Why are PE funds, who are usually quite pragmatic/opportunistic about investing and businesses, so rigid in their recruiting?
This whole idea that you have to have done pre-MBA banking to get into PE or that you have to have done XYZ etc... just sounds so rigid to me when you're in the business of identifying imperfect companies (but where you see opportunity) and making money off of buying and improving them. Hedge funds are better in the recruiting sense as they're more open-minded, but why is PE not like that? Why not just interview people who seem interesting, give them a shot at the interview (which is mostly analytical/case study anyway), and select that way? Why set all of these stupid rules of pre and post-MBA, 2 and out, blah blah.
Just doesn't make sense to me coming from people who can only be good at their jobs if they're opportunistic and pragmatic, not if they're rigid and so black or white in their thinking.
Not all funds are like that. Some lmm funds behave like VCs in their recruiting style.
BBs and any big corp really..HAS to streamline and simplify their hiring process using rigid structures because of their size and how specific functions are.
I think very few PE funds are large enough for the size of their associate class justifying such a rigid structure, however. I think the problem is more "if it ain't broken don't fix it". PE funds are managing risk in their approach to recruiting. Why gamble when you know the 2 years at GS Wharton undergrad will, in all likelihood, perform well enough to move the chains before he's kicked out in two years to join another fund / attend business school. However, when hiring vp's / positions they consider "career track", you will find that they are more open minded, as they are hiring for much less process oriented roles where the intangibles can make a difference.
I’ll push it even further and confirm that some MM funds also recruit in a very informal fashion.
In my experience, these funds have a healthy layer of senior folks that come from a non-traditional background themselves and therefore have a thing for the atypical candidate.
A large part is that investors want to see that track as well. It's much easier for a prospective LP to look at the Associate class, see the "expected" credentials, and get more comfort with your firm.
That LP who bases their decision on the resume of the juniors at a PE fund needs to ... I dunno, but something not good.
When you're putting that next PPM together, would you rather show your LPs 5 Harvard MBAs with IBanking experience, or 2 guys from sales, 2 from engineering, and 1 from marketing? Up to you I guess, but I'm going with the first one every time.
I also don't know how you fault the LP for that, they are working on limited information and dealing with 100% blind pool risk - the perception of quality at the firm is extremely important.
Sorry, but do you really think that Texas Teachers is looking at associate bio's when they are selecting funds? No chance. They are taking meetings and basing their decisions on behalf of investor-facing IP's and track record. There's no way associate pedigree has any bearing on the decision on whether or not to invest with a fund.
Yes, I do know that LPs will in fact look at the whole team, which yes, includes associates bios. In most cases its just checking the box - unless of course you have an unconventional Associate pool, at which point you'll have to speak to it.
Obviously investment team and track record carry the day, but an in-depth diligence visit will involve the question "who is doing the work, running the day to day models".
PE firms push outside the box when evaluating new deal opportunities because it could result in discovering something that ultimately yields outsized opportunities, so there's a clearer risk-reward analysis to be considered. The risk-reward curve on taking a gamble on associate hiring is less attractive, so people are more rigid.
Most of the PE value add is not the creative "seeing opportunity where others don't". That's generally a tiny part of it. Most of the alpha comes from having advantages in the trenches: relationships that can allow you to get an advantaged seat in a process, experience that can allow you to more confidently assume certain bolt-on acquisitions or refinancings or spin-offs (knowing you can get them done, rather than hoping), relationships with consultants and other experts that can make your diligence process cheaper. It's 80% process-related advantages and 20% creativity. At best. Often feels more like 90/10. So having junior folks who can help manage a process is really important. Nobody is really looking for a 24-year old Warren Buffett.
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