Goldman's New Policy for Investment Banking Analysts - 3 Reasons Why it Won't Stop the Bleeding to the Buyside
The Current Promotion Cycle for Investment Banking Analysts
So recently I got word that Goldman Sachs is announcing a pretty dramatic policy shift in the promotion cycle of investment banking analysts right out of college.
Traditionally, investment banking analysts would work for two years and then jump to a private equity firm, hedge fund, start up or some other role in corporate finance. The rare breed that could withstand the 100 hour work weeks would sign up for a third year. Most of the best & brightest would move to greener pastures where they could work a measly 70-80hrs/week on average and earn the same (or in some cases of the top PE and hedge funds, significantly more).
Now Goldman Sachs has announced that instead of a third year as an "analyst", these third year analysts would be directly promoted to the Associate level -- along with the typical $50-100k pay raise (including bonus) that comes along with that title.
Now there is no doubt in my mind that the majority of the analysts that have completed two years of boot camp can make very successful associates for the firm. I'm just not convinced that this will move the needle enough to retain the most talented of the bunch...and here are my three main reasons why:
1. It's More Than Just Immediate Pay
While this direct promotion will reduce the pay gap between pre-MBA PE associate positions and the third year at an investment bank, I still think the best of the best will choose to go to the buyside. Why? These young overachievers realize very early on (thanks in large part to the glorified BSDs of mega PE funds and mega HFs in the media) that the outsized pay opportunities come when you are a partial owner in the form of carry.
No matter how fast they move up the ladder, banking is still the safer route with relatively lower pay. It sounds crazy when we say that these kids would scoff at $300k+/yr, but let's look at this objectively:
Option 1 - Banking: If you are good, steady promotions and at a top bank if you make partner, you're easily clearing $2-5m/year. Amazing, right?
Option 2 - Private Equity of Hedge Funds: If you are good, steady promotions and the possibility of raising your own fund. If you are successful at raising your own fund, even if it's only $100-200m to start, if you have decent returns, the LPs will typically reup. Eventually, if you run a shop with 2-3 other partners and are managing over $1bn, your average annual compensation can spike dramatically. We're talking in the $10+m range. Granted, this option is significantly more risky, but it is also more enticing for the brightest financial minds (that are not as risk averse).
That's the magic of carry ...basically, becoming an owner instead of staying as an employee of a big bank can lead to insane returns. It's the same reason why banks are also fighting the drain of talent to Silicon Valley. Even though most start-ups fail to materialize into the next Uber or AirBNB, the potential of out-sized returns is very tough to resist.
2. Where Are Your Skills?
The junior finance professional would be wise to focus on building a strong foundation of skills across a variety of functions. Someone who sticks on the sell side indefinitely will likely make a great banker, but I'd argue that they will rarely get to think as an investor.
They will be more focused on impressing the client with beautiful decks than actually thinking about whether a specific deal makes sense or putting their own reputation or capital at risk. While there is nothing wrong with this, I think most junior analysts instinctively know that deciding so early in their careers that they want to be "bankers-for-life" is limiting their options.
Any trader will tell you that options have value...so why would these analysts feel the need to stay when they can do two years on the buyside, get into a top MBA program and then jump right back to banking if they so please? Why do so few pre-MBA bankers go back into banking?
To be fair, I think Goldman and some of the other bulge bracket banks have been addressing some of the work-life balance issues, but I'm not convinced they have done enough to compete with the options, "prestige" and potential for out-sized returns that the top private equity or hedge funds provide.
3. The type of work
Let's be honest. After 2 years of working in investment banking, the work can get monotonous. Goldman is smartly trying to address this with allowing the third years to transition to new groups, and they are paying lip service to technology that reduces some of the grunt work. (would love to get WSO's view on this)
However, the reality is that the work is still incredibly repetitive. So is a lot of work on the buyside, but at least after two years of long hours, it's a new type of repetitive. At least there are new skills being developed and at least these kids can dream of one day running their own fund.
What do you guys think? What percentage of analysts jump ship now after two years (75-85%)? What percentage do you think will jump after this new policy? Do the bankers on WSO disagree with me?
My best guess is that it may increase retention by ~5%, but I doubt it will have the dramatic impact Goldman is hoping for...I welcome your thoughts!
Stay Strong,
Patrick
I was under the impression that in recent years as an analyst if you decide you want be a banker for life and you're decent it isn't very difficult to get a direct promote and basically stay for the long term anyway. And like I said, if you're decent. Does this mean that everyone who doesn't get a buyside gig or leave for something else gets to be an associate? This is an exaggeration but kind of like "ah screw it, I've got nothing better to do and they'll give me a big raise if I stick around."
I've yet to see this amazing technology Goldman is yammering about. The move is an added carrot, but it's trying to compete with a buffet. If you'd really like to solve the problem, I might suggest letting associates and VP's begin to build skills necessary for partnership- like rainmaking with clients. Analysts are leaving because so few of GS MD's make partner, and they can get partnership from the buy side within time. Those are my thoughts, anyway.
Wanna compete with Silicon Valley? Start acting/treating analysts like entry level Silicon Valley people. Make it actually fun to come to work.
Where did you get this information? Will other banks/EBs do the same? When will this be implemented?
...the Wall Street Journal...
The buyside dream is overly simplified. To survive and make it 10+ years and launch your own fund is a pipedream and overly simplified in the OP / the boards.
I know GS was promoting several (select) analysts directly to associate after 2 years already so this seems pretty standard. I also don't think it really changes much because recruiting for PE happens 12-18 months before the analyst program ends and regardless, you'll never get GS or any bank to start promising promotions 6-12 months into an analyst's tenure.
What you will have is happier 3rd year analysts who are now making associate salaries. I think you'll keep a lot more third years / new "Associates". You'll have an issue with Associates making significantly more than analysts when they begin discussing salary for PE jobs. Believe it or not, most PE jobs don't pay $150k base. So now the Associate has to take a paycut to leave the bank or the buyside will strictly recruit A1/A2s as the salaries match up. As a result, I think you will actually have slightly better retention in banking. Also the idea of "seeing the light" a full year earlier makes a big difference mentally for banking. Associate work-life balance is slightly better than an analysts, although both are miserable.
Goldman was already making direct A2A promotes after two years for smart analysts. This isn't groundbreaking, it's simply a standardization of a soft policy that previously existed.
While it won't impact buy-side recruiting too much (given how anyone who wants to be an investor, not a grunt at the bottom of a totem pole where shit flows downhill like the Human Centipede, will be looking to leave banking as promptly as possible), GS plans to extend A2A offers at the 6-month mark (January) to counteract how early the process goes off.
The real thing slipping past everyone's radar here is what the real motivation behind all these technology initiatives are. While they're in the earliest stages, the basic gist is that a tremendous amount of the mind-numbing work in PPT and Excel could be done by a smart machine (or 6th grader, but I digress). If you get those smart machines involved, all of a sudden you have happier employees who have more free time and an easier time at the office! Except what actually happens when technological innovation improves quality of life for employees? The employer simply gets rid of the unnecessary human labor component and enforces the same quality of life for the remaining employees.
Who knows, but we may see smaller analyst classes there in the future and the recruiting process is explicitly shaped to get people in the door for long careers there.
You might pooh-pooh it away, but think of how far ahead of the industry GS was with secdb ... what happens if the model-building and deck-making becomes heavily automated? You need way fewer analysts to do the actual analysis simply because the analysis is less time-consuming to perform. We're in that era now; existing technology (query-able machine learning systems that can easily perform all a banking analyst's tasks) is simply too expensive relative to paying an analyst $140,000 out of college. When that balance shifts, the human capital model in banking will be upended.
Separately, an interesting point is that moves like this (Goldman is always a leader on these initiatives and the other BBs follow suit within months) are likely to make more buy-side firms establish their own analyst programs. BX (on the principal side, not advisory) always had fantastic analyst programs. Silver Lake hired two (?) analysts a year from Wharton. Bain's had one for several years (decade-ish?). KKR and TPG are coming up on five years with theirs. CCMP is the only MM PE firm I know of to have an active campus recruiting effort for an analyst program. My guess is that we will see more of this.
Bleeding to the buyside?
I thought that the typical Goldman Sachs exit opportunity was to work as an SEC or Fed executive.