Wall Street Banks and Private Equity Firms Compete for Young Talent

http://www.nytimes.com/2014/07/06/business/wall-street-banks-and-private-equity-firms-compete-for-young-talent.html

by a5seo • 12 years ago

64 43 12 years ago

Balgair2• 12 years ago

Sorry to be a cynic, but:

"Promising to take a job with a particular firm can create a conflict of interest for an investment bank analyst, especially one assigned to work with private-equity firms on deals, bankers say."

Really, I don't think there will be too much hand wringing for these folks.

tootie2• 12 years ago

It's not a matter of professional ethics, it's a matter of them making decisions in favor of their future employer to the detriment of their current one.

uptown• 12 years ago

Sounds like the revolving-door career path that many politicians follow.

Balgair2• 12 years ago

How is that different than just, you know, ethics?

lmg643• 12 years ago

The whole time I read this article, I could only think of PG's "The Submarine."

http://paulgraham.com/submarine.html

This article describes a process that's being going on for decades, but manages to do so while imbuing a "drama" that only a headhunting firm could truly muster (or the guy who wrote the book selling for $299).

It's true, that the pressures have ramped up over time as private equity becomes a monster approaching the size of the banks themselves.

But at root, this article is about people in one great job, looking to go to another great job. News, indeed! Nice work to the press people who put this together.

JTon• 12 years ago

Just read The Submarine for the first time. For those who haven't, it's well worth it. Very enlightening. Still very relevant today seeing how it was written in 2006

VonGuard• 12 years ago

Journo here. Very, very true. PR runs most of the stories you see. They don't usually run the hard news, like disasters and such, but they often glom onto those things so after a day or two, it's hard to tell who's actually reporting, and who's just regurgitating, and who's being spoon fed bullshit.

We could debate the many reasons for this fact, but suffice to say that there is A: a lot of money riding on getting such stories printed, and B: not enough time in the day or money to pay journalists to do the real work.

This plays out in a couple ways. The most common form is where the PR firm is also representing a company that advertises in the outlet. The New York Times writing about suits was probably printed on a page next to an ad for Macy's. The editorial guys are not complicit, but it's become common for sales to make "intros" to editors at parties and such. It's gross, but common.

Another way it plays out is that we get some amazing, long article with in-depth journalism that's just the best thing you've ever read. Then no one reads it because it's really long and doesn't have pretty pictures, so compared to the story linked next to it on the front page, it's basically a one or two day blip in the system, then it's forgotten. Meanwhile, that other story with a title like "Docker will revolutionize datacenters," or "Google Glass User Assaulted," are getting the same number of hits, and they took about 10 seconds to write, so as a journalist, it can be a bit frustrating to be beholden to "hits," rather than to "quality."

Which, frankly, is what most journos are dealing with. Most outlets want quantity over quality. That means the writers tend not to understand what they're writing about, but rather, they're just flying over and giving a scouting report in a vain attempt to be first.

The Wire got this soooo right in season 5. Beat reporters need to cover their beats. The smaller the beat, the better they should be able to cover it. If you have one reporter on programming only, you can really get the pulse of the industry, rather than just having your tech reporter check in every 3 months.

Journalism remains broken, with many examples of great work being ignored in favor of "10 reasons Beiber is made of plastic, and what types of plastic those would be if he were made of them," stuff. How are we going to write about people places and events when those people places and events are writing about themselves for free.

kudos200• 12 years ago

You make a fair point, given what was in the article.

I think one interesting thing that the article left out is that the situation has actually changed a fair amount in the last decade. Around, say, 2002-2006, second year banking associates (and sometimes management consultants) interviewed in the spring (~18 months into their banking job) for PE jobs starting that fall - around 3-4 months early. This seems pretty normal.

But an arms race started, and in 2006-2007, interviews were happening in January. In 2008, headhunters joked that soon they'd be interviewing candidates a few months after they started, and then that's exactly what happened. The next year, they started in December, then October or November, and they continued to go earlier until the current state where they interview after 6 months on the job for a new job 15-18 months away.

So, it's worth noting how much it changed in a fairly short time frame. I think this must have to do with the number of PE firms that exist now compared to 2000 - back then, there was no point to interview early because no one else would swoop in and get your candidate.

Also funny is that it's all somewhat based on a notion that all candidates vary on one dimension of "quality," that the "best" candidates will be gone if your firm doesn't try to snap them up now, and furthermore, that you'll be able to figure out who the "best" candidates are at that stage.

It's a classic coordination failure - even given how silly that premise is, and even though the resulting situation is so obviously crazy to all involved, it continues to occur, because that's how the incentives line up.

What's also interesting is that there's no clear way to change things. Coordination failures are often fixed by governments, when the situation is important enough (this hardly qualifies). College admissions solves this by tacitly agreeing to have everyone apply the same time every year. Of course, some colleges tried to beat this with "early decision" and "early action," which conceivably could have continued like this did (with applications starting in junior year, etc.). But it seems there's some combination of respect for the process, decorum, etc., that prevented it. Plus, once a group of the "top" schools decided to eliminate the early decision/action process, the decision stuck (for a while at least - it appears to have come back) . In that case, there was a fairly agreed upon list of "top schools" that could set the terms, given most students would be willing to wait and apply there. But with PE firms, most candidates would be willing to take a job with a middle market fund (and make a looot of money) rather than gamble on a bigger fund (assuming those are more desirable, which isn't always the case). I suppose that things could change if banks got stricter around things (as they're trying to), or if all PE firms could agree (if that's even legal...?), but it's not an easy solve.

Of course, no one will be throwing a pity party for anyone involved. The banks, PE firms, candidates, and headhunters will all be fine. Still, it's a funny situation to watch, in a "how can that really be happening?!" sort of way.

ivan_ah• 12 years ago

Wall street must be really in trouble for talent! My "PR diving" from a while back reveal this beautiful piece selling working for banks and donating you salary to charities as the "ethical" choice: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/31/j...

rayiner2• 12 years ago

This situation is always painted as a "prisoner's dilemma" because otherwise talking about coordinating with regards to hiring smacks of anti-competitive collusion. However, I don't think the timeline is, on the net, disadvantageous to recruits. It's hard to argue that folks on a two-year contract at a bank are somehow disadvantaged by being able to line up their next gig a year or more in advance. It's also hard to ignore the fact that the long lead time gives recruits a lot more margin for error, because they get to make a run at private-equity well before their contract runs out at a bank.

foobarqux4• 12 years ago

It's disadvantageous because the banks fire them if they find out, usually after simply asking them.

jessriedel2• 12 years ago

I'm not so sure. The high-energy physics community created an ethically (but not legally) binding agreement on the date of theorist postdoc offers to prevent a useless race for ever earlier commit dates.

In recent years, we have seen a growing number of early offers with short deadlines for high energy theory postdoctoral positions...We are worried that this practice is preventing young researchers from making a free and fair choice among their job opportunities. And, while there may be some short term advantage for the institutions which do this, we believe it will have serious negative effects in the long run....Thus, we commit to make no postdoctoral offer for the fall of a given year, whose deadline for acceptance is earlier than January 7th of that year.

http://insti.physics.sunysb.edu/itp/postdoc-agreement.html

I think all the postdoc applicants generally like this, so it does seem to be in their best interests.

It's very plausible that various private companies have a harder time than HEP professors coordinating on a pledge like this given legal restrictions and the fact that they do not have the common framework of academia. So I think this really could be a prisoner's dilemma.

rayiner2• 12 years ago

There was a similar agreement among federal judges for the hiring of term clerks. There was much gnashing of teeth when the plan broke down, and judges started hiring two years in advance. But I don't think there is any real prisoner's dilemma. What do the candidates lose? It's great to have a job lined up that far in advance. It lets you plan, especially if you have a family. Its obviously more burdensome for judges that way, but if they didn't think it was worth it to break the plan, they wouldn't have!

michaelochurch4• 12 years ago

I think it's important to dispel a certain myth about this sector of finance.

Around and past an IQ of about 135, work boredom is a chronic risk and sometimes a disability. If you're in this set, entry-level banking ("analyst" programs) and private equity aren't where you want to go. Past 135 (much less at 140, 150, or even 160) even 8 hours per day of grunt work is impossible, much less 17.

There are plenty of 135+ in finance, but either they go for trading and quant or even IT roles, or they move to "the soft side" at a higher level: usually at least VP.

So, yes, these people are above average in talent, but they're not "the most talented" in our generation. Depending on bonuses, they're not even the best paid. Oh, and they're the ones who go on to become VCs (not you, programmers, despite your superior talent).

The 23-year-olds making half a million in private equity do exist, but they're (a) uncommon, and (b) not especially smart, just connected and unusually able (top 1%) to grind out hours. If you want to become a Master of the Universe, the optimal IQ is probably in the low-mid 120s: enough that you can build something in Excel, but not near the level that brings boredom or anti-authority risk.

peterjancelis• 12 years ago

You're over-thinking the IQ part.

And I know some 20-somethings making $500K and more for PE megafunds. There are some guys from middle class backgrounds there.

The connected-but-useless ones tend to get hired in investment banking.

foobarqux4• 12 years ago

Plenty of high IQ people in PE and hedge funds, especially those who entered direct from college, skipping IB. They seem to be people who can tolerate grinding though.

It may be true that the work gets boring but the alternatives aren't significantly better (how many people at Google are doing substantially more interesting work?) and pay and career advancement are much better.

crapshoot101• 12 years ago

Yup. Some of the smartest people I've ever met went into finance, because the money is crazy - these are the kids who were building stuff for fun in college, or first gen immigrants who were on full rides and knew that college was about getting skills and getting a job, not just about 3AM drunk discussions about Sartre. The idea that these people are not as intelligent as "tech people" is silly.

michaelochurch4• 12 years ago

I acknowledge that there are plenty of very smart people in finance (especially in quant roles). I said:

There are plenty of 135+ in finance, but either they go for trading and quant or even IT roles, or they move to "the soft side" at a higher level: usually at least VP.

Smart people tend to avoid competing on hours. Why? Because if you're putting out a 17-hour day (which is necessary at the entry level on "the soft side") anything that is a disadvantage can (no, will) derail you. That includes being too smart for the work. So they prefer trading and quant jobs where the hours are reasonable and also where the work is more interesting and they're not as much at risk of high-IQ problems.

[P]ay and career advancement are much better [in finance than software].

Absolutely. This is completely true. Any idea what we should do about this in engineering? (Or just call it hopeless and exit for finance?)

joncooper• 12 years ago

Talent != IQ. And I'd argue "smart" != IQ.

gone352• 12 years ago

Around and past an IQ of about 135, work boredom is a chronic risk and sometimes a disability. (...) Past 135 (much less at 140, 150, or even 160) even 8 hours per day of grunt work is impossible, much less 17.

Interesting. I went to a rather old-fashioned school with a strict IQ cutoff of 125-130+ (Stanford-Binet LM, I think, because some scored above 160), and my impression is the opposite: the higher they scored, the more they valued career paths like (non-quant) finance, medicine or corporate law --tracks with plenty of grunt work and long hours but well-defined, steady payoffs.

I asked many of them about this because, to me at the time, it seemed counterintuitive and a tragic waste of human talent. It often turned out, however, that they chose those careers precisely because they lavishly reward grunt work, which they can do with such incredible (almost infuriating) ease that, to them, it doesn't feel like work at all!

That is not to say they do not have rich intellectual lives outside of work: but that, for them, corporate work is more like a generous sinecure that doesn't substantially impede their other pursuits. In fact, it was those of us with the "lowest" IQs who tended to be more freaked out about the prospects of mindless corporate work, and who were more likely to go for more "intellectually stimulating" careers like academia or applied fields.

michaelochurch4• 12 years ago

Your thesis is interesting.

I suppose I thought that the grunt work of those careers was like the grunt work of programming, e.g. maintenance of bad code, learning "how we do things here" idiosyncrasies with little general value: mentally taxing (and, at an IQ above 130, mind-crushingly boring) but not intellectually difficult.

MaxScheiber2• 12 years ago

One reason that you see this sort of behavior in the first place is that very few people are able to successfully become lifetime bankers. The skillset required to be an excellent investment banking analyst is extremely different than the skillset needed to be an investment banking vice-president (or higher). Modeling skills and pitchbook formatting knowledge will do little for you if your job is to try to bring business to your bank. Analysts know that the internal track will end at the associate level (or, more likely, they'd be booted out after two years with no internal promotion to associate at all). Therefore, it makes sense for them to jump ship, and the subsequent prisoner's dilemma also makes sense.

What's interesting is that a similar thing happens after two years as a private equity associate, in that almost all PE associates are booted out after two years, being told that they don't have the skillset to be promoted within the shop. At this point, I believe that many employees move onto internal corporate development, but my knowledge here is pretty incomplete about what happens after that break in the track. ("Greatness", perhaps?[0])

[0] http://www.leveragedsellout.com/2007/07/breaks-in-the-track

spuiszis2• 12 years ago

Analysts know that the internal track will end at the associate level (or, more likely, they'd be booted out after two years with no internal promotion to associate at all) What's interesting is that a similar thing happens after two years as a private equity associate, in that almost all PE associates are booted out after two years

Many PE shops, VC funds and banks do this because they want you to get an MBA. This is why many of the associate hiring positions are described as pre-MBA associate and post-MBA associate. Post-MBA associates are the ones that will go onto internal promotions and potentially the partner track.

mr_doobey22• 12 years ago

I can't speak for the PE side, but on the IB side be prepared to work with some truly awful tech and systems. Seriously crappy. Given the tech budgets and spend, it is amazing how much duct tape and band-aids hold together the IT systems across the bank.

dworin• 12 years ago

Someone in IT at a large bulge-bracket bank once told me that the reason tech was so shoddy despite the amount they spent was because by the time they did something the "right" way, the market opportunity was gone, or regulations changed and the old rules didn't apply anymore. So fast was much more important than good.

blibble• 12 years ago

I think it really matters which part of a bank you end up in... I've heard some horror stories about back office roles, but I work on a front office trading system and it's the most technically challenging, interesting and plain old geeky role I've ever had.

X4• 12 years ago

how did you get in?

pling• 12 years ago

And if you think that's bad, you want to see the insurance sector! Data loss is good for insurance businesses in the long run...

hacknat2• 12 years ago

The Epicurean Dealmaker's thoughts (he's an MD for some big shot bank): http://epicureandealmaker.blogspot.com/2014/07/you-go-first....

MaxScheiber2• 12 years ago

"The solution to this dilemma, of course, is simple. Private equity firms have become large and rich enough that they should do their own damn recruiting at colleges to hire junior personnel."

This is already the case, at least at Wharton. A number of the PE megafunds recruit undergraduates here, specifically Blackstone and Silver Lake. I only really know of one or two offers being extended per year, but that's because private equity shops simply have fewer entry-level positions -- they can therefore afford to be picky.

I'm sure that PE middle-market companies also recruit here (my knowledge here is more limited, as I gravitate toward the technology portion of my education rather than the finance portion), but it seems likely that students would take a bulge-bracket investment bank over a middle-market PE shop.

It's simple supply and demand.

hacknat2• 12 years ago

Interesting, thanks for the feedback. It's good to hear the other side of the story.

bfwi• 12 years ago

This article talks about a lot of things these firms do to attract talent. What about just offering more money?

patmcguire• 12 years ago

PE does. But only for some, it's anti-scalable. This is a nice little trick - if you only accept 2% of a highly competent applicant pool, you must hire the best, right?

Eh, maybe, but you could just get everyone to apply and make the same decisions. Now you've got brand and people give you money...

It's intentionally a ludicrous amount to suggest that they're Just. That. Good. to all their potential clients. But we can't all be payed three times going wage, can we?

epaladin• 12 years ago

I'm currently working in science, and ultimately interested in science and entrepreneurship. I don't have a PhD yet, and the financial situation in science and with startups makes me pretty nervous. Is it feasible for someone without a finance/business background to jump to an IB/PE job for a few years? I just want to feel more financially settled, before moving on with other things. I'm not quite 30-something, and if it helps at all my microecon professor in college apparently called my parents to get them to convince me to major in econ (I must have been the only one in the class who cared).

Wall Street Banks and Private Equity Firms Compete for Young Talent

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