3/7/2023: The Key Competencies and Skills Developed in a Private Equity Role

Working in a private equity role can be an incredibly challenging but rewarding experience.?As a private equity professional, you’ll be responsible for managing investments, identifying new opportunities, and working with portfolio companies to help them achieve and maximize their growth objectives.?Along the way, you’ll develop a ton of valuable skills and competencies that can help you succeed, regardless of your career objectives.

I’m going to quickly run down a few of the core skills you will engage and build on during your time in private equity.

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One of the fundamental skills you’ll develop in a private equity role is financial analysis. Investment professionals need to be able to quickly and accurately analyze financial statements, projections, and other data to identify potential investment opportunities and make informed decisions. This can range anywhere from quickly taking a look at preliminary marketing materials and coming away with high-level summary judgments of the company or taking a deep dive into the historical performance of the company and how different events have played into its development.

Doing this effectively requires a deep and fundamental understanding of financial concepts such as revenue, cost of goods sold, and EBITDA, as well as the ability to use financial modeling tools such as Excel and other software.?You’ll also need to be able to think critically and creatively to identify potential risks and opportunities within a company’s financial data.

You’ll also need to understand how these major line items vary from industry to industry or how they are nuanced if you are in an industry-specific role. In the beginning, this will likely seem challenging, but as you gain experience, you start to understand where the fundamental profile of a company diverges from how it is marketed, which I think is a core step into becoming a sophisticated investor.

This is an essential skill that allows you to take a company’s business model and translate it into financial terms, which is a highly transferable skill in any domain and allows you to quickly identify if a company fits your firm’s investment profile or objectives.

Due Diligence

Another critical competency in a private equity role is due diligence. Private equity firms need to conduct thorough due diligence on potential investments to ensure that they are making informed decisions and mitigating potential risks.

Bankers, owners, and managers are always going to paint a favorable picture of the companies they are trying to sell.?They’ll often manipulate key figures and add-back items to EBITDA to make the company look better than it is. In private equity, it‘s your job to separate the facts from the fiction and many of your analyses will be able to prove this and identify trends and themes you may not have considered earlier in the investment process.

This involves researching the market, competitors, and other factors that could impact the success of the investment. You’ll also need to evaluate the company’s management team, operations, and financial performance to determine whether it is a good fit for the portfolio. Furthermore, you’ll take a deeper look at various parts of the company’s operating statements and financials and tailor your analysis of the data to see whether or not the company’s data supports your underlying thesis.

Effective communication is imperative in a private equity role. As a private equity professional, you’ll need to communicate effectively and efficiently with a variety of stakeholders, including investors, portfolio companies, and other professionals in the industry – not to mention your senior team, who will actually consider what you report quite seriously.

This requires strong interpersonal skills and the ability to articulate complex financial concepts and investment strategies in a clear and concise manner. Unlike banking and consulting, there is no room for fluff here.?People want to understand the facts and figures that really matter, and they want to understand these items quickly.

You’ll also be charged with building strong relationships with portfolio company executives and working collaboratively with them to achieve their growth objectives, at an early stage of your career, which is valuable regardless of whether you stay in the industry or not.

Strategy Development

Investment professionals also need to be able to develop effective strategies for their portfolio companies.?This requires a nuanced understanding of the industry, market trends, and the company’s unique strengths and weaknesses within the space it operates in.?You will also need to understand where these companies are falling short of your growth objectives and what levers you can pull to get them back on track. This requires second-order, deep thinking and really refines your operational thought-process, in my opinion.

Moreover, you’ll need to be able to identify new opportunities for growth, develop a plan for achieving those objectives, and work with the company’s management team to execute on the strategy. This requires strong analytical and strategic thinking skills, in addition to the ability to balance short-term and long-term goals.

Investment professionals also need to be adept negotiators and deal-makers. As a private equity professional, you’ll be responsible for negotiating deals with potential investors, lenders, and other stakeholders.?Furthermore, you’ll also play an important role when it comes to the game-theory behind the bidding process and will gain a very cool and unique understanding of how to maximize your firm’s outcomes through a structured approach to bidding.

This requires strong negotiation skills, the ability to think creatively, and the ability to build relationships with potential partners. You’ll also need to be able to structure deals that are fair and equitable for all parties involved, while still ensuring your firm makes good money on the sale.

Beyond this, when you get to the VP level, you will be actively responsible for sourcing deals as well.?Many deals are sourced through years of consistent communication and relationship-building with target companies. Understanding your approach and how to communicate what value your team brings to the target to ensure mind share becomes increasingly important as you rise up the ranks and start thinking of how to creatively generate business on behalf of your firm.

Most of all – when you take a new deal to your firm’s investment committee, it’s important that you are able to pitch why your firm is the best candidate to buy the target company. Understanding where you stand and where you have an edge is of paramount importance in the deal-making process and knowing how to identify this to the key decision-makers of your firm is a big skill you’ll learn; it’ll also pay many dividends throughout your career undoubtedly.

To wrap up, working in a private equity role is going to be an incredibly challenging but rewarding experience. Along the way, you are going to develop a plethora of skills that are going to make you incredibly valuable both in the private equity space or in most industries in general.?Kids this young seldom get the opportunity to have this much responsibility or this much exposure to develop career-defining skills.?Private equity experience can be a game changer in terms of your professional development, and you’ll be able to add substantial amounts of value from the items you learn in private equity to many roles. I will guarantee it.