Not ready for prime time

In the hunt for junior-level associates The Carlyle Group says it is doing things a little bit differently this year. As its competitors begin wooing promising first year analysts at top Wall Street investment banks in early spring, Carlyle will wait patiently on the sidelines.  

“A lot of recruiting firms are urging us to hurry up because others have already begun making offers,” says Jeannine Santarelli, head of associate recruiting at Carlyle. “But the other side of the coin is how can we make a determination of who would be in our top 300 list when it is still so early in the year?” 

The risk, as Carlyle and a growing number of GPs see it, is that recruiting analysts only months out of college can result in hiring decisions based more on potential than performance.   

“It’s gotten too early to begin judging these recent graduates’ skills as analysts. Waiting at least 12 to 18 months provides us with year-end performance reviews and bonus numbers,” she explains. “And who knows, perhaps the best analyst happens to hold a liberal arts degree and needed a year to outshine those peers with a finance degree.” 

Carlyle kicked its pre-MBA recruitment process off in May two years ago, and then as early as March last year. This year, the firm will wait until first year banking analysts have a full year under their belt before making pre-MBA offers, Santarelli says. 

WAR FOR TALENT

As Carlyle’s experiences demonstrate, the hiring complexities in filling junior-level positions can be tricky. To understand why one needs a grasp of the typical private equity-bound undergraduates’ career progression. With degree in hand, most usually start off by undergoing a two-year stint on Wall Street at an investment bank or consultancy firm where they learn how to build financial models, value companies and hone other skills needed for a successful career in buyouts. During this early period, GPs try to pluck the best and brightest analysts or consultants (much to the chagrin of investment banks) to enter the more prestigious world of private equity – typically by offering a two-year contract as an associate. Once those first four years of work are completed the 20-something professionals head to business school; and from there later become “post-MBA hires” where they are offered more permanent positions with a private equity firm or some alternative industry. 

The first two-year period is a time when the pre-MBA juniors first become exposed to the working world. A fair percentage are also for the first time learning the intricacies of finance, having joined an investment bank not with a degree in economics or finance, but with perhaps one in politics, philosophy or history. Others, even those with a related academic background, may discover the demands and lifestyle of an analyst are not for them. Career paths, and even one’s sense of identity, can quickly change when in your early 20s.  

With this in mind, private equity firms have historically waited for young analysts to settle into their role before holding interviews and subsequently making their pre-MBA offers. But in recent years a growing number of firms thought it advantageous to begin making offers to promising analysts before they had even completed the first leg of their two-year tour on Wall Street. 

Analysts were only nine months on the job before they were being asked to sign away another two years of their life to private equity

Just two years ago a number of early bird firms in the US were making offers as early as May, says Sachi Gahan, head of the venture capital and private equity practice at recruitment firm Glocap Search. If so that would mean analysts were only nine months on the job before they were being asked to sign away another two years of their life to private equity.

Last year things started even earlier, with Bain Capital reportedly kicking off the recruiting season in March – in effect forcing its competitors to do likewise or potentially miss the boat on top prospects. And this year things started off as early as February, say multiple sources, who agree it is not mega-funds leading the charge for talent, as has been the case in past years, but mid-market and growth equity firms, and increasingly the hedge fund industry. 

TOO YOUNG TO SERVE

So why are megafunds suddenly conceding first pick of the litter to others? It’s not for lack of candidates, who tend to prefer landing a job with a well-known industry titan (like KKR to name an obvious example) over a less-known outfit like a regional mid-market firm. Instead, megafunds have recognised the risk of candidates being too young – just too early in their career – for that coveted pre-MBA offer, sources say.  

On the other hand, one mid-market GP who admits going earlier than most in this year’s recruiting season argues today’s first year analysts have more deal work to their name. “In the years just after the financial crisis deal activity was low so the first year analysts had less of a track record. That’s not as much the case today.”

But it appears the recruits themselves are frustrated by the trend. A fair percentage of analysts early in their careers are not yet even able to draw clear distinctions between the private equity and hedge fund industries, sources say. Yet those same analysts are being asked to make a serious commitment to one industry or the other. Consequently, many first year analysts are being coached on the nuances by their second year peers so as not to appear clueless during the interview process, sources tell Private Equity Manager. 

Many analysts on their two-year Wall Street tours are aware that some firms are experiencing buyer’s remorse by hiring associates based on potential rather than accomplishments. On Internet forums populated by young Wall Street professionals where pre-MBA job seekers exchange strategies and advice regarding GPs’ recruitment processes, one poster described the situation last year as megafunds “being pretty pissed off about having to give offers to pimply-faced 20-year-olds that had absolutely no experience to talk to”.

Instead, according to the forums, the large-cap players at this point in the year are holding informal meetings, banquets and lunches with top prospects as a way of signaling their interest. The apparent intent is to encourage top prospects to reject early bird offers in the hopes of landing the more coveted gig with a mega-fund later in the year. But others warn that megafunds are wooing more candidates than they have seats available.

Considering the value today’s crop of analysts place on job security (having graduated during volatile economic times) it may be a tough sale for a large-cap player to make promises without commitments. But it may not matter, if it is true that patience is a virtue in pre-MBA recruiting, by the summer it will be easier to identify who the real talent is.