Open season 1(2)

In 2012, six of private equity’s biggest players teamed up to make a controversial move. Buyout giants The Blackstone Group, Bain Capital, The Carlyle Group, Apollo Global Management, KKR and TPG chose to delay their recruitment cycles for pre-MBA associates. The highly competitive process was starting earlier each year, and the investment banking analysts being evaluated often had minimal deal experience to assess, so the firms decided to wait until January 2013 to find talent for that summer.

The agreement collapsed when smaller firms carried on with an earlier schedule and the big firms became concerned that they would miss out on all the prime talent. The status quo returned the following season, with private equity shops extending their first offers in late February 2014 for positions starting in summer 2015.

“It was admirable for them to try to do that because it would make more sense for everybody,” says Katie Solomon, director of human capital at mid-market firm Genstar Capital. “I think everyone would like [the process] to be different, but it’s such a competitive market and there’s so much game theory involved.”

The recruitment season is a stressful time for all parties (firms, potential candidates and the investment banks) and getting more intense each year, which has caused many in the industry to question its efficiency. Banks are beginning to push back, fearing the loss of valuable resources spent training the best and brightest finance undergraduates who leave after two years for bigger paychecks.

“It’s a war for talent,” says Gloria Mirrione, financial sector leader at Korn Ferry/FutureStep. Her colleague and co-head of the firm’s private equity group Joseph Healey agrees: “With more private equity funds and the growth of existing funds, this is becoming a chronic problem for banks. But the firms have every incentive to keep things the way they are.”

Despite the structural flaws in the system, firms find the process successful. Without collective action from private equity shops or the banks, the process will continue accelerating and some predict this year’s season will hold an even earlier start.

The poaching 

In November 2013, one first year analyst, like many of his peers, began receiving calls from headhunters. The calls led to coffee meetings, where he was asked to describe what he would want to do when he began his private equity career in the summer of 2015. With only a few months of deal activity under his belt, he still knew he had to be specific.

“You have to be convictive about what you’re saying early on and give verbal commitments about what you want to do, often about a skill set you have not yet developed,” he notes in an anonymous call with pfm.

Some say forcing 22-year-olds to determine their career path so early is a failure of the system. The analyst, now in his second year and under contract to start at one of the largest private equity firms in the world, says it’s the only way a candidate can stand out among the competition.

Last year, Bain Capital was the first mover in the second phase of the interview process, he says. After the firm held an informal information session for analysts in February, the frenzy immediately began.

“I got the first call on a Thursday at 11pm asking me to do an interview the next day,” he says. “By Sunday, I was getting so many calls that I had to turn people down.”

By the end of the month, after being contacted by 18 firms and enduring as many as eight back-to-back interviews, he secured his role. Throughout the ordeal, he heard from his fellow interviewees about how other banks were handling the annual exodus of their young staff. While his own employer had a relatively relaxed policy (almost expecting analysts to skip out on work for private equity interviews), Goldman Sachs for example, had a stricter approach, where candidates scheduled mysterious “doctor’s appointments” to explain their absences.

Goldman has reason to worry. It’s rare that analysts will stay on beyond two years, despite all the effort banks put in to hire and train them. Approximately 72.5 percent of bankers that started in analyst programs in 2012 have now left their positions, according to research from recruiting start-up Vettery. The most popular destination for those absconders? Private equity firms.

More of the same 

Genstar’s recruitment timeline is a little less stressful for candidates than that of larger firms. The firm spends about two weeks to review potential hires and fly them out to San Francisco, Solomon explains. Still, the firm is not immune to the madness that ensues. In mid-December, Solomon was meeting with her external recruiters to discuss this year’s cycle. 

“Other firms are already starting to do marketing events,” she said in early December call with pfm. “It’s going to be a pretty early year from what I’m hearing.”

The analyst agrees, saying that the class below him is feeling even more urgency to meet with headhunters before the interview phase begins.

Even though Solomon admits that the industry’s recruiting style is “bizarre” Genstar has a history of success with their recruits. All of the firm’s current senior associates and vice presidents were once pre-MBA associates. “We have always been happy with the result of our process,” she says.

Limited alternatives 

Nevertheless, if the process continues to creep up the calendar, something will have to give. “I think it’s already been pushed back as early as it can be,” says Healey. “There’s a limit to when you actually have any data to support whether one candidate is better than another.”

The biggest efforts for change, Healey and Mirrione say, will have to come from the investment banks. Goldman has been switching up its approach, ending its two-year analyst program in 2012, offering bonuses and introducing lifestyle initiatives like protected Saturdays in order to retain more talent.

Unfortunately, this might not be enough. “If someone joined Goldman or Morgan Stanley to get into private equity, whatever incremental amount the bank could pay them to stay on longer becomes irrelevant when they get that call from someone like Blackstone to join the associate pool,” says Healey.

The two-year analyst programs may go the way of commercial bank credit training programs, say Healey and Mirrione. Once considered the most elite path for finance undergrads and boasting high retention rates, the programs’ ranks depleted when investment banks and private equity shops began poaching talent. Most banks reduced their programs from two years to one year, then to 90 days, then eliminated them entirely, says Healey, a route that some investment banks may currently be considering for their analyst programs.

“I think you can safely say that there are people inside Bank of America and JP Morgan analyzing this right now, trying to protect and retain their engine room resources,” says Mirrione.

Then again, the outcome of this recruitment cycle is not all bad for banks. Losing talent to current and potential clients in the private equity space, while disappointing in the short term, can foster connections and benefit banks in the long run.

“Goldman Sachs isn’t necessarily dissatisfied having several thousand former analysts populating the private equity business,” comments Healey.

While banks have more to lose with the current system, some private equity firms want to address the flaws as well. Blackstone, for example, has begun going directly to the undergraduate talent pool instead of letting banks weed out the cream of the crop first. The firm already has a strong on-campus presence, hiring undergrads for its summer internship program and hiring some of its full time analysts from that class of interns.

“That’s the next step and places with enough scale will begin to do it,” says Healey.

Even so, that will still leave plenty of middle-market players like Genstar to continue tapping investment banks. A campus campaign would be too premature for their needs, notes Solomon. For now, they’ll stick to the current process.

“It doesn’t make a ton of sense, but it is what it is at this point,” she says.