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How to Get Into Private Equity from a Hedge Fund: Top Strategies & Tips

People frequently talk about making the move from private equity to the public markets, but there just aren’t as many resources on the reverse: how to get into private equity from a hedge fund.

Private equity generally takes a longer-term investment time horizon, offers more opportunities to work directly with company management teams, and is a more stable job. Depending on your preferences, it could be a much better fit. Read on for a game plan on how to make this move happen for yourself:

Transitioning from hedge funds to private equity: what you need to know

Making the switch from the hedge fund industry to private equity can be challenging, but it’s becoming an increasingly popular career move as hedge funds face performance challenges and limited growth opportunities (not to mention a huge amount of volatility). If you’re contemplating this switch, here are the key things you need to know:

1. Understand the the differences between hedge funds and private equity

First thing to know – private equity is vastly different from hedge funds. You’re making control investments over a five-year period, rather than trading around quarterly earnings. This gives you the opportunity to have a real say in the direction of the business and outcome of the investment. It’s a more hands-on role, which can be great if that’s what you’re interested in, or can drag you down if you’re not.

But, most importantly, private equity is incredibly process-oriented, focusing on the deal. Particularly at the junior levels, you may be spending more time doing deal-related work than you do actually evaluating opportunities for potential investment.

This might be boring compared to your hedge fund role, or it could be exactly what you’re looking for.

2. Utilize headhunters to make the switch

Most private equity investment professional positions aren’t publicly posted, and many firms prefer to work with recruiters to find top talent. Therefore, it’s essential to build strong relationships with all of the top headhunters. They can help you identify which firms may be open to hiring someone with your background, and they can also leverage their relationships to get you in front of the right people. At the end of the day, you’re not going to get an interview without them (outside of the smallest lower middle market firms).

When you speak with headhunters, have a solid idea of what type of private equity firm you’re targeting. The more specific you are, the more seriously the headhunters will take you. It’s a signal that you really want to make the move and will perform well in front of whatever firm they introduce you to.

Things to nail down are firm geography, target industry, fund size, and choice of buyout/growth/VC/credit. Never a bad idea to come ready with a list of names.

3. Tighten up your LBO skills

The most important thing to nail down as you prep for PE interviews is your LBO modeling. It’s a very different style of model than what you’ll be used to from your hedge fund days. I’ve seen a few people making this transition neglect their LBO practice because they think they already know how to model. It’s critical that you drop your ego and just bust out some practice tests so you can maximize your chances of converting your interviews.

4. Hit the street and start networking

Networking is essential in any industry, but this is especially true when making a non-traditional move into private equity. Leverage your connections from undergrad and any prior experience in investment banking. Reach out to learn about their experience, get your name in front of them, and get a heads up on any potential recruiting processes.

You’ll still need to go through the headhunters, but networking can dramatically improve your chances of having the private equity firm select your resume for an interview after they receive the list of potential candidates from the headhunter.

Final thoughts on the transition

The transition from hedge funds to private equity may not be easy, but it is certainly doable with the right preparation and approach. The key thing is that you already think like an investor, which is the most important thing that private equity firms try to evaluate in interviews. Having prior buy-side experience will automatically put you in a better position than someone coming from the sell-side, consulting, or other role. It might be a non-traditional path, but it’s the best non-traditional path you can take.

When you’re ready, just start reaching out to headhunters (don’t be afraid to cold email). They might put you on the back burner if they’re busy with the on-cycle recruiting rush, but they’ll be happy to work with you when they’re able to.

Targeting the right firms

When making this transition, one of the most critical things to consider is the right type of firm to target. There’s a huge universe of funds, each with different size, strategy, approach, and, importantly, ease of breaking in.

1. Understand where you’re coming from

You’re background will have huge influence on where you’re able to land. If you’re coming from a small, not well-known hedge fund, you’re going to have a difficult time breaking in to megafunds or upper middle market private equity. In this scenario, you’re much better off targeting middle market or lower middle market firms.

But, if you’re coming from a Tiger Cub or other top fund, it may be possible to take your pick of private equity shops. You’ll find headhunters are much more receptive, and you’ll have an easier time getting interviews. Whether or not you land the role will depend on your interview performance, but you’ll have more “at-bats” at a wider range of firms.

2. Understand the impact of your prior experience

Your pre-hedge fund experience also has some influence. Did you spend time at Evercore, Goldman, Centerview, etc., or did you come from Raymond James or Harris Williams? Whether or not this has any bearing on your actual ability, it will influence perception of your candidate profile both with headhunters and private equity.

A lack of experience before your hedge fund role will probably be a slight negative. Time spent in investment banking does do a great job of building familiarity with the M&A process, and signals that there’s a higher likelihood of you having strong technical skills.

If coming from a top tier hedge fund this will be manageable, but coming from a smaller shop will, again, likely force you to focus on moving to lower middle market PE.

3. Align your industry experience

Because you’re taking a non-traditional route to private equity, it will be helpful to play up the unique perspectives you can bring to your new deal team. One way to do this is to align your coverage universe. For example, if you were in TMT banking group and then a tech-focused hedge fund role, you’ll have a much higher probability of successfully transitioning to private equity by targeting tech-focused funds.

Even better if you can niche down even further. For example, HCIT banking, to HCIT hedge fund, to HCIT private equity.

You’ll still be able to make the move if you’re hoping to switch industry coverage to something new, but it will be much easier to leverage your prior experience.

Preparing for the private equity interview process

When prepping for the actual interview process, the majority of your time should be spent getting familiar with LBOs, both the actual modeling and truly understanding key drivers of private equity investments. You likely already have a solid foundation for evaluating opportunities, so can dedicate less time to this aspect of prep.

  • Practice your paper LBOs – be prepared to knock them out in ~5 minutes.
  • Along with that, understand drivers of returns. Know which levers to pull to tweak the outcome of a certain investment. Practicing paper LBOs and modeling will help you get familiar with what parts of an LBO have the biggest impact on your returns profile.
  • Think through your deal experience. Discussion of prior deals is a huge component of private equity interviews, and you won’t get a free pass coming from a hedge fund. You may or may not have traditional M&A experience – if not, discuss a prior investment, including your thesis, diligence plan, and key considerations. Feel free to mention whether or not you think that investment would have worked as a buyout.
  • Get your technicals down cold, most of which will be focused on LBOs. Similar to paper LBO prep, just make sure you have a full understanding of investment mechanics. Technicals are less prevalent in private equity than investment banking, but you will definitely get asked and you’ll want to be ready.
  • Practice your LBO model tests and case studies, both of which you are almost guaranteed to get in any private equity interview process. You’ll probably be solid on evaluation of the opportunity and discussion of investment risks/merits, but make sure you can finish your model in the allotted time (with no errors), are able to align your LBO and assumptions/inputs with your thesis, and can understand key diligence areas from a private markets perspective.
  • Familiarize yourself with the firm’s investment process, investment style, and the types of deals they typically pursue. Know why you’re interested in this firm and what their edge is – proprietary sourcing, operating partners, industry expertise, roll-up strategy, etc.

Ultimately, you’ll want to position yourself as peer with a strong investment background, not as an unknown quantity from an entirely different industry that most PE professionals don’t really think about.

Why private equity?

The final step in your prep is to nail down your answer to the inevitable question on why you want to make the switch. Check out the full guide to this question, but also make sure you tweak it to focus on your specific reasoning for leaving a public markets role.

Potential considerations include…

  • M&A and Deal Process: You enjoy the process-oriented nature of PE investing and think it offers more of an opportunity to capture value vs. more efficient public markets
  • Deep diligence: You think public markets investing is only able to scratch the surface on diligence efforts, and want to truly dig into a company in a way that’s only an option with the full access of a sale process.
  • Timeline: You don’t like the short investment horizon common in many hedge funds, believing that true value creation takes place over a much longer period. Trading around quarterly earnings, for example, feels more like luck than investing.
  • Hands-on involvement: You want the opportunity for heavier operational involvement, staying active in a deal post-transaction. Maybe that takes the form of add-on opportunities, evaluation of new strategic angles, or taking an active role in choice of the management team.

There are a number of avenues to take with your response, just make sure you have one ready. This is the only question you know you’ll be asked with 100% certainty.

Concluding thoughts on breaking into private equity from a hedge fund

It might not be easy, especially if you’re coming from a smaller hedge fund, but the transition is definitely possible. You’re in a very strong position compared to many other candidates trying to make the jump into PE.

Spend some serious time prepping and then hit up headhunters to get the ball rolling. If you’re having a tough time getting traction, look down-market to smaller firms and start ramping up your networking efforts.

Sam Hillier

Sam Hillier is a reporter at Transacted covering private equity and investment banking. He previously spent time as an investment professional focused on direct buyouts, as well as an earlier strategic advisory stint.