Are these the worst sorts of firms to work for on the buy-side?
Struggling finding work on the buy-side? There are many alternatives to private equity firms and hedge funds that are currently desperate for talented investment pros. Whether you really want the job is the real question.
Pension funds, endowments, sovereign wealth funds (SWFs), foundations and other institutional investors are struggling to find quality investment talent, according to a new study. Nearly 60% of limited partners (LPs) in private equity firms cite the lack of high-quality recruits as a significant barrier to improving their returns – the second most common response behind “scale of resources,” a potentially paired issue. Nearly all the LPs included in the research by Coller Capital have over $1 billion in assets under management, with more than 30% controlling $50bn-plus.
The report didn’t break down the individual reasons for the recruiting struggles, but headhunters tell us it’s all about the two P’s: pay and politics – both literally and figuratively concerning the latter. Sovereign wealth funds are known to pay poorly compared to traditional private equity firms, a reputation that was fleshed out in our recent Ideal Employer survey. A job at a state-owned investor also tends to be accompanied by plenty of bureaucracy and red tape. Plus, you won’t find offices in desirable locations like London or New York. The work-life balance may be a bit better, however.
Working at private and public pension funds can provide similar frustrations, according to one buy-side recruiter who asked to remain anonymous. The oversight and scrutiny can be intense. “Imagine having one million bosses, many of whom consider [their pension] to be their only source of income but who don’t know the first thing about investing,” he said.
Public pension funds controlled by legislators are known for capping compensation, along with the massive public outcry that can accompany a dip in performance. Expectations often clash with the average rate of return, particularly considering the conservative approach pension funds are supposed to employ.
Earlier this year, the $151 billion Texas Teacher Retirement System’s pension fund received pushback when it looked to lower its assumed rate of return from 8% to a still-lofty 7.25%, with retirees pointing to the bull market of the last five years as they questioned the decision. Public pensions are also chronically underfunded, adding additional pressure to managers. Some private equity firms have even turned away investments from pension funds because they can be inconsistent and difficult to work with.
Then of course there is the issue of compensation, which is managed by a board of trustees. The Arizona State Retirement System currently caps bonuses at 25% of annual salary, as an example, a far cry from what investment managers take home in the private sector. One can see why famed investor and author John Mauldin once titled a piece: “Mamas, Don't Let Your Babies Grow Up to Be Pension Fund Managers.”
Meanwhile, the environment at endowments and foundations tends to be a bit more comfortable, as the money doesn’t belong to any one individual. Still, fund managers face somewhat similar consternation over pay considering the investments are donations, said the headhunter.
Look no further than the owner of the world’s largest endowment.: Harvard University. Jack Meyer ended a nearly 20-year run as Harvard’s endowment head in 2005 following alumni backlash over the compensation of his top performers, despite generating annual returns of more than 15% for over a decade. Meyer took his top three employees with him to start a new firm.
Jane Mendillo, who led Harvard’s endowment fund from 2008 to 2014, was heavily chastised for her conservative investment strategy, leading to speculation that she was pushed out. Two years later, a group of incredulous alumni wrote a letter to Harvard’s board, demanding a full accounting of the endowment, starting with the pay allocated to fund managers.
Maybe Harvard’s alumni have a point, however. While they typically pay their endowment head over $10 million a year and several other managers well into seven-figures, the endowment manager at a small school in Wisconsin whose rate of return has bested the Ivy League titan over the last decade makes just $250k a year. A hedge fund likely would have come calling if he didn’t just invest in indexes.
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