Private equity professionals typically spend their day evaluating various businesses and investment strategies, such as judging potential gains and losses to certain growth companies, assessing the possibility of leveraged buyouts, and gauging upside and downside risks associated with potential venture capital investments.
Private equity managers do a lot of the same things that hedge fund and investment banking professionals do, with the differences being that private equity firms tend to be more focused on executing transactions on behalf of their fund rather than on behalf of their clients. They also tend to be more focused on corporate managerial issues, such as streamlining management processes and corporate cost cutting, as opposed to the rapid fire trading of hedge funds. The generally longer time horizon and use of their own money in less liquid investments can end up making the job of a private equity manager more or less lucrative than competing financial careers. It all depends on how good you are.
The Economy’s Affect On The Private Equity Manager
This background leads to the question: how is the economy affecting the life of the private equity manager? Well, not surprisingly, private equity employment is highly procyclical with economic growth, with year over year growth rates up almost 5 percent before the onset of the financial crisis, after which employment dropped as much as 6.5 percent at its trough in the fall of 2009. Since the bottom out of the employment decline, private equity firms slowly added to their payroll through the end of 2011, after which private equity employment has seen a slight decrease.
Private Equity Employment Prospect
So, why is private equity employment growing slower than the economy’s overall employment base, and, when will it pick up? One reason behind the lagging performance of private equity employment is that investors are still jittery about prospects for economic growth, and as such, are demanding greater liquidity, which is something private equity firms are not know for (because of the way a number of private equity deals are structured, liquidity is generally not a feasible feature). Another reason is that private equity returns during the financial crisis period underperformed some of their competitors, such as hedge funds. So, although private equity investments generally outperformed hedge funds and most other asset classes in the period before the onset of the financial crisis, the large losses during the financial crisis is a factor that sticks in investors’ minds (i.e. loss aversion as opposed to return maximization).
When will private equity employment growth pick back up? When investors have greater confidence in the strength of the economic recovery, employment in private equity firms will likely pick up at a faster rate than competing financial professions. The real question for individuals interested in private equity employment is, then: when will investors become more confident in the economic recovery?