When Does the Pendulum Shift
Hi All,
Wanted to start a discussion about how/if/when investment banks stop the brain drain to PE that’s been a problem for years. Obviously many firms have started to try and tackle the problem with its most junior positions by boosting base salaries to record levels, but is there a long term solution to the more senior levels, and even associate levels, of the firm? Or is PE destined to stay as the best asset class on earth with compensation that the banks can’t rival and loose all of the best talent to in perpetuity?
Give it a few months to a year. A lot of funds are going to shutter, only the top quartile funds will remain and grow. Not all funds and firms are built the same and many are quite shit. Institutional LPs are going to be much more selective with allocations and require more from GPs. A lot of funds are going to have difficulty raising and deploying capital to generate a return. The down market will expose the frauds. If you are at a boutique VC or PE fund, good luck.
How do you classify a boutique VC or PE? Fund size, partner backgrounds etc.?
I used the wrong terminology but what I really meant was anything that didn’t generate top-quartile returns. If your fund is shit at generating returns or still in its first fund/scaling I.e no proven track record of good returns, it will be tougher to raise, tough to deploy, tough to return. No amount of IRR/return calculation manipulation will save you.
I am not in IB, but if I were, I would be weary about jumping ship to the supposed promise land right now unless it is a top-quartile fund. If ur at a shit tier fund that may not even weather the storm, you’re better off in IB. Don’t get so desperate that you join some shit fund just to say you work in PE. The market for funds is about to consolidate.
It is infinitely easier to ride out a recession in private equity than it is banking. The PE firm’s revenues are mostly fixed as they come from the c.2% fee charged to LPs. This enables them to continue to pay their staff throughout a recession (should they choose to). Yes, it is unlikely that you’ll be exiting portfolio companies and generating carry during those years, but the carry is simply delayed as long as the portfolio doesn’t go under. Similarly, fundraising is likely to be pushed back, but it isn’t the case that the bottom 75% of funds are going to die off or fail to generate a sufficient return.
Meanwhile, services firms live year-by-year and deal-by-deal. These firms lose their revenue stream immediately when deal flow dries up. So while it wasn’t the precise question posed by the OP, it is worth mentioning that it is a lot safer to be in PE than IB/Law/services if the economy turns.
Rx will be in demand though
Utterly horrific take
The short answer is it likely won’t shift. Young professionals like analyst programs for the optionality it provides for their careers and banks like analyst programs because it requires a short term investment in smart, but untested 22 year-olds.
As long as MBA associate pipelines remain strong, there’s no reason for banks to question the current system. In some ways it’s even better that analysts leave for PE. As a bank, who do you want to start putting in front of clients - a 24 year-old who spent 2 years behind a computer and got promoted or a 30-year old with 5 years of work experience and a graduate degree?
For someone who was quite young pre 08, why was banking pay higher back then? What changed after the crisis so that PE became such a higher paying path?
Banks prefer A2As every time. If they COULD fill their associate class with them, they would.
It used to be that analysts would leave their 2 year program, get an MBA, and come back to banking (that’s what many MDs did). Then the analysts started leaving for PE/HF or stopped coming back after their MBA (so they created A2A program so analysts wouldn’t need the MBA at all and then shortened the promotion path from 3 to 2 years in some cases).
Tl;dr They’re using the MBA programs to fill in the gaps for missing A2As, not as their ideal pipeline
Not so sure about that, I know some banks are stopping MBA laterals for associate all together (PWP). This is why I think the dynamic going forward should be interesting.
This will not shift. The main reason is taking capital risk will always pay better than services. Higher risk means higher reward and at the best funds, that will always mean higher compensation.
Throughout time various market crashes and events have created regulations that forced banks to exit these risk taking businesses. Pre 2008 banks S&T teams could take risks like hedge funds with a ton of capital and information. Blackstone spun off IB to PJT for a reason. I wouldn't be surprised if in 10 years banks can't even have equity research and IB under the same roof. Or potentially wealth management. Eventually some politician will rightly or wrongly call bs on one of these "Chinese firewalls" within banks and try to pass new punitive regulations.
I think rising rates almost ensure PE will have some sort relative compensation decline to other finance professions if not the broader economy. If regulation ever gets rolled back in a way that allows banks to act as principals and deploy capital in major way, conflicted or not, you will see the compensation, talent and financial innovation come back to investment banks.
This doesn’t distinguish between what level you’re in within private equity
Yea if you’re the partner you can ride out a down 5 years without losing your shirt, even without a fundraise or exit
But if you’re the associate, senior associate or principal.. you’re really expensive to just keep around on portfolio management… New funds and deploying capital is what justifies comp for those levels
Otherwise churn and burn new associates to put together LP updates and hand hold portcos and save bigly on fund expenses
All the while in a down market, no new funds would be opening / raising
Every other fund would be going through similar treading water / survival mode and not hiring mid level laterals for the most part
So you’re frozen out of the industry and don’t really have such transferable skills
Not saying banking is insulated at the mid level
But I do think it provides higher comp at the jr and mid levels (at least EBs)
And you’re in the flow of information / deals / the market a lot more so you have more optionality coming out of banking
Heard through the celestial grapevine that private equity is the asset class that delivers the highest returns amongst all planets in the entire galaxy.
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