Hey gang. Happy October. How I do love sweater weather.
Am taking a slightly different tack with this post and am hoping to crowd source some insightful responses, both from bankers as well as my fellow PE gents and ladies out there, but everyone feel free to add in their two cents.
It's a theory regarding the future of employment for PE shops and it goes a little something like this:
PE has gone through and will continue to go through some industry phase shifts, if you will. At the risk of scorn from older monkeys and of oversimplification, there has been a general drift away from financial engineering of transactions (LBO Boom of 1980s and 90s) to a more operationally-driven approach to value creation. In fact,
this term 'value creation' is among the most overused in the industry. Even a cursory Googling of 'private equity value creation' yields scores of industry reports by the likes of Morgan Stanley, Booz & Co, McK, PwC, and a host of other familiar characters. (These first two have pieces titled, 'Operational Improvement: The Key to Value Creation in Private Equity' and 'Value Creation Tutorial...' for example)
So what implications does this have for finance professionals, you may ask? Well, the ramifications have the potential to change hiring into these PE firms a bit.
While PE firms do like to hire ex-Goldman and JP guys who have cut their teeth in M&A, over the last decade, bulge bracket banking groups have expanded to the size where the hard skills of M&A advisory, while still far from commoditized, are more commonly available. Tack on the creation of more boutique banks focused on restructuring and you have a much much larger pool of guys to choose from who can 'do the job' of creating an LBO model.
Where the big money is to be made in PE, some have said, is not the nuts and bolts or financing of the transaction (though it cannot be overstated how crucial these are to a successful investment) but taking a company and 'creating value' through operational improvements, management changes, or shrewd and targeted investments in its future. Sweeping generalization: The money to be made in arbitrage of a PE portfolio company is tiny compared to industry appreciation and company outperformance of the sector.
Which leaves us to wonder: will PE firms continue to hire bankers in droves? Or will there soon be an exodus from the strategy and operational consulting firms of the world and top companies in industry to try their hands in the frothy PE market? Granted, it is not an uncommon move for someone from Bain, for example, to jump over to the buy side, but will PE firms actively seek out these guys more for VP-level and Director-level positions? Most of the number crunching is done by those fresh-faced Associates in any case. So why allocate a large portion of your salary spend on another guy who can check the numbers when in reality you want someone who is going to take your investment from an 8x to 12x multiple?
Or so the argument goes.
This is not earth shattering stuff and I'm content admitting that, but my question for those industry veterans out there, as well as for those who have less experience, but can follow the above, do ya'll think this trend towards operationally-focused hires is set to increase? And if so, will its aftershock (10-15 years down the road) affect the applications to banks, if operationally-focused roles are those getting the mid/upper management positions at PE firms?
As a current Strategy Consultant not from MBB, I can say that PE and HF hiring has not been as difficult as I expected from WSO attitude. Nearly every place I have interviewed with has not discounted my experience and many have sought it.
*Should be noted I have M&A and PE experience in internships and full-time work
yes, PE shops must create value because every business is already running as lean as possible as it is and outsourcing is common as sliced bread
TL;DR the LBO boom of the 80s and 90s trimmed away all the costs, now the US economy is in the shitter and companies are going to have to figure out how to sell shit to people who dont have any money, or income for that matter.
Nice life trying to boost value on xyz widget/gadget when the next 20 years of potential consumers are working minimum wage and paying off their debt
PE shops can always outsource operational improvement tasks to consulting firms.
Consultants don't exactly have an incredible CF profile. Almost better to cut to the bone post-deal on your overleveraged target (and today, if you aren't overleveraging your are either not winning the auction or hitting your hurdle or both) and then rebuild capacities as you need them. Thus the rise of operating groups at the large buyout shops. But that is different than a consultant on the deal team.
I think there are a good amount of PE shops that hire consultants. You just have to fund the firms that have MD"s used to that.
For instance, I feel former Bain Capital guys who have started their own funds have taken a pretty even split of bankers/consultants. I think it's really what the fund founders grew up with that dictates a lot of hiring.
I think that bankers will still be highly sought after. PE firms need to get deals done to survive and I think that people with a banking background may have an edge when it comes to doing deals that consulting may not have. Like HedgeKing said, there will always be the opportunity to outsource certain work to consulting firms, but I also think that the industry focused firms have a pretty good understanding of the industries in which they invest in and can rely heavily on the contacts that they have in the industry. That said, I have never worked for a consulting firm and my PE firm never utilizes consultants. We rely on our own knowledge of the two sectors in which we invest and the team is split so that guys only work on one industry. I think that it will be harder to hit the returns of the past on the megafund deals because many of the companies since the recession have been cutting costs already as people have mentioned. I think that the upper middle market down will have the opportunity to still "create value" as people say, but I don't think that the industry can make a huge switch to consulting professionals given that the dynamics of investing and the intangibles are a bit different. There is only so much value that consulting services can bring to a deal and I am not convinced (based on my experience) that it is that much greater than a banker. I think that at the junior level this is even more apparent because most associates really need to have the technical skills and deal experience to help execute deals so it is harder for a consulting guy to compete with a banker, not that it is not possible but just based on my experience, this is what I have seen.
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