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DISRUPTING THE OLD-BOYS NETOWRK IN PRIVATE EQUITY RECRUITING

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The current private equity recruiting process is inefficient, unfair and ripe for a technology disruption. Is there a way to create an online market that could better connect young professionals looking for associate positions in PE firms looking to hire that talent while reducing some of the frictions that currently exist? How might a platform like that arise?

The Current Recruiting Process

Currently, the majority of top private equity firms source their candidates from a handful (~5) recruiting firms based in New York and these firms, in turn, source almost all of their candidates from top bank analyst classes (with a few consultants sprinkled in for good measure).  Starting about 4 months into banking analysts first months on the job, they begin the antiquated process of scheduling interviews with the gate keeper recruiting firms, sneaking out of work and trekking around the city to make the rounds for 30-minute face-to-face interviews. Then, at some point later, one of the top PE funds decides to kick off their recruiting process; this “kick off” has been inching ever earlier (now happening ~9 months into an analysts job) as firms rush to start their process first, hoping to get a few hour head start before all their competition follows. Some firms will then complete their first and second round of interviews in the following 72 hours. Others will take slightly longer, but likely most PE jobs are filled by the end of March, ~14 months before any of those analysts will actually start at the firms from which they received offers.

The Problem With How It Works Now

The current process introduces a variety of problems which both firms and candidates would value solutions for:

First, the current “race for talent” that has been taking place for years means that firms are hiring much earlier than they would prefer to.  There is important information about candidates that could be learned if the process were to start later – talent can change and grow significantly from 9 months into a job to 2 years into a job. Firms would prefer to all hire much closer to the actual start date so that they could have more perfect information about the candidates they were hiring, but because there is a lack of centralization, regulation and alignment of incentives, firms continue to push the process forward. In addition, later blooming candidates would benefit from a process that allowed all of their on-the-job accomplishments to be considered vs. mostly pre-work experience knowledge and accomplishments.

Second, the current process sources from too limited a talent pool, leaving potential top talent out of the process.  Recruiting firms are only sourcing from investment banking backgrounds (with a few consultants sprinkled in for good measure) and there are too few minorities, including ethnic minorities and women, in the source pool.  This limited talent pool arises from a few frictions:

  1. Traditional screening “metrics” used as a first funnel by the recruiting firms and candidates have been shown to not necessarily predict outcomes:
    1. College name and GPA
    2. SAT scores
    3. Pedigree of bank where candidate was an analyst
    4. Ranking in bank analyst class
  2. The gate keeper firms are themselves biased – they are mostly women, mostly white, mostly wealthy and are incentivized to find candidates that fit the PE firms’ existing candidate profiles since they get paid immediately on candidate acceptance.
  3. Referral networks are biased. Candidates currently find out about the PE industry and its recruiting pathway from friends who have done it. Since the PE ranks are mostly male, and mostly white, this unfortunately leaves many qualified talents out of the pool since they didn’t know the right baking internship to get, or the right recruiter to talk to.

Solutions a Technology Platform Could Provide

Ideally, the PE talent market should act as a two-sided market place connecting PE candidates to firms looking for talent. The tool should aim to cut out the recruiter function in the channel and monetize by capturing the value that these firms currently capture. The tool would ideally also create additional value by providing firms with access to more and better talent by expanding the initial candidate pools and providing more quantitative screening metrics proven to be tied to more successful outcomes.

  1. Expanding the pool: Young minority candidates currently have a much weaker network helping them to navigate the “path” to lucrative finance opportunities. Many internships are passed down (literally) from generation-to-generation in fraternities, sports teams, eating clubs, etc.. And unfortunately, once you don’t get the first internship, it is very hard in the current system to rejoin the PE path. By creating a more transparent, and public recruiting platform, could advertise to this currently under-educated group of qualified candidates and provide them with a network to access the advice that their peers already have.

 

  1. Changing the initial resume screen: Introduce a set of screening metrics which will actually predict success as an associate at the firm. These metrics should be based on tests (that can be done on the platform) and on skills/questions (that can also be asked through written answers or video answers) vs. pedigree.  The measures should be tested over time to show correlation with candidate success at each individual firm. This change in screening method can hopefully help to remove some biases that are known to exist when just looking at resumes and provide firms with a way to find “diamonds in the rough” who either developed later and didn’t necessarily get into a great college, or get a great first job, or who didn’t have access to these opportunities by virtue of their upbringing or financial background.

Adoption Challenges

  1. Attracting initial users: The value of the platform, initially, will likely be maximized by starting with a large pool of qualified pool of candidates and a handful of good firms, versus having a wide range of firms and only a few candidates. A strategy for attracting initial qualified users is to specifically target the minority candidates (women, black, Latino/a) mentioned earlier. This subset of users currently lacks the offline networks of their male counterparts, and thus may find an online community providing recruiting advice and guidance valuable. The initial platform could be a social network providing consumer-generated recruiting tips prior to signing up any firms to adopt the platform.
  2. Signing up firms: Once the platform had attracted an active user base of potential candidates, the underlying recruiting product could be marketed to a handful of top firms who would be willing to test the tool in order to gain access to a pool of candidates which they have currently had trouble reaching. Although firms will likely be unwilling to switch from their traditional sources of candidates in one fell swoop, proving initial success sourcing the first few candidates will be an important proof of concept.
  3. Winning the market: If firms did have success using the tool to source candidates that they would not have accessed through traditional channels, they may be encouraged to use the tool to replace the current “recruiter” function in the channel, in which case users would be forced to follow since it would be necessary to join to have access to the available jobs. The platform should charge the firms (and not the candidates) since they have the higher willingness to pay, it might go against the value of being more inclusive to charge candidates, and the firms already have demonstrated their ability to pay more traditional recruiters. Firms will require both analytics and sourcing value in order to stay with this platform versus another competitor platform.  A broad, differentiated, high quality sourcing network will be a longer-term competitive advantage and the social community / advice / information piece will be critical to keep attracting high quality talent to the site.

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2 thoughts on “DISRUPTING THE OLD-BOYS NETOWRK IN PRIVATE EQUITY RECRUITING

  1. I think this is a terrific idea and addresses a big issue at HBS (and evidently, based on your post, long before we even get to business school) that I first read about in the September 2013 NY Times article that stated, “women never heard about many of the most lucrative jobs because the men traded contacts and tips among themselves.” From what I understand from classmates who recruited for PE while at HBS, the recruiting firms still play a prominent role in filling full-time opportunities, and I have to imagine similar biases persist as seen in recruiting from investment banks. However, as I reflect on the Zillow discussion today, I am curious whether there is an opportunity to work with the recruiting firms, rather than seek to displace them. I imagine the PE firms value the recruiting firms to do a first in-person screen and manage the flow of candidates, and I am curious if your proposed platform could serve to broaden the funnel of talent that recruiting firms draw on, as well as offer tests that provide a clearer evaluation of a candidate’s financial skills. If you plan to pursue this idea, I think it could be valuable to speak to a few recruiting firms, and a range of PE firms – both small ones who do not have an HR function and larger ones with HR and Recruiting teams – to better understand what frictions they see in the process and then factor that feedback into the design of the platform.

  2. This is certainly an innovative idea, and one with potential long-term benefits, though I’m not sure how to incentivize the PE firms to break away from their current process since they likely do not even think there is an issue with the “system”. In their minds, they are pursuing the quickest and easiest way to gain top talent – and since the skill set required for PE is largely reflected in banking, they believe that they are screening candidates in the most efficient way possible.

    When we signed up for HBS, we knew that we would have an HBS label that would perform a similar function for us; recruiters glean information from the fact that we have been deemed qualified enough for HBS, so they are partially relying on HBS’s screening efforts in addition to their own. I think that having this online system that you proposed as a targeted platform for nontraditional candidates, in addition to their already effective engine, may be the way to go. And once a few banks such as GS sign up, others will follow.

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