The best advice I can give is that given the option, go to the group where you will get the best deal experience, and the most modeling experience. Having said that, yes, certain groups will likely give you an advantage when applying for private equity jobs. These groups include M&A, Leveraged Finance (Lev Fin) and Financial Sponsors. M&A and Lev Fin, are two groups that are typically more analytically intensive. Financial Sponsor Groups cover private equity firms so being in a Sponsors group will likely get you some direct exposure to PE firms, which will help your job search later on. If you want to join a PE firm that specializes in a particular industry, by all means, look to join that industry group.
This is a tougher question to answer than ones about private equity, because the hedge fund world is so broad. However, most investment bankers that move into hedge funds, wind up doing either fundamental type investing or event driven investing (merger/risk arbitrage or distressed). For analyst positions at fundamental based hedge funds, you will need to demonstrate excellent technical skills, especially valuation and modeling. Moreover, you will need to show that you not only have a strong interest in investing, but that you have the ability to make or recommend investment decisions based on your analysis. This is a key difference between the buy-side (e.g. hedge funds) and the sell-side (e.g. banking). In banking, the goal is do analysis that is accurate, with assumptions that you can back up. In investing the goal is to be right. You will need to have the confidence to act on your analysis, not just format it. Note also that many hedge funds, in the interview process, will ask you to either do an analysis of a position or recommend an investment.
Those interested in merger/risk arbitrage or distressed investing are going to need to demonstrate strong understanding of the M&A process or the restructuring/bankruptcy process, respectively.
Unlike Analysts, who typically stay at a bank for two or three years, Associates are considered candidates for long-term banking careers. However, that doesn’t mean that many Associates don’t move on to do other things after a few years of banking. Hedge funds and other buy-side jobs tend to attract ex-Associates. Corporate Development jobs are appealing to those bankers that want to stay in finance but are looking for a better lifestyle. It is not unusual for Associates to join a company for which they had helped advised as a banker. Some Associates start their own businesses or join startups. The one area where Associate opportunities are far more limited than those for Analysts is in the world of Private Equity. Private Equity firms rarely hire Associates who were not Analysts previously or have not had private equity experience.
First and foremost, private equity firms want Analysts that have had good deal experience. That is, Analysts that worked on, and played significant roles on live transactions. Private equity firms also want Analysts with excellent financial modeling, valuation and other technical skills. In addition, its important to demonstrate a solid understanding of the business side of things. In other words, what are the key drivers of a company’s growth, where are the risks, what types of costs might be excessive, etc. Lastly, but just as important, PE shops want to hire Analysts who have a high level of maturity and have excellent communication skills. Note that Analysts who move to private equity firms are generally granted the title of Associate.
Unless your uncle is Henry Kravis, your odds are, unfortunately, pretty slim. Even the large private equity firms are tiny relative to banks and employ few people. While PE firms may hire laterally (that is, from other private equity firms), the only way for most people to enter the industry is out of a good investment banking analyst program (either pre or post-MBA) or at the very senior level (i.e. CEO). For better or worse, that’s life.
Being an Analyst at an investment bank is a great entree into other areas of finance. These days, many Analysts move into the world of Private Equity or Hedge Funds. Others go straight into Business School (MBA Programs) or occasionally law school. Another possibility is to move into a corporation, large or small, in a corporate development capacity. Some Analysts leave finance altogether to start businesses.