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Morning Coffee – The junior bankers who are embarrassed and offended by $300,000 offers. Lazard is hiring for a new top team

Of all the strange practices of the investment banking industry, “on-cycle recruiting” for private equity firms is possibly the silliest.  It’s the process whereby private equity firms interview brand new investment banking associates, in order to offer them a job starting in a couple of years’ time, when they’ve finished the graduate training programme. 

People from almost any other industry might start immediately asking questions about why they do this, and why the investment banks tolerate it. But the whole process is raised to heights of absurdity by the timing.  Out of a belief that they need to get a jump on the competition in order to secure the very best of the new bulge bracket associate class, PE firms have started recruiting earlier and earlier, to the point where they are interviewing brand new graduates who have barely learned where the toilets and the cafeteria are, let alone anything about the industry.

Not only is this unlikely to be a reliable way of finding good future employees, it’s apparently unbearable for the candidates too.  Private equity interviewers are still making them take rigorous tests on things like valuation, but since they have had hardly any training and no experience, the only ones who are passing these tests are those who have mentors already in the industry to tell them what to study for.

And investment banking associates are ambitious graduates of elite universities; if there is one thing that they hate above all else, it’s failing tests.  They’re particularly nervous to do so at an early stage in their career – as one private equity headhunter puts it, “if you embarrass yourself … we'll have seen you not do great. We'll understand, and that firm will say, 'eh, they weren't prepared, they weren't good enough.”

Consequently more and more of the exact kind of recruit that private equity is looking for, are refusing to take part in the process.  This has meant that many firms have filled less than half of their target class sizes in the “on-cycle” process and will be looking to come back later “off-cycle” and start talking to candidates over the next 24 months.

When they do come back, they may find that some of the tactics used in on-cycle recruitment have given a very bad impression.  In order to encourage people to enter the process, recruiters have apparently been using pressure tactics, claiming that all the seats were full and bombarding candidates with messages.  According to one anonymous young banker, “This is a very early indication, but strong indication, of how the culture at private equity firms work. Because they enable this behavior to go on … Honestly, it has been making me think that private equity especially is just such an abusive industry”.

It's quite an achievement to go out into the market with a bunch of highly desirable job offers with salaries of over $300,000 and come back with only half of them filled and a considerable number of target candidates put off the industry for life.  People have been marvelling at on-cycle recruitment for years, but perhaps this is the season in which some of the top firms will make the decision to stop the madness.

Elsewhere, people have been noting for a while that the gap between the biggest “super-boutiques” and the full service investment banks has been closing.  This week sees another step in the blurring of that distinction, as Lazard is launching a “Capital Solutions” team, to be run by Tim Donahue (recently hired from JPM).  The new team will apparently “advise companies and help them execute on a variety of ways to raise capital, such as preferred stock and convertible debt”.

In other words, it’s a capital markets division.  Historically, M&A advisory boutiques have stayed out of capital markets business, because they don’t have the balance sheet to do underwriting and they don’t have sales & trading arms to distribute. However, it seems that Lazard now thinks that it can carve out a franchise in providing “market intelligence” and concentrate purely on the advisory element of capital transactions.

That probably means taking an advisory role in the deals of bigger banks who can supply the nuts and bolts service of getting the securities issued, and getting them into the hands of investors. But since Tim Donahue is also meant to be leading coverage of the largest US private equity firms, it’s not out of the realm of possibility that Lazard could lead its own deals in private credit and related areas. In any case, it looks like a new employer just opened up for good capital markets bankers.

Meanwhile …

It’s probably unrealistic to hope that anything might persuade Sam Bankman-Fried to shut up entirely, but he’s agreed to a “gag order” that he won’t make statements about the credibility of witnesses, information that isn’t admissible at trial or “anything that might influence public opinion about the case”. He’s still allowed to say that he’s innocent. (Bloomberg)

Tom Naratil is joining Lightyear Capital, where he will work with old colleagues from PaineWebber.  This is interesting for UBS employees, as there had been considerable rumour that Naratil would be brought back by Sergio Ermotti as part of the new old management team. (Finews)

More mud is still flying in the JP Morgan/Jes Staley/Virgin Islands litigation, the latest being a claim that Staley expensed some of his trips to visit the disgraced financier.  It is hard to believe that this hasn’t been settled yet. (Financial News)

Reminder that reputational risk in banking isn’t just an excuse; the charity Christian Aid have fired Barclays because of their oil and gas exposure.  A large charity isn’t necessarily the most profitable customer to lose, but it does happen that some clients object to the presence of others. (Bloomberg)

A rare sighting of the “hiring spree”.  PJT Partners have bucked industry trends with revenues up 73% for the second quarter, and they’re declaring this to be “our most consequential hiring year ever” as they pick up rainmakers who are disillusioned at the big banks and fancy a try at life in the boutiques. (Financial News)

A former employee of the jail that hedge fund founder Raj Rajaratnam was sent to for insider trading, has been charged with accepting improper payments for special treatment from his billionaire prisoner. (Reuters)

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AUTHORDaniel Davies Insider Comment

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