Case # 5-0021

Updated August 12, 2003

Note on Private Equity Careers

Finding a position in the private equity industry is a challenging prospect for MBA
students. Yet every year, MBAs are hired and post-MBAs are promoted to senior
ranks. Despite issues such as the economic cycle and increasing competition within
the industry, it is clear that competent motivated individuals with good investment
acumen can and do succeed in private equity. This note describes the industry,
compensation structures, and characteristics of successful professionals.

For a recent MBA graduate, the private equity industry offers the opportunity to
exercise many of the skills developed in business school while working in a fast-
paced entrepreneurial environment that has the potential to be extremely rewarding
financially. The private equity industry continues to evolve as it adapts to new
investment climates and becomes institutionalized. This has created challenges and
opportunities.

Private Equity Industry Structure

The private equity industry is generally composed of four major types of investors:
Venture Capital, Leveraged Buyout, Mezzanine, and Secondaries / Funds of Funds
investors. There are key distinctions between venture and buyout firms. Venture
capital is about understanding the impact of products and technologies on markets
while buyout is about control and deal structure. Regarding domain expertise, it is a
requirement for venture capital investing, however buyout firms can and often do
hire consultants to gain further understanding of a sector. A venture capitalist is by
nature an optimist, often asking “What can be done?”, while a buyout investor is

This document was written by Jonathan Rotolo T’04 and Adjunct Assistant Professor Fred
Wainwright under the supervision of Professor Colin Blaydon as a basis for class discussion rather
than to illustrate either effective or ineffective management.

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Note on Private Equity Careers Case # 5-0021

concerned about worst-case outcomes and tries to mitigate risks through deal
structures. Further details of all private equity investors are described below.

Venture Capital
A venture capital fund invests in early stage companies in need of capital for
growth. Such an equity investment is often structured as a preferred stock security.
It is rare for a venture capitalist to structure an investment in an early stage
company as a straight debt instrument, as the startup with unproven products and
cash flow constraints would be unable to make the interest payments. Venture
capitalists will usually take a minority, non-controlling stake in the company and
may often syndicate the risk of the investment among a number of firms.

Venture capital investments typically proceed according to a number of different

stages. A pure startup company will obtain its initial financing through a “seed
round.” This round may be far less than $1 million in size, and may not even be
sourced from a venture capitalist but rather from an angel investor. An angel
investor is a wealthy individual, acting alone or in a group, that makes small
investments of his or her own personal capital in early stage companies. If the seed
round is successful, the company will often require several rounds of venture
financing before the investors are able to exit their investment through an initial
public offering (IPO) or, more commonly, a sale to a strategic investor.

Leveraged Buyout
A company entering into an LBO is typically a mature but underperforming entity
with a proven product and stable cash flows. Often, an LBO candidate is a
subsidiary of a larger company that has been underperforming or has become non-
essential to the parent company’s operations. An LBO fund is unlikely to undertake
a transaction with a high growth technology company due to its unpredictable cash
flows. Cash flow is essential to make interest payments on debt. Unlike a venture
capitalist, an LBO investor will typically take a control position in the company,
investing equity and structuring a combination of loans from various lending
sources.

In analyzing a transaction, the LBO investor will typically value a business based
on a certain multiple of its EBITDA (Earnings Before Interest, Taxes, Depreciation
and Amortization). The debt used in the transaction will be raised from the public
and/or private markets through the issuance of high yield bonds and the
commitments of commercial banks and other institutional lenders. The percentage
of equity used in a transaction will vary depending on the investment climate and
the projected cash flow of the company compared to its debt payments. Once the
transaction has closed, the LBO firm will seek to improve the company’s internal
processes and structure so as to maximize its free cash flow available for interest

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payments and investments in growth projects. Once value has been created, typical
exits include IPO, sale to a strategic buyer or sale to another LBO fund.

Mezzanine
A mezzanine investor is somewhat different from other direct private equity
financiers due to its preference for investments in debt-like securities. A mezzanine
investor receives securities which have greater seniority than equity in a company’s
capital structure, typically at the subordinated debt level. Such securities may
feature an accumulating or current pay dividend and will often include equity
warrants. Due to its lower risk tolerance and investment in less risky securities, the
mezzanine investor typically receives a lower return than other private equity
investors. These funds’ ability to generate returns are somewhat dependent on the
IPO market since mezzanine financing is typically used to bridge the financing gap
from the time a firm decides to issue public securities to when it is actually able to
execute the sale of these securities. Recently, mezzanine funds have gained
popularity and multi-billion funds have been raised.

Secondaries / Fund of Funds

A secondaries fund is different from other private equity vehicles in that it does not
invest directly in operating companies. Rather, it purchases interests in existing
private equity funds, often at deep discounts, from limited partners who choose to
monetize their investment before the typical 10-year period of a partnership has
been completed. Similarly, a fund of funds investor is an asset manager that
allocates capital among a number of private equity funds, including both venture
and LBO funds. Through this approach, the fund of funds manager offers
diversification and expertise to certain types of limited partners, such as small
endowments and foundations that do not have the staff to manage the investment
process effectively.

Economics of a Private Equity Fund

When a private equity fund is organized, the general partners (GPs), or managers of
the fund, seek out a number of institutional investors that may include public or
private pension funds, endowments and financial institutions. Investors in the fund
are called limited partners (LPs). LPs contribute capital in return for a share of the
fund’s returns. A private equity partnership is typically structured to last for ten
years with possible one- or two-year extensions. Throughout the fund’s life, the
private equity firm will receive a management fee based on the assets committed by
limited partners. These management fees typically range between 1% and 3%

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percent. When the fund is liquidated, the limited partners are returned their
proportionate share of the fund’s capital and investment profits (if any) in the form
of cash or stock, depending on whether all investments were liquidated through
sales or an IPO. One structure commonly used is as follows: no distribution of
profits occurs until the LPs have reached their preferred rate of return (or hurdle
rate) typically set at 8-10%. Returns above the hurdle rate are split on a percentage
basis, often 80/20 between the GP and the LPs. A GP’s share of a fund’s profits is
called carried interest.

Structure of Private Equity Firms

While there is no typical private equity firm, the majority of firms are relatively
small, often with less than a dozen professionals. The size of these firms indicates
that the organizational structures are flat and that firm members must be able to
contribute to the firm’s operations in multiple ways. It should be noted that changes
in firm structure are presently taking place. An institutionalization trend has
developed since the early 1990’s that has led to geographical networks of affiliate
funds, families of venture capital and buyout funds, joint ventures with hedge funds,
and other relatively complex structures.

Corporate venture funds are associated with larger corporations. They typically
invest for strategic reasons as well as earning returns. Compensation structures vary
from traditional funds and often do not include carry.

Roles within Private Equity Firms

A 2002 compensation survey conducted by Thomson Financial’s Venture

Economics and Glocap identified and described six post-MBA roles within private
equity firms, as shown in the table below.

[See table on next page]

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Table 1. Roles within Private Equity Firms

Years of Post-
MBA Partner
Job Title Experience Compensation Track? Comments
Salary, Bonus,
Associate 0-1 (Carry) Sometimes
Salary, Bonus,
Senior Associate 2+ (Carry) Yes
Vice President 3+ Salary, Bonus, Carry Yes
CFO/COO 5+ Salary, Bonus, Carry Yes Often have CPA.
Partner/Principal 5+ Salary, Bonus, Carry -
General Partner 7+ Salary, Bonus, Carry - Often receive
significant carried
interest.

For a candidate, this list is a starting point in understanding the organizational

structure of private equity firms. Titles and responsibilities vary significantly based
on firm size, investment focus, and geographic location, among other factors.

The Associate Role

Since most MBA students will be seeking a position as an Associate, most of this
note is focused on describing an Associate’s tasks, what the Associate title means,
how this role is changing, how an Associate develops a career, and the challenges
for MBA students seeking an Associate position.

Tasks and Activities: A successful Associate candidate must have a diverse skill set,
as he or she will be called upon to participate in all phases of deal making and
possibly in operations and fundraising. The three main abilities required are:
technical skills to understand the industries in which the firm invests, analytical
skills to assess investment opportunities, and interpersonal skills needed to build a
strong network which will be a major resource throughout his/her career.

• Technical skills – firms tend to target their investments in specific sectors or

domains. Much of the Associate’s job is focused on gaining expertise in a
firm’s specific domain (if he/she does not have previous experience in this
sector).

• Analytical Skills – These skills are largely acquired through work

experience in finance, consulting or similar positions as well as an MBA
education. The Associate must be able to understand business models in

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Note on Private Equity Careers Case # 5-0021

detail, produce relevant research on market trends, competitor products and

customer profiles, and also be able to support an investment thesis for the
specific industry sector or market. This involves due diligence such as
visiting the company, speaking with customers, suppliers and competitors,
and modeling the financials to determine the company’s valuation.

• Interpersonal Skills – These skills will obviously be important for general

success within a firm, but interpersonal skills are essential for establishing
the network of contacts that will support the Associate throughout his/her
career. Networking activities should seek to build two types of contacts:
¾ Contacts that will provide deal flow – these will include other investors,
service providers such as lawyers and bankers, trade groups, and
entrepreneurs.
¾ Contacts that have access to individuals with managerial capabilities –
these will include entrepreneurs, industry executives and possibly
management consultants.

Associates must have the ability to process various kinds of data, interpret the data
effectively and reach a conclusion. The Associate must absorb a lot of information,
determine trends and key issues, and then tactfully raise and address these points
with investment decision makers in the firm. Associates should expect to be judged
on how well they are able to assess the key factors of a deal, whether they make the
right recommendation about the deal and how fast they reach a decision. Beyond
execution, relationship building is extremely important for Associates and is
essential to their long term career success. A more comprehensive list of the tasks
Associates perform can be found in Exhibit 1. A sample of an Associate’s typical
day can be found in Exhibit 2.

The importance of technical skills goes beyond the intricate understanding of an

industry. Increasingly, firms are targeting candidates with operating experience.
Associates are being asked to move to roles in operating companies (often for
significant periods of time) before being considered for more senior positions. To
complicate matters further, few firms have formal procedures for tracking and
repatriating former Associates into their firms once the individuals have
accumulated relevant operating experience.

The Associate role is different in each firm. In general, jobseekers should expect
firms to have three categories of Associate positions. Many firms have Associate
positions held by individuals without MBAs. These individuals often have spent
two to three years as analysts with the private equity firm following a two to three
year stint with an investment bank or strategy consulting firm. Their job is mostly
business development; finding deals for the firm through trade shows, tracking local

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companies and following up on leads generated by partners. These are

predominantly non-partner track positions.

The second kind of Associate position is a non-partner track position for post-MBA
candidates, and the last type of Associate position is a partner track position for
post-MBA candidates. In all but the largest venture firms, the Associate position is
becoming a non-partner track position. This trend is largely the result of the
downturn in the economy and may change with the economic cycle.

The Changing role of the Associate: Beginning in the late 1990s and continuing
through 2000, venture firms experienced a dramatic increase in deal flow. To
screen the increased number of investment opportunities, firms were forced to
increase the number of Associates they employed. At the same time, the number of
funds firms raised increased, as well as the size of these funds. Greater assets under
management meant making more investments which translated into a need for more
partners. Additional partners were required for two reasons: limited partners
wanted to know that a “partner” was overseeing their investment and entrepreneurs
wanted the support of a “partner” to help ensure the success of their company.
These trends created greater opportunities for MBA students to find Associate
positions, as well as provided a condensed career path for Associates; Associates
were able to make partner in three to four years instead of the historical seven to
eight years. These trends have led to “title inflation” and a perceived dilution in the
quality of younger professionals.

As part of the rightsizing of the venture capital industry, human capital policies
have changed; the duration of the career path to partner for Associates has returned
to its historical norm. Traditionally, promotions within private equity firms have
been made during fund raisings. One reason for this is that firm members’ carried
interest is determined at the time of a fund’s creation. The legal structure of the
partnership and firm politics leave little room for changes in profit sharing once a
fund has been created. It is also important for the firm to indicate to potential
limited partners who the investment decision makers will be at the time of fund
raising. The large cash overhang within the private equity industry, the slower
growth prospects for new companies and the difficultly of exiting investments have
led to a significant slowdown in venture fund raising, resulting in less hiring at
funds and fewer promotion opportunities for those in the industry.

The direction of career paths to partner have also changed. With the recent
economic downturn and increase in competitors, firms are reassessing the skills that
are required for partner positions. It is useful to compare the roles Associates and
partners play in the investment process. The Associate role described above and in
Exhibit 1 can be contrasted with the partner description below:

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Partners have several key roles within the firm. The role of an individual partner
will depend on their particular skills, their tenure with the firm and what stage of
the investment process the firm is in. In general, a partner’s responsibilities can be
divided into four tasks: managing the partnership and the firm, sourcing deals,
overseeing investments, and managing partner relations1.

• Managing the partnership and the firm. Generally a Senior Partner is

responsible for managing the firm and its employees. The day to day
operating tasks are likely to be delegated to other partners and the degree of
specialization will depend on the size of the firm. It is becoming more
common for large firms to have a CFO and/or a COO.

• Sourcing deals. Partners are generally the source of the most deal flow. It
is not uncommon for VPs/Principals to be involved in this process but
Partners, who generally have the most experience and the most contacts, are
the primary source for investment ideas.

• Overseeing investments. The level of oversight required for each

investment varies significantly. The Partner may only be required to
represent his fund by sitting on an investment’s board or may need to find or
provide operating assistance for the firm. This is often the most time
consuming part of a Partner’s position. Sourcing and evaluating deals
requires a significant commitment of the firm’s resources, but ensuring that
its investments are successful can consume the majority of a Partner’s time.
A Partner may be involved with ten or more portfolio companies and may
sit on the boards of six to eight of those companies.

• Partner relations. Partner relations break down into two parts: finding new
limited partners when raising capital and maintaining relationships with
existing investors. Depending on the number of funds previously raised by
the firm, a Partner will dedicate a significant portion of time to building
relationships with potential limited partners.

In addition to the responsibilities listed above, the Partner must find time to stay up
to date on changes in key industries through attending trade shows, speaking with
managers and CEOs, and reading relevant publications.2 Partners must also be
available to mentor the younger members of their firm. The apprenticeship

1
From the 2001 Vault Career Guide to Venture Capital
2
Ibid.

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structure of the industry means that much of an Associate or VPs training is through
informal information transfer from the partners.

VC funds have traditionally earned the majority of their returns from a few
investments in their funds. At the outset of a fund’s life a Partner may spend time
with a number of portfolio companies. As the fund’s life shortens, Partners will
focus their efforts on their winners. They’ll spend an increasing amount of time
working with management, customers and suppliers of startups with the best
chances of producing superior investment returns. Since working with portfolio
companies will consume the majority of a partner’s time over the life of a fund,
operating experience is important for ensuring a portfolio company’s success.
Similarly, as the operating environment becomes more challenging, as it has for
many technology companies since the year 2000, operating support is increasingly
important for VC investments. Operating support can also be a differentiator for a
VC firm. In light of this, some of the larger private equity firms have dedicated
operating partners who focus on portfolio company support and investing partners
who focus on sourcing and executing deals. Operating Partners are typically
industry executives or entrepreneurs with a proven track record while investment
partners are typically career venture capitalists.

What all of this means for the private equity job seeker is: operating experience is
considered invaluable by venture firms. There is a strong chance an Associate
candidate will need to demonstrate relevant operating experience to a firm if they
intend to land a Partner track position within that firm; however, if the candidate
does not have operating experience they should not be deterred from seeking a
position. Instead, he or she should expect to be asked to acquire operating
experience at some point in their career before being considered for an investing or
Partner level position. This will likely involve leaving the firm and taking on a
senior role within one of the firm’s portfolio companies.

Moving Up: An understanding of the Partner’s role in a firm allows the Associate
candidate to identify the skills he/she needs to develop if he/she is to pursue a career
in venture capital. Having insight into what differentiates a great investor from an
average investor will ensure that aspiring professionals focus their career
development efforts appropriately.

An excellent article on influential venture capitalists was published by VCJ in

February of 2002. Through a survey that used investment success (in dollars),
board seats, sector expertise, personal connections and a host of other criteria, VCJ
identified a list of the “top ten” venture capitalists.3 As most VCs, limited partners

3
“Influential VCs”, VCJ, June 2002

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and industry observers will tell you, there is no one trait that is common among
great venture capitalists. Rather, each VC brings to the table a unique skill set and
perspective that allows he or she to be successful. In an attempt to find some
tangible commonalities among VCJ’s “top ten” VCs, the author of this article took
the liberty of summarizing VCJ’s findings.

VCs can be thought of as being one of two types of investors: business builders and
idea investors. Business builders are typically serial entrepreneurs or industry
veterans. They have a great understanding of the operations of the businesses they
invest in. The result is that business builders earn great respect from, and are able
to provide direct assistance to the management teams of their portfolio companies.
A more technology driven VC may not be able to provide the same direct level of
support.4 Business builders will also have developed an extensive network of
industry contacts from their previous industry and investing experience. Idea
investors exist at the other end of the VC spectrum. They are able to identify gaps
in an industry, areas of need that have not been fully serviced. The truly great idea
investors are able to identify new industries in their infancy; they are able to create
new markets for technology. Idea investors may have less domain expertise than
business builders and will invest across industries throughout their careers, rather
than choosing to specialize.5

Most VCs exist somewhere on a continuum between these two extremes, but these
two types of VCs are a good starting place for thought on the different philosophies
individuals can bring to venture capital. Despite differences in how VCs approach
investing, there are a set of personal assets or traits that seemed to be common
among VCJ’s top ten VCs. The first of these traits is a genuine enjoyment of
working with people. Whether coaching a CEO making a difficult decision,
mentoring a younger member of their firm, soliciting limited partners or speaking at
a conference or with the press about a new investment, VCs must have the
capabilities and desire to work with people. The second trait or asset follows from
being in a people business, a great network. VCs use their networks to reach
investors, source investments, find management talent, find customers and
suppliers, and share ideas.

A third trait that seemed to be common among successful VCs was humility. VCs
need to recognize when they have the skills to accomplish a job and when they need
to tap their network to find the right person for the task at hand. Similarly, VCs
must find the appropriate level of support for portfolio companies to ensure that
entrepreneurs are able to run their businesses. Perhaps the most common mention

4
Ibid.
5
Ibid.

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of humility was in regards to learning from investment mistakes. The fourth

common trait that was found across VCJ’s “top ten” was big returns (big surprise).
Although some investors claimed not to be focused on returns, all of those on VCJ’s
list had plenty of them.6 It should also be noted that the majority of VCs selected
by VCJ started their careers in industries other than VC! From VCJ’s article it is
clear that the path to become a partner in a VC firm may have several courses.

Progression to Senior Positions

As described previously in the Thomson Financials Venture Economics and

Glocap’s 2002 compensation survey, time is a factor in promotions, as in any
industry.

One recent business school grad has described the importance of generating returns
for the firm. Because an Associate will spend a significant portion of time
evaluating investment opportunities, he or she must choose his battles carefully.
When bringing an investment idea to senior members of the firm, the deal should
“move the needle” for the fund (i.e., provide significant returns to the fund). An
Associate will likely screen a number of interesting deals during their tenure, but if
the investment opportunity is not large enough to impact a fund’s returns, then it
may not be worth the effort.

Superstar investors share these characteristics:

• Investment acuity (identifying characteristics of success and recognizing
patterns of success in management teams and business models)
• Ability to find and coach talented individuals
• Sourcing and closing successful deals (including company selection, sector
selection, deal structuring, legal negotiations, value added operational and
financial strategies, successful exits)
• Leveraging networks of deal sources, co-investors, banks, and individuals to
add to management teams
• Building and maintaining rapport with partners
• Building and maintaining rapport with employees

6
Ibid.

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The Job Search Process

Finding an Associate Position: Understanding the career path an Associate will

travel on is essential to helping the Associate candidate design and execute their job
search. Our discussions with industry participants revealed a number of insights
into hiring processes that we thought were worth sharing with potential job seekers.

As discussed throughout this note, obtaining a certain amount of company building

experience is important. The quantity and type of experience required seem to vary
from firm to firm and depended on the stage of investment the firm focused on. For
example, one early stage investor said, “There are certain stages and steps that most
companies go through, regardless of industry. Having experience starting a firm
allows the VC to provide insight into portfolio companies and is extremely valuable
in heading off problems.” Another VC said, “If you have no operating experience
you should go and get some! You’ll be handicapped if you don’t!” This VC
recommended finding an operating role with a company in a location near a VC
community so the candidate can stay in touch with the VC industry. The candidate
should contact those firms to express his/her interest and try and get involved with a
portfolio company. The candidate can use this opportunity to prove themselves
while maintaining contact with perspective employers.

What is most important in landing a position within a firm is a candidate’s “fit.”

Every firm has a culture and some individuals may or may not fit into it based on
their background, education, and values. This suggests that firms may be willing to
engage a candidate with less specific industry or investing experience if they
believe he or she is the right person for the firm.

According to a Boston-based executive search firm it is clear that many business

school students lack the network and the networking skills needed to land private
equity interviews. First, private equity job seekers need to start building their
network as early in their career as possible. This may be in business school or it
may begin long before that. However, networking exclusively for the purposes of
job searching is not effective. Job seekers need to be able to add value for their
contacts in the same way they expect their network to provide value for them.
Networking is a two way process. This means knowing exactly who you are
speaking with by researching his or her background and interests and being
prepared to engage in discussions regarding his or her interests as well as yours.

For those lucky enough to land an interview, there are just as many considerations.
Business school students are good at preparing for consulting and finance
interviews but they are not proficient in private equity interviews. Consulting and
investment banking interviews are focused and structured. Private equity

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interviews are typically conversational and informal. Candidates should also expect
considerable variation in interview practices across firms as well as across
individuals within a firm. The infrequency of interview opportunities as well as the
variation in the interview process means the candidate must be thoroughly prepared.

There are a number of steps that candidates can take to prepare for interviews.
First, candidates should know who they are talking to. This means obtaining a true
understanding of what role the interviewer plays within the firm. Using the firm’s
public information, try and determine how long the interviewer has been out of
business school. This should provide a baseline for understanding what this
individual does within the firm. The interview candidate should also talk with the
firm’s competitors to collect more information on the firm’s organizational
structure. Co-investing and networking result in a firm’s peers having a good
understanding of how an individual firm is organized and staffed. The flat structure
and small size of private equity firms means that Associates will often have as
much input in hiring decisions as more senior members of the firm.

The second step interview candidates should take to ensure their success is to
understand the type of investments a firm makes. Information about investments is
often available on a firm’s website. Interview candidates should be familiar with a
firm’s portfolio companies. This means having a thorough understanding of an
investment’s operations, competitive position and financial position. Candidates
should also consider speaking with entrepreneurs and management of the VC firm’s
portfolio companies. This will provide some excellent insight into how the firm
works as well as provide the opportunity to learn more about the portfolio company
itself. It is suggested that the interview candidate ask the VC firm for a contact
within the portfolio company rather than contacting the firm directly.

One Associate candidate wrote the equivalent of a sell-side research report on each
of a VC’s active investments before interviewing with that firm. Candidates in
today’s environment need to go one step further. They should also be prepared to
discuss potential investment opportunities with the firms they interview with.
Having investment ideas will demonstrate an understanding of a firm’s investment
style as well as domain expertise. Some firms conduct final rounds of interviews by
asking candidates to make presentations to partners on specific investment
opportunities or themes. This is also an excellent example of networking; the
interview candidate is adding value to the relationship rather than simply trying to
extract value.

The third step a candidate should take to prepare for an interview is to be abreast of
general industry knowledge. As previously described, the private equity industry is
dynamic and currently going through a number of changes. Candidates should be

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able to demonstrate their knowledge of such issues and carefully considered

opinions on what further developments may occur.

One specific private equity industry trend that candidates should understand is
succession planning and the impact it may have on the Associate role in a private
equity firm.7 There are three trends driving changes in succession planning in the
industry: lower future returns for the asset class, the aging of senior partners, and
the maturing of the industry. These trends may have implications for the stability of
firms, the political and work climate within the firm, and how members of the firm
are compensated. Each trend is discussed briefly.

The first trend is perhaps the most disruptive and this destabilization has many
limited partners concerned. As stated in the Venture Capital Journal:

VC carry is likely to shrink going forward, which means that some senior partners
may decide to squeeze out their junior partners and hold on to as much wealth as
possible. Moreover, many of the junior partners who made huge sums for their
firms in the late ‘90s did not get to share in the wealth to the same extent. And…it
is unlikely these partners will get rich anytime soon. The industry is rife with
discontent and disruptive forces. Without a clear and equitable succession plan,
these problems could be greatly exacerbated.

The VC business is a people business and if firms are unable to keep their
employees motivated the industry will be destabilized until firms adjust their
compensation and promotion policies. Some firms are being proactive about
seeking outside advice from consultants in order to gain perspective, understand
what other firms are doing and make careful, well-thought adjustments that ensure
the long term success of the firm.

The second trend, the aging of senior partners, is not unique to the VC industry.
The coming retirement of the baby boomers has significant human capital
implications for many industries but the partnership structure and apprenticeship
nature of a VC career makes the potential loss of senior partners particularly
challenging for VC firms. A well articulated succession plan will help ensure that
members of the firm and LPs know the future has been planned for.

The last trend driving succession is the maturation of the venture capital business.
This is an essential process if the industry is to continue to grow. New VC
investors will be less sophisticated and require greater transparency into a firm’s
processes. This means VC firms will need to make larger investments in
infrastructure and be able to demonstrate how and why they are making investments

7
See the cover story of the Venture Capital Journal, June 2002 issue, “The Next Generation.”

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Note on Private Equity Careers Case # 5-0021

and managing their firm. Hiring and succession planning are two internal processes
that firms will need to systemize as the industry continues to mature.8 Individuals
searching for a position in the venture industry should be aware of the implications
succession planning has for firm structure and stability.

The Buyout Perspective

Several trends have impacted the buyout sector. Specifically, valuations remain
inflated relative to earnings, too much capital and too many players entered the
industry over the past ten years, and banks have reduced lending and lowered the
leverage allowed per transaction. These trends have adversely impacted returns for
buyout funds.

Since 2000 domestic firm’s earnings have declined along with the economy.
Valuations have become more rational. This may indicate an opportunity for
buyout funds to become more active as investors but it is unlikely any renewed
buyout activity will generate employment opportunities with buyout firms given the
other trends impacting the industry. More recently, banks have become more active
and have somewhat reduced lending restrictions.

The buyout industry, as the venture industry, is currently awash in capital. An

estimated $100 billion of buyout capital was uninvested at the end of 20029. The
large capital overhang has resulted in a decline in new commitments of buyout
capital (new buyout commitments are below 1997 levels) as investors realize the
implications of such an overhang; increased competition for prime deals resulting in
lower returns. As with VC firms, human capital decisions at buyout firms are
largely based on fund raising and the excess of capital buyout firms are contending
with likely means less hiring.

Although interest rates are at historical lows, spreads on bank loans and high-yield
bonds have risen significantly since the early 1990s. At the same time, the amount
of equity contributed to leveraged buyouts has nearly doubled since 199010. Lower
returns have caused institutional investors to allocate away from the asset class
meaning fewer new funds and thus fewer employment opportunities.

One caveat is that experienced operating managers are also in demand in the buyout
sector. An effective buyout investor must be able to evaluate, motivate and manage

8
“The Next Generation”, VCJ, June 2002.
9
Venture Economics. U.S. based buyout funds only.
10
Ibid.

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Note on Private Equity Careers Case # 5-0021

operating management as well as finance a transaction. This has lead buyout firms
to increasingly partner with outside operating managers to source and support
deals.11

Post-MBA Associates typically have strong backgrounds in investment banking.

This is important for 2 main reasons: training in financial modeling and deal
structuring, and developing networks of sources of debt financing. Most buyout
firms are based in or near cities with major financial markets and large numbers of
institutional lenders.

The private equity job search can be a time consuming and challenging experience.
Patience, preparation, and persistence are important, and the financial rewards can
be very substantial.

Compensation in the Private Equity Industry

The private nature of the industry has meant that there has been little compensation
data available. The partnership structure of firms has meant that compensation has
varied widely within firms as well as across firms. Thomson Financial’s Venture
Economics and Glocap’s 2002 Private Equity Compensation Report is useful. The
survey analyzed the compensation levels of approximately 690 industry participants
from 2000 and 2001.12 The survey focused on salaries paid and bonuses but did not
extend its analysis to include carried interest. The report summarized its findings
into six major points:

1. Cash compensation across the industry increased an average of 21.7% from

2000 to 2001 despite a slowing economy.
2. Larger funds do not pay more than smaller funds in terms of cash
compensation.
3. LBO funds pay more than VC funds at all levels.
4. Investment banks and commercial bank’s internal funds pay more than stand
alone funds.
5. Compensation is not higher in areas with a higher cost of living suggesting a
national market for compensation levels in the industry.
6. There is no meaningful relationship between the industry focus of a fund
and the level of compensation.

11
“Current State of the Buyout Market”, Bear Stearns Merchant Banking and Vestar Capital
Partners, April, 2003.
12
2002 was the first year the survey was produced.

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Note on Private Equity Careers Case # 5-0021

Excerpts from this report are listed below.

Table 2. Base Salary by Asset Class

Asset Class Position Year Average Maximum Minimum Sample
Venture Associate 2001
Capital13 $104,587 $350,000 $50,000 78
2000 $98,138 $300,000 $35,000 58
Sr. Associate 2001 $116,437 $225,000 $52,000 63
2000 $103,250 $200,000 $65,000 36
Vice President 2001 $131,415 $300,000 $50,000 65
2000 $125,090 $250,000 $50,000 50
Principle/Partner 2001 $192,464 $600,000 $80,000 50
2000 $194,909 $450,000 $90,000 33
General Partner 2001 $785,400 $1,000,000 $550,000 20
2000 $680,769 $840,000 $480,000 13
Buyout14 Associate 2001 $100,758 $250,000 $55,000 33
2000 $104,500 $250,000 $55,000 10
Sr. Associate 2001 $103,750 $150,000 $30,000 8
2000 $100,000 $130,000 $50,000 7
Vice President 2001 $148,620 $250,000 $70,000 33
2000 $125,406 $250,000 $70,000 17
Principle/Partner 2001 $186,191 $400,000 $50,000 23
2000 $187,386 $400,000 $44,000 14
General Partner 2001 $720,294 $980,000 $80,000 17
2000 $637,647 $850,000 $470,000 17

13
The report defined venture capital as: Firms specializing in all aspects of early and later stage of
investment of companies for entrepreneurial growth.
14
The report defined buyout firms as: Firms that invest for controlling, majority stakes or whole
acquisitions of public and private companies.

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Note on Private Equity Careers Case # 5-0021

Table 3. Bonus by Asset Class

Asset Class Position Year Average Maximum Minimum Sample

Venture Associate 2001
Capital $64,404 $300,000 $1,000 57
2000 $43,446 $115,000 $1,000 46
Sr. Associate 2001 $72,153 $1,000,000 $20,000 49
2000 $54,829 $515,000 $10,000 35
Vice President 2001 $131,720 $2,000,000 $1,000 50
2000 $59,568 $200,000 $1,000 44
Principal/Partner 2001 $117,807 $500,000 $2,000 31
2000 $175,862 $600,000 $5,000 26
General Partner 2001 $342,000 $660,000 $200,000 20
2000 $266,000 $380,000 $200,000 20
Buyout Associate 2001 $81,600 $250,000 $10,000 20
2000 $82,222 $250,000 $10,000 9
Sr. Associate 2001 $121,000 $160,000 $70,000 5
2000 $80,000 $100,000 $60,000 5
Vice President 2001 $188,304 $1,100,000 $1,000 23
2000 $157,750 $1,000,000 $1,000 16
Principal/Partner 2001 $160,720 $375,000 $10,000 14
2000 $148,083 $376,000 $9,000 12
General Partner 2001 $385,294 $590,000 $250,000 17
2000 $297,647 $400,000 $210,000 17

Since carried interest is a significant portion of total compensation in the private

equity industry, below is a table detailing the carried interest distributions from a
2000 private equity compensation survey conducted by William M. Mercer Inc.

Table 4. Carried Interest in 2000

% of Positions with
Position Carried Interest %
Carried Interest
Associate 0.3% 24%
Senior Associates 0.4% 44%
Jr. Partner/Principal 0.8% 100%
Mid-Level Partner 1.6% 100%
Senior Partner 2.7% 100%
Managing General Partner 5.3% 100%

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Note on Private Equity Careers Case # 5-0021

Exhibit 1. What an Associate does15

An Associate in a VC firm can generally expect his or her time to be divided among
three core job requirements: sourcing deals, performing due diligence on potential
investments and supporting the portfolio company.

Supporting Portfolio
Sourcing Deals Due Diligence Companies
- Consult with analysts at - Talk to customers - Conduct research and assist in strategic
investment banks planning process
- Consult with market research - Research and talk to the competition - Attend Board of Directors meetings
firms
- Attend trade shows - Interview industry experts - Support the management team
- Read trade press releases - Use technical consultants to evaluate - Source and screen potential management
technology candidates
- Talk with entrepreneurs - Conduct management background - Negotiate and work with investment
checks bankers
- Make due diligence face calls - Use lawyers to review IP protection - Negotiate and work with potential
acquirers of portfolio company
- Network with other VCs - Use accountants to verify financials - Raise money from other equity sources
- Talk with lawyers and - Talk with previous investors - Negotiate terms of bank financing
accountants
- Conduct Internet research - Spend time with management - Help acquire other companies
- Attend investment conferences - Build valuation models

15
From the 2001 Vault Career Guide to Venture Capital

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Note on Private Equity Careers Case # 5-0021

Exhibit 2. A Day in the Life of a Venture Capital Associate16

7:00 AM – Arrive in the office.
7:01 AM – Read The Wall Street Journal, paying careful attention to the Marketplace section
covering you industry focus.
7:20 AM – Read the trade press for information about new companies in your firm’s domain.
Cross-reference your firm’s internal database to determine if your firm has contacted any the
companies that interest you. Conduct a quick internet search to get a few details on each
company. One company in particular stands out and you send yourself an e-mail as a reminder
to call the company during business hours.
7:45 AM – Drop off any interesting articles to members of your firm with expertise related to
the companies in those articles. Use this as an opportunity to exchange ideas about industry
players and technology with other members of the firm.
8:00 AM – Respond to e-mails or voice mails from the day before. Most of your
communication is with entrepreneurs, other VCs and personal contacts.
9:00 AM – Quickly skim a business plan before it is pitched by a group of entrepreneurs to you
and one GP from the firm. The company pitching its business needs additional copies of its
presentation. You work with your assistant to make the needed copies while the GP talks
informally with the entrepreneurs. During the presentation you sit quietly making note of what
you believe are the three most critical issues facing the firm. You use the Q&A session as an
opportunity to evaluate whether you would want to work with this company’s management
team. In the end, you decide to make some calls and gather more information about the market
and the firm’s competitors. The probability you would invest is low but you were impressed
with the management team.
11:00 AM – Return calls received while you were in your 9:00 AM meeting and follow up on
issues relating to another potential investment.
12:30 PM – You have lunch with an executive recruiter. This particular recruiter is tapped into
the local pool of management talent in your domain. You have kept in touch with the recruiter
after meeting her at a trade show last year. You make an effort to meet her once a quarter to
hear the latest buzz and stay in her good graces. The lunch also offers an opportunity to discuss
what you are seeing in your domain to fill the recruiter in on up and coming ventures.
2:00 PM – Call new companies you have heard about over the last few days. Ideally you are
mining new invest ideas each day but find that your success is correlated with your mood so you
save these calls for when you are most upbeat. These calls typically last longer than you
planned so it is also important to have a block of time set aside. You leave voicemails for four
CEOs but are able to get through with one and spend an hour talking with him about his firm
and its market position.
3:30 PM – You and a partner meet with a portfolio company on a conference call. The
company is facing some challenges and you offer to screen executive recruiters to help find a
new CFO for the firm. The GP offers to talk to two M&A firms to get an opinion on selling the
portfolio company. At the end of the call the GP gives you the name of several executive
recruiters which you add to your own list of contacts.
4:00 PM – You call the executive recruiters and determine their ability to complete the search
for your firm’s portfolio company.
4:40 PM – Make due diligence calls for a potential investment. Last week you spent time trying
to model the economics of an investment in the firm. This week you are talking with suppliers
and customers to determine how realistic the assumptions of your model are. You also hope to
unearth additional information about the management team.
5:45 PM – Make calls to the west coast. Confirm your dinner plans. Do some miscellaneous
surfing on the internet to gather articles on the domain you are covering.

16
From the 2001 Vault Career Guide to Venture Capital

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Note on Private Equity Careers Case # 5-0021

6:30 PM – Stop in to talk with a few of the VPs and GPs to brainstorm some investment ideas
and learn what is happening with each of the companies they are following.
7:00 PM – Dinner with two Associates from other firms. It is a good opportunity to network as well
as gain fresh perspectives on the deals you are looking at.

Center for Private Equity and Entrepreneurship 21