Does an MBA Pay in Private Equity?

After the first five years, the advantage quickly declines. Those with over five years but less than ten years of experience saw a modest 10 percent increase in base compensation. In terms of cash compensation, after 10 years, there was no advantage to having an MBA whatsoever. In fact, the majority of those with MBAs earned less than their counterparts once they crossed the 16 year level of experience in the industry.

When it comes to carried interest in private equity funds, MBAs saw no real advantage. Carried interest was much more closely correlated with years of experience than education, with significant participation limited to the upper levels of the firm.

MBA Required for Getting in the Door?

Of course, the argument for investing in an MBA predictably moves toward the statement, “It isn’t necessarily about just the pay; you can’t get into a private equity firm without it.” Although this line is often delivered with conviction, it simply is not true.

“Although our founders both have MBAs, we have historically hired more professionals without MBAs…” says Nathan Birchall, CFO at the private equity firm Ranch Capital in San Diego. “Having an MBA is not as important to us as a demonstrated track record of excellence in academics, industry, consulting [or] other investment groups.”

He went further and discussed an analyst at their firm that was considering a Chicago Booth MBA. They tried to convince him to stay at the firm but he did move on. “While an MBA is not necessary to succeed within our organization, we do recognize the potential value of an MBA to the employee from an overall career and networking perspective.”

Ranch Capital is a small, boutique firm, so you might think, “But it is different at the large firms.”

Well, it is and it isn’t.

“My general opinion on an MBA [is that it] does not always get you in, however a lack of it may keep you out of the discussion,” says Ore Adeyemi, an Investment Professional at HSBC Private Equity.

Adeyemi went on to say that HSBC hires a good mix of MBAs and non-MBAs. It seems the industry experience factor plays a larger role in that hiring decision. “We have recruited non-MBAs, however, with the right experience – deal sourcing, transaction experience, etc.”

Necessary for Advancement in the Firm?

When we asked about the necessity of having an MBA for advancement opportunities at the firm, the responses didn’t exactly support the argument for investing in the degree. “It is not a requirement.  Advancement is solely dependent upon performance and opportunity,” says Birchall. It isn’t a requirement at HSBC either.  “At a junior level, it may help with the transition from Analyst to Associate,” says Adeyemi. So, when it comes to advancement, it is no surprise that a combination of talent and experience will trump the MBA — at both large and small firms.

The Value of an MBA in Private Equity is Not Clear

While in the past, the decision to pursue an MBA may have been considered an easy choice, today the right decision is not so clear. With a payback period approaching two decades, for most people, it’s difficult to justify the investment. The years of experience sacrificed to pursue the degree may actually be better spent enhancing specific industry knowledge than attending an MBA program. From an educational standpoint, rather than investing in a traditional two year program, many might be better served by enhancing their industry experience with job-specific training, such as financial modeling.

The exceptions, of course, may be the very top MBA programs.

These programs offer more than just the education, they offer door opening opportunities that simply cannot be found elsewhere. Recruiters from some of the best known private equity firms circle these graduating classes like hawks looking for the next great investor, and the alumni networks can be helpful in your career far beyond graduation day. But the numbers are small as only about 10,000 students will get admitted to these programs each year. That leaves tens of thousands of talented students on the outside looking in.

The reality is that the MBA experience can certainly provide value and personal reward. For some, this path may make sense, so long as there is not an expectation of a considerably larger paycheck as a direct result. For most professionals interested in a career in private equity, the perceived advantage of an MBA simply isn’t supported by the data.

David Kochanek is the Publisher of the Private Equity Compensation Report and the private equity career site Private Equity Jobs Digest. He brings over 20 years of professional experience including mergers and acquisitions, company turnarounds, executive recruiting and nearly a decade with a top 10 consulting firm.

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