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The 8 kinds of people private equity needs to hire now

If you work in an investment banking division (IBD), you probably want to work for a private equity fund. You're not the only one. Recruiters talk of huge numbers of people chasing every private equity job. Funds can afford to be choosy.

A new report on the state of the private equity industry from consulting firm Bain & Company offers some pointers on who private equity funds are likely to choose as they hire in 2017. Ex-bankers are still needed, but so are people with deep operational expertise.

1. PE funds need talented fund raisers

Fund raising hasn't been a problem for private equity funds of late, but this could be about to change. Last year, Bain notes that more than 2,500 PE funds hit the road, looking to raise $890bn. However, as more funds joined them during the year, an additional $666bn was sought. For 2016 as a whole, therefore, capital sought exceeded capital raised by 2.4 times.

There are fears that the industry can't sustain this pace of fund raising. Slowing exits, falling stock markets and a possible recession all have the potential to frighten investors away and make fund raisers' job harder.

More than 300 buyout funds went on the road at the start of 2016, aiming to raise $244 billion

PE fund raising

Source: Bain & Co

2. PE funds need exceptional deal-makers 

Private equity funds might've raised big money from investors, but that doesn't mean they've done anything with it. As Bain & Co note, so-called "dry powder" (money that hasn't been invested), is now at record levels in the private equity industry. Finding somewhere to invest it is a problem - Acquisition multiples in the U.S. and Europe are close to record highs at more than 10 times EBITDA. In the circumstances, it's hard to see how assets bought at these prices will generate big returns - particularly if a recession takes place.

As a result, funds need to hire deal-makers who can sniff out good investments and see a way to making returns, even at high purchase prices.

Dry powder reached another record level in 2016

Private equity dry powder

Source: Bain & Co

3. Funds need deal-makers with experience of software companies

Deal-makers with experience of the software sector hold a particular allure for private equity funds. Bain notes that revenue growth in software companies tends to exceed other sectors: the five largest software public-to-private deals in 2015 and 2016 had average annual revenue growth of 22.6% vs. just 5.7% for the non-tech deals. However, this comes at a cost: the average price-to-EBITDA multiple for the software deals was 18.1 vs. 10.2 for non-tech deals.

As a result, funds particularly need deal-makers who can direct funds to the software investments which will make money despite their high cost.

Software and tech-enabled services account for about 80% of technology deals by count and value

Private equity software

Source: Bain & Co

4. Funds need people with operational experience in software companies

Once a software investment has been made, private equity funds need people with the operational expertise to make money from it.  Bain says management teams at successful software companies have often neglected to "aggressively optimize costs."

This makes it comparatively easy for experienced investors with software management expertise to optimize the companies invested in. Software businesses are expected to have EBITDA margins of 40% or higher. Most companies fall short of this, creating opportunities for people with experience of working in the software sector to add value.

5. PE funds need massive schmoozers

Before they can actually make the investment, private equity funds first need to identify the best targets. For this, they need to hire people who will get out there and see what's on offer. This takes a lot of networking. Bain notes that for every 100 potential deal opportunities, only one or two deals usually close. As the chart below shows, Bain says managing directors in PE funds should be networking with 20-30 active deal targets, plus another 30 potentials. networking bain

Source: Bain & Co

6. They need experts in operational due diligence

With purchase prices high and funds needing to make operational improvements to the companies they invest in rather than simply flipping them on again, successful PE investing is about improving operating margins. This means funds need to conduct operational due diligence to establish how operations can be restructured before they make the purchase. The key is cutting costs and achieving top-line growth. This requires a deep understanding of how the business works and familiarity with direct competitors and industry standards.

7. Funds need data scientists

Investment banks and hedge funds aren't the only ones chasing data scientists.  Bain says private equity is starting to take advantage of "advanced analytical tools" too. The chart below shows the potential application of data to the PE investing process - data can be used for everything from analyzing customer reviews to looking at social media sentiment about a target.

Advanced analytics for use in PE

private equity data

Source: Bain & Co

8. PE funds need people who can prepare their investments for a strategic sale

Lastly, an investment is nothing without an exit. As the chart below from Bain's report shows, exits peaked in 2014 before falling off again. Instead of initial public offerings (IPOs) and sales to other private equity companies (sponsor to sponsor), most exits now take the form of strategic sales to corporations. This has been the case since 2008.

Private equity investing is now far less about a "quick flip" and far more about investing in a company for the long term. In 2016 only 18% of all buyouts concerned investments held by private equity companies for less than three years - down from 44% in 2008. Private equity funds therefore need to hire people with both the operational expertise to turn companies around and with the deal-making expertise to find a trade buyer to sell the turnaround to.

Sales to strategic buyers remained the dominant channel, and IPO value halved from 2015

PE strategic sale

Source: Bain & Co


AUTHORSarah Butcher Global Editor

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