE firm that you have your MBA because of all the business strategy skills needed. These two things aren’t an impossible task, but spending 5 years at Goldman Sachs then going to Wharton in order to get into PE is.
Private equity is a really exciting and fast-moving career and if it is something you are interested in, spend your time in college trying to get an internship or job at an investment bank.