Private equity has traditionally regarded itself as immune to some of the effects an economic downturn can have on other corners of the asset management community. It’s fairly traditional now for investment banks, for example, to shed 100s of jobs when market prospects look precarious, but private equity (PE) has generally proved to be more resilient, largely as a result of its longer-term investment perspective – witness the labour ‘hoarding’ that went on between 2001 and 2004. Partners have tended to sit tight, waiting for a wave of top-dollar exits before paddling off into the setting sun. Also, investors hate change in senior levels of management.
The websites of leading European recruitment consultancies were still advertising a wide range of roles in April, everything from portfolio managers, investment analysts and managers, fund accountants, and associate directors, to placement professionals, financial controllers, VPs, investor relations, and other usual suspects.
Clients were equally varied, from mid-market firms to the large LBO players, to secondaries, fund-of-funds, venture capital firms, hedge funds with PE operations, investment management, operating all over the world.
So far, so good. But experts expect that in the shorter term some jobs will be axed, or anxious employees will jump ship from captive PE funds where a larger, parent organisation is feeling the pinch, and from funds with strategic sectoral or regional focuses that have become unpopular, retail for example.
Sectors gaining favour include energy, utilities, infrastructure, even some financial services ironically. This rebalancing is tipped to become even stronger as investors value more defensive characteristics in a slowdown or recession.
New, top-rated entrants bristling with outstanding academic achievements, intellectual capability and blue-chip experience in finance will likely be in greater supply as previously strong competition from hedge funds and investment banks moderates.
Guy Townsend, joint managing director and head of private equity recruitment at recruitment firm Walker Hamill, sees another upside in this about-turn in competition for younger talent. “In the past year or so, candidates would line up positions in private equity. It was a daft situation, but it’s definitely calming down.”
When it comes to senior appointments, PE has never found it easy to identify, attract and secure experienced PE practitioners. Much recruitment at this level has tended to be through personal contact and awareness of who is doing what and how well in the industry.
Some industry observers speculate that there may be a return to congestion in the higher ranks of PE firms as partners delay retirement to await the return of more propitious times to realise investments. It has happened before, and led to a layer of frustrated mid-tier executives.
As Western economies stutter, emerging markets can provide a useful sink of new job opportunities for practitioners with suitable backgrounds.
A sign of the times: Private Equity Recruitment (PER), the PE and VC specialist consultancy, recently advertised an in-house vacancy for a consultant to advise Middle East funds, mainly in Dubai, Abu Dhabi, Riyadh, Tunis, and Oman.
Gail McManus, managing director at PER, says that while the Middle East is still a small market measured in terms of employment and the number of PE funds operating within it, they are recruiting.
Some invest purely in their domestic markets so need people that speak native Arabic, effectively putting them beyond the reach of most European job hunters. Some invest in emerging markets around the world, while others are building up stakes in Europe, in which case they like country-specific skills.
“It’s slightly fragmented,” says McManus. “And they look for candidates globally. UK, India, Canada, Australia and South Africa are big markets for them.”
Currency and other considerations have also taken the shine off no-tax or low-tax remuneration packages that the Middle East used to dangle as a large carrot. Remuneration could not be described as ‘fabulous’ says McManus.
“Unless you’re going in at a very senior level, the remuneration is as it would be in the US. It’s really dollar-linked, so I would say any advantage that people might have had from the tax regime has been taken away.”
But there are other reasons to look East.
“It’s to be in a developing and exciting part of the market,” she says. “And if you’re in Dubai, you don’t think Europe, you think Asia.”
Massive investment in infrastructure – hotels, roads, bridges, ports, airports, schools etc – and in companies that operate infrastructure throughout Asia and the Middle East itself are one glaring attraction for deal makers. “Geography isn’t an issue if you’re a Dubai-based fund. It’s a question of where is the opportunity?” says McManus.
“I would also imagine that the route to promotion within the first few layers would be quicker than in a European fund, because the glass ceilings will be higher.”
Back home, the big emerging story in recruitment is at the portfolio company level, and once again it is a tale of scale.
With large buyouts all but dead in the water, there is little demand for executives to go in to deals, says Jonathan Hick, founder and director at Directorbank, a leading board recruitment provider for PE-backed management buyouts and buy-ins. It sources management to complete deals, to contribute to due diligence and to generate dealflow.
“From our big clients we are seeing a little more intellectual interest in just having cups of coffee with people, rather than hiring them straightaway, and that for me is an investment in 2009 rather than 2008.”
With 3,000 candidates listed online at any time, and 1,000 clients in 80-plus PE firms, as well as 1,000 web searches a month, Directorbank sources more than 100 PE placements a year, making it a good barometer of activity, particularly in the mid-market, where it does a lot of volume.
“When people start hitting our website or calling, looking for people to talk to in volume to brain-pick about sectors and opportunities, or moving towards deal generation, we think, well, they aren’t doing any deals at the moment. So that’s the message from the big buyout houses as we see it.”
But it has been business as usual, and more, in the mid-market, and certainly the lower mid-market. “We have had our biggest two months ever in 10 years in business. And I can see that for the next two or three months as well,” said Hick in early April.
Tellingly, he has seen placements of financial directors (FDs) rise 40% since last year as incumbents are replaced, while appointments of interim directors have trebled.
“What that’s saying to me is that there is some distress and concern in portfolios. Also, going into deals, there is much more concern about the financial role. In the last three years we’ve seen more and more FDs being appointed at point of deal rather than trusting whoever is in situ.”
In the past, Directorbank always had a majority of non-executive directors, but Hick predicts that for the year ending in June, 40% of appointments will have been FDs, on a par with non-execs, marking a big swing.
Sectoral differences are marked. In the past six months, 15% of Directorbank’s placements have been in retail, 12% in support services and 10% in leisure. Nothing else was in double figures.
AshtonPenney Interim, a UK specialist in the field, confirms that PE is turning increasingly towards interim managers for, say, three to 18 months to inject the skills and experience needed in harder times for invested companies, some of which are contemplating their first ever bank covenant breach. And it is the same story as for permanent appointments.
“More than anything else, we’re seeing growth in replacing underperforming finance managers who’ve started to fall foul of those pressures, people who’ve never been in those situations before,” said James Wheeler, director in charge of the PE side at AshtonPenney.
Recruitment advisers are seeing growth in business from funds specialising in rescues or turnaround of ailing companies in troubled sectors. In early April, one such fund had approaching 40 opportunities from distressed retail chains on its desk and was fielding them around consultants.
It is one reason that day rates for turnaround and restructuring advisors have leapt as much as 30% in a year, according to Wheeler, even while he advises caution in interpreting the headline figure.
“That is more to do with the level of appointment. Interim executives have been progressively employed by PE at a more senior level. Ergo they get paid more and there’s been a big hike in daily rates for interims who go in to support management and chief restructuring officers without necessarily taking on a board position. These are people who go in to kick backside hard in order to achieve short-term gains.”
Inflation for other classes of interim appointments has been more modest: less that 10% year on year, reckons Wheeler, who expects rates to stabilise across the board in the new climate.
Directorbank’s Hick concludes with two pieces of advice for any executive living through unstable times: spruce up the CV and network as much as possible.
“Your CV is your key marketing tool. Most are dreadful and if you find yourself out on your ear, you don’t want to spend a month or two dusting off and improving your CV. It should always be in a ready- to-go position.”
Networks take a long-time to build, are easily lost, and hard to re-build. “The people who suddenly find themselves looking for new opportunities for good or bad reasons, and aren’t there very long, are the people who’ve kept up their networks.”
The demands of being in a job make it hard to network; but simple things such as registering with recruitment consultants are easy. There is both a threat and an opportunity in the message from a new Directorbank survey with Grant Thornton, which will show that in buy-ins and buyouts over the past five years, around half of all incumbent managers were changed during the life of the deal. “I think we’re going to see that percentage increase a lot in the next year,” said Hick.
Investing in people
Private equity has been a long-time investor in the recruitment sector, and are increasingly turning their back on generalist consultancies in favour of specialist outfits
Recent private equity deals in the recruitment sector point up more recession-proof business models and strategies as more generalist people providers lose their appeal to investors seeking superior returns.
Swift Technical Group, a market leading oil & gas global recruitment and relocation company owned by mid-market house Gresham, is one shining example.
Oil majors use Swift to scale up quickly and cost effectively from feasibility studies through to building a production platform then operating, inspecting, repairing and maintaining it. Swift’s network of 30,000 skilled contractors, its global logistics, and industry-standard quality certifications, can provide the right people either as contractors or permanent staff at the right time and in the right place.
Over 25 years it has carved out market leadership in a sector that is booming on the back of technological advances, high oil and gas prices, and efficiencies created through outsourcing.
Gresham recently announced the creation of a dedicated energy and environmental team to build on its successful investments in the sector.
“Swift’s model provides great revenue visibility,” comments David Silver, managing director on the investment side at Baird Europe Capital Markets, which has been a prominent player in the pulling together of many recruitment deals.
“You’re not spot-placing someone for six months, you’re potentially placing them for a multi-year project. The oil and gas engineering space is interesting because its global and energy prices are helping investment.”
Silver commends other engineering recruitment plays with exposure to GDP-agnostic markets and infrastructure projects. “It could be the Olympics, for example, or building a dam, a bridge, which will happen come what may.”
He is also enthusiastic about Recruitment Process Outsourcing (RPO). A recent example is Graphite Capital’s £50m backing of the £100m MBO of Alexander Mann Solutions (AMS) from global private equity group Advent International.
AMS covers the recruitment cycle from initial hiring through to outplacement if need be. It has 900 staff serving 28 clients in more than 50 countries, turned over £340m in the year to September 2007, and is the leading RPO provider in Europe and Asia-Pacific. The RPO market is forecast to enjoy long-term double-digit growth.
“The business model has exposure to the vagaries of the economy,” concedes Silver. “But they’re winning massive contracts. Win a contract to manage the recruitment process for Global Bank ‘X’, and you’ll be recruiting many thousands of people a year for a number of years.”
It also gives RPO providers visibility through locked-in relationships and contractual terms which allows them to build an infrastructure around such contracts. AMS, for example, has a significant number of people in outsourcing centres in Poland, Philippines and other territories where it is operating a low-cost business model.
The appeal of AMS’ model and market position was underlined by the fact that there was strong trade interest in it as well.
AMS consolidated its European leadership for RPO in February when it acquired Capital Consulting, the number two player in the UK behind AMS. The deal has added 14 high quality customers such as American Express, Britvic, Vodafone and Freshfields to AMS as well as a strong pipeline of new business and a Hong Kong office as a base for enhanced growth in Asia-Pacific.
Other business models are not so well regarded. General staffing and some IT staffing firms with a domestic UK focus are still reported to be trading reasonably well, though Silver notes that listed UK examples have been trading well off their highs, even though no-one is yet seeing such valuations in results.
Indeed, combined turnover in the UK’s temporary and contract recruitment industries leapt 7.4% to a new record high of more than £26.67bn, in the year to March 2007, according to the most recent annual report from the trade association, The Recruitment and Employment Confederation.
It was the largest increase since the report was first compiled in 2001/02 and came on the back of a growing economy, increased labour immigration and increased focus on finding and retaining talent. Talent is still at a premium, but with the economy slowing and calls for greater immigration controls, the expectation is that recruiters that have no bulwark against a domestic economic downturn will remain unloved.
Exit valuations have not set the world on fire. When Graphite Enterprise Trust, the listed vehicle owned by Graphite Capital, sold Huntress Group, a London-based white collar recruitment specialist, the sale last autumn, and the refinancing which took place in 2005, made the Trust a 7.6x return on its initial investment at start-up in June 2000.
A year earlier Gresham generated a 2.3x return through the €17.8m sale of Blue Group International, a UK recruitment company, to HCL, and Baird Capital Partners Europe sold Traffic Support, a UK traffic warden provider, to Mouchel Parkman, a support services company, for almost €32m, giving a 3.5x return on Baird’s investment once a €7.1m pre-completion cash withdrawal was factored in. Baird had first invested in 2000.