The Private Equity Draft

What does the typical Private Equity analyst have in common with a professional basketball player?

Other than being ballers; they are both getting drafted younger and younger, far more so on the basis of potential than that of proven skill.

Taking a page from the David Stern manual, Private Equity mega funds like KKR, Blackstone and TPGare making analyst recruiting more of a speculative endeavor than ever before.

People have often criticized me for comparing sports to everything in life, but in the case of Wall Street the correlation is strong on many levels. Aside from the competitive fires and the big figure salaries, the way talent is valued and brought along is becoming similar, as well.

Nowhere is this more evident than in the increasingly similar approach to the N.B.A Draft and pre-MBA Private Equity analyst recruiting.

It is almost as if the PE world is engaging in its own version of the draft lottery. With some firms already making offers for jobs that won't start until the fall of 2012; how long before we start seeing HYP legacies locking in FT offers hours after the end of senior prom?

Now I know this makes some of you guys jump for joy and foam at the mouth. I can't say that I blame you, but I have to ask:

Is this really an advisable practice?

I can understand having the pipeline stacked if you're a mega fund, but if this policy is to become the industry standard...won't it hurt the overall level of play?

In perhaps the clearest sign that the recruiting frenzy has hit a boiling point, several smaller private equity firms have hired star students or well-connected ones straight out of college.

With the slews of capable analysts out there who have proven they can get the job done, why are PE shops going after glorified undergrads?

Didn't they learn anything from the N.B.A and its ill-advised high school to the pros experiment?

Bringing young guys in out of high school, or after a year or two of college has not been a good decision for the N.B.A. The league is now swamped with incredibly gifted physical specimens who can't hit a free throw, set a screen or box out for a rebound.

Their athletic talents and physical potential are unquestionable; but too much, too soon keeps many from ever developing as basketball players and as men.

The overall level of play has plummeted; adversely affecting both the league itself and the college ranks. Overall product quality and revenue generation has plummeted. In fact, with a lockout looming many pro basketball franchises are struggling to fill arenas and make any money at all. True fans of the sport are just tired of paying for a sloppy product.

Finance is a lot like basketball. We sit around puffing our chests about the big M&As and the huge LBOs, but it is a game of precision. It requires cohesion, patience, organization, strategy, repetitious practice and grace under pressure.

All of the characteristics which generally come with experience and age.

I'm not saying that there should be an age floor for PE analysts .
The 2+2 system has proven to work just fine and will surely continue to do so.

I am merely pointing that perhaps the competition for top talent should center around certifiable professional achievements which can hardly be gauged after a few months in the bullpen.

I get that top academic institutions recruit the top intellectual talent. But so do Nike camps and that rarely guarantees success in the league.

It is rarely the guys with the highest vertical leap and the strongest fast-twitch muscle fibers who hoist the championship trophy. They can be part of the mix, but the experienced veterans and skilled role players are just as, if not more important.

Let's consider the lessons of the watered down product that is the N.B.A. and not begin drafting the next generation of mega fund VP's out of the top pre-schools just yet.

Comments (18)

  • gnicholas
  •  Mar 10, 2011

I disagree with the statement that drafting high schoolers was a bad decision for NBA teams. I'd say they pan out about half the time, which is as good as I'd say for college.

Take 2004 for example, you have Dwight Howard, Shaun Livingston, Robert Swift, Sebastian Telfair, Al Jefferson, Josh Smith, and J.R. Smith going in the first round. Six years later you have one superstar, one all-star, one good player, one decent player, and 3 backups/out of the league guys.

Mar 10, 2011
Midas Mulligan Magoo:

Didn't they learn anything from the N.B.A and its ill-advised high school to the pros experiment?

Maybe they did. See Bryant, Kobe. James, Lebron. McGrady, Tracy. Garnett, Kevin. Dawkins, Darryl. Stoudemire, Amare. Howard, Dwight. Perkins, Kendrick. etc.

Point being that there are a TON more draftees right out of high school but these are the ones that still have a huge impact. I would be willing to bet that almost any NBA team will run the risk of getting a Travis Outlaw if the potential reward was Lebron or Dwight Howard.

If I had asked people what they wanted, they would have said faster horses - Henry Ford

Mar 11, 2011
happypantsmcgee:
Midas Mulligan Magoo:

Didn't they learn anything from the N.B.A and its ill-advised high school to the pros experiment?

Maybe they did. See Bryant, Kobe. James, Lebron. McGrady, Tracy. Garnett, Kevin. Dawkins, Darryl. Stoudemire, Amare. Howard, Dwight. Perkins, Kendrick. etc.

Point being that there are a TON more draftees right out of high school but these are the ones that still have a huge impact. I would be willing to bet that almost any NBA team will run the risk of getting a Travis Outlaw if the potential reward was Lebron or Dwight Howard.

Exactly. A lot of the talent that skipped college and was locked up by the NBA ended up dominating the league... it still does.

While there will ALWAYS be room for late bloomers, locking up the highest potential talent early makes sense in a competitive market. If there weren't some generally agreed upon principles that all the firms abide too, then I wouldn't be surprised if there were a 2+2 lockup program with top students at H/P getting locked up by KKR, etc. right after they get the BB IBD offer while they're still in college... but just like how david stern and the nba won't let the lakers draft a guy in 9th grade (lebron would have been the number one draft choice in 8th grade, maybe 7th... based on pure potential), the senior people at these firms lay out some ground rules so that things don't get SILLY.

The reality is that just like in basketball, how you can only have 5 guys on the court, you can only have a few guys making the big investment decisions at a top PE firm or hedgefund... and having THE BEST person, not just a A GREAT person, makes a huge difference. Another way of looking at is that THE BEST PERSON >> 5x Great people.... because there's only so much capital to invest in so many deals etc.

Mar 10, 2011

are P/E firms really "wining and dining" analyst to come to their firm?

You give me a gift? BAM Thank you note! You invite me somewhere? POW RSVP! You do me a favor? WHAM Favor returned! Do not test my politeness.

Mar 10, 2011
1man2nv:

are P/E firms really "wining and dining" analyst to come to their firm?

yes

Mar 10, 2011

Well when I say "wine and dine" I don't only mean dinner, but I mean actively recruiting them like calling them, persuading them, etc...Like a college athlete for example.

You give me a gift? BAM Thank you note! You invite me somewhere? POW RSVP! You do me a favor? WHAM Favor returned! Do not test my politeness.

Mar 10, 2011

This is pretty stupid. I don't know why they just don't recruit like six months in advance. I don't see the value of having such a large lead time, for either party the candidate or the pe firm. If it was only six months the candidate would have more time to think about what his true interests were and pursue that type of career. Also, the pe group would have way more to evaluate each individual on with 18 months of experience as opposed to 8.

Mar 10, 2011
ke18sb:

This is pretty stupid. I don't know why they just don't recruit like six months in advance. I don't see the value of having such a large lead time, for either party the candidate or the pe firm. If it was only six months the candidate would have more time to think about what his true interests were and pursue that type of career. Also, the pe group would have way more to evaluate each individual on with 18 months of experience as opposed to 8.

it's just economics, dude. the PE firms try to collude and hold off on recruiting because they know it would be generally better if they could evaluate candidates after they've had more experience and after they've been vetted by their more senior bankers, but there are just too many competing firms to do this effectively. there's always an incentive to deviate and try to gain an edge in hiring by going early and with so many firms participating, someone's going to do it.

Mar 10, 2011

What does banking teach you about PE that you could not learn on your own? At smaller places there will be less technical intensity and more focus on diligence, which can be picked up on the job by a kid with hustle. At megafunds, the focus is on modeling. While you might not pick up on the latest practices at a bank, packages like BIWS do a plenty good job of teaching the basics. Is the bank training worth the 2 years? I think you could take all the relevant parts and condense it into a 6 month intensive training program.

Mar 10, 2011

I'd say it's pretty standard for the final group of candidates to be taken out to dinner or drinks, or something similar. You have to make sure you actually like the person, regardless of how well rehearsed their interview/modeling skills may be.

Mar 10, 2011

The article says: industry experts say the practice of hiring undergrads WON'T spread to megafirms like Blackstone ....

Well, DealBook needs to rethink which "experts" it talks too, because BX has been hiring PE analysts straight out of undergrad for years. Whoops.

Mar 10, 2011

haha, nice one, apprentice. true true.

Mar 10, 2011

I honestly don't see the point of doing it so early if they aren't going to join for another 18 months. I mean, seriously, just wait till they finish a year and get their first year reviews. That way you can actually be sure you are getting the best of the best.

Either way, this is yet another reason why I sort of hate finance in general. It's just a constant funneling process of moving from one "step" to the next.

Mar 10, 2011

Totally disagree on the NBA. NBA is realizing a renaissance in talent right now. It is a golden era of point guards. The older generation of players (some of which came right out of high school) are still performing at a high level- Kobe, KG, Nash, Duncan, Shaq (just kidding), while there is a new crop of budding all-stars Westbrook, Rose, Durant, Griffin, etc and already established studs, LBJ, Wade, Howard, Dirk. Anyways, NBA ratings are doing very well this year and I'd like to see where it says revenue is falling. Some of the franchises in trouble are over-leveraged while others are simply in horrible markets (over-expansion).

Anyway, maybe that's what PE has/will become, no longer an exit op from banking, but more and more out of undergrad. Is it better to do 2 years in banking then move to PE or learn the ropes in PE right off the bat and stay there awhile longer?

Mar 11, 2011
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