Private Equity Recruiting: Changed for Good?

Two recently announced policy shifts at some of the biggest names in the industry — J.P. Morgan and Apollo — reflect a growing concern around the ethics and practicality of early-stage recruiting into Private Equity.

We wanted to take the time to explain these changes, reflect on the implications for young entrants into the industry, and share our candid reactions to these developments for better (or worse).

Background

Private Equity firms have a long history of using Investment Banking analyst classes as talent farms.  Aspiring young investors would typically intern at an Investment Bank the summer after their Junior year in college, receive a return offer, and start their full time job as an analyst upon graduation.  Onboarding usually consists of a formal training program in July and August, and analysts start the real work on the desk by September.  Investment banking analyst programs are typically a 2 year program, with an overwhelming majority of analysts (90%+ at some firms) leaving after two years for Private Equity firms, Hedge Funds, business school, or other opportunities.

Within the first 6 months or so on the job, analysts would have built up a significant level of skill and likely had practical experience working on live deals.  At this point, the most prestigious Private Equity mega funds would start their “on cycle” recruiting, interviewing the most talented analysts for roles that would start at the end of their two year analyst program.

Other firms would interview sporadically over the course of the year in what we call “off cycle recruiting”.

This was generally a symbiotic relationship between the banks and these firms, who are also their clients. From the standpoint of the investment bank, since it was understood that an analyst would likely be leaving after two years no matter what, the training and apprenticeship you provided would ultimately be an investment in a future loyal client. And private equity firms could confidently bring on new hires who had already been through a sophisticated vetting process, best in class training, and been mentored through live deals. 

The Evolution of On-Cycle Recruiting

As the industry became increasingly competitive, the most prestigious firms began the on-cycle recruiting process earlier and earlier. The entire process became a game of chicken.  Firms didn’t want to sit idly by and watch their competitors snatch up the best candidates. So as soon as one firm started the process, everyone else would reluctantly dive in. In this environment, Apollo, one of the largest and most prestigious private equity mega funds, emerged as a leader. In the words of one headhunter: “On-cycle recruiting starts when Apollo says ‘go’”. So with the stakes higher than ever, the recruiting timeline has accelerated to the point of absurdity.  

Last spring, private equity mega funds started on cycle recruiting before analysts even set foot in training, let alone formally starting on the desk.  Within days of graduating college, incoming analysts were being asked to commit to jobs that wouldn’t start for another two years. They hadn’t been trained, and they hadn’t had any real world experience beyond a summer internship.  The world’s most prestigious firms were largely selecting talent based on the combination of resume signals: school, internship history, and elite investment bank job offer.  Not pictured? Insight and intuition gleaned from experience, positive client feedback, or positive performance reviews on actual work completed.

The recruiting process became notorious for happening early and under conditions of tremendous pressure, with multiple rounds of extremely rigorous interviews, speed-based performance tests, and exploding offers, with calls coming in sometimes in the middle of the night.

Analysts who accepted these offers were still expected to perform at a high level for the next two years at their investment banking jobs. Those who’d been culled in the on cycle recruiting process would often be concerned that they’d missed their chance at success. They’d have to enter the process of “of cycle” recruiting, which happens on a much more ad hoc basis and can be a drawn out process. 

The result 

Not only did we see a huge increase in burnout among young Investment Bankers, but heard overwhelming reports of disappointment from managers on both the sell side and the buy side with the performance of their new hires.

None of this surprised us. 

Forcing newly minted graduates to interview for and commit to a future job in an accelerated, high stakes gauntlet that interferes with their commitment to their existing job makes little sense. Expecting someone who has already accepted the offer for their NEXT dream job to perform at their current one is a fool’s errand.

From an Investment Bank’s standpoint, it’s like telling a high school freshman that they’ve already been accepted to Harvard, then wondering why they don’t care about getting straight A’s in school.

From the PE firm’s standpoint, it’s like admitting a middle schooler to Harvard based on their 7th grade academics, then being puzzled as to why they aren’t performing up to your expectations when they arrive on campus.

The talent wars had reached a fever pitch that could not be sustained. We made our position on this clear in a Financial Times article last month.

What’s happening now

Last week, it all came to a head — but not the way we expected. 

At the beginning of June, J.P. Morgan announced in a leaked internal memo that analysts who accepted offers to work at other firms within 18 months of starting at the bank would be terminated.  

We’ve had dozens of conversations with junior and senior investment professionals all over the world in the days following this announcement, and saw a wide range of reactions. Many applauded J.P. Morgan’s decision.  After all, wouldn’t this finally put a stop to the insane recruiting cycle?

My thoughts: if that was the policy’s intention, this was the wrong implementation. Rather than incentivizing Private Equity firms to revise recruiting timelines to a more sensible framework, it punishes the high achieving, aspirational incoming analysts who want access to the best opportunities.  Elite candidates looking to forge a career at the top Private Equity firms might simply steer clear of J.P. Morgan under those circumstances.  And philosophically speaking, Wall Street built this system. Why now penalize those who play by its rules?

We were concerned that this was yet another example of well intentioned policies with unintended consequences, or at the very least, imperfect implementation.

Luckily, we had a major positive development within the last 48 hours.  Apollo announced they would delay recruiting for the associate class of 2027 until next year. 

Wednesday, Marc Rowan (the CEO of Apollo) said in the Financial Times:

“Recruiting has crept earlier and earlier every year, and asking students to make career decisions before they truly understand their options doesn’t serve them or our industry…when great candidates make rushed decisions, it creates avoidable turnover — and that serves no one”.  

We couldn’t have said it better ourselves. Apollo has led the way when it comes to competing for the best talent. For Apollo to now publicly break with the trend sets a bold precedent for their peers to follow suit. In fact, General Atlantic made a similar announcement yesterday afternoon. We hope this is the first step towards restoring sensibility to the recruiting process in a way that benefits all parties: the banks, the private equity firms, and above all else, the candidates.  

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