Get ready for a massive reshuffling of private-equity talent.
That’s what Jonathan Goldstein sees developing from his perch as regional managing partner of Americas for private-equity recruiting at Heidrick & Struggles.
“We are starting to have more candidates approach us,” Goldstein told Business Insider in a recent Zoom interview.
“The markets have turned, and a lot of them look at the firms they are at, and the funds they are investing out of, and a number of them see a pretty bleak situation.”
Large private-equity firms including KKR, Blackstone, and Apollo reported markdowns of their portfolios for the first-quarter because of the disruption caused by the coronavirus, while smaller, more specialized firms with portfolio companies in areas like energy and retail are scrambling to save the businesses they own or take them through bankruptcy proceedings.
That means PE execs won’t get compensated for the carried interest they hoped to earn upon selling what were until recently relatively healthy businesses. And investors may choose to stop giving money to some PE firms that are unable to deliver satisfactory returns.
Even some diversified PE firms are at risk.
“If you have a PE firm that has 12 portfolio companies and three our four are in the energy space, then nobody is getting any carry, even though the deals you did in business services or the industrial space may have done well, the energy deals haven’t, and that may pull down the entire portfolio,” said Goldstein.
The uncertainty is causing some private-equity executives to reassess whether they are working on the right platform to carry them through the next five to 10 years, he said.
For vice presidents and principals, their career progression hinges on their investment record, and with portfolio companies in energy, retail and hospitality hurting, and fundraising seizing up, execs are eyeing jobs in the most active areas of investing.
“If they’ve closed very few transactions and they don’t see their way to closing transactions over the next couple of years, they probably have to start looking elsewhere,” said Goldstein.
“There are firms where they are large enough institutions where you can get by without having closed a deal in a long period of time. In the short-term and sometimes medium-term, that’s not such a big deal. But in the long-term it’s disastrous.”
Goldstein, who recruits both investment professionals and operating partners, shared his insights alongside five other recruiters. They laid out the hiring trends that private-equity executives and anyone looking to break into the industry should know right now.
They all pointed to investing areas such as distressed debt, private credit, structured equity, and special situations picking up.
These areas are creating opportunities for junior and mid-level talent, they said, as firms raise gigantic funds to capitalize on the dislocation of assets in the troubled economy.
They did not name specific funds to protect confidential client discussions. But media reports show Oaktree planning to raise a $15 billion distressed debt fund. Last year, KKR was raising a $1.5 billion special-situations fund, or a stockpile of investor dollars for high-risk, high-reward purchases. And this April, it signaled efforts to revitalize its special-situations fundraising.
“Distressed, loan-to-own strategies, special situations and tactical opportunities, you are seeing those folks fired up right now,” said Adam Kahn, a recruiter with Odyssey Search Partners.
Overall, though, those opportunities are limited and recruiters said there has been a hiring slowdown across the board, causing somewhat of a career-path crisis for junior to mid-level private-equity professionals.
Louis Demetro, a recruiter at Sheffield Haworth, estimated that two-thirds of his PE clients have formal or informal hiring freezes. And most PE firms decided to only take a fraction of the hires they were planning to bring onboard during 2020 so far.
“It’s more so business-critical hiring right now,” he said, pointing to PE funds that planned to raise a debt fund over the coming year.
“If they have a fund going out, they need to hire those senior investment professionals so they can deploy capital,” he said. “It’s less of the tack-on, additional capabilities for the fun of it.”
Part of what is driving the hiring isn’t just the asset class in which funds are investing, but the life-cycle of a fund.
PE firms that just raised a fund and haven’t deployed any capital yet are in a good place, whereas firms that may be halfway through deploying capital may need to use the rest of their dry powder to save existing portfolio companies, rather than close more deals.
“Some funds are in the middle of a cycle and maybe LPs aren’t ready to invest more in their strategy,” said Noah Schwarz, a recruiter with Korn Ferry. “That’s difficult for those PE funds.”
On the other hand, he said: “If they just raised capital and they need to put capital to work, your valuations are going to be much cheaper. There are more choices to look at. And if you have a strategy where you can invest in both distressed and healthy companies, those will do quite well.”
The largest private-equity firms including TPG, Blackstone, and Carlyle, either did not respond to a request for comment or declined to comment on how recent events have affected their hiring approach.
But industry observers say that they expect these firms to seek out attractive hirings and acquisitions that may emerge from the feast-and-famine employment situation.
One recruiter who declined to be named publicly because they were not authorized to do so pointed to business development corporations, or “BDCs” — funds devoted to lending — that may very well get snapped up by large PE giants on the cheap.
“It’s public knowledge that BDCs are trading at low valuations right now,” this person said.
“You’ll probably see large PE businesses buying BDCs and absorbing their assets. That could lead to fewer jobs if the acquiring investors are working with the portfolio and don’t acquire the talent with it.”
Outside of acquiring capital, large private-equity shops also face decisions about how to hire for associate and analyst positions.
Many large financial institutions have switched to shortened, remote summer internships for investment-banking analyst roles. That means when they join in 2021 in full-time roles, it’s questionable whether they will have the experience needed for a PE firm to poach them.
PE firms have extended offers to investment banking analysts earlier and earlier in an analyst’s tenure because of competition over what is perceived to be the best talent. Last year, PE firms started hiring as early as September, offering analysts jobs not long after they started work at big banks like Morgan Stanley and Goldman Sachs, with start dates two years out.
“It’s very suspect at the moment what their summer experience will be like this year, versus the traditional experience,” said Kahn, the recruiter.
“So when they hit the desk in 2021, even if they can go into the office, they may have zero experience working on deals by the time PE firms start interviewing them.”
But even this year’s class of investment banking analysts may have good reason to resist a PE offer in 2020, Kahn said, given that they may not even have the chance to physically appear to the office of their employer come fall.
“They may not get to go to work from the office in October or November,” said Kahn, the recruiter. “So, can they really be ready to recruit with a PE firm that wants to get started early if they have never actually set foot in their employer’s office?”