Before I became so fervent about Private Equity, I thoroughly considered all my other career options: hedge funds and VC.

One common question Ive been getting lately goes something like this:

I just started as a freshman at Harvard.  I am majoring in economics and finance and Im in the stock market club, the investment banking club, and I even borrowed $500,000 of my Dads money to invest in my personal accounts.  So far Ive earned a 50% return in 6 months.

How can I make sure that I work at Blackstone by the time Im 25?

Another variant of this same question:

I am only doing investment banking so that I can pay off all my student loans in 2 years, but I have no interest in ever doing it again.  What are the exit opportunities like for Associates at boutique banks who want to get into hedge funds?

For those breaking into investment banking. the exit opportunities are always a big motivation.

It makes sense on paper: you go from working 90-100 hours a week and doing mindless work to working 60 hours a week and doing meaningful work 100% of the time, right?  Right?

Lifestyle is a common reason for switching from investment banking into private equity or hedge funds.  Specifically, people assume that they will actually be able to have lives for once rather than sitting in front of a computer for 18 hours a day .

Private Equity Hours

If you go to a large private equity firm, like Blackstone, KKR, TPG or Bain. this assumption is false.  You will be working banking hours for another 2-3 years bet you cant wait for that.

Im amazed at how many people dont realize this until they get to interviews with these places or until (gasp) they actually start working there.

If you go to a smaller PE or growth equity firm like Summit Partners or TA Associates, then you wont be working 100 hours a week.  But you will still be doing 60-70 significantly more than a normal job and on top of that you will have to travel quite a bit, so forget about a consistent schedule.

And when a deal heats up and youre close to acquiring a company, your hours may remind you of what it was like to be an investment banking analyst. weekend work and sleeping under your desk for a few nights each week.

Hedge Fund Hours

Hedge funds tend to be better than private equity in terms of consistent schedules.  You work market hours, and weekend work is not required unless you work at a PE-like fund that acquires companies.

However, some travel can still be required for doing channel checks (e.g. checking to make sure that the toy retailer youre acquiring still has Wii stockpiles even in its Minnesota office).

And if youre at a West Coast hedge fund, you now get to wake up at 5 AM every day so that youre at work before the market opens on the East Coast.

Some exit opportunities can indeed offer a better lifestyle, but youll never be working 40 hours a week in any of these industries.  And youll almost always have a difficult time getting a consistent lifestyle with anything in finance.

Before diving into your next job, figure out what the lifestyle is really like so that you arent surprised by the mandatory weekly visits to the Yukon Territory in the middle of winter while doing diligence on an oil company.

Yes, private equity and hedge fund pay tends to be higher than those investment banking salaries you always hear about but thats not the whole story.

Private Equity Pay

At private equity firms, you will make about as much per year as post-MBA Associates at banks make (e.g. significantly more than you made as an Analyst).  At smaller places and growth equity firms, the difference in pay is not as huge, but it does tend to be higher than banking at the equivalent levels.  At bigger places, it can be much higher than entry-level banking Associates; some even guarantee $500,000 or so per year.

However, the pay difference is much greater at the Managing Director/Partner level than it is at the more junior levels of private equity and investment banks.

So it would not be rational to want to switch into private equity solely because of higher pay, unless you are a very senior hire.

Hedge Fund Pay

Hedge fund pay can vary wildly between different funds.  The standard seems to be a base salary of $100,000 for those coming in directly from banking, plus a bonus that will take you to the $200,000 $300,000 total compensation level (very similar to private equity Associates).

This is much higher than what you could get as a 3rd year investment banking analyst. and is about on par with what post-MBA Associates at investment banks make.

Depending on the fund, their performance, and your performance, the bonus could be significantly more or less than this; if you have really bad luck, you might just get nothing as the fund collapses before your eyes. (ok, this is unlikely)  And if you do really well, you might make closer to $500,000 total.  That scenario is unlikely except for the largest funds.

However, as with private equity pay, there is a significantly greater difference at the Partner level, where top hedge fund managers can pull in over $1 billion in cash per year .  That is more than private equity Partners make and far, far more than even the CEO of Goldman Sachs made last year .

It should also be noted that hedge fund managers making $1 billion are exceptions rather than the norm and most managers dont make anything close to that, though in general they still make more than investment banking Managing Directors.

Exceptions Apply

One exception to all these salary figures is prop trading and certain small hedge funds / prop trading firms that could potentially pay you an unlimited bonus.  I know of at least one place that actually pays you 50% of what you earn from trading, and there are several recent college graduates earning millions of dollars per year there.

But most people going into buyside jobs are not going to suddenly be earning millions of dollars at age 24.  Your salary will almost certainly increase, but the really substantial increases over investment banking salaries come at the more senior levels.

The Work Itself

This is where people have some of the most incorrect ideas about private equity and hedge fund jobs.

Yes, there is a lot of stupid grunt work in investment banking that everyone hates doing changing periods and commas in presentations, editing text in documents 500 times formatting PowerPoint graphs.

The amount of stupid work you do certainly decreases when you move onto private equity or hedge fund jobs.

But guess what?

If you dont like Excel or you think analyzing companies, doing valuations, or modeling are boring, youre not going to like the buyside very much.

The work is just not that different.

You still do financial modeling you still do diligence, and you still have to do some annoying grunt work.  When private equity firms acquire companies and work with banks, for example, the Associate will be tasked with writing bid letters and working with banks on financing, which can often require a lot of number scrubbing and attention to detail .

Not only is the work fairly similar to what you do in investment banking, there is also a new type of work that most people despise: sourcing.

Sourcing is a euphemism for cold-calling.  This is more prevalent at growth equity places (Summit is notorious for making its Associates cold-call companies all day) than at large private equity firms.

It may sound impressive at first to say that youre in charge of bringing in deals.  You may even think to make it part of your private equity resume .

But actually, youre just in charge of cold-calling; the Partner still owns the deal, even if you sourced it.  Some private equity firms do pay their Associates a bonus for closing deals they generated, but its paltry compared to what the Partners will make off it.

Managing Directors in finance source deals via their long-standing relationships and through regular communication with prospects.  They dont cold-call every company on the Inc. 5000 list until someone says, yes.

You, by contrast, will be doing this, or at least some form of it.  And its one of the most common reasons why people dont go into private equity or at least avoid the firms with a sourcing model.

The Social Aspect

This is one of the most overlooked aspects of investment banking vs. buyside jobs.  With banking, you have a group of other Analysts working alongside you and you chat with them in your downtime, go to Starbucks together and enjoy models and bottles with them outside work.  Its almost like living in a dorm in college all over again.

With buyside jobs, this disappears.

You might be the only Associate; you might even be the only person under 30 in your office, depending on the firm.

Private equity firms and hedge funds tend to be much smaller than banks and dont have as much of a need for an army of Analysts and Associates to do work there simply isnt as much work to be done.

This may sound less significant than the other factors I list above, but dont underestimate it.

I actually know of some 2nd and 3rd year Analysts who were reluctant to leave for this very reason yes, the pay and upside might be better, but not having any close friends in the workplace can make for a bad experience.

The Bottom Line

I dont agree with those who think investment banking is only a stepping stone to working in private equity or at a hedge fund.

Doing the job only because you think those options are going to be completely different experiences is a bit absurd.  Theyll be better in some ways, but they can also be worse in some respects as well.  No one in banking ever yelled at you for not cold-calling enough companies.

If you want to work in private equity or at a hedge fund, its better to go there directly; if that is not possible, just do banking for a year and switch over (harder to do now with the market downturn ).

I know someone is going to bring this up unless I discuss it here.

Venture capital and corporate development jobs can indeed offer a significantly better lifestyle than either private equity or hedge funds.

However, you will likely take a pay cut compared to what you were making as an investment banking analyst .  You could actually be as senior as a VP in banking and make less than a 3rd year Analyst!

Plus, you still have the issue of the work not being that much different and the social aspects referenced above.

Dont get me wrong: if you want to still have a good salary and a much better lifestyle, venture capital or corporate development could be right for you.

But recognize that, as with any other choice you make, there are tradeoffs between all these options and nothing is the best.