But, as Paola Subacchi discovers, the competition remains tough. Today private equity and venture capital, seen as the grubby end of corporate finance five or ten years ago, attract the brightest and the best who previously were only interested in working for the best banking and consulting firms. Consequently the entry bar for private equity and venture capital is today incredibly high, despite this the supply of good candidates far exceeds demand.
After three tough years, indicators are pointing to better economic outlook and market conditions in 2004. Prospects for the UK economy are strengthening on the back of upbeat consumer demand and stronger global conditions and in continental Europe the economy is slowly emerging from their recent lethargy and growth is due to accelerate, provided the recent appreciation of the euro against the dollar does not act as a brake.
According to Deloitte’s last Private Equity Confidence Survey, practitioners in private equity are optimistic about the outlook for the industry this year. Deal activity is strengthening with 64% of practitioners interviewed expecting an increase in deal volumes in the next six months. Portfolio exits have begun to pick up after being depressed for more than two years; however, when it comes to fund raising the survey indicates the climate may not ease in the short term. As many as 63% of respondents expect the ability to raise new funds will remain the same over the next six months and only 20% expect an improvement in fund raising conditions.
Recruitment and fund raising correlation
Unlike in other industries, the fact that activity is picking up does not necessarily mean private equity and venture capital firms are recruiting. Indeed, because of the industry’s particular structure of rewards, turnover, especially at partner level, is normally low. The only way to ensure resources necessary for recruiting a new team, or to expand an existing one, is through fund raising. “There is no question that firms which are raising a new fund will seek to add new professionals,” says Nigel McConnell, managing director of Electra Partners Europe. Fund raising therefore, drives trends in recruitment.
“During the technology boom in 1998 to 1999, fund raising was strong and so was recruitment,” explains Joanna James, managing director at Advent International. “In 2000 to 2002, when fund raising was difficult, the recruitment market was also stagnant.” Iain Kennedy, director at Duke Street Capital, says: “In the last couple of years, when it was difficult to raise money, recruitment was flat. A lot of LPs who put money into venture capital in particular did not make any return and therefore reduced their exposure to the whole private equity asset class.”
In any case, as McConnell points out, because of the size of the industry, hiring, even in good times, remains relatively small compared to other segments of the whole financial sector. “This is not a huge market and relatively few jobs come up every year,” says McConnell. “The structure of incentive schemes discourages mobility and therefore encourages team stability. There are pro’s and con’s to this.”
The structure to which McConnell refers is the established industry method of using carried interest; effectively a share in the profits of the fund that grows alongside the institutional monies being invested. This profit share is typically not accessible to the fund managers until the institutional investors have been returned their original capital plus a minimum hurdle. As such it means the performance related element of private equity and venture capital investors’ remuneration is often delayed by five years or more, thereby discouraging movement between firms.
Who is recruiting?
Subdued fund raising explains why practitioners are cautious in assessing the recruitment market. Evidence, nevertheless, suggests an upturn for the first time in about three years. “Things have certainly picked up,” says Guy Townsend, joint managing director at Walker Hamill, the recruitment group.”2003 was not bad at all, but during January we have been a lot busier.” More and more firms have been recruiting since September last year. For instance, in late 2003 Hermes announced two new additions to its private equity team as a result of its decision to develop a full standalone private equity business. Similarly, Electra Partners Europe and Advent International have boosted their European teams.
Advisors have also been strengthening their presence in the private equity arena. Ernst & Young recently appointed Kevan Leggett, an experienced M&A practitioner, as head of UK M&A private equity. US law firms are building or reinforcing their European practice. “It is a good time to build a private equity practice in Europe because the transaction market has begun to turn up and fund raising should pick up too,” says Matthew Hudson, head of European private equity at O’Melveny & Myers, the international law firm.
Not surprisingly then that recruiters are rather upbeat about the prospects of the market. “The last two quarters of 2003 were better than the first half,” says Gail McManus of Private Equity Recruitment, a specialist recruiter focusing on the private equity and venture capital industry. “The New Year started well, with increased number of opportunities. I suspect that demand will continue strengthening as I see a bit more optimism creeping through this year.”
Recruiters feel conditions are right for stronger recruitment activity this year. First of all, several firms have been on hold in the last three years, so the assumption being that the up tick in markets should see them move forward in the forthcoming months, since institutional investors are not sold on the idea of a new fund that “will” hire, rather they like to know and get to meet who will do the job before they commit to a fund.
Second, in the last six months a number of new funds appeared in Europe, such as Clessidra Capital, the €560 buyout fund lunched in Italy at the end of last year, building their teams from scratch. Third, in the last 18 months secondary funds have become more established. Finally, activity on the mid market buyout arena is picking up.
The recovery, though, still eludes venture. Recruiters confirm most of their current work is with buyout funds, secondary funds, fund-of-funds, mezzanine, gatekeepers and even with family offices, but activity with venture capital funds is still sluggish. This is partly because these funds are normally much smaller than established private equity firms and therefore they need fewer people. However, the main reason is that the whole venture segment is still suffering from the adverse impact of the boom and bust of the late 1990s. “Of the 43 mandates that we completed last year, only three were in venture. In 2000 it was half and half,” says Guy Townsend. “For the current year I expect up to 20% of mandates to come from VC firms, but I would not be surprised if it was less.”
There are few doubts the current growth is more driven by fundamentals than in 1999 to 2000, even if it is much less buoyant. Then the expansion of established funds together with the creation of new economy funds led to unsustainable growth. “Back in 1999/2000 many clients were new funds while now they are mostly well established players in late stages rather than VCs,” says McManus.
Unbalanced supply and demand
Even so, the recruitment market is as unbalanced now as it was during the boom years. There is an important difference, though. Back in 1999 to 2000 demand for private equity professionals was stronger, creating a lot of competition for good candidates. Now it is a buyer’s market with an excess of supply of people keen to join the industry or to move around than the available jobs.
Investment banks’ large cut backs during the last downturn has contributed to maintaining and expanding a pool of talented professionals at senior level. Alongside these are people who came out of captive funds closed down by their parent banks as well as people willing to move to other firms to improve their career prospects. “We can now rely on a larger pool of high quality professionals than before,” says Guy Townsend. “This is bad news for those who want to get into private equity post-MBA because they inevitably have to compete with people with some level of experience.” Supply of juniors, on the other hand, is being fuelled by banks and consultancies’ training programmes, which, every six months, make a new crop of analysts available for the market.
People are keen to get into private equity, for one thing because it is seen as more shaded from the financial markets’ cycles than investment banking. “It is perceived as a gentler craft than investment banking, everybody likes to be the client,” says Matthew Hudson, “Especially in the last few years a lot of people wanted to be in private equity.”
Not surprisingly, then, an advertised position, especially at the junior level, can attract hundreds of applicants. “Candidates come from a variety of sources,” says Nikos Stathopoulos, partner at Apax Partners in London. “We receive constantly a high number of applications.” Recruiters tend to control the number of unsolicited CVs by taking only those routed through their website on the back of an advertised vacancy. Private equity firms, in their turn, take a rather hard view on unsolicited CVs as, by experience, only rarely they can provide the right candidate at the right time. “I receive unsolicited CVs almost every day,” says Joanna James. “Unless they catch my attention within 30 seconds, I send the standard ‘Thank you, we are not recruiting’.”
The result of the current supply excess is that the quality of candidates is higher than in the late 1990s. Firms can afford to be selective and pick the candidate who not only provides excellent skills and track record, but also fits best in the firm’s culture and style.
Although private equity firms claim financial packages on offer from established players are not substantially different from those of the boom years, recruitment specialists say offers can actually afford to be less competitive and look at the longer term. “Packages are now perceived to be more long-term focused,” confirms Matthew Hudson. “In 1999 to 2000 we were seeing exits that appeared to be pushing carry to unbelievably short periods of liquidity, while now we talk again in ten year cycles.” Candidates, on the other hand, are also more careful when they accept an offer and look at the whole package rather than just at the carried interest. “There is more scepticism about what carried interest means,” says Gail McManus. “Candidates now do a reality check to make sure that the rest of the package is there.”
Things, of course, can change, especially if investment banks begin recruiting again, and there are signs of that being the case. Even so, the size of the private equity industry is still relatively small and, moreover, there is no risk of demand overheating. “Even if we assume that the market will grow rapidly in the next couple of years, private equity is a small industry so the number of recruits will remain tiny,” says Iain Kennedy.
Seeking out talented people
What has not changed across the years, even though the whole industry has changed almost beyond recognition in the last decade, is the quest for high quality people. Recruiters and firms recognise private equity is an extremely competitive industry, which thrives on excellence and where human capital is a key factor for success. The current supply unbalance versus demand makes things easier, but there is no guarantee that a vacancy can be filled with the best available candidate.
“The entry bar in our industry is very high as a combination of skills, not just financial, are required,” explains Stathopoulos. “To be successful in this business means being entrepreneurial, able to work in a team environment, having strong analytical and interpersonal skills, building long term relationships and analytical skills, and having a lot of stamina.”
It is certainly the case that firms use recruitment specialists mostly for filling junior positions while they tend to rely on personal contacts and networking for senior levels. “Approximately 65% of investment professional recruitment activity is focused on pre-MBA associates, 20% on principals and 15% on partners,” says Guy Townsend. In deciding whether to outsource the search to a specialist recruiter or rely on their own network, firms have to assess whether through their network they are able to reach the best available people.
Recruiters claim to have the best snapshot of the market at any point in time, but practitioners feel that, certainly at the partner level, they know much better what is going on in the industry. All practitioners interviewed for this article said they prefer to use specialist recruiters with focus and contacts in specific areas, country, sector or even market segment, rather than relying on big firms. The small size of the industry, however, means poaching from each other is somehow inevitable, but it is not a reliable source. “We have also to take people from other sources and train them,” says Joanna James.
Breaking through to the top
The entry level is high, but even once in there is no guarantee of a steady and smooth career path. Internal turnover is low and promotion to partner level needs a trigger such as raising a new fund, the firm’s decision to move up in deal size or the retirement of one of the founders. These triggers happen infrequently. In the meantime senior individuals have to wait patiently or look around to see whether one of the above conditions is true elsewhere.
“Many firms are owner managed businesses with the first generation of founders still in charge,” says Gail McManus. “They are not experienced in managing the career development and the expectations of people in their firm. It is inevitably very emotional.” Especially in the last few years, lack of exits has proved to be a constraint to partners’ mobility as fewer have been able to set up their own fund or to retire. However, as Joanna James points out, private equity firms will soon have to face the problem of transition as the industry has matured and needs fresh blood at the top. “Transition and realising that partners may be ready to retire are issues that investors have only recently become aware of,” she says. “But they want stability and put a lot of pressures on partners to achieve this. The risk is suddenly to have huge generation change rather than slow turnover.”
How far does your CV go?
Given the relatively large pool of good candidates, the selection process is tough. Guy Townsend of Walker Hamill says one of his recent mandates started with a list of almost 2,000 candidates. What do the 10% of candidates who pass the first screening to be invited to an interview with the recruiters have over the other 90%?
Depending on the level, there are some basic requirements that should be met. For associates and analysts, an excellent academic record is paramount. “We look at graduates with first and 2-1 grades, regardless of the subject,” says Gail McManus of Private Equity Recruitment. Work experience in one of the graduate training programmes set up by blue chip companies is equally required. This gives recruiters another criterion to further narrow the group. Then, they look for graduates in the top ranking of their training programme. “We like to see the evidence that they are top performers,” says McManus.
A background in accountancy, corporate finance and management consulting is an advantage. Personality counts too; recruiters look for team players, pragmatic individuals with communication skills and the ability to sell. As a result, three or four candidates among those passing the recruiter’s selection, those with a genuine shot of the sector, as Townsend points out, are put in front of the client for the final interview.
For more senior applicants, a strong academic and professional background continues to be important, but it is somewhat overshadowed by the investment experience and track record. “What matters more here is the kind of transaction the candidate has been working on,” says McManus. “For instance, professionals in large leverage buyout houses normally do not have the experience preferred by a mid market firm.” Townsend says “We look at candidates who can complement well the client’s fund raising and enhance value.”
Is there a way to strengthen a not so quite appropriate CV? Many ambitious professionals believe gaining an MBA, possibly from a top class institution, would lower the high barriers to entry. It is certainly the case that a good MBA helps ticking the right quality box as Townsend suggests. After all, going through an MBA accelerates the learning process of the financial and private equity specific skills necessary to practitioners in this industry.
Usually MBA graduates have time and project management skills as well as analytical skills. An MBA is therefore a requirement in about 75% of mandates to recruit for senior positions. However, being a requisite, it does not necessarily set up a candidate for a job in private equity. “It is not a substitute for work experience, but sometimes it fuels high expectations,” says Iain Kennedy.
According to Walker Hamill, about 2% to 3% of graduates from Europe’s top business schools get a job in private equity. The rate of rejection is high, but more because of the large supply of people interested in working in this industry than because of lack of quality. Plus, private equity funds tend to be rather conservative and prefer candidates with standard CVs. “Clients love standard profiles and only in exceptional cases are they prepared to consider unconventional candidates,” says Gail McManus. “For instance there has recently been an increase in people with US and Latin American VC experience looking for jobs in Europe, but they are extremely difficult to place.”
Pan European skills
Private equity is increasingly a pan European industry, with funds strengthening their presence in the main cities in the continent. “In the last four-five years there has been a big push to set up offices in continental Europe,” says Iain Kennedy of Duke Street Capital. Executives easily move across Europe chasing deals or meeting investors. For many pan European funds it is not unusual to have partners in charge of continental European offices attending Monday meetings in London. “As a global firm we tend to use resources across our European and US offices. Languages and knowledge of different cultures are therefore an advantage,” says Nikos Stathopoulos of Apax Partners. It is not surprisingly, then, that the pattern of recruitment reflects the industry’s pan European approach. Established players look more and more for people with a broad European profile. This does not only mean people able to speak two or three European languages and to move across different cultures, but also professionals with experience in international consulting firms or investment banks.
This could be, for instance, a Spanish national with an MBA from a top US business school working for a German investment bank in London. “This kind of profile is now considerably more common, particularly for larger funds i.e. over €1bn, accounting for over 75% of hires since 1997,” says Guy Townsend of Walker Hamill. Nigel McConnell of Electra Partners says of the ten people short-listed for two positions in London last year, most were non-UK nationals. “At the end we selected a German and a Spaniard, both with a strong international profile.” Quite often, after some years in the international circuit, these professionals are ready to move back to their country of origin. This makes them even more attractive because, as Gail McManus points out, experienced candidates are normally less mobile than juniors because of their family commitments. But Joanna James of Advent International stresses the risk here is that professionals who have spent several years abroad have lost touch with the country of origin and may need a while to get plugged back into the relevant networks.