Private equity hiring change is skin-deep

(Image:blue prom dresses) This is particularly the case when, seeking capital for their next fund, buyout firms have been anxious to persuade investors that far from being a crew of predatory bankers, they understand how the companies in their portfolios work.
One way has been to widen their recruitment beyond the usual crop of investment bankers and look for people with skills as consultants or from industry.
It may, however, be little more than cosmetic. Some buyout firms have made unheard-of changes to their recruitment habits, but most hires are still from the banking sector, and it seems that many firms are not in quite the same need of operational skills as they would like to make out.
Slowly changing
This is not to say things have not changed. “Hiring definitely changed after the crisis, particularly with large-cap funds,” said Caroline Sage, co-founder of Kea Consultants, an executive search firm focused on alternative asset management. “For the first time ever, private equity firms are looking for people with a consultancy or entrepreneurial background.”
She said firms had asked her to seek out candidates with “more interesting backgrounds”, and not to get bogged down with the need for leveraged buyout modelling skills.
Pat Hedley, managing director responsible for human resources, marketing and communication at General Atlantic, a private equity firm based in New York, agreed that executives entering the industry needed a variety of skills beyond financial modelling.
“They need to be analytical, diligent, thoughtful and responsive,” she said, adding that they must interact well with management teams at target or portfolio companies. “The business of private equity is in many ways an apprenticeship-type business, where people are learning to evaluate and make good decisions.” There are some private equity executives with backgrounds outside banking.
General Atlantic conforms to the trend of mostly hiring from investment banking, but John Bernstein, its managing director and head of Europe, qualified as a barrister, although he came to General Atlantic through finance, working at SG Hambros then Advent International. Martín Escobari, who leads General Atlantic’s Latin American investment programme, has a background in consultancy and entrepreneurship. He began his career as an associate at Boston Consulting Group before co-founding Brazilian online retailer Submarino.com.
Buyout firms Bain Capital, co-founded by US presidential candidate Mitt Romney after he left consultancy Bain & Company, and Advent International have a history of hiring consultants, although Advent generally hires about five former consultants to every 100 ex-bankers, according to a person familiar with the matter.
These examples may still be the exceptions, however. Between 70% and 80% of recruits to private equity firms are still from investment banking backgrounds, though this is lower than in pre-crisis years, Sage said.
She said that while private equity firms often start off keen to hire from non-financial backgrounds, they are often put off by such candidates’ lack of financial modelling expertise once they get to interview stage.
Few resources
Few buyout firms can spare the resources to teach financial skills, according to one private equity executive.
“Private equity firms are fairly small compared with investment banks,” he said, adding that they lack the same capacity to train junior staff.
He added that, ideally, private equity firms would bring junior staff in aged between 25 and 27. “Any later and it’s hard for them to catch up.”
Alan Giddins, managing partner and co-head of private equirty at 3i Group, said that candidates from consultancy or industry-based backgrounds often join private equity in their late 20s or early 30s while those with investment banking experience tend to join in their mid-20s.
And not many buyout firms have an urgent need for the hands-on operational skill set that consultants, entrepreneurs and MBAs possess, Sage said. “Very few private equity firms are hands-on, mixing it up,” she said.
Such firms do not generally get “heavily involved” in running the companies they buy. “Only 10% to 15% of the role is activity on boards,” she said.
The slowness of change may be as much a matter of supply as demand, she added, because consultants tend to be more reluctant than investment bankers to apply for private equity positions.
Sage said: “With most bankers we speak to, all they want to do is go to the buyside. They are more confident about going for those roles and they are more honed through working on buyside deals – they are already thinking in the right way.” Consultants, on the other hand, are often “nervous that they don’t have the skills and don’t necessarily put themselves forward and the inclination is not necessarily there.
“They might be looking at roles on the corporate side, plan to do an MBA or start their own business.” Private equity firms may have persuaded themselves that demonstrating operational expertise might help them to attract investors, but investors also want reassurance that the buyout firm has financial skills.
The financial crisis, combined with more stringent regulation, has made it increasingly difficult for private equity firms to raise capital for their funds from the same sources as they used to. This has made the role of investor relations, responsible for fundraising, more important.
At smaller firms without dedicated investor relations teams, associates are sometimes given the role of meeting investors alongside the leaders of the firm, said Sage.
She added: “Over the last five years, we have seen investor relations teams [at larger firms] building out and hiring mostly bankers. These used to be relationship-driven roles, but now they need an analytical person to demonstrate the abilities of the firm.”

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