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Succession starts here

With the rush of new money flowing into the asset class, private equity shops are finding that recruitment of junior professionals can be as competitive as deal sourcing.

For young job seekers eyeing careers in private equity, the rush of pension money and institutional capital into the space has created one of the more appealing backdrops for the industry in quite a while. Yet, the caveat for the resume pushers is that along with the industry's rise, more and more business school graduates are now competing for the bottom-rung spots, making entry into the asset class just about as tough as it has ever been.

The qualifications for employment have certainly not changed. One recent job advertisement posted by a Bay Area buyout fund seeks a ?top? post-MBA candidate with a minimum of three years experience in Asia to fill a vice president position. The job requires a ?very aggressive self starter? and ?previous deal sourcing experience,? and candidates also ?must have senior-level deal execution skills.?

Needless to say, the typical Monster.com applicant probably won't qualify. But for those that meet these demanding prerequisites, the opportunities for employment are there.

One sign that the industry is hiring – albeit an indirect indicator – is the number of funds raising capital today. In the US alone, there were more than 400 funds out seeking money last year. Whether it's a debut fund or a ballooning follow-on, both circumstances translate into new job creation not only at the ?entry? level, but at all levels of the employment chart. Indeed, one of the primary reasons firms continue to raise larger funds is to build out the franchise and add staff.

Another signal that buyout shops are out recruiting junior professionals – perhaps a more poignant sign – is the backlog of opportunities that are out there today. Glocap Search, for example, a private equity recruiter that posts its jobs online, currently has more than 105 entry-level and junior professional positions listed on its website. Harvard Business School, meanwhile, possibly the largest feeder of talent into the private equity industry, has over 130 private equity jobs listed in its online job bank for current students and recent grads.

More demand than supply
While there are no industry figures as to exactly how many jobs were created in private equity last year, based on the amount of money flowing into the space it would seem reasonable to assume that associate recruitment has become nearly as competitive as the push to raise new funds or even find new deals.

Brian Korb, a partner at New York-based Glocap, has seen first hand the pains private equity firms are going through to woo the top prospects.

?It seems like there are so many good opportunities out there that all the firms are jockeying for the A-plus talent,? he says. ?All the capital that has come into the industry has had a direct impact on that. Nobody wants to reduce their standards, but the demand for top talent has surpassed the amount of available supply.?

Moreover, hedge funds continue to provide a significant source of competition for the talent pool. The asset class has been poaching top talent for years now, and it continues to entice some of the best private equity candidates. While Korb says he has seen the allure of hedge funds level off somewhat, he notes, ?The ability to pay a young associate a half million [during a good year] is still tough [for a private equity firm] to beat.?

From the point of view of the newly minted MBA, entry into private equity is more difficult than most industries. A college graduate seeking a career in marketing, for example, can generally find employment in his or her desired field without any forced detours. Private equity hopefuls, though, typically need to put in two or three years at an investment bank or consultancy. From there, they can link up with a buyout firm at a junior level position for another two or three years, and following that stint, can move on to a top-tier business school. Upon graduation, candidates can then re-enter the applicant pool, but there is still no guarantee there will be a hiring upcycle. During the 2001 to 2003 timeframe, for example, there were very few firms hiring at all.

As difficult as that sounds, getting in the door of a private equity firm is probably even more challenging in practice. Private equity is renowned as an apprenticeship business. There are feeder systems, to be sure, but even if industry hopefuls jump through all the right hoops, their search for an industry job could still flounder if they are not meeting and leaving a good impression on the right people.

Brent Leffel, a director in the private equity arm of Angelo Gordon & Co., notes, ?Private equity is a true apprenticeship. You can't miss any steps. Candidates need to first understand financial analysis and from there they'll eventually learn how to put a deal together. But you can't just go from zero to 60 in this industry.?

He further notes that Angelo Gordon prefers tapping people that the firm already knows for its associate level openings. ?The best way to fill these spots is with someone whom we've worked with before,? he says.

David Landau, a founder of LNK Partners, backs this view. LNK is a new firm Landau helped launch at the end of last year. To fill the openings among the junior ranks, he tells Private Equity Manager that LNK only hired people that professionals from the firm had either worked with in the past or met through referrals.

?We had originally retained a headhunter, but very shortly afterwards we realized that we would be better off doing it ourselves,? he said. ?We primarily brought in people that had worked extensively with one of the founding partners in the past.?

However, that's not to say that every job in the industry is secured through networks and recommendations. The HBS job bank, for instance, lists openings from The Blackstone Group, AEA Investors and The Carlyle Group, among many others, implying that many of the top firms will put out an open casting call.

As private equity as an industry continues to develop, many may forget that it wasn't more than five years ago that the space was still considered a cottage industry. Indeed, many of its forefathers, such as Henry Kravis and David Rubenstein, continue to be as active today as they were in the 1980s. Because of that, though, opportunities for promotion may seem remote.

But limited partners want to see firms plan for the future. They are typically making a commitment to a fund with a lifespan of between 10 and 13 years. While a firm's rainmaker may attract the interest, most limited partners realize it will be the associates that will be the fund's caretakers by the end of its lifespan.

Landau notes that in putting together LNK's team, the firm recognized the gravity of this task. ?It's critical,? he says. ?These people are the future. If you want to build a lasting institution in this business, it's my observation that the best transitions come from within.?

College pros
Twenty years ago, private equity was at best an afterthought in the curriculum of most US business schools. Today, many universities have not only established private equity departments, but some schools have even seen fit to launch their own private equity funds.

Select students in schools such as the University of Utah, Cornell University and the University of Michigan can get their hands dirty in private equity, performing due diligence, helping source deals and, yes, investing real capital alongside some of the top players in the industry.

The Michigan-sponsored Wolverine Venture Fund, named after the school's mascot, even notched a significant exit recently when it was part of an investment group that floated blade-free laser technology outfit IntraLase on the Nasdaq. The school-sponsored fund generated a more than fourfold gain on the investment.

Each school employs a different model. Utah, for example, manages a $5 million buyout- and venture-focused vehicle that collected outside capital from limited partners to fund its activities. Michigan, with $3.5 million at its disposal, concentrates primarily on venture and gets a tiny piece of the university's endowment. Despite the differences, the goal is the same – to get students real life experience.

?It's important for us to work on real companies,? Tim Faley, a managing director at Michigan's fund, says. ?It has a much bigger impact than just going through simulations. Students take the work seriously because they have real outcomes.?

Unfortunately, the students aren't in line to profit from those outcomes, but that doesn't mean there aren't lines of applicants waiting to get into these clubs. Michigan's program selects eight students per semester to participate in the Wolverine Fund – not even 10 percent of the pool of candidates, while Utah's university fund selects roughly one out of every 20 applicants, according to reports.

But success isn't measured in terms of IRR or return on equity for these funds. A homerun is a job after school, although the job may not necessarily be at a private equity firm.

?We tell most students to not expect a job in private equity coming out of school,? Faley says. ?To get into a VC firm you need financial experience, you need industry expertise and you need operating experience. Few if any of the students will have all three.?

But then again, fewer than one percent of all college basketball players make it to the pros in any given year, so the odds to land a private equity job might look promising by comparison.