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The Middle Market Is Hiring

As larger firms raise smaller funds and shed jobs, the middle market continues to grow and create opportunities

There hasn't been much in the way of good news in terms of hiring and compensation in the private equity industry over the last couple of years. However, for the first time in a long time, there seems to be a light at the end of what's been a very long tunnel. The first positive change is that hiring seems to be picking up - at least anecdotally.

Evidence suggests that private equity hiring is increasing. For example, Pinnacle Group International, a firm that handles recruiting for private equity firms and investment banks, completed 22 placements during the first three quarters of 2012, that's up from 17 for all of 2011 and 25 for all of 2010. Additionally, the firm currently has 13 active searches in the works. What's more, mid- to small-market firms are doing most of the hiring. Of the searches that Pinnacle completed thus far this year, seven of them have been for middle-market buyout shops.

"Last year was a very tight market. This year has been better, and the middle-market firms have been a little more robust than they have been in the recent past. The fact of the matter is that it's harder to raise capital, and there are less management fees available, making it harder to hire people. However, I think this is the new norm," says Joseph Logan, a managing director and founder of Pinnacle, adding that, in general, there will be fewer people in the private equity business, as firms wind down old funds and aren't able to raise new funds.

"The growth, going forward, will come from smaller firms. They will emerge as the survivors. It's the $100 million to $500 million range that will survive, simply because there's more dealflow, and the overhead is not as significant, making it easier to run on a smaller scale," says Logan.

Recruiters agree that smaller is better these days, because the reality is that the smaller firms are outperforming their larger brethren. "Lower middle-market-focused growth equity and leveraged buyout firms have generated a significant amount of the returns in the private equity asset class in recent years," says Holly Davidson, a managing director with Jamesbeck Global Partners, an executive search firm specializing in investment management. "Although a few of the mega-firms are continuing to hire at senior levels, most of my clients in recent years have been middle market firms."

This isn't all that surprising considering that many of the mega-buyout shops have been forced to raise smaller funds over the last few years as a result of a pullback from limited partners (LPs). From January through the end of September, only 12 firms have raised more than $1 billion for new funds, compared with 45 to 60 firms raising over $1 billion per year between 2005 and 2008. Bain Capital, for example, is targeting only $6 billion for its upcoming vehicle, Bain Capital XI, which is down significantly from its $10.7 billion fund, Bain Capital X, which was raised in 2008. More painfully, the firm may be decreasing the carry fee that it charges LPs from 30 percent to 20 percent for Bain XI, which hasn't closed yet, according to a source familiar with the situation.

Naturally, smaller fund sizes equate to lower management fees, which means either less money for everyone, or less staff. Most funds have reacted by decreasing the size of their investment teams, which is mainly affecting junior staffers at the mega funds. Additionally, with less capital to put to work, they simply don't need as much staff to deploy the capital. "In my practice, I see a lot of mid- to senior-level investors looking for new homes as a result of firms getting smaller," says Davidson. "Unfortunately, there just aren't as many seats at the table these days as there were a few years ago, and it is often the principals and junior partners who get pushed out first to either make room for junior people coming up the ranks, or to maintain the economics of the senior partners."