Private equity kicks off ‘on-cycle’ recruiting race for talent

Happy Thursday!

Private equity’s mad rush to find the best young talent kicked off this week, with firms making offers for slots in their 2022 associate classes.

I’ve been hearing some grumbling about a failed attempt to maintain a sort of informal agreement among lots of big firms to hold off on recruiting associates until later in the year, allowing for some diversity-themed recruiting events in October. (If you know anything, hit me up at cwitkowsky@buyoutsinsider.com).

An interesting dynamic this year is that the candidates have had a year of actual work experience in their two-year banking analyst programs. In the past, firms rushed to recruit associates just out of school who were just starting in their analyst roles.

The process, known as on-cycle private equity recruiting, works like this: A day comes when suddenly a host of firms schedule interviews with tons of candidates over the course of a few days. The firms make fast-expiring offers to fill out their associate classes. Once one firm kicks off the process, other firms follow because they don’t want to miss out on future talent, sources told me in previous interviews.

I last wrote about this process in 2019, when the process, called on-cycle private equity recruiting, kicked off in September. Last year, the cycle was disrupted by the pandemic lockdown, sources said.

In a sense, this disruption was helpful in that it allowed the process to reset, so that this year firms are recruiting candidates with actual work experience. This is similar to how it worked 10 years ago, I reported back in 2019.

I wrote this back in 2019, which holds true today: Earlier recruiting is challenging because the candidates have almost no work experience, meaning firms have to assess their potential based on interviews, on-the-spot financial modeling and analysis exercises, their track record at school, the bank where they are working and perhaps recommendations from their personal networks.

It’s that network aspect of the process that some believe could be detrimental to the promotion of diversity in the industry, according to an executive at a PE firm.

“It really benefits the kids with connections … ‘this guy was in my fraternity’ or that kid’s dad knows someone that helps them prepare for the interview,” a GP told me.

Those with such connections have an advantage over the “really smart person” who went to a state school in the Midwest and may not have the same network, the executive said.

Value: A characteristic of software investing is dealing with high valuations. But talk to tech investors, and they’ll tell you the valuations are justified considering the importance of the services they provide, made more clear in the pandemic and remote-everything environment.

Karishma Vanjani of PE Hub interviewed Rachel Arnold, co-head of Vista Equity’s Endeavor fund, about the firm’s focus and valuations in the software world. Read the full Q&A here:

What we’ve seen proven over the past 12 to 18 months, especially in the virtual environment, is that the business of enterprise software matters significantly as we think about long-term global growth. Significant capital flows into digital platforms have really created an environment where software is projected to remain the fastest growing sector globally for the foreseeable future. As investors have become more aware of the durability and value of this asset class, that has really bolstered what we’re seeing externally in the market, and we don’t expect that to change.

With these factors in mind, it’s not surprising to see a valuation dynamic in the market. Obviously, no one knows exactly what the new valuation normal will be but what we do know is that there’s no shortage of capital for software companies.

That’s it for me! Have a great rest of your day. Hit me up with tips n’ gossip, feedback or book recs at cwitkowsky@buyoutsinsider.com or find me on LinkedIn.