Movers and shakers

With the situation in the wider economy deteriorating rapidly and the banking sector reeling from its near collapse in September, European private equity deal activity has seen a dramatic slowdown in recent weeks. Indeed, anecdotal evidence suggests that many investment professionals, particularly in the buyout space, have relinquished hope of closing a deal in 2008 and are instead already making preparations for next year. Given this sombre and decidedly inactive backdrop, the recent swathe of recruitments across the industry has come as something of a surprise. A total of 43 appointments were announced during October (equivalent to almost ten a week), suggesting that there may be a silver lining emerging amidst the current gloom.

Downsizing
The largest proportion of recruitment activity occurred in the small- and mid-market buyout space, which accounted for 16 appointments overall - 37% of the total. Significantly, much of this was accounted for by investment professionals moving downstream from large-cap houses; a trend that represented over a third of all appointments in the space. This is despite the fact that deal activity in this area of the market, which had remained resilient during the first six months of 2008 by virtue of the fact that transactions rely less heavily on large syndicated debt packages, has been curtailed in recent months as the knock-on effects of the credit crunch have spread throughout the global economy. "Things are not as binary at the smaller end of the market; though getting debt is challenging it is doable and it is still possible to find growth businesses despite the challenging economic climate." explains Kevin Grassby, managing partner of Bowmark Capital.

However, given the differences in how deals are sourced and structured at the top of the market, inevitable questions arise as to how easily people from these firms can be assimilated into buyout houses further down the value spectrum. But Grassby, whose firm hired two to its investment team in October from European Capital's buyout arm and Nomura Private Equity respectively, suggests that this perceived discrepancy is not as severe as is commonly assumed: "Its easy to forget that many of the people working in these firms were doing much smaller deals themselves not that long ago as mega-deals are a relatively recent phenomenon. Its just a case of getting someone with a generalist skills set, as to be successful at this end of the market you need to be fairly balanced.

It terms of the other perceived discrepancy - that of remuneration - the ongoing lack of activity in terms of large buyouts arguably negates this issue. Though the potential carried interest payments from larger buyouts are certainly attractive they are worthless if there are no deals, which in turn makes any possible reward from smaller transactions all the more alluring. Furthermore, Grassby argues that the decision to gravitate down the value chain is often not solely based on financial motivations: "Small- and mid-cap buyouts can still be sourced directly, rather than solely via intermediaries, which means you can apply a little creativity and entrepreneurial spirit to generate opportunities. At the moment this is particularly attractive as there are no deals at the top end of the market and there is only so much portfolio management that is going to get you up in the morning."

Emerging bright spot
Another area that has seen a spate of recruitment activity is Central and Eastern Europe, which is especially significant in that it has seen two new office launches in the last month - those of Swedish buyout house EQT and international law firm DLA Piper. The fact that such sizable firms are currently increasing their presence in these areas is a testament to the positive perception that continues to surround emerging markets. According to a spokesman for Dubai International Capital (DIC), which has itself recently bolstered its global emerging markets team: "We are actually doubling our efforts in emerging markets at the moment and there does appear to be a general consensus that they represent a bright spot in an otherwise dark time.

This increased focus on emerging European economies may seem counter intuitive in the current climate. The region, for a long time assumed to be insulated from the credit crisis, has recently been exposed as suffering dramatically in the midst of the spreading global economic slowdown. However, DIC (and others) remain bullish about the prospects for such markets: "The fundamentals of these economies remain strong and, in many cases, still display growth. Things are slowing down but it remains positive in comparison to many Western countries and there will therefore be opportunities for private equity." Indeed, these fundamental and attractive future prospects have been driving private equity professionals to these markets for a number of years: "People in this industry tend to think of life in terms of long-term ten-year chunks so these markets have been a compelling proposition for some time. There is a growing shift towards the east that has merely been exacerbated by the current turmoil.

Advisory opportunities
In addition to the areas of the market that have long been cited as offering a positive outlook, the current downturn is also creating new opportunities for advisory groups as private equity portfolios hit troubled waters. This has prompted a flood of recruitments as firms attempt to adapt their business model to the new paradigm, with intermediaries announcing 13 new hires in October - 30% of the total - making this the second largest category overall. With restructurings and insolvencies the issue at the forefront of GP concerns, it is no surprise that law firms represent more than half of this activity with eight new recruitments over the month. Furthermore, there have been countless internal moves across the sector as many firms redeploy talent from other, less-active divisions into dedicated restructuring and insolvency teams.

Notably, the trend observed in relation to private equity firms in terms of professionals moving downstream has also been evident amongst the dearth of moves within the legal community. One possible explanation for this could be that the client base of the larger legal firms is more concentrated amongst the large-cap private equity groups and therefore they are experiencing the same knock-on effects from the reduction in dealflow. However, once again this pattern is not something that is entirely novel, indicating perhaps that there are more personal issues involved in the motivation to downsize. "Medium-sized firms offer an environment where people are given much greater client responsibility and exposure and this has attracted a number of associates at 'magic circle' firms in recent years," explains Richard Moulton, Partner at Eversheds.

Natural selection
Clearly much of the recent recruitment surge within European private equity is concentrated on areas of the industry that have been recognised as offering either relative stability in the face of the economic upheaval, or potentially lucrative future growth prospects. But although most of the trends observed are not unprecedented, the scale on which they are currently happening is. Beyond the personal reasoning that many professionals have for embarking on these well trodden career paths, there is a sense that the natural and ongoing evolution of the asset class has picked up pace as it adapts to the post-boom world.

This is occurring even despite the fact that many of these recognised areas of strength are beginning to show signs of strain in the wake of the sharp economic downturn. And here enlies the industry's real strength. The ability of firms to take the long term view and avoid reactionary measures, whilst also quickly adapting to exploit new opportunities when incumbent revenue lines become squeezed, is what will separate the wheat from the chaff. It is therefore likely that the recruitment boom will continue in the short term future, as firms and professionals alike prepare for what is likely to be a long and difficult - but potentially prosperous - period ahead.

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