LPs Play Back-Stage Role In GP Recruiting Trends

If you want to understand sponsor behavior, it’s often a good idea to look at what’s going on with institutional investors. So it is with recruiting.

Among the biggest recruitment trends of last year expected to extend well into 2011: a surge in hiring at the junior levels, the beefing up of investor relations and internal marketing departments, and the addition of senior-level staff with either operational or debt-markets expertise.

Solveigh Marcks, managing director at The Denali Group, an executive recruitment firm, said many sponsors expect to continue hiring at the junior level in 2011. They’re especially interested in associates with at least two years of investment banking experience under their belts. Part of the reason has to do with the stinginess of their backers, many of whom are at or over their target allocations to private equity. With buyout shops less sure about prospects for management fee income, they have had to be more conservative about hiring at senior levels. Marcks made her remarks last month as a speaker on a webinar hosted by Thomson Reuters, publisher of Buyouts.

The hiring sponsors are doing at a senior level also owes much to institutional investors. As noted, convincing investors to come on board a new fund has become a much more challenging enterprise for firms in recent months. And even when they’re already in a fund, LPs have become more demanding of firms, such as in requesting frequent and detailed information to evaluate ongoing performance.

Both trends translated last year into the need to have senior professionals on staff with expertise in salesmanship, project management, PPM creation, and the compiling and writing of quarterly reports. Marcks called the addition of investor relations and fund-marketing professionals to handle such tasks “probably the single biggest trend we saw in 2010.”

Needless to say, some buyout shops did beef up the deal-making side of their firms last year, if at a subdued pace overall. In some cases, they brought on executives who could lead them into ancillary businesses, such as mezzanine lending and senior debt trading. The Carlyle Group, although a long time player in the debt markets, made a significant addition on this front early last year by hiring Michael “Mitch” Petrick to head up the firm’s leveraged finance, mezzanine and distressed investment teams.

In other cases, sponsors added operational talent to their payrolls—often in an industry complementary to that of other partners, enabling the firm to source deals in fresh territory. This let firms ramp up their investment pace after a relatively quiet time in the wake of the credit crisis. But here again, investors played a role.

“Certainly LPs are looking more than ever to see operating improvements and increases in EBITDA drive returns,” said Marcks. “They’re really assessing firms on that criterion when they’re looking at their track records.”

All this hiring has contributed to the need for someone to manage the growing administrative needs of a firm. That led to yet another recruiting trend last year, which was for sponsors to hire CFOs and COOs with broader skill sets than in the past. Indeed, according to Marcks, many sponsors have grown to the point where they need managers who can oversee human resources, investor relations, information technology, and—due to growing regulatory scrutiny of the market—compliance functions. Some sponsors, she said, are even looking to poach administrative talent from investment banks and money managers, “where chiefs of staff often bring very broad skill sets to the table,” she said.