Private equity is the most common exit from investment banking – and one of the most competitive. Understanding what PE firms actually do, how they generate returns, and what the career looks like is essential whether you're targeting PE directly or simply want to answer interview questions about exit opportunities intelligently.
What Is Private Equity?
Private equity firms buy companies, improve them, and sell them for a profit. The 'private' in private equity means the firms acquire businesses that are either already private or take public companies private through buyouts.
A PE firm raises a fund from institutional investors (LPs – limited partners), uses that capital plus significant amounts of borrowed money (leverage) to acquire companies, then works to increase the value of those companies over a 3–7 year holding period before selling them.
The combination of leverage, operational improvement, and multiple expansion is what drives PE returns.
How Does a PE Deal Work?
The core PE transaction is the leveraged buyout (LBO). Here's the simplified mechanics:
A PE firm identifies a target company generating £50m of EBITDA. They agree to buy it for 10x EBITDA = £500m. The PE firm puts in £200m of equity (40%) and borrows £300m of debt (60%). Over 5 years, the company grows EBITDA to £70m, pays down £100m of debt from cash flow, and the PE firm sells at 10x EBITDA = £700m. After repaying the remaining £200m of debt, the equity value is £500m – a 2.5x return on the original £200m invested.
Three levers drive this return: revenue and EBITDA growth (operational improvement), debt paydown (the company's own cash flow repays acquisition debt, increasing equity value), and multiple expansion (selling at a higher EV/EBITDA multiple than you bought at).
'Walk me through a simple LBO' is one of the most common PE interview questions. Memorise the framework above with actual numbers. The follow-up will be: 'What are the key drivers of returns in an LBO?' Answer: EBITDA growth, margin expansion, debt paydown, and multiple expansion. If pushed, add: 'Multiple expansion is the least controllable and the most dangerous assumption to rely on.'
The PE Career Path
Analyst (2 years, pre-MBA): Support deal sourcing, build LBO models, conduct due diligence on potential acquisitions. Comp: £80,000–£150,000 in London; $150,000–$250,000 in the US.
Associate (2–3 years, post-MBA or promoted): Lead workstreams on deals, interact with management teams, present to the investment committee. Comp: £120,000–£250,000 in London; $200,000–$400,000 in the US.
VP / Principal (3–5 years): Source deals independently, manage portfolio company boards, lead negotiations. Comp: £250,000–£600,000 in London; $400,000–$800,000+ in the US.
Partner / Managing Director: Make final investment decisions, manage LP relationships, raise new funds. Comp is dominated by carried interest – top partners at mega-funds earn $5–20m+ per year.
Carried interest works similarly to VC: partners receive a share (typically 20%) of fund profits above a hurdle rate (usually 8%). In a fund that returns 2.5x on committed capital, carry can be worth multiples of cash compensation.
What PE Firms Look For
PE recruiting from banking is highly structured, particularly in London and New York. Firms recruit Analysts in their first year of banking for Associate roles starting 12–18 months later.
Technical skills: You must be able to build an LBO model from scratch, walk through a merger model, and discuss valuation methodologies fluently. If you can't build a paper LBO in your head in 5 minutes, you're not ready.
Deal experience: Interviewers will drill into every deal on your CV. Know the strategic rationale, valuation, key negotiation points, and what you personally contributed.
Commercial judgement: PE firms want people who think like investors, not just bankers. Can you identify what makes a business attractive for a buyout? Do you understand unit economics, competitive moats, and operational improvement levers?
PE interviews typically involve a case study or modelling test alongside traditional technicals. You might receive a CIM (Confidential Information Memorandum) and be asked to build a simple LBO, assess the investment, and present your recommendation in 2–3 hours. Practise this format repeatedly.
Types of PE Firms
Mega-Funds (Blackstone, KKR, Apollo, Carlyle, TPG): Manage $100bn+ AUM. Do the largest deals ($5–50bn+ enterprise value). Most structured recruiting. Highest base comp but carry is diluted across large partnerships.
Upper Middle-Market (Warburg Pincus, Advent, Cinven, BC Partners): $10–50bn AUM. Deals in the $1–10bn range. Strong combination of deal complexity and responsibility.
Middle-Market (HgCapital, Bridgepoint, Charterhouse): $5–20bn AUM. More responsibility earlier. You'll see more of the full deal process as a junior.
Growth Equity (General Atlantic, TA Associates, Insight Partners): Minority or majority investments in high-growth companies, typically with little or no leverage. Blends VC-style growth investing with PE-style diligence.
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