PE recruitment drops a gear or two

Recruitment in private equity is experiencing a slowdown this year compared with levels of activity in the previous two years. While volumes are down overall, hiring is still going on but because there is such a large pool of candidates employers have become increasingly selective.

That means there are limited opportunities for many of those laid off by investment banks in recent months, or those quitting dot.com ventures or Internet incubators.

Guy Townsend, managing director of executive search firm Walker Hamill, says despite the slowdown, recruitment in the PE market is still going on. “Certain firms I know will take on 10 to 15 people this year across Europe and in many of the larger PE/leveraged buyout houses one or two people for each office are being hired during the year.”

But he adds that one of the major differences in the market, compared with last year, is the availability of candidates. Last year the labour market was tight but now, with the investment bank redundancies and new economy firms laying off or not hiring, it is a different scenario. “This year employers are a lot more choosy; they want perfection plus 10 per cent,” says Townsend.

Sally RowleyWilliams, managing vice president of financial services at recruiters Korn Ferry International, agrees: “There was a big recruitment push last year but that’s dried up as a lot of the technologybased venture capital funds have pulled in their horns.”

She expects this environment to remain as long as the global economic uncertainties linger, although she notes there are still some US funds considering coming over to Europe because they see a more positive outlook this side of the Atlantic.

Tim Clarke, a partner at headhunters The Bloomsbury Group, says: “We’ve seen sustained growth in the PE recruitment market for four years but from the first quarter of this year there’s been a slowdown and whether that will be sustained is unclear.” The decline in hiring reflects the fall off in the technology boom of the last couple of years and a general tailing off in corporate finance activity, especially M&A.

Fundraising is also an issue says Clarke. “There are a large number of funds in the market and in recent months it’s been harder to fundraise,” he says, adding that the process of closing funds has been stretched out. “The timescales are longer to get approval for investments from institutional investors and that’s led to a reticence to build up PE teams.”

But Clarke is not pessimistic. “I believe there is still an underlying confidence and appetite from institutional investors in terms of allocating funds to private equity and things can change in a few months in this sector. We may see more optimism after the summer.”

Even in the current environment hiring is still going on, says Gail McManus, director at search firm PE Recruitment. The private equity market is fragmented, she says, with scores of teams constantly evolving.

“While there is less hiring overall there is always something happening. Many firms have been going through changes in ownership or direction and that always has recruitment implications as people want to leave or new owners want to bring in new people.”

The declining activity in PE houses has also spilled over into recruitment of senior management to run buyout companies. David Shellard, managing director of Russell Reynolds Associates, which find CEOs, CFOs and other senior managers to turn around companies, says there are fewer technology ventures this year. “For the last five years there’s been a lot of interest in the technology element but that has dampened in recent months.” But there is still some activity on the tech side, as well as in traditional sectors like manufacturing, says Shellard. “A lot of the private equity houses are saying that prices are now good for buying companies but that the problem is raising the funds,” he adds.

Such opportunities as there are remain attractive to senior managers in large public companies: “The PE investors want someone who can turn around the company in a short time and add a lot of value, while the manager wants a stake in the venture and therefore the chance to make a lot of money,” says Shellard.

Stakes offered to top managers vary from one per cent to 10 per cent, depending on the individual and the state of the company. John Borchers, a partner at technology venture capital firm Crescendo Ventures, says: “We have our own networks for recruiting new management teams but use executive recruiters a lot for senior people and it’s money well spent because there’s nothing more important than having the right managers in place.”

He says that, while most top managers want an equity stake, many have become more cautious as a result of the fallout in many Internetrelated ventures: “There has been some movement to higher base salaries and lower longterm compensation in the form of options.”

Like many technology funds Crescendo is not hiring at the moment. Crescendo has built a team of six in its London office over the past year; one hired from within the private equity industry and the rest from consulting, banking and handson operational backgrounds. Borchers says: “When you think that some $35 billion was raised in Europe for venture capitalprivate equity last year, compared with about $25 billion the year before, a lot of firms have been scaling up their teams accordingly and are now digesting that fundraising and no longer hiring.”

One area where hiring continues is continental Europe. Tim Clarke of The Bloomsbury Group says: “We’re still actively involved in running a number of mandates but they tend to be in specialist areas, either geographical or sectoral.” There is still confidence in continental Europe, he says, and a need to find good quality people who can originate and execute deals in Germany, France and Scandinavia. “There’s probably more demand for those kinds of people than for UK-based staff,” he says.

Germany, which has been the potential Holy Grail for private equity houses in the last four years, has so far failed to live up to early expectations of an explosion in buyout activity. But there are hopes that next year’s tax reforms will jump start activity.

But finding people with the right experience in Germany is a major challenge, says Clarke. “Lots of firms have been gearing up in Germany in recent years but because we haven’t seen the levels of corporate activity that were predicted there are relatively few practitioners with deal experience there and those that do have the right experience are sought after.”

Iain Kennedy, a director at Duke Street Capital in London, echoes this concern. The firm will be looking to hire a UKfocused director and a continental Europefocused director in the coming year. “In the case of the Europeanfocused director they must be a national of the country where they will be spending most of their time and in the last two to three years that has meant Germany.”

But there are only a finite number of Germans with private equity experience, he says: “That’s why we’ve seen a lot of poaching going on in the German market between the PE houses.”

The limited pool of candidates in Germany and the fact that senior people are tied in with carried interest payments and therefore have to be adequately compensated, means hiring costs can run into millions of pounds, says Kennedy. For this reason it makes sense for all but the largest firms to consider other recruitment strategies. Duke Street, says Kennedy, is thinking laterally. “Perhaps our new staff will come from within the private equity industry, which will cost us a lot, or maybe we can find people from other areas.”

He says the firm is particularly interested in people with handson experience in corporate development in industry.

One of the keys to the firm’s recruitment approach is ensuring there is a crosssection of backgrounds represented, he says. “Most UK private equity houses recruit UKtrained chartered accountants but our new staff probably won’t come from that pool because we want to widen our mix so they could be exinvestment bankers or, more likely, have a consultancy background plus an MBA, or from industry.”

Guy Townsend of Walker Hamill says he does not expect many of those that have left investment banking jobs in recent months and, still less, those that have left Internet incubators, to find jobs in private equity. This is partly due to the limited hiring opportunities.” If any of the major houses recruit more than a couple of people in London this year I’d be surprised and even if you put all those together that’s not a large number of jobs.”

The other element is the skills that are being sought by PE firms. Candidates tend to come from strategic consultants, corporate finance and investment banking, he says, and occasionally accountants, lawyers and people with a background in strategic corporate development in industry.

“With the redundancies in the City [of London] there are more candidates on the market at the same time as there are fewer private equity jobs.” As for Internet incubators and other new economy sectors, there are many people leaving and seeking private equity posts but few are likely to succeed. “They think their experience makes them right for private equity but in reality that’s not really the case and there’s also a slight stigma if someone has left a failing new economy venture.”

New economy experience is no more relevant than a consultancy or investment banking background, says Townsend: “You also find that the people coming from an Internet or technologybased job had an interest in those fields from the beginning and at the moment that’s not really the area that private equity houses are recruiting in.”

The lack of a track record in exiting investments, which is a key skill PE houses are looking for is also absent from many of the Internet incubators. “They don’t have a track record on exiting investments and, if they do, it’s likely to be a poor one,” says Townsend.

At heart, says Townsend, private equity skills focus on financial assessments of investments and putting together investment models. “The incubators and dot.coms were not really about analysing business models but predicting whether a service or product would be big three years down the line. They were never concentrating on the numbers in the way private equity investors do.”

Some argue, however, that even in technology-based venture capital there is still recruitment activity. PE Recruitment’s Gail McManus says: “There is still demand for people with strong, demonstrable investment experience, which has always been a skill in short supply.” But she adds that, due to the current uncertainties, people in the more established funds are more cautious than they were 12 to 18 months ago about jumping ship to a bigger role in a smaller, more entrepreneurial house even if the potential longterm financial gains are higher.

While there have been some predictions that the UK/European PE market would become more “Americanised”, with more people moving between firms and less company loyalty, this is regarded as unlikely by some. Guy Townsend points out that, while recruitment in sectors like investment banking has become more fluid, the long-term financial tie-ins that bind PE practitioners to their funds mean the sector has an extremely high staff retention rate. He is also unconvinced that there is a growing demand for industryspecific staff. “If you’re looking for someone to come into a telecoms team then they will clearly need experience of that sector, similarly with fields like pharmaceuticals. But it all depends on the job and it’s often basic transactional skills that funds are looking for.”

The outlook for PE recruitment is unclear, although many in the market do not expect a return to the substantial hiring of the last couple of years. “We’re back to how it was in the mid to late 1990s, when it was very tough to get into private equity,” says Townsend.

Tim Clarke believes the current period is one where many of the PE houses are looking after their investments rather than making new ones: “Private equity is a cyclical business because you must raise funds, execute them and then exit, and maybe we’re in a period where people are looking after their portfolio rather than making lots of new investments.”