27 March 2018

Why leveraged finance is the perfect route into private equity, by a banker who’s done it

Most people who start their careers in the investment banking division of an investment bank (“the sell-side”) aim to move into private equity (“the buy-side”). If this is your aim, you may want to consider starting your career in leveraged finance (LevFin), instead of the M&A or equity capital markets (ECM) and debt capital markets (DCM) teams.

Like ECM and DCM, leveraged finance is about raising money for companies or ‘corporates.’ However, leveraged financiers deal with less-established firms, which typically find it harder to raise capital. As a result, LevFin’s most common products are high-yield bonds (debt that credit rating agencies deem as riskier and therefore pay out more to investors) and leveraged loans (a loan typically given to non-investment-grade companies).

Steve Paras is a former MD and the head of the U.S. leveraged loan capital markets division at Merrill Lynch and the head of European leveraged loan capital markets at Bank of America Merrill Lynch. He left banking in 2011 and is now an MD and investment committee member at Star Mountain Capital, an asset manager specializing in U.S. lower-middle-market PE and private debt. Paras suggests leveraged finance jobs are a better route into private equity or private debt than standard M&A jobs.

“Leveraged finance has a focus on core underwriting skills, understanding industries, companies’ financial statements, as well as capital structures, so it helps to have a background in accounting and finance,” Paras says. “In investment banking, you’re managing many deals, and once you close one, you move onto another suite of deals that become your near-term focus.”

This deep focus on balance sheets is good preparation for the long-term nature of working in private equity, or “principal investing,” and private debt.

“With principal investing, it’s an additional level of commitment with long-term alignment with investors,” says Paras. “From an institutional asset management perspective, you’re always aligned with the companies you’re investing in.”

Working in private equity or private debt is a “broadening experience” when you’ve been on the sell-side, says Paras. In leveraged finance, you’re typically only making a minority investment. In PE, you end up owning a company outright. You’re an investor, not an advisor or an intermediary.