Senior hiring for private equity firms is a tricky business. There is arguably far more downside than upside, from disrupting the existing culture, and demotivating
mid-level and junior colleagues, to the financial and PR costs of breaking a
contract if the integration doesn’t work.
On the other hand, demand remains high: institutional investors have broadly doubled their allocations to private equity and this capital can only be deployed properly by seasoned investors. There is a plethora of new firms opening up – around 50 in Germany alone over the last couple of years – and these also need senior figures to lead deals and develop business. With more capital chasing the same historic level of dealflow, prices have soared, and with them execution challenges. Whilst a rational analysis might suggest taking resource out of this imbalanced equation until the market cools, in practice many of the key players are seeking to step up their hiring, to look for that incremental gain that gives them the edge in this ever more competitive environment.
In our experience of managing such mandates in recent years, the following observations hold broadly true:
• At a senior level, to be effective in private equity, you have to be capable of generating incremental dealflow. Even though the private equity business has become more sophisticated and mature than ever before, the key dynamic remains interpersonal: this is a people business and the winners are going to be those able to build effective relationships with sellers and management teams. With so many firms chasing relatively few deals, and pricing almost always now in a narrow, if full, band, vendors will mostly go with the firm they trust and like. Reputation, communication skills, integrity and, perhaps above all, humility count for more than ever. Your new senior team member should be viewed critically against these criteria.
• The best senior hires tend to be those made by firms who know exactly what they are looking for. Just adding extra execution capacity is a pretty blunt requirement; rather seek specific sector credentials, dedicated geographic coverage or a particular set of incremental relationships with LPs or origination sources, for example.
• Equally, be ready to articulate what is special about your own firm and this opportunity for a new joiner. This will not just be hard empirical data on track record and remuneration, though these are also important. An LP spreads their risk by diversifying across a portfolio, but a new recruit only has one ‘silver bullet’ and will be heavily influenced by their interpretation of culture so the more openly this is displayed and the more consistently it is felt across every touch point in the organisation, the more convincing it will be. You are not just buying in this transaction, you are also selling.
• With this in mind, think carefully about the sequence and structure of your preferred interview process. Do not put unnecessary obstacles in the way at key junctions – for example, making proven senior investors sit standardised written tests designed for recent graduates before even meeting anyone from the firm is viewed as patronising and rude. This is a courtship and choosing to flatter applicants with early exposure to your own top team does not have to mean any compromise on analytical rigour.
• The pool of relevant people who are ‘legitimately mobile’ at senior levels is small and cautious. Many of the best performers will be happy and locked in financially, whereas the most visible people looking for new roles often have a reason not to be so. You are looking for those whose specific circumstances make them available, either by way of a change in personal circumstances, or some sort of glass ceiling or tension in their current firm (diligence alert: if so, what and why?). People like this are sensitive about putting themselves forward for new interviews, as they often have value at risk and limited capacity to meet. This means these processes are delicate and can take time – so plan accordingly.
• Timing becomes especially significant when you look at your own fundraising cycle, and the likely milestones for potential individual joiners on their existing fund liquidity events (carry, bonus etc). Notice periods, non-competes and the risk of rival offers, including from current employers, make this a three dimensional game of chess.
With over 20 years of experience at the heart of the European private equity industry, we have the network and the industry knowledge to be an effective guide as you consider hiring at senior levels.