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Is Private Equity as BS as Consulting?

 
#1 Is Private Equity as BS as Consulting?
19/12/2008 09:56

Anon

I'd like to know if the work invovled in PE has the same BS as in consulting. Do you have to pretend to know what you're talking about? Do you have to suck up to clients? Do you not learn any real skills?

Opinions welcomed from those who've been on both sides.

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#2 RE: Is Private Equity as BS as Consulting?
19/12/2008 13:42

Mars A Day to Anon (#1)

It's all BS in some senses... MC you talk BS to walk the walk with a client, but with an intention at least of adding value; PE you walk the walk but with the intention of stripping value.

MC = excel, then start again, excel, start again, excel. Hence the feeling people get they are not learning anything - it's just that you have to keep reinventing the wheel.

PE = excel, repeat, repeat, repeat. It's an eat what you kill environment, less varied that MC, slower progression too.

I guess one major point of difference is that in PE you can't get creative and bluff your way through on commercial nouse and extrapolation, which a good MC can do when they have to; in PE just like IB, everything is checked and checked again, verified, checked again. It's an anal environment for details, so no room for BS.

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#3 RE: Is Private Equity as BS as Consulting?
19/12/2008 14:37

OP to Mars A Day (#2)

But in PE you have the power right? There's no client to suck up to, or at least only punctually when raising funds... Am I correct?

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#4 RE: Is Private Equity as BS as Consulting?
19/12/2008 14:57

Mars A Day to OP (#3)

Of course you have clients to suck up to, usually institutional investors who want their returns. In reality, unless you are experienced enough to go in at an origination level, you will still get the find/mind/grind of MC, just swapping the umpeenth rehash of the PPt presentation for the umpteeth rehash of a xl comp.

Work/life balance much better though, and the PE sector has become more open partly through forced regulation and disclosures, partly through the collapse of the mega deals, so smaller boutique funds at the low to mid market are thriving. For an MC moving across it would make sense to move into a PE firm with some interests in turnarounds rather than just asset stripping/restructuring, as this would help overcome the lack of banking background (their preferred hiring profile is Associate level 2/3 in BB).

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#5 RE: Is Private Equity as BS as Consulting?
19/12/2008 15:08

OP to Mars A Day (#4)

Thanks Mars.

What I hate about consulting is the power imbalance towards the client's side. I'm looking for more of a collaborative environment.

Also, why do you say that PE destroys value? I thought it was the ultimate value creation mean - buying a company and turning it around to make it more profitable.

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#6 RE: Is Private Equity as BS as Consulting?
19/12/2008 20:52

Anon to OP (#5)

Mars - I'd be interested in names of PE firms that specialise in turnarounds?

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#7 RE: Is Private Equity as BS as Consulting?
22/12/2008 16:33

Mars A Day to OP (#5)

OP without a 'power imbalance' we wouldn't even be having this conversation... it's called capitalism.

Do what you ENJOY rather than look for the politics; if you want an environment in business where you have parity with every stakeholder you are looking for the Holy Grail; yes you might have an army of Accountants doing your DD for you, you might be making the IB advising you on a transaction jump through hoops, but that's just playing - when you are called to account for P&L to your investors, you'll really sweat. Screw up in MC and your career will survive; screw up in PE and you're finished in that industry.

As regards value creation, for someone looks for a more equitable environment, I'm surprised you point straight to revenue generation - to my mind value generation is more than that; it's about sustainable markets, consistent demand, customer acquisition/retention at low cost with productive touch points, a sense of investment among staff, belief in the brand/mission etc, all the things which make an organisation robust and likely to provide returns in the long term.

Or maybe I've been at the xmas sherry?

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#8 RE: Is Private Equity as BS as Consulting?
22/12/2008 16:54

OP to Mars A Day (#7)

We have the same definition of value creation.

If you're telling me that PE does not create value -- in the sense that we both understand -- then I am not interested in that industry as I would not like to become enslaved by extreme capitalism. Surely there must be a few firms who do create sustainable value, e.g. socially responsible funds? Am I incorrect?

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#9 RE: Is Private Equity as BS as Consulting?
22/12/2008 17:06

Mars to OP (#8)

OP PE is the pinnacle of the capitalist model: with the possible exception of shorting trades I doubt there is any other industry which has made so much money by using the money from one, the misfortune of another, and no real risk.

What on Earth is a 'socially responsible fund'?

OP the days of IB and PE being the Masters of the Universe are over, and will not return for a generation imho, if ever. Quite rightly everyone is looking at the overt consumerism, excessive risk, excessive profit generation and finding it gluttonous: Sir Martin Sorrell was quite right to point to this some 18 months ago: that we have made ourselves sick on overindulgence. So you want to be a socially responsible master of the universe? It won't happen because is can't happen, unless you are going to place social ethics alongside returns, in which case you'll never get an investor.

If you want to do something intelligent, challenging, socially responsible possibly even life changing, join an NGO or a charity - most of them now are run on best practice and have highly commercial environments, attract some of the brightest people from all sectors, and have the kind of aims you seem to be attracted to.

I sympathise with what you are looking for, find it very appealing myself. But you want to find morning in midnight and it won't work.

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#10 RE: Is Private Equity as BS as Consulting?
22/12/2008 18:50

OP to Mars (#9)

Mars,

Socially responsible businesses is a concept that Muhamad Yunus has long praised and has proved to be somewhat viable as an increasing number of people become wary of the importance of ethics for sustainable development. I think that the positive effects of the current events is that the public opinion is growing hateful of investor's limitless greed. Hopefully this will have an impact on those investors who might start putting their money in socially responsible businesses and accept smaller returns.

Social impact as a metric of company performance is real and has been implemented by several companies such as Danone in Pakistan. If you are interested in this topic, you can read Yunus' book "Creating a world without poverty" where he talks about the concepts of socially responsible business.

Capitalism's "only" flaw is that it is driven by a human vice that is greed. As soon as we will learn to accept a 10% return instead of a 50% one capitalism can survive I think. It is only a matter of dosage IMO.

I guess my point is that PE doesn't need to be the vile expression of extreme capitalism as long as investors are not too greedy. It can be perfectly economically justifiable to buy a firm, optimize its operations and strategy for the long term and then "release it" in the business landscape and make a profit from it.

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#11 RE: Is Private Equity as BS as Consulting?
22/12/2008 19:43

Q to OP (#10)

How on Earth are you going to convince a limited partner that they only really need a 10% return as opposed to whatever they are used to??

It's a nice ideal but a little bit out of touch with the reality on the ground.

Perhaps you could go and work for some sort of foundation or charity that invests in socially responsible companies and is less concerned about return??

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#12 RE: Is Private Equity as BS as Consulting?
23/12/2008 00:28

W to Q (#11)

I believe the principle is to make a consistent, sustainable, 10% return as opposed to aiming for 50% and ending up with fluctuations that average out to 10% in the long run (50% up one year, 27% down the next).

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#13 RE: Is Private Equity as BS as Consulting?
23/12/2008 09:13

OP to Q (#11)

Q,

Just as some companies dedicate a part of their profit for corporate citizenship initiatives to improve their image, investors could have a "socially responsible fund" in their portfolios.

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#14 RE: Is Private Equity as BS as Consulting?
23/12/2008 16:20

Q to OP (#13)

There are plenty of social investment funds around.

I am not sure how you would manage to run one alongside traditional funds within the same company though - would/could cause some logistical issues I would imagine, but maybe it happens.

If anyone can consistently, sustainably guarantee a 10% return then I am sure they will do ok. The fact that nobody can actually sustain this perhaps throws some light on why we more commonly see 50% returns from one deal and -27% from another. People are always going to try to maximise returns. How can you justify anything else to limited partners?

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#15 RE: Is Private Equity as BS as Consulting?
28/12/2008 19:34

PE to Q (#14)

The short answer to this post is yes! But PE is more rewarding financially.

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#16 RE: Is Private Equity as BS as Consulting?
29/12/2008 11:21

Dan E to PE (#15)

If it were possible to make consistent 10% returns, don't you think this would have happened by now?

I am sorry but you aren't really living in the real world if you think that investing is that clear cut. It is all to do with risk. To average 10% return, you would have to have a range of deals some making more some making (a lot) less and then you might eventually average somewhere near 10%.

The risk that exists is not all internal - it comes from utterly human and unpredictable factors such as political interference (Fanny May?) combined with behavioural / psychological reactions of the markets.

Maybe, just maybe, if every single person on the planet started acting 'socially responsibly' and in a low risk manner, the returns would become more consistent. But then we would have issues of collusion to worry about and firms not acting in an economically efficient manner.

From here, you would enter a downward spiral caused by inefficient allocation of resources, and GDP growth would drop significantly. R&D funding would be cut, new innovations start to disappear, and stagnation set in.

This would only be brought about through political interference, and we would enter a capitalist market with political, regulatory and behavioural conditions unlike any seen before, and therefore completely unpredictable. Investments that in the 'old' scheme would have yielded 'safe' (predictable) returns will now become a lottery.

Unable to invest with an appropriate (or identifiable) degree of risk, credit will dry up (sound familiar?) and capital will no longer go to those firms that need / deserve it. This will not just happen at a macro level, but internal decision making in large firms operates on a similar basis - this really would hit decision making based on efficient allocation of resources practically impossible.

Bottom line - I think you're confused about what ethical investment is. It's not about less risk, or consistent risk (in fact investing ethically implies greater risk as there are less investment options open and so hitting the portfolio that lies on the target yield curve is more difficult).

Ethical investing is for those that want their conscience clear (be it for whatever reason) and want to invest in firms that typically do not do 'harm' - they operate in an environmentally friendly manner, do not employ children, are nice to people etc. It doesn't imply that they do not make the highest returns possible within their framework.

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#17 RE: Is Private Equity as BS as Consulting?
29/12/2008 11:39

Eps to PE (#15)

"But PE is more rewarding financially."

It WAS more financially rewarding. Not these days, even if you can get and hold a job in PE.

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#18 RE: Is Private Equity as BS as Consulting?
29/12/2008 14:24

Pee-Eee to Eps (#17)

PE is great - you get to wear vest tops and trainers all day...

D'oh!

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