IVCA Feature: Highlights of Educational Luncheon ‘Building a Career in Private Equity: Different Routes to Partnership’

September 16, 2014

The path through the Private Equity industry can be perplexing to people just starting out from college, and interested in the profession. The IVCA presented an educational luncheon that addressed the necessities for that path, “Building a Career in Private Equity: Different Routes to Partnership” on September 9th, 2014. It featured moderator Ted Martin of Martin Partners, and panelists Sean Cunningham of GTCR, Justin Ishbia of Shore Capital Partners and Jeffrey Moss of Susquehanna Growth Equity.
Moderator Ted Martin was the Founder and is the Managing Partner of Martin Partners, a leading executive search firm. Sean Cunningham is a Managing Director at GTCR, and was previously with the Boston Consulting Group. Justin Ishbia is a Managing Partner at Shore Capital, contributing a vital range of Private Equity expertise for the healthcare focused firm. And Jeffrey Moss is a Director with Susquehanna Growth Equity, concentrating on software, education and other technology-enabled service businesses.
The panel discussion was set up as a question-and-answer format, with Moderator Ted Martin providing the inquiries for the experts in the PE industry.

View event pictures here.
QUESTION: What are your requirements for hiring people into your firms?
Sean Cunningham: In our pre-MBA program, we hire five to six people a year. Many of our partners started as pre-MBAs. We think of that pool as the next generation of leaders. That is a very important function for our firm. For post MBAs, it’s typically one-two people a year. Typically, pre-MBA, we’re hiring a couple of people a year, pretty consistently. Generally, we recruit from business schools, and we’ve had one lateral hire in the past couple of years.
Justin Ishbia: Our hiring is a bit different, based on our size and structure. We raised another fund last year, and hired an additional partner for that, and two more associates. One thing that we do is have a robust internship program, with junior and senior undergrads, one or two per quarter. We have given offers to people based on that program, three times over the last five years.
Jeffrey Moss: Our model is probably similar to Justin’s. We don’t do lateral hires at the associate level, and we have four pre-MBAs, our goal is to promote them from within, and we traditionally hire directly from undergrad ranks. On the partner level, we made two lateral hires recently, one being myself, but in my case I knew the team for over 15 years. When we bring people in from the outside, there has to be a level of comfort with culture, deal profile and firm interests. Otherwise there is a ton of risk.
QUESTION: Any comments on the value of the MBA in hiring practices?
Moss: We actually don’t value it all that much. The junior analysts have the opportunity to make partner without going back to business school. It’s all personal, it all depends on what the individual wants. I got my MBA, but I don’t know if there is a ton of value on the academic side of it, but certainly from a network perspective it was incredibly valuable. I’m just not sure how necessary it is, as compared to 10 or 15 years ago.
Ishbia: I agree that the great value for an MBA is in the network. You get friends and contacts from being in a program, but from a pure learning standpoint it’s a personal decision to obtain the degree. One thing with a post-MBA, I expect people who walk into the door to know the process of Private Equity, because if it’s their first time through, it’s a great challenge.
Cunningham: We probably value the MBA a bit more, but to Justin and Jeffrey’s point it’s about the individual. The post-MBA role at GTCR are highly capable of sourcing and executing deals, so the MBA helps for gravitas, maturity and confidence. But it’s certainly not a prerequisite in our shop.
QUESTION: What are the traits or trend that allow an individual to move up from the associate level to VP, and VP to partner?
Cunningham: Even at the pre-MBA level, we value folks who are very well rounded. We want individuals who can engage with CPOs, investment bankers, consultants and industry professionals. The reality is it’s easier to work with a pre-MBA that has high productivity and creates models and industry analysis, and gets it done. It’s no secret that folks that are better on the analytics – quantitative and otherwise – tend to do a little better at the associate level, although those skills can become less relevant over time. As a person matures in a firm, the relationship building and the judgement skills – those intangibles involving people and investments – become a bigger factor than the analytics. It’s also about investing the time to make a deliberate effort to work through any shortcomings. If a person is willing to do that, and they are willing to own their professional value, they can be successful.
Ishbia: For younger analysts and associates, it’s about attention to detail. For a person coming out for his first or second job out of college, I use this comparison. In college, if you got a 98% on a model or analysis, it was an ‘A.’ But the two percent in our business is just as important. If I make a decision on a phone call with a banker, and it’s about four options, and afterward if I find out the one option I picked has a flaw in the model, then I lose confidence in that person. You can build confidence a penny at a time, but you can lose it all at once. So it’s attention to detail that is the skill set I place the highest value upon. I can teach a lot of things, but I can’t teach hard work.
For senior level, it’s about the CEOs who want to work with those individuals, or entrepreneurs who want to see them. It’s about the results they get through the process or from the team. That’s a big skill set, and it’s hard to teach or even describe.
Moss: The only things I would add to that is an example. If someone at the junior level was in a situation where a partner misses a flight to a meeting, they would be able to handle it themselves. Obviously they wouldn’t push the ball forward that much, but at the same time they wouldn’t put us in a bad position. Secondly, ultimately what it comes down to is likability. The entrepreneur or management team has to like a person. There is a ton of capital out there, the market is frothy and competitive, but ultimately the reason a person wins or loses a deal is that the CEO likes or doesn’t like you.
QUESTION: How many hours a week is a good dedication for each of you and your firms?
Cunningham: There are not enough hours for pre-MBA associates. I think it’s a bit better than banking, 60-80 hours a week. Everybody works pretty hard in our business, or any business these days, and we’re on 24 hours a day. That’s the reality.
Moss: It ebbs and flows, like any business. If we’re super busy, there is going to be late nights and weekends. I was given the advice to think about it as if you’re running your own business. Do you have the ability to leave by 8pm, or can you find more knowledge or business through doing the research? It’s up to the individual, and they control it.
We are in this industry because we love it. There are painful elements to it, but if you wish you were someplace else when working extra hours, then it’s not the right industry for you.
Ishbia: It is the ebb and flow of closing a deal. At it’s busiest, you are on at all times. But at the same time, it’s about business and pleasure co-existing – your business associates become your friends and colleagues. 
Moss: That’s one of the best things in the industry in my mind, you can control your own destiny. Aside from being on a deal support team, as an individual you can decide what knowledge you need to expand upon and what trip you have to take. You have that position of control.
QUESTION: How important is fundraising on the road to partnership?
Moss: In a previous associate position at Summit Partners, I saw very little fund raising. When I joined Sterling Partners, fundraising took up a considerable amount of time. It depends on the fund and which fund number you’re on. There is no common attribute to it, except for customer management and interaction.
Ishbia: It depends on the position of the funds and the firm. I don’t think it’s something an associate in the industry today has to be concerned about, that will be later down the road. From a partner’s point of view, it’s about an associate’s prepared materials that is more important. The fundraising has usually been done by the first three or four people in the firm, it’s the supporting documentation that an associate develops that becomes more important.
Cunningham: I think shops that have been around for a long time have different approaches, depending on the LP base and how consistent it has been. At GTCR, everybody pitches in a bit in fundraising and invests time in it, but culturally we're not so much sales oriented. We like to demonstrate our commitment to our LPs, and work extraordinarily hard for them, to generate returns.
QUESTION: So what should the VP level pay attention to in regards to fundraising?
Cunningham: I wouldn’t spend a lot of time thinking about it. If you want to be in the industry for a long time, you should know capital ebbs and flows, but it will be there. If you jump around from fund-to-fund, it should be important to your due diligence, but I wouldn’t spend a lot of time worrying about it.
QUESTION: There has been a lot of splintering in the industry of late, as firms come apart and new firms are formed. Are there ramifications for associates and VPs, and can you spot a potential splintering in a firm?
Ishbia: It’s hard to spot, and it’s going to happen. As an associate, the core of the job is to serve the partnership, and to keep an eye toward locking themselves in with a partner who they see as strong.
Moss: What I would add that as an associate, the number one thing you can do is to learn as much as you can. It’s an apprenticeship business, so spend as much time working on as many deals as you can. Find the partners you can gravitate to, and you should be able and willing to learn from anyone at that level. It’s great if you can go into a firm wanting to stay there your whole career, but that is the exception and not the rule. Therefore you need to focus on as much time as you can learning about the business. When things happen, like splintering, if you’ve done a good job there will be opportunities.
QUESTION: What historically is the general percentage of associates who eventually make partner at your firms?
Cunningham: I don’t know what the percentage is, but I will tell you that if you look back at our pre-MBA associates at GTCR, there are many of them now at other firms, and many of them have made partner at those firms. Besides the numbers in your own firms, I also think it’s relevant to look at those former associate who have had opportunity throughout the industry.
Moss: It’s too early for Susquehanna to make that assessment, but if you’re a pre-MBA the goal should be learning as much as you can about the industry when you break in, and figure out where you want to go – whether it’s within the firm or elsewhere. You need to spend time understanding what the path is to partnership, especially if you plan to stay at that firm. Understand where the firm is in regard to fund raising cycles, what the promotion rates are within the structure and what that really means.
Ishbia: Another trend becomes who is in front of you in a firm’s structure. If you’re a post-MBA in your thirties or early forties, and there are partners in their fifties who aren’t retiring after a couple funds, you may see that in fifteen years there might not be a piece of the pie for you. That may be the time to splinter or do your own deals.
QUESTION: Do those partnership obstacles cause a lot of splintering?
Cunningham: Yes. Historically, you’ve had people who have grown through an organization, acquired skills and relationships, and just feel it’s time to strike out on their own. That will continue to happen, and it ebbs and flows with the economy. The last two years, with the fundraising market coming back, you’ll probably see more of it.
Moss: It’s not all economic. I’ve seen people move not because they’re not getting enough carry, but because a firm they go to has more upmarket potential. It’s also about the interest in a fund a person has, and that can split apart if the interest goes from one side of a fund to another, like healthcare technology that becomes two separate entities.
Cunningham: There are a lot of different flavors, sizes and interests. Our industry is much more nuanced than economics.
Moss: That’s a vital consideration for someone just starting out in Private Equity and their role, the nuance of the industry. There is the obvious nuance of investment size, or buyout versus venture versus growth. Some firms build management teams and great platforms, others do a more operational focus. There are different models and styles, and part of figuring out that first job in Private Equity is about what is intellectually interesting to that person.
Ishbia: Those nuances include companies doing energy, industrial, healthcare and consumer products. Every firm has a different approach to the marketplace. As an associate, it doesn’t matter when you’re starting out what you choose, but post-MBA it matters a whole lot, as in what you believe in and what industry provides the most interest for you.
QUESTION: There are institutions, like teachers unions or pension funds, who are buying portfolio companies themselves. Do you see that as a trend?
Cunningham: You see it in different forms. You see some large institutional funds that are doing direct investments, but you have to divide that between those who are doing the controlled direct investments and those using management teams – it’s about driving value versus participating directly. There are different business models, so they can become both a customer and a competitor.
At the end of the day, most institutional investors don’t want to do the work it takes to directly invest. It’s not an easy business, and those institutions that dabble in it over time appreciate how difficult it is to do it, despite the economics.
Moss: The comment I’ll make is again it ebbs and flows. It’s been in vogue before and it’s in vogue now. It could may be about the Private Equity management fees, or about someone in the institution wanting to raise a stand-alone fund, but it doesn’t seem like there is any specific trend heading in any direction.
AUDIENCE QUESTION: What are the discussions within a firm that deals with succession plans, or do those discussions occur?
Ishbia: I’m a younger Managing Partner, so I haven’t thought too much about it. It’s an important question, and it goes back to a succession plan not being as successful in Private Equity as corporate America. In our profession the challenges for the long term is spread out the responsibilities to our team members, and create an orderly transition somewhere down the road.
QUESTION: Back to the splintering issue. Do Partners spend enough time focusing on that issue, or can they not prevent that from happening, once they set up their culture?
Cunningham: That’s simply firm and individual specific, it’s hard to characterize the whole industry. We talk a lot about sustaining GTCR in the long term, so it’s important to provide opportunity for people to move up in the industry, so we create value in the organization. We’ve made it a priority.
Moss: Splintering is not mutually exclusive with good succession planning. They are two different things. It’s about the transitioning from one set of Partners to the next set and how it works. If it goes off without a hitch, it’s successful. The splintering is not about economics sometimes, but strategy. It might not be a bad thing, and it doesn’t mean succession planning didn’t work.
QUESTION: Is operating a portfolio company a good thing, and do you value it at the VP and associate level?
Cunningham: The reality is that Private Equity asset classes have grown incredibly over the past 30 years since GTCR was founded, and the number of Private Equity backed businesses have grown. Some people would argue that there are more Private Equity capital out there then there are great operations managers to run the Private Equity backed businesses. There is a ton of opportunity, and when you think about a career in Private Equity today, I would not limit yourself to GPs, that’s not how the world is today.
Moss: It depends again on the firm. Economically or financially, it stops that growth a bit, but operations can be intellectually interesting. It can make you a better investor, because you know the nuts and bolts, and have done it on an operations level. It can be a right path, and could cure a blind spot in your knowledge base, but it becomes personal to what you want to do.
Ishbia: Industry operations expertise has a lot of value. It allows you to see things at an investor level that you haven’t seen before.
The next IVCA Educational luncheon will be Tuesday, November 4th, 2014, with the topic to be announced.