The 'beer test' and other harsh realities of switching from investment banking to private equity

For every available private equity job, there are 200-300 keen, young investment bankers vying to get in. Making the switch can be the graveyard for egos, the first time high-achieving individuals get a real taste of failure.

Private equity remains an aspirational vocation for many a junior investment banker, counting down the hours until they can move out of a deal-driven, hierarchical working environment and into something deemed more long-term. Here’s what you really need to know if you want to make the switch.

1. You will be subject to the “beer test”

Compared to investment banks, the investment teams of even large private equity firms are tiny - even large firms comprise around 30 people in the front office. One of the key make or break elements of the recruitment process is whether the senior executives believe any new analysts or associates will be the right cultural fit. This is not about proving your team-working abilities – something every bank is espousing currently – but nor is it about gaining the personal approval of the interviewer.

“Every candidate has to pass what we call the ‘beer test’ or the ‘flight test’,” says Hephzi Pemberton, a former Lehman Brothers banker and co-founder of Kea Consultants, which recruits junior bankers into hedge funds and private equity firms. “The interviewer asks themselves whether they’d like to go for a beer with the candidate, or if they could survive a long-haul flight with them. This is applied very early in the recruitment process.”

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2. Be prepared for ad hoc recruitment schedules

Keep an eye out for news of new funds, fund-raising, or job ads for juniors – don’t expect a recruitment schedule with clearly defined deadlines and annual hiring targets, says one private equity professional who switched from investment banking.

“It’s generally done on an on-need basis,” he says. “If there is a new fund being launched, there are likely to be opening for roles at both the junior level and mid-level. There is no structured recruitment. Knowing someone in the PE shop will definitely help get your foot in the door, but ultimately it will rely on timing and the PE fund needs.”

3. Develop your buy-side brain

Most investment bankers, even at the junior level, are stuck in a deal-driven mentality and the key to impressing private equity firms is to develop a ‘buy-side mentality’, according to Pemberton.

“They need to think like an investor, look at the viability of a business, which is very different from advisory work and taking a fee,” she says. “How do you get a return on capital? What are your exit options? How can your business plan yield the expected return for the firm and your investors? This is analysis beyond what you learn in investment banking.”

4. You might know modelling, but do you really know modelling?

To junior investment bankers, who spend the majority of their lives behind a spreadsheet, suggesting that their financial modelling skills are not up to scratch is bordering on insulting. However, the vast majority of applicants fall down on the ‘case study’ element of the job application, which involves financial modelling and presenting a business case for an investment, says Pemberton.

“Many junior bankers work off a template and building a model from scratch, thinking about the process and design from the critical perspective of an investor is something many people struggle with,” she says.

“There is no room for training so if you don't have any credible financial modelling experience, it will almost be impossible for someone to cross over,” adds another former investment banker turned private equity professional.

5. You almost certainly will have attended a top university

If you haven’t got a university brand name on your CV and impeccable academics, you can almost certainly discount your chances of landing a private equity job. In the UK alone, 56% of new private equity recruits went to Oxbridge universities and 69% attended private school. “If you didn’t go to a top tier university, you need to make a compelling case as to why,” says Pemberton.

6. You will speak at least one foreign language

This is more for roles targeting Europe than the U.S, but foreign languages are a definite plus. Pemberton says that Nordic languages are particularly desirable currently, along with Spanish – especially for firms pursuing distressed opportunities. “80% of private equity roles have a foreign language requirement,” she says.

7. You will have demonstrated PE experience, or entrepreneurial spirit

Despite the fact that making the switch from investment banking to private equity is a common path, it’s “near impossible” to move without some PE experience, says another recent convert. “Have a track record of running and closing deals and have a sound ability to source new deals and be able to structure the deal that protects your rights as an investor,” he says. “Someone from banking is very unlikely to be able to move into the mid or senior level unless they have significant LBO or advising PE shops experience.”

Failing that, he says, it helps to have been involved with your own business venture – even if it’s a minor demonstration of entrepreneurship while at university.