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The Different Types of Buy-Side Firms–and How to Choose One

Transitioning from investment banking or management consulting, or just looking to pivot into a firm that purchases securities? Read this article to learn how to decide which is the best for you.

By Nathan Ricks

October 10, 2022

Introduction

I’m here to help you navigate the vast world of the buy-side; a world where you are acting as the investor (buying assets) and where there are many more choices than you may think possible. The firm at which you end up can either lead to fulfillment and a great career, or disappointment and a quick turnover.

In this article, I will walk you through the range of options, and at the end, I’ll provide you with two valuable litmus tests that will help guide you to the right firm. Transitioning from a demanding role in banking or consulting can be a daunting experience, but hopefully, this will make the change a little smoother.

But first, a bit on my story.

I’ve been a nerd my whole life. As a kid, all I watched were the science and history channels. When I was 12 years old, I paid my own way to attend a space camp. As you may have guessed, the ladies were coming after me in droves.

I thought for sure that I would go the STEM route in college (aiming for MIT); however, I soon realized that I was too A.D.D to become a subject matter expert stuck in a lab. At the end of high school, I decided to pivot toward business. I was attracted to both the large number of different companies I could work for and the broad range of subjects within the field. From this, I decided on Brigham Young University for college due to its strong undergraduate business programs.

While at BYU, I was fortunate to land an internship with a search fund operating near the campus. Alongside several of my classmates, we found acquisition targets with enterprise values between $20-100M and then performed due diligence on them.

It was an amazing experience and made me realize that I wanted to become a career investor. Many of my fellow interns were heading to buyout firms–companies that try to acquire the majority of a late-stage company. It seemed like an area with lots of prestige (and high levels of compensation!), so that is what I, too, decided to go for.

But, of course, to get a job at a buyout firm, we all knew that we needed to go through investment banking or consulting firm, or a similar role in financial services. I chose investment banking and landed an internship, and then a full-time job, at Goldman Sachs in the Financial Institutions Group, covering asset management and financial technology clients.

I enjoyed the people I worked with and the area I covered, but it wasn’t as intellectually engaging as I would have liked. So, after about a year, I started looking toward the buy-side.

Due to my experience in banking and hearing that many buyout firms are just “banking 2.0,” I decided to aim for a more traditional growth equity shop instead. The interview process was tough, as expected, and many of the firms I was targeting weren’t hiring on the traditional timeline. Throughout the process, I learned more and more about the types of companies that these growth equity firms invest in, and for me, it wasn’t all that exciting.

Then, I got an interview with a venture capital firm focused on growth-stage companies called G2 Venture Partners. I learned about who they were investing in and the impact that those companies were making in the world. I knew almost immediately that I needed to be at a firm like G2.

Luckily for me, I was extended an offer and worked there as an associate for over two years. I loved my time there and am very glad I was able to find the right fit.

The Different Kinds of Firms

As you can see, I went from wanting to go to a big buyout firm, to a traditional growth equity firm, to a venture growth firm. Though at first glance they may appear all to be similar, they couldn’t be more different.

Reflecting on my history and what inspires me, however, it makes sense why I went on this arc. To figure out what your arc may look like, you need to understand the range of options out there.

Buyout

As the name implies, buyout firms try to acquire the majority (70-100%) of late-stage industrial, financial, healthcare, and retail companies. By “late-stage,” I mean those that are producing cash flow and not growing much–or at all–at the time of acquisition.

Because these companies do have cash flow, a buyout firm uses a combination of debt (money given to them by banks) and equity (money from their own pocket) to acquire the company. The cash flow is then used to pay off the debt and the company is usually flipped for profit after three to six years.

Value is generated by getting in at the right price, using strong financial engineering, and making the company more profitable, often by cutting heads. Associates at a buyout company will evaluate potential targets, build the financial models that justify the purchase price, and monitor previous investments (the “portfolio”).

Traditional Growth Equity/Private Equity Growth

Traditional growth equity firms focus on acquiring a large portion (40-80%) of mid-stage, healthcare and technology companies. “Mid-stage” means those that are producing some amount of cash flow and are still growing at a decent clip (20-50% annually).

Similar to buyout firms, they often use a combination of equity and debt to buy the company. Value is generated by once again getting in at the right price and half-decent financial engineering, as well as working with the company to continue to grow the business while keeping margins strong.

Associates will be hyper-focused on sourcing opportunities. Once getting the target through the door, they’ll likely be involved in some amount of due diligence and financial model building, and some interactions with portfolio companies.

Venture Growth

“Venture growth” isn’t an official term, but it’s what I’ll use to describe the venture capital firms that invest in high-growth companies (70-200%) in the technology space, who are usually somewhere between Series B and pre-IPO.

Venture growth firms will hardly ever use debt to make an investment. They’re also usually only one of several investors at the table in any given round. The checks range from $10-100M, depending on the round and the firm, for 5-15% of the company.

With VC growth firms, value is generated by giving the company more fuel to pour on the fire and continue growth. Getting in at a good price is nice when possible, but you are more often betting on the future upside (IPO/buyout) so it’s the exit price that really matters.

Associates again focus on sourcing companies, but they carry them through the entire due diligence process alongside more senior people at the firm. They’ll likely work with portfolio managers as well.

Early VC

Early venture capital firms invest in early-stage companies in the technology space that are often still trying to prove product-market fit or go-to-market fit. Investing occurs here at the pre-Seed, Seed, and Series A rounds.

Debt is never really used and, like VC growth firms, there can be multiple investors around the table. The investments typically range from $500K-15M.

Here, value is generated by betting on the right founder and idea. Sometimes, the firm can use its network and expertise to help the company reach success. At this stage, you’re basically banking on one or two of the companies in your portfolio making it big (i.e. 50-100x returns). It is boom or bust, which can be very exciting.

Associates focus on using unique sourcing methods to find high-potential companies at very early stages when they have small digital footprints. They do a lot of market research and form theses around certain areas or companies, and may also be a little involved in the portfolio.

Hedge Funds, Credit Funds, Fund of Funds, Sovereign Wealth Funds

Because I am not as experienced with these firms, I won’t go into detail here. This is just to show that there are even more options out there for you. Utilize Google and Wall Street Oasis to learn more if you’re interested.

Other Notes

A few dynamics that span across all of the options I’ve listed above are the size of the firm (both in assets under management and headcount), its reputation, and the type of background that will be the best fit.

The size of the firm can have a major impact on your experience. A “megafund” with $50B of capital will feel a lot different than a $5B mid-market buyout firm. Similarly, a multi-stage VC firm with $15B to deploy will feel different than an $800M VC growth firm.

As a general rule of thumb, the more capital or the higher the headcount, the longer hours you’ll work and the more structured your role will be; but, you’ll also be earning more in total compensation.

The reputation of the firm might not make too big of a difference on your experience in the role, but it will impact your prospects afterward. In my personal opinion, I would focus more on the reputation of the partners, especially the one who you’d be working the closest with, even if the firm is young and still making a name for itself.

As for the background that will be the best fit, I’ll say that the later stage you are (i.e. buyout and traditional growth equity), the more important a background in investment banking will be. Financial modeling is a major part of this role and banking seems to give you that skill set a bit better than consulting does.

On the flip side, the earlier you go (VC growth and early VC), the more relevant a background in consulting will be. You’ll be analyzing markets and trends more than building financial models, and consulting will set you up well for this.

Early-stage VC firms also like to see people coming from operational roles within startups.

Across all of these options, it is possible, though difficult, to break in right out of school. The earlier you go (i.e., the closer to early VC you aim), the easier it is to break in right out of school.

Tying it Together

Looking back at my experience now, I can see why VC growth was such a good fit for me. It really comes down to this litmus test:

Are you more passionate about finance and financial engineering or technology and markets?

The more you lean toward finance and financial engineering, the better of a fit buyout and traditional growth equity firms will be.

The more you lean toward technology and markets, the more suited you will be for VC growth and early VC firms.

Realizing my passion for technology from a young age, I now know why VC growth was the best fit for me. I was and still am, inspired by technology companies breaking boundaries and creating new markets. Though there isn’t as much data to go off of as late-stage buyout targets, there is still enough data to help you be reasonably confident in your investments, and I liked that. I can see now that being a model junkie at a big buyout firm would have never been good for me. But, to each their own!

Another litmus test to help you narrow in on the right firm is:

How much do you enjoy structure?

The more you prefer structure and guidance, the better of a fit a larger or more well-established firm will be. However, keep in mind that this also means the partner track is a harder ladder to climb.

The more you enjoy flexibility and the ability to be creative, the more you’ll likely enjoy a smaller or newer firm.

When choosing where to go post-banking, size was not a major factor in my decision. But, I really came to enjoy the flexibility that I had at a younger firm that was still making a name for itself.

Of course, there are a lot more variables to play than these, but hopefully, this gives you a good base on which you can start building your transition.

Final Note

Reach out to me on Leland if you want further guidance on navigating the available options, deciding which are the best for you, or interviewing at your preferred firms. I’d love to help you figure out your next steps. Book a free intro call on my profile to get started.