So, you want to work in private equity.
You’ve worked hard to master buyside technicals for private equity interviews. (See here for technical questions included in the 2022 on-cycle process). Soon enough, you’ll be able to fly to your private island on your own private jet.
Just one problem. You’re struggling to come up with a compelling interview answer to “why private equity?”
In this article, we’ll list out some reasons that you can use for your answer.
But before you can answer this question correctly, you need to first understand the idea behind this question. So let’s go over the importance of “why private equity” and why interviewers want to ask it.
Why Private Equity – How Important Is It?
Here’s the short answer: If you can’t get this question right, you won’t get the job.
The good news is, you don’t need to have an incredibly awesome or unique answer to get it right.
Based on our experience, this question is more of a check-the-box sort of question.
You must get it right in order to move on to the next stage of the process. But once your answer passes the minimum threshold, there’s no need to go overboard because it won’t earn you any extra points.
Some candidates, especially those from the traditional investment banking and consulting background, spend way too much time on this question. Time that could’ve been much better spent preparing for deal discussions. After all, their compelling story for “why investment banking” got them the IBD offer in the first place.
Investment banks and consulting firms have a penchant for asking this question. In fact, we’ve seen IBD offers given out because some candidate has a very compelling “why investment banking” answer.
That’s not really the case with private equity interviews.
You will never get an offer solely because you have a killer reason for why you want the job. How can we be so sure?
Simply because that’s not how the private equity guys operate.
Private Equity Firms Want People Who Will Add Value
Recruiting, just like the rest of the world, operates based on realism. Private equity professionals are in the business to make money. Not charity. No one is going to hire you just because you have the world’s most compelling or unique reason to do the job.
They’ll only hire you if they think hiring you will benefit them. In other words, they’ll hire you if they think you’ll help them make money.
Do you have a great investor mindset that can help them identify profitable opportunities? Are you well polished enough to coordinate among banks, lawyers and accountants? Are you a good modeler who can help them churn out error-free financial models to facilitate their analysis?
You won’t get the offer because you worked hard to get to where you are. But you will land the offer if you show the PE firm that you’ll work hard for them. See the difference? As a result, things like technicals and mini-cases are far more important.
These are just some examples of an Associate’s value-add. PE firms want to hire people who will add the most value to their team.
So Why Do They Even Ask “Why Private Equity”?
Private equity interviewers are not asking this question so they can hire whoever has the best reason. Quite the opposite.
They’re asking this question to filter out the candidates who are doing it for the wrong reason. This is an easy way to identify the candidates they don’t want.
Plenty of candidates actually go into private equity with the wrong perception of the job. They think it’s going to be one thing and it turns out to be another. Next thing you know, they realize they don’t want to do the job anymore. This negatively affects the private equity firm’s productivity and morale, which is bad for business.
Consider Mike. Mike is an overworked banker wanting to work in PE so he doesn’t have to make profiles or decks anymore. He starts on the job excited to run billion-dollar companies. One month in, profiles and lengthy presentations on CIMs is all that Mike has done. What do you think happens to Mike’s motivation? He slowly become frustrated with the work and stops taking initiatives. Productivity goes down all because the interviewer didn’t detect that the job isn’t what he had in mind. Or worse, Mike quits and leaves the team hanging. Associates quitting mid-way through their PE program is very disruptive to the teams. This happens pretty often.
Or Sarah. Sarah is a management consultant who can’t wait to work in PE so she doesn’t have to travel anymore. Two months in, her private equity firm sends her to camp out of Rancho Cucamonga for a month to help a portfolio company’s FP&A team with its accounts payable and receivable capability. Not good.
To avoid these scenarios, private equity interviewers ask you “why private equity” to make sure you want to do it for the right reason.
How Should You Structure Your Answer?
This one is simple. 3-5 sentences is sufficient. Go beyond 30 seconds and you’re being long-winded.
Some candidates like to go into a whole story about their finance spark and journey that led them to private equity. They should do that only in the beginning of the interviews where the interviewers ask them to walk through their resume. Don’t do it here.
3-5 sentences gets the job done. It checks the box. It answers the question and the interviewer wants to move on.
Going for an extended answer here is not a smart move. You risk losing the interviewer’s interest by being long-winded. Worse, there’s no upside rewards that come with this risk. As explained above, you don’t earn extra points for having a killer story.
So you only have downside risk, but no upside reward. Remember how we mentioned that the key to think like an investor is to think about risks / rewards?
Keep things concise but on-point here and help the interviewer check the box.
If the interviewer wants to probe further on this topic, he’ll ask follow up questions. When he does, feel free to go into your story-telling mode. You can give him that story about how you operated a small business when you were 8 years old and how it inspired you to be the new barbarian at the gate.
What are Some Reasons You Can Use?
Some reasons that you can use to answer “why private equity” are listed below. Choose one or two reasons from the list and tailor it to your own experience.
- You enjoy learning about businesses and what makes them great.
- You want to develop portfolio operations skillset in addition to financial analysis, which sets you up well for a career in investing.
- PE has proven to be the investment style that delivers the most consistent returns over the long-run.
- You desire to be more involved in the due diligence process beyond just financial modeling because you’ll learn all aspects of the company.
- You want to work with management teams over the long-run and add value to your portfolio companies.
“Why Private Equity” Sample Answer 1: I want to work in private equity because I really like the opportunity to learn all aspects of the business beyond just the P&L. And coming from an investment banking background, I think the ability to work closely with portfolio companies will enhance my understanding of businesses, which will set me up very well for a career in investing.
“Why Private Equity” Sample Answer 2: I want to work in private equity because I really enjoy learning about new businesses and being able to work with management teams over the long-run. The opportunity to apply the operational knowledge I developed in consulting with rigorous financial analysis to identify attractive investments and add value to portfolio companies is very exciting for me. And that’s why I want to work in private equity.
That’s it. End of the answer.
The reasons above will answer the question. But interviewers might still ask you follow-up questions. So even though you explained “why private equity”, they’ll still ask you “why not hedge fund”. Or “why not stay in banking?”
Why Not Stay in Banking / Consulting?
Because that’s like saying you want to work more and get paid less. Duh!
It’s simply the truth. But just because it’s the truth doesn’t mean you can say it. Interviews won’t last very long if that’s your real answer.
For bankers, you can say that you really enjoyed the analytical aspect of the job, but wish you’re more involved in the due diligence process. You’ll also be a lot more involved with portfolio operations in PE than you will in banking.
For consultants, you can say that you want to complement your operational skillset with rigorous financial analytics. This will set you up very well for a long-term career in investing. You’ll also be more involved in implementing operational improvements than you will in consulting.
However you word your response, avoid framing your answer in a negative way. Don’t say you want to work in private equity because you didn’t like banking or consulting. It tends to introduce negative energy into the conversation. And more importantly, private equity at the junior level is in many ways very similar to the work in banking and consulting. So refrain from talking smacks about your current job.
Instead, frame the response in a positive way. You enjoyed your current job but you’re looking to take it to the next level. Or you really want to gain more exposure to an area that you’re not getting in your current role. This type of positive response tends to work best.
Why Not Hedge Funds?
This is a pretty common follow-up question. It’s actually pretty easy to answer. You should use the differences between private equity and hedge fund investors to frame your response.
Private equity investors control their portfolio companies. Hedge funds don’t. So you can be an active investor that actually add value to portfolio companies rather than a passive one.
Private equity investors work with portfolio companies over the long-run, often 5-8 years. Hedge funds investments can be as short as a few weeks. So private equity teaches you the art of long-term view. Private equity also gives you the ability to work closely with the company over an extended period of time.
Private equity investors can conduct in-depth diligence on the company with private information. The company usually opens its books and let the investors evaluate all aspects of its operations. Hedge funds investors, on the other hand, can only do their research based on public information. So you can say that you want to work in private equity instead of hedge fund because you’ll be able to understand the companies you invest in much better than public investors.
Private equity investors have to go through a deal-making process. Hedge funds investors can just buy stocks with a click of a button. So as a private equity investor, you can say that you will develop more holistic soft skills. You’ll learn to manage different equity & debt financing work streams, coordinate with lawyers & consultants, deal with management teams, etc.
Why Not Venture Capital?
Both PE & VC invest in the equity of private companies, but with some major differences. Similar to the way you would answer “why not hedge funds”, you should frame your response based on these differences.
Private equity invests in established businesses with a proven track record. Whereas VC’s invest in early-stage companies. So you’ll be working with companies that are in completely different stages of their lifecycle.
Because venture capital invests in early-stage companies, these investments have higher chances of failure. Venture capital’s investment style is to invest in a whole bunch of companies with a small equity check. Many will fail, but all they need is one company to be a home-run, and that one successful investment will carry the fund. So you can argue that’s not the type of investment style that you want to develop.
Private equity firms often acquire the entire enterprise. Venture capital firms acquires only a portion of the equity ownership. So you have more control in private equity and can be more involved with the operations of your portfolio companies.
Private equity investments usually involve debt financing. Debt financing often make up over 50% of the total funding sources. Venture capital investments are usually all equity. So you’ll gain exposure to both credit and equity. As a private equity investor, you’ll learn much more about credit than you will in venture capital.
Private equity deals are much more extended and complex than venture capital deals. You can argue that you’ll be able to do more extensive due diligence in PE.
Private equity firms invest across all industries. Venture capital investments are primarily allocated to tech companies or tech-enabled businesses. If you’re not interviewing for a tech PE firm, you can say that you’re not interested in focusing solely on the tech industry.
Why Not Fund of Funds?
This is a rare follow-up but easy to tackle.
Fund of funds usually invest in private equity funds but they can sometimes also co-invest with private equity firms in LBO deals. What this means is that they will invest alongside the private equity firm when they’re doing a buyout. A portion of the equity check that will finance the buyout will come from the fund of funds.
So the interviewer is asking why not go to a fund of fund, where you’ll also be able to invest in companies. You learn to analyze not only traditional companies, but also private equity firms as well.
But the catch here is that evaluating corporate opportunities is not their specialty.
How it works in practice is that the private equity firm will lead the deal process. They’ll be the one that coordinate all the due diligence work streams, arranging debt financing with the banks, etc. They are at the frontline of the work and pass their diligence findings to the fund of funds. It’s rare to see a fund of fund lead a private equity deal.
So there are a few things you can say.
First, you can say that you’re more interested in investing in corporations rather than funds. So you want to spend most of your time analyzing companies instead of private equity funds.
Second, you can say that you want to work in private equity because you’ll gain much more exposure to the deal process. You’ll learn significantly more by being at the frontline of the due diligence work.
Third, you can say that you want to be actively involved with post-investment operational work. You’ll be able to work closely with management team in private equity, but that’s rare for fund of funds.
“Why Private Equity” Conclusion
So now you have an arsenal of reasons that you can use to answer “why private equity”. Remember to stay concise and avoid being long-winded.
Also, don’t copy the “why private equity” examples above word-for-word. Spend some time to tailor it to your own background and interests. While you must be able to get this question right to advance in the process, you don’t need to go overboard to create a unique answer. Just checking the box will do.
Instead, focus on how to think like an investor and how to talk interviewers through a deal.
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We are a small team composed of former investment banking professionals from Goldman Sachs and investment professionals from the world’s top private equity firms and hedge funds, such as KKR, TPG, Carlyle, Warburg, D.E. Shaw, Citadel, etc. Our mission is to cultivate the next generation of top talent for Wall Street and to help candidates bring their careers to new heights. We’re based in the United States, but we have expertise across Europe and Asia as well.