Any layoffs in private equity?

"What's that? Uh...layoffs?! Don't talk about -- layoffs? You kidding me? Layoffs? I just hope we can win a game!" -Coach Mora

I was curious as to whether you guys heard anything, either truth or speculation, about potential layoffs in private equity.

In my case, I work at a large middle-market private equity shop and haven't heard of anything about layoffs. In fact, there seems to be an emphasis on paying people who perform,and absolutely no ruminations about potential job cuts. That being said, we do have a hiring freeze until at least the end of the year, and there are little expenses here and there that the company is trying to moderate on (like travel, lavish holidays parties, unnecessary spending on printing and messenger services, etc.). I was wondering what any of you other PE folks are seeing out there.

 

I am seeing a ton of layoffs at our portfolio companies but none so far within our shop. As you know most PE shops run pretty lean even during good times and exisiting management fees alleviate the need to really cut that much cost during down periods within PE groups. Hiring has certainly slowed I do think many PE shops will cherry pick some of the best candidates out there

 
Best Response

I guess I should have clarified in my earlier post in that we are definitely seeing some layoffs at our portfolio companies, but not at our fund level. That being said, while I certainly have heard the argument that most PE firms run pretty "lean," how "lean" is enough? People around here aren't busy all the time and are going home at more reasonable hours.

I don't know if this is paranoia or reality or whatever -- call it what you will -- but I'm sure that if management here wanted to have fewer people do more work, they could. Additionally, some of my friends get to roll out of the office around 6PM just because things are pretty quiet right now, and I'm just wondering what's keeping management teams of those PE/LBO shops from pulling the trigger. I'm not so curious as to want to learn from experience, of course, but with the economy being the way it is and people in other industries losing their jobs, but what's really preventing private equity from being the next shoe to drop?

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The only thing it would really do is allow you to spend more money out of the management fees for overhead and operating costs, or distribute more out to the senior guys. It's real money to these guys, but not enough to make them fire the "support" staff. Plus, then all the guys remaining would have to pick up the slack for the other guys' PC's and it's a pain to relearn another company inside and out, as well as get to know management. I'm sure if expenses got tight you would consider letting people go. But it's a pretty bad excuse to let associates go just so senior guys can have more money in their pockets from management fees, when the real money is in the carry anyways.

At the larger funds, I can see non-performing senior guys getting the boot. Hell, at my fund, senior guys at one point were so cutthroat that they were giving the boot to guys not pulling weight, and that was in the best times of PE.

Agreed that it's pretty dead and people are going home early (although for some reason I've been working banker-ish hours lately). But I think at the junior level you'll see more hiring freezes than layoffs. We're also in a hiring freeze for the time being, but it works out because everyone is staying on for a third year. We're just happy to have good paying jobs with no real fear of downsizing.

 

I started another thread semi on this issue. There are some that believe that PE is overstaffed and layoffs will be coming. The article in the FT was a bit outrageous saying 90% of the people are not money makers, so you are not entirely off base with your comment. With that said, I work at a boutique with a PE arm (about the size of a smaller MM shop) and have recently been staffed to rework a corp model for one of our PCs because we are too short staffed for one of the PE dedicated analysts to do it, so I don't know what to believe anymore

 

funny you mention the ft article and the "90% not money maker" quote, because the guy (no pun intended) who made that comment just fired 3 or 4 guys from his firm because of the screwup on EMI

http://www.ft.com/cms/s/0/07ed132a-c0ab-11dd-b0a8-000077b07658.html

as I said, they do not represent the norm, although i guess quite a few other people will eventually get their heads lopped off for boneheaded deals done in 07

 

Would anyone care to elaborate how layoffs are being conducted at portfolio companies? Who is being canned? Is it primarily back office functions at the PCs (i.e. accounting, HR) or are executives, operations/strategy, marketing/business development/sales people etc. being let go as well?

Are layoffs being conducted at the portfolio company level even at companies that are doing well in anticipation of next year, or are they only being conducted at companies that have underperformed throughout 2008 and show signs of continued underperformance in '09/'10?

Are a lot of PE firms restructuring whole departments/groups at their portfolio companies, or are they primarily just cutting the fat (i.e. bottom 10% of performers)?

 

According to PEHub: "The decision will result in approximately 100 layoffs, which comes on top of Carlyle’s moves last month to close both its Warsaw office (10 staffers) and its Asia leveraged finance team (7 staffers). A majority of the affected employees work in the back-office, but dozens of investment professionals also are being let go. All laid-off employees will receive severance packages."

http://www.pehub.com/25228/report-major-layoffs-at-the-carlyle-group/

 

Hiring will slow (though it hasn't for summer '08), but layoffs seem highly unlikely. Deal flow has dried up - while debt syndication markets are better than they were late summer, they are still pretty awful.

That said, there is no shortage of portfolio company work to be done and still plenty of deals waiting in the wings. Given that the largest PE shops (referred to as large-cap, not "bulge") hire associates in the high-single to low-teen range, the labor force dynamics in PE are very different than those for BB IBs hiring massive analyst classes.

 

Like SMU said, there is more than enough work to go around maintaining prior acquisitions and preparing them for a sale in the next several years when the credit and IPO markets come back. Obviously, PE is extremely cyclical and I think you will see less PE acquisitions and more corporate acquisitions/consolidations now that the debt markets are in shambles.

Regarding the labor force, PE is not a sell-side service industry (obviously), which means face time isn't a necessity and PE groups can do a lot more with a lot less resources (i.e. less employees). A substantial amount of PE work is out-sourced during all phases of the due diligence process anyway (legal, accounting, etc.) PE groups are still generating fees even in lean times...(even though it is nothing like it has been in the past 2 years)

 

PEs typically view their hires (even Associates) as much more "long-term" than banks view Analyst hires. The sad truth is that Analyst hires are almost interchangeable/easily replaceable to BBs - the problem is you don't require any special skills to do the job as an entry-level person and there are plenty of people who could do it (I know I'm exaggerating here a bit).

Most buy-side places view their hires as long-term, even if many Associates at PEs do end up going back to B-school after 2 years. They'll be less reluctant to lay people off because they are very selective over who they hire in the first place.

Many of the buyouts that were completed in the 2003-2005 timeframe (or even 2006 or 2007...) are also "coming due" and will be up for sale soon, so PEs have plenty of work to do.

I think bonuses will be down significantly but probably no massive layoffs like you've seen at banks.

 

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