The Hunt for Talent: How Long Can It Last?

Although Wall Street observers are keenly aware that industry hiring moves in cycles, few think the current up cycle is close to a peak.

For more than a year and a half, amid persistent concerns about the health of the economy, both the buy-side and sell-side have been chasing talent. The market for talent is "definitely the tightest I've ever seen, and I've been through the tech boom," says Alison Seanor, senior vice president at Glocap Search, a recruiting firm for private equity and hedge funds. "I don't think we're at the apex. A lot of hedge funds are doing very well. Banks are reporting record profits."

"The M&A cycle still looks pretty darn good, both in Europe and the U.S.," says Brad Hintz, financial services analyst at Sanford C. Bernstein. While a cooling U.S. economy indicates merger activity will level off on this side of the Atlantic, Hintz says European M& A continues to boom. Among other hot areas he lists: euro-denominated bond issuance and trading, oil and gas trading, and retail brokerage.

While investment banks are actively recruiting for every level from analyst through vice president, activity is most feverish on the buy side, among hedge funds.

"I've had as much business in the first half of this year as I had all last year. It's accelerating," says Dave Tomer, president of Boston-based Tomer Search Group.

"Everybody wants to move into hedge funds" because they're making so much money, Tomer says. Their general partners are willing to pay whatever it takes to lure good portfolio managers from rival hedge funds or long-only investment firms, so they can keep taking in assets that generate lofty annual fees of two percent (or more), plus 20 percent of investment gains.

Macro Worries Abound; Markets Hold Their Ground

When might the gravy train stop? Forecasters have spotlighted a number of possible triggers. While most of these worrisome signs have been in place for at least a few months, the economy and markets seem to be weathering the impact.

The liquidity surge propelling both hedge funds and private equity has spurred talk of a debt-fueled asset bubble. Yet when $9 billion hedge fund Amaranth imploded last September, there was barely a ripple in the markets. This year, UBS shut its money-losing Dillon Read hedge fund, and Goldman Sachs's once stellar Global Alpha fund continued to post negative returns. Instead of tarring the sector, those ugly headlines merely set off a feeding frenzy among headhunters and rivals seeking to lure talent away from the two troubled funds.

Also, sub-prime mortgage woes are getting worse, casting a pall over the bond market's mortgaged-backed, asset-backed, and collateralized debt obligation sectors. But despite record-high foreclosure levels, delinquent loans make up less than five percent of all residential mortgages. Thus far, the housing downturn has had only a minor impact on overall consumer spending or bank profits. Bear Stearns' share price is off 17 percent from its January high, but neither Bear nor any other major firm has slumped enough to raise fears of an industry-wide crisis.

Some prominent industry figures are warning of a corporate debt bubble, brought on by banks extending ever-easier credit to support PE-led buyouts. With corporate defaults at record lows, easy credit shows little sign of drying up. If and when it does, that could pull the plug on one of the bull market's engines.

A fresh source of concern flared up this month, in the form of Congressional proposals to eliminate capital gains tax treatment for private equity profits from buying and selling companies. If adopted, private equity firms' tax rates would double, and the sector would inevitably cut back.

Room to Run?

"It's hard to stop the train when it's moving," observes Dave Tomer, referring to the continuing bull market for financial talent. "I'm hoping we get three or four more years out of this run." However, he adds, "I can guarantee you, it will end" at some point.

Since entering the business in 1983, Tomer has observed three complete market cycles. He says the up cycles averaged seven years and the down cycles, three to four years.

The last down cycle began in 2001. Although the economy and the stock market recovered strongly from 2003 on, Wall Street hiring stayed subdued until 2005 - illustrating the truism that employment trends are a lagging indicator.

To be sure, even now the industry has its pockets of softness. Hintz points to portions of the bond market exposed to the sub-prime meltdown; the increasingly crowded U.S. prime brokerage business, where commissions are being squeezed; and ongoing retrenchment in sell-side equity research.

Hintz also cautions that corporate earnings growth, which drives equity underwriting, and GDP, which drives M&A, are both slowing. Still, he says, "M&A won't come to a screeching halt until we hit credit problems on the financing side."