Investment banks have increasingly been trying to convince their analysts and associates to stick around, but the lure of a job on the buy-side is still convincing Millennials to move after a couple of years.
Just 3% of investment banking analysts in the class of 2014 in the U.S. surveyed by recruitment firm Odyssey Search Partners said that they view a career in banking as a long-term option. Instead, the most desired career path was a move to private equity, followed by hedge funds and then a possible move to a start-up. Private equity firms have been targeting investment banking analysts ever-earlier - some times extending offers after just six months into their training programmes. Worryingly for banks, 48% of the class of 2015 said they would jump to the buy-side before their two-year training was up, compared to 34% of analysts who joined in 2014.
“The challenge for the investment banks is that most smart, graduating seniors interested in finance tend to only see investment banking as a stepping stone, rather than somewhere to build a career,” said Anthony Keizner, partner at Odyssey Search Partners. “As a consequence, when opportunities to join the buy side come up, whether it’s more sporadically on the public side or with the more structured private equity process, bankers are going to put their names forward to interview."
In 2014, most banks increased salaries for their junior bankers, but 2015 was all about rolling out schemes designed to placate and retain analysts, who are perceived as a bigger flight risk. In November, Goldman Sachs rolled out a scheme to promote all analysts to associate after two years - rather than the traditional three - something that was already in place at UBS and Citi. Credit Suisse, Barclays and Deutsche Bank have since unveiled fast-track programmes and Royal Bank of Scotland has just started promoting its analysts to associates after two years. This is on top of schemes like allowing analysts to take Saturday off or capping working hours.
“Efforts such as reducing Saturday workloads or allowing more time for philanthropic activities are appreciated but won’t stem the overall demand to move on,” said Keizner.
There are some misconceptions about the earning potential in private equity, however. One survey respondent commented rather frankly about moving to the buy side: “Half the hours, double the money, right?"
In fact, analyst salaries in private equity for those based in the U.S average out at $81.5k, according to figures from Preqin, with total cash remuneration of $116.3k. Associates bring in $190.5k annually on average, it suggests. Bankers who talk about money or lifestyle factors in an interview are unlikely to go far, however, says Keizner.
"‘Passion for investing’ is almost always something people are looking to uncover, and in reality, top-performing buy-side analysts tend to spend evenings and weekends working on ideas and reading about companies – because this is what they enjoy,” he said.
Pamela Golding, a vice president at Glocap Search, adds: “It seems like many candidates go into banking to learn a specific skill set and quite a few know their end goal is to get to the buy-side when they first join the investment bank,” Golding said. “Many others aren’t sure what they want to do after banking, but given how early the PE [recruitment] process launches each year, they make a decision to join the buy-side before really getting a chance to evaluate all their options, including banking,” she said.
Ultimately, for many junior investment bankers, it comes down to one word: compensation. Longer term, once carried interest starts kicking in - usually at associate level - PE simply offers more money. Carol Hartman, managing partner of the financial services practice, North America, at DHR International, said: “In the PE firms they quickly get carry, and that is never available in the banks,” she said. “They just make massively more money.”
Not that moving to PE is an easy option. One private equity firm with a graduate programme tells us that it gets 270 applications for every available role. Recruiters say that you have a 10% chance of even getting your resume through the first screening process.
Cogs in a wheel
Bankers who are getting real-deal experience with increasing responsibility, in teams they like and respect, might be more reluctant to leave, Keizner said.
On the flip side, those that describe their roles as ‘feeling like being cogs in a wheel,’ continually having to build models and prepare pitch books for deals that go nowhere, are the ones who are run fastest for the doors.
“Given the instability of the sell-side, and the overall weakness in the wider economy, we see buy-side candidates placing increasingly emphasizing stability factors like diversification of LPs and stickiness of capital, whereas previously factors that candidates would continually probe instead would be career opportunities – and compensation,” Keizner said.
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