If we had to name the strangest personnel practice in financial services, it would probably be the private equity industry’s habit of recruiting its employees from investment banks, and doing so at earlier and earlier points in their career. Instead of working on deals, graduate recruits at banks like Goldman Sachs and JP Morgan seem to go straight from collecting their security passes to their first private equity interviews, and to get offers for their private equity associate jobs before they’ve worked out where the restrooms are or how to pay in the canteen. We’ve noted on several occasions in the past that it’s quite humiliating for bulge bracket advisory franchises to be used as a farm team (let alone for managers who have to deal with analysts that spend three quarters of the program with their eye on the exit), but private equity firms are such important clients that they can’t say no.
Now Blackstone, the five hundred pound gorilla of private equity recruiting, is facing up to another key problem with this approach. If the 2021 private equity associates are drawn from the 2019 investment banking analysts, who were selected from the 2018 summer interns, who were selected the 2017 spring interns who had their first interviews in 2016, then you’re putting quite a lot of faith in the relevance today of the snap assessment five years ago, made by a bored or hung over MD on a campus visit, of a bunch of teenagers. Not only that, but you’re restricting the base for selection to precisely those teenagers who not only got into one of a small number of elite universities, but who went there already knowing that they wanted to be an investment banker. As well as being a pretty strange implicit assumption about the talent pool, that pretty much sews it up for the possibility of achieving diversity targets.
It’s this last issue that seems to have made Blackstone’s mind up. As one of the few PE shops that has its own graduate recruitment program, it’s deciding to expand the reach of that program from nine schools to 44, and somewhat more seismically, to do all of its recruitment that way, eliminating the investment banking channel other than for significantly more experienced specialists to fill particular areas of need.
The big question is – will the rest of the industry follow suit? And the answer is probably yes, for the firms that have the resources to do it. There are not many firms above the boutique scale that can realistically ignore diversity, and given the reality of the pipeline, the choice is really between making an effort to cast the net wider, or a really undignified scramble for the small (even if it grows in the future) pool of minority candidates in the investment bank analyst programs.
This sounds like bad news for junior bankers who want to move into private equity. But not all private equity firms are big enough to handle their own campus outreach, so it’s likely that there will still be offers made to analysts. However, if the top tier of PE houses stops participating, then a lot of the prestige is drained out of the exercise, and private equity becomes just another option for young bankers who don’t feel that a career at Morgan Stanley is for them, rather than the glittering prize. That might mean that banks’ own analyst programs can focus on training for the job in hand, rather than putting investment into someone else’s human capital.
Daniel Davies – Read more on efinancialcareers.com