Investment banks and private equity firms are fighting over the kids again. Both sides want the smartest graduates hungry to get rich (many have monster student debts, to be fair), but someone must put them through Wall Street Boot Camp, the basic training of financial modelling, pitching clients and selling deals. Banks typically bear those costs — and they’re fed up of private equity free riding on their investments.
Hoping for an informal code of honor between competing firms, or threatening dire consequences for junior analysts who don’t play by some imagined set of rules won’t fix the problem. A better solution would be to use the tool that governs everything else in finance: money.
The issue has been around for years, but it seems to have gotten worse as private equity has grown and become greedier for Wall Street’s human capital. Jamie Dimon, JPMorgan Chase & Co.’s chief executive officer, has been complaining about it more regularly and loudly in the past couple of years. Last week, the firm’s global banking heads put a marker down by warning that it would sack juniors who sign contracts to jump to private equity as a second job when they’ve barely begun their analyst programs. This week, Apollo Global Management LLC CEO Marc Rowan held his hands up and admitted that Dimon had a point. Apollo promised to slow down on snagging commitments from youngsters too soon.
There’s huge competition within the industry to capture the best and hardest working juniors, echoing the battle among those recruits to land roles at the leading firms. JPMorgan, along with Goldman Sachs Group Inc., tops the lists of most sought-after starter jobs year after year. The fact that these banks are still losing talent early shows just how lucrative working at private equity firms has become as the industry has gained scale and power.
But that provokes an obvious question: Why aren’t the likes of Apollo or Blackstone Inc. or KKR & Co. training more of their own graduates? Some of the biggest hedge funds or electronic market makers like Jane Street LLC are grabbing kids early and keeping them. For example, Citadel and Citadel Securities had more than 100,000 applicants for about 300 places across their summer intern programs this year — and the best of those will come back to junior roles and full careers.
In Europe, private equity tends to still recruit from consultancy firms as well as banks, but in London and New York the fund houses almost exclusively want people who have been through investment bank analyst programs. That’s despite the fact that the biggest private asset managers have their own in-house investment bank-type operations these days, doing capital markets and advisory work for portfolio companies. However, those may be too small and regarded internally as too much of a cost center to be suitable for polishing up raw recruits.
The question facing banks, then, is how better to defend their investments in teaching Wall Street knowhow. To sack an individual who’s planning to soak up the training and run, an employer bank needs to find out that’s what they’re planning; unless bosses think they can start monitoring private communications, I’m not sure that’s feasible.
Banks could try relying on private equity to start acting more honorably and only target analysts who are deep into their second year, or after. That probably won’t work either. Each firm is competing with others to snap people up, which is how this kind of recruiting started happening earlier and earlier in the first place, as my colleague Matt Levine has noted.
What banks really want is to get a decent return on the investment in human capital they’re making. They could do more of what they typically do for all their bankers, which is to defer rewards: Pay analysts less salary upfront but with guaranteed loyalty bonuses six months, a year or 18 months after the training program is done. The best banks will still attract top graduates even if lesser rivals pay higher starting salaries — but I bet the industry would converge on more strung out compensation anyway. The losers would be those analysts who don’t make the cut and so work the horrid hours for less money.
Another alternative would be something like the model used in professional European football, which has rules around very young players to determine how much a buying club should pay to a team that developed their talents over their teenage years. This wouldn’t work the same way in investment banking; but firms could insert some training cost into employment contracts that quick-quitting juniors would have to pay back if they move straight to private equity or even join a Wall Street rival. That would probably end up being paid as a signing-on fee by the firm keen to hire the analyst — but at least the first bank would recoup something.
It would also send an important message. The problem isn’t so much about churn, it’s about investment and commitment between firms and bankers in both directions. Adding monetary friction for poaching younger talent could make the hiring firm and the analyst think twice about the costs involved in jumping early and the risks of getting the move wrong.
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