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Private Equity, Hedge Funds Lure MBAs Away From Chastened Banks

Private equity is a diamond in the rough. Regulatory scrutiny and caps on pay and bonuses have tainted banks' appeal – pushing MBA graduates into PE firms and hedge funds.

Mon Mar 2 2015

Stagger into a Berlin tavern, or Kneipe, in February and you may just bump into a sloshed private equity executive.

The buyout industry’s bosses flooded the German city last week for SuperReturn, the grandest gala in their portfolio. Heavyweight speakers from Carlyle Group, Blackstone and CVC Capital swept the stages. Any budding buyout managers will have kept a close eye on events.

Private equity is a diamond in the rough. The public’s dislike of bankers for their role in sinking the global economy in 2008 has taken its toll on recruitment.

Banks have yet to fully rebuild their reputations. Greater regulatory scrutiny and caps on pay and bonuses have tainted their appeal to business school students.

According to a global survey of 174,000 business students last year by Deloitte, fast-moving consumer goods has replaced banking for the first time as the most popular career path.

Werner Bonadurer, faculty director of the MSc Finance program at W.P Carey School of Business, says that senior professionals tend to move out of the heavily regulated environment and find homes in private equity and hedge funds.

“Less regulation, less bureaucracy and less capped pay checks are there,” he says. Banks are seen by business students as less secure, friendly and flexible, according to Deloitte.

At the Booth School of Business, for instance, the number of students going into investment banks fell from 30% in 2007 to 16% last year. At London Business School in 2007 46% of MBA students got jobs in finance but in 2013 only 28% did.

The end of the international banking model has also eroded jobs at the world’s biggest banks.

As if to underscore the point, a few days after private equity’s Berlin event got underway Royal Bank of Scotland revealed a mass global scaling back of its operations, and plans to slash jobs at its investment bank.

Yet at many business schools careers managers say MBA students are still interested in working in banking, although plenty will use the experience as a route into hedge funds and private equity.

At Melbourne Business School investment banking experience is essential for roles at private equity firms, according to John Gurskey, director of career services.

Paula Quinton-Jones, director of career services at Hult International Business School, says investment banks are often a powerful hunting ground for private equity recruiters.

“Without a background in M&A or leveraged finance candidates may find it difficult to break into PE,” she says.

As attitudes towards global banks have soured over the past few years, some of the world’s top business school candidates have been looking elsewhere for careers.

Paul Schoonenberg, head of MBA careers at Aston Business School, says that banking is still appealing to MBAs, but there will continue to be an interchange of talent between banks and private equity firms. “Many of the skills are complementary,” he says.

This is partly because one of the big draws of banking careers has diminished – the pay.

At Stanford Graduate School of Business, for instance, by far the largest portion of MBAs working in finance are in private equity, earning the highest annual salaries of any industry at $170,000.

Hedge funds also hired more Stanford MBA graduates than investment banks, and paid them $150,000 in salary – $50,000 more than banks.

Martyn Drage, career consultant for finance at Henley Business School, says there is a perception that the alternative investment market provides richer rewards.

Commissions and bonuses tend to be large and are unregulated. “Private equity is coming to the fore,” he says.

But hedge funds have in recent years come under scrutiny for the high fees they charge despite lacklustre investment performances. Hedge fund returns reached only 3.6% in 2014, according to HFR, the hedge fund data provider.

“The competitive hedge fund field has become crowded and market environments are not very friendly,” says Werner at W.P Carey.

As a result hedge funds are not hiring as strongly as they have done in the past, say careers officers.

But there is still a need of the right MBA talent. “Skills across finance, operations, front office and risk and compliance are in demand,” says Paul at Aston.

As well as shrinking pay, career progression at banks has slowed since the crisis and it is harder to reach the top of the greasy pole.

Morgan Stanley, for example, appointed just 151 managing directors this year compared with more than 200 appointments as early as in 2011. At Goldman Sachs only 78 new partners were appointed in 2014, a fall from 94 promotions in 2008.

MBA graduates also typically earn less than peers when they are promoted to the highest levels at banks, according to figures compiled by Emolument, a salary data provider.

Jonathan Nicholson, managing director of leading City recruitment firm Astbury Marsden, says that there is much less focus on MBA graduates in the current employment market.

“Their importance has fallen since the downturn,” he says. “[Finance] employers are much more interested in seeing experience and aptitude than theory.”

But where MBA graduates may have an advantage in private equity firms is in their broad understanding of business models, as befits the nature of the degree.

At private equity firms roles are more hands-on, says Martyn at Henley. “You’ll be looking at how effective the organization and its management is,” he says.

Because private equity firms tend to be smaller, career progression can be more rapid – but recruitment is usually on a much smaller scale than at investment banks.

“Recruitment tends to be done through networks and alumni – and very much below the radar,” says Sotirios Paroutis, assistant dean for the full-time MBA at Warwick Business School.

Smaller outfits mean that culture becomes more important in the recruitment process at both private equity firms and hedge funds.

Sotirios says that candidates must be able to fit into firms’ unique cultures and their teams.

Aside from these soft skills, he adds that advanced excel modelling skills and an understanding of valuation principles are key to being hired by private equity groups.

“They also want to see an understanding of domestic and international financial markets, as well as financial risk hedging tools and techniques,” says Werner at W.P Carey.

One positive sign for private equity is the amount of “dry powder” – money committed to funds but not yet invested – in the market, which is at a record $1.19 trillion globally, up from $1.08 trillion in 2014, according to data provider Preqin.

Such a buoyant fundraising market towards the end of last year has resulted in more promotions at senior levels within private equity firms, says Paul at Aston.

But there are complaints in the sector that there is too much money chasing too few assets.

The valuations of companies bought by private equity firms this past year have been particularly high in Europe.

Paula at Hult says the European recruitment market is tight, with an already huge talent pool.

Jobs are available globally but it may be difficult for private equity companies and hedge funds to tempt business school graduates away from banking careers.

Banks are suffering but they still receive a staggering number of CVs. Goldman, for instance, in 2013 had 17,000 applicants for its 350 investment banking internships.

This demand shows no sign of abating. Last year the US investment bank had 43,000 applications for the 1,900 jobs in its analyst cohort.

“Although [private equity] it is appealing, most students aim for banking more than private equity because of the number of open roles,” says Hult's Paula.

While careers at banks are still in demand among business students it is clear there is now more choice in the financial services industry.

As Martyn at Henley puts it: “There are lots of things that are changing the nature of the game.”