From a PE Recruiter’s Eyes: “Layoffs Are A Function Of Fund Size”

With murmurs that PE firms may not be immune to layoffs (and proof of that rumor trickling in), what’s a private equity recruiter to do? I asked Todd Monti, head of the PE practice at global executive search firm Heidrick & Struggles, what’s going on with the private equity job market.

Your firm recruits upper level private equity pros. That must be tough if there aren’t any openings to fill. What are you seeing there?

It really depends on the amount of assets under management and how much of it is deployed versus dry powder. Firms that have access to capital are being opportunistic in hiring. For those that don’t, it’s a wait-and-see approach with a lot of questions. The main hiring I’ve been doing is when a fund has just been raised and the firm feels a need to supplement the team. The second category of firms hiring is the firms that are starting to view distressed as an opportunity. A number of firms are bringing in turnaround pros.

What about layoffs?

It’s a function of fund size and what a sponsor’s commitment is to raising a pool of capital. If one feels it may be difficult, or they’ve decided to scale back fundraising efforts, there’s a direct correlation to layoffs. It would be case specific but wouldn’t be surprising if a firm that decided to scale back its efforts on the fund side also did so on the personnel side.

There are two variables really. One is performance and two is the ability to raise capital. If there’s a team with a strategy that can’t get off the ground, then typically those (people) are reallocated. If there’s no immediate need for them elsewhere, they’ll get caught up in the layoffs.

So, you’re saying, if we see firms reduce their fund size that could mean a head count reduction is in store?

Yes.*

Ok. Where on the ladder are the cuts likely to start? I assume the bottom.

It’s the lower level individuals that could be caught up first. Other, more senior individuals that fall below the principal or partner level tend to be the next layer that gets hit.

Meaning VPs?

Yes, in that range.

Have layoffs affected your practice?

It hasn’t yet unless a firm has decided to completely abandon a strategy, and we haven’t had too many situations where a firm has abandoned a strategy on a large scale. As far as fundraising goes, firms have put off or delayed fundraising activities but not canceled them altogether.

What does hiring look like for the middle market specifically?

Issues in mid market are more generational. Founding partners are questioning whether they want to go back and fundraise either because they don’t want to, or they’ve made enough money that they don’t need to go through it again. That’s created opportunities for firms to come in and recruit their other investment professionals.

Have you see a flock of Wall Street bankers attempting to move over to private equity firms? Are they giving PE job hunters a run for their money?

I never expected large amounts of banker to go to private equity. Most firms look for principal investors to add to their teams. The people that come out of investment banks are talented but more on the sell side than the buy side. So there’s a premium placed on people who have a demonstrated ability to put capital to work. If they are coming out of a bank, there’s more of an appetite for people who were part of a merchant bank or a PE practice.

So where are the bankers going then?

Good question. I don’t have the answer. It’s hard for them to start their own PE firms given the fundraising environment.

One place PE firms are hiring is on the financing side. They’re bringing in an individual to help arrange financing activities, so any time they need deal finance, they’ve got in-house senior level leveraged finance experts straight from of the banks. That position didn’t previously exist at a lot of firms.

What about lower level recruitment?

I’m not as close to that, but the sense is that larger firms have scaled back recruiting activities and will continue to do that into 2009. However, they won’t shelve it completely.

Earlier: Private Equity Pink Slips, Private Equity Layoffs: The Opening Salvo