Another 5 Insider Lessons from a Wharton MBA Private Equity Class
Lessons You Won’t Find Anywhere Else
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Mar 25, 2025
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Private equity (PE) is one of the most coveted industries in finance, but it remains shrouded in mystery for many. While some aspects of the job are well-known—like the massive paychecks, deal-making excitement, and grueling hours—there are lesser-known lessons that reveal what it’s really like behind the scenes.
This post is a follow-up to a previous article that explored key takeaways from Wharton’s Advanced Topics in Private Equity class. Taught by Dan Zilberman, the former Head of Europe and current Global Head of Capital Solutions at Warburg Pincus, the class dives into the nuances of PE investing. With Zilberman’s real-world insights, here are five more lessons that shed light on what it takes to succeed in private equity—and what makes the industry tick.
One of the key advantages of private equity is access to investments unavailable to the average person. PE funds raise money from investors known as limited partners, who typically need to be accredited investors. This generally means earning at least $200,000 annually or having a net worth exceeding $1 million.
This exclusivity exists because private equity investments are risky, require significant due diligence, and lock up capital for 5–10 years. Unlike public markets, where you can easily buy and sell stocks, PE investors are committed for the long haul. However, because of this long-term commitment, private equity has historically outperformed public markets and provided strong portfolio diversification.
While the public may not have access to PE investments, the higher returns and diversification benefits make this an appealing, though elite, asset class.
2. “Water Cooler” Conviction Can Make or Break Deals
Closing a deal in private equity isn’t just about data and diligence—it also requires informal conviction-building within the firm. The process typically starts with evaluating a company’s Confidential Information Memorandum, a presentation prepared by management or an investment bank. If the opportunity looks promising, the firm signs a non-disclosure agreement and conducts initial due diligence. After gathering enough information, PE investors draft an Early Action Report, outlining why the deal makes sense, and share it with senior partners.
However, getting a deal to the finish line often depends on more than just the formal analysis. Investors need to build “water cooler conviction,” meaning they casually seek feedback and support from senior investors through informal conversations before formally presenting at the Investment Committee (IC). This step is essential because IC meetings are intense, high-stakes sessions where investment ideas face rigorous questioning. Without sufficient behind-the-scenes buy-in, even a promising deal might fail to gain approval.
3. Beware of Arguing for Multiple Expansion
In private equity, there are two primary ways to increase a company’s value and achieve a high internal rate of return (IRR):
Operational Improvements – Increasing revenue, reducing costs, and improving overall efficiency.
Multiple Expansion – Selling the company at a higher valuation multiple than it was purchased.
Multiple expansion occurs when market conditions improve, leading to higher valuations. For example, if a PE firm buys a company generating $100 million in EBITDA at a 10x multiple, it pays $1 billion. If the company increases EBITDA to $200 million but sells at a lower 5x multiple, the sale price is still $1 billion—resulting in no financial gain. On the flip side, even if EBITDA stays flat at $100 million, selling at a 20x multiple would result in a $2 billion exit.
The problem? Multiples are market-driven and beyond a PE firm’s control. Relying on multiple expansion is risky, and investment committees typically frown upon any thesis that relies on this factor alone. Successful investors focus on operational improvements they can influence, rather than banking on market-driven factors.
4. PE Investors Are Jacks of All Trades
Private equity investors need to wear multiple hats. They must manage various workstreams, including business strategy, legal issues, taxes, human capital, and sales. However, while they oversee these functions, they don’t necessarily have to master them—except for financials.
In the early days of PE, firms could rely on financial engineering, using leverage (debt) to amplify returns. But as the industry matured, this approach became commoditized. To stay competitive, PE firms evolved, learning to drive value across diverse business areas. This means that modern PE investors need to be well-rounded, with enough knowledge to guide experts in each field while keeping the big picture in mind.
5. Most CEOs Don’t Last Long After a PE Takeover
One of private equity’s dirty secrets is that roughly 70% of CEOs leave within three years of a PE investment.
Despite the narrative that PE firms “back management teams,” their top priority is maximizing returns. If a CEO underperforms, they’ll be replaced—often quickly. This urgency stems from the pressure to deliver high IRRs, which are time-sensitive. The longer a firm holds an investment without improving its performance, the harder it is to achieve strong returns.
Ideally, PE firms aim to invest in companies with strong management teams from day one, but things don’t always go as planned. Replacing a CEO can take 6–12 months, which can significantly hurt returns.
The Bottom Line
Private equity is a fast-paced, high-stakes industry where investors face constant pressure to deliver results. From managing complex deals to navigating internal politics, the job requires a unique blend of financial acumen, strategic thinking, and people skills. While the potential rewards are high, so are the risks. Whether you’re considering a career in private equity or simply curious about how the industry works, these five lessons offer a deeper look into the realities of PE—and the challenges that come with chasing those elusive double-digit returns.4o
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