The Future B-School Hire in Private Equity
January 12, 2009
An acquaintance of mine who’s about to finish his M.B.A. asked me the other day whether he should take a job offer to work as a financial analyst at a large transportation company out West, making ‘okay’ money, or hold out for a job in New York working in the capital markets. To me, this wasn’t much of a dilemma. I told him to take the analyst job, get some experience, and in a couple years when there’s more stability in the capital markets, you can consider moving back to New York.
Time will tell whether that’s good counsel. Certainly, a few years ago, this guy wouldn’t even be facing this question, as financial services companies were hiring scores of MBAs to assist with everything from cold calling to deal modeling. But with the slowdown forcing investment banks, hedge funds and even private equity firms to reduce headcount, an increasing number of MBAs will have to get their feet wet in less exotic bodies of water, so to speak. (Others, of course, will become professional students or aspiring novelists who reside in their parents’ basement.)
If you go back 20 or 30 years, when financial services was arguably less sexy and young professionals still had to pay their dues before hitting it big, it wasn’t unheard of for an MBA student to join a retailer, for example, and cut their teeth as a store manager for a few years before moving up the ladder. And while I don’t foresee too many Wharton grads running the local McDonald’s, I do believe the market for MBAs has changed.
The question is how—and perhaps if—a back-to-basics shift will impact the firms who are doing M&A deals. PE firms, for instance, have historically maintained small staffs. A core group of partners would raise money to launch a fund, find deals, sit on a handful of boards and use their rolodexes to finance deal opportunities. But when M&A activity began its rise to the record levels of 2007, PE firms—and virtually everyone in the M&A space—who wanted to stay competitive had no choice but to ramp up their staffing, particularly in the lower ranks of analysts and associates. Not surprisingly, we’re seeing the reverse happen now that the deal market has cooled down. (Case in point: Sun Capital Partners).
If PE firms end up spending more time on their existing portfolios as a result of a slower deal market, theoretically they will need more operational power. But even if that’s the case, I don’t see them staffing up in a big way, for two reasons: 1. When push comes to shove, they can always outsource operational help or secure the services of a retired executive who knows their industry. Even though consulting fees are expensive, hiring consultants is a well established practice in private equity, plus it’s usually tied to a specific objective (i.e., a turnaround, or perhaps a deep analysis that will lead to a change, etc) rather than maintenance. 2. Hiring a bunch of people that eat into your fixed costs makes the whole concept of setting up a PE fund less viable. In the middle market, save a handful of exceptions, scale probably isn’t the right path to success.
Having said that, I’m not sure if keeping the status quo is the right approach either. Even if the debt markets loosen a bit next quarter, as some have predicted, most PE firms will have to bring about true operational change in their portfolios to gain an attractive ROI. To that end, hiring a few MBAs with some on-the-ground industry experience may prove to be a worthwhile investment.
Adam Reinebach (adam.reinebach@sourcemedia.com)
3 Comments
In response to James' question on Jan. 17: James, I think the big question right now for acquiring companies is whether the target in question is going to survive the next 12 to 18 months. If a company has growth potential over the next few years, then yes, I think there's a market for those companies. M&A advisors, particularly the smaller mid-market guys, are hurting for fees and are aggressively shopping companies that have a decent story. But ultimately the buyers are in the driver's seat right now. Hope that helps.
Posted by: Adam R | February 4, 2009 10:44 PM
In this environment of fewer deals is there a greater or lesser concern with the long term quality of the deal in terms of a successful match between the target company and the acquiering company? In other words, will the long term success of a merger be a stronger factor in the deal or will the transaction fee to the M&A firm be the stronger force?
Posted by: James S | January 17, 2009 9:07 AM
In this environment of fewer deals is there a greater or lesser concern with the long term quality of the deal in terms of a successful match between the target company and the acquiering company? In other words, will the long term success of a merger be a stronger factor in the deal or will the transaction fee to the M&A firm be the stronger force?
Posted by: James S | January 17, 2009 9:05 AM
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