Nature vs nurture: Training PE professionals

Private equity can be a forbidding field for those just entering it. It certainly seemed that way to Chester Moynihan, founder of Australian distressed asset investor Allegro Funds, when he entered UK-based Permira as an analyst.

Fortunately for Moynihan, his employer had anticipated his difficulties, and already had a plan. It sent him to the British Private Equity and Venture Capital Association's (BVCA) residential training course, which featured presentations from senior industry professionals plus the chance to compare notes and experiences with his future peers. "It got you off to a strong start in that regard," he remembers.

Opportunities like this are not always available to newly minted PE professionals, and the type of training available depends on one's location. For example, the Australian Private Equity and Venture Capital Association (AVCAL) provides training through its PE 101 sessions. Unlike the BVCA's offering, however, these classes are limited in scope, lasting hours instead of days, and therefore cannot cover as wide a range of material.

"They're trying to do something that the BVCA, I thought, actually did better," Moynihan says. "What I liked about the BVCA course was that it was not just great content, but it was residential. The networking side of it was actually very good, and you knew that as you progressed in your career, you actually had reasonably good contacts to call on."

Push and pull

While new PE professionals have traditionally been trained by the firms that hire them, many in the industry believe there would be value in an objective industry-wide qualification. However, efforts to establish such a standard must overcome industry inertia as well as the skepticism of some established players. The most effective push may come from outside the establishment altogether.

The desire for more objective standards stems from concerns with the existing training model. At present, the question of qualifications is a matter for each firm to handle on its own, during the hiring process. The emphasis is on learning through experience. Those recruited from related industries are expected to apply existing skills to investing, while in-house programs are developed to bring new entrants up to speed.

Many in the industry justify this model as best suited to the type of individual who will do well in private equity. Moreover, the kind of skills needed may not be suitable to a classroom.

"I don't think you can necessarily teach people private equity, or how to make money," says David Willis, national sector leader for private equity at KPMG in Australia. "A lot of this you learn over time. Many people will take views of sectors and management from things they've seen in previous deals, and use that as a base for how they make decisions about new investments."

The fact that many of the currently successful private equity firms and professionals did not go through a formalized training process could make it hard for the idea to gain traction. If the current system is working, then introducing a new qualification or standard serves little purpose, and might be counterproductive.

However, entrenchment of the traditional approach should not be a challenge to its reexamination. While the idea of on-the-job training may serve the industry in some ways, in others it could become a liability.

For one thing, building up experience takes time, during which the new professional's contribution to the firm is limited. The individual may miss valuable investment opportunities through misreading the market, or waste his time chasing leads that appear attractive but that he should know are ultimately not productive.

"Humans are wired the wrong way. We get happy when the market is going up, and panic when it's going down," says Nick Nash, former head of General Atlantic's Singapore office and currently group president of consumer internet platform Garena. "It takes training to learn to react the opposite way, which is actually correct."

In addition, while there are methods of proving competence that are commonly accepted in the industry, these also may not be as useful as they first appear. For instance, many firms look on an MBA as a positive attribute that shows a candidate's intellectual preparation - and in fact, taking a break to get an MBA is still a commonly accepted practice.

Though challenging, many programs include little, if any, material that is directly relevant to private equity. Getting an MBA can still be a worthwhile achievement, and the training might help with some aspects of the job, such as managing a portfolio company, but it is not the indisputable sign of competence that some would like to see.

One of the most widely accepted marks of expertise in the industry is experience. Having worked for an investment bank, or another firm, can be a useful endorsement on a candidate's CV. But hiring managers who assume that such experience indicates a professional's knowledge of the relevant sector may find out otherwise, to their detriment.

"Having worked at an institution doesn't actually mean they're qualified," says Chang Sun, co-founder and managing partner of Chinese agriculture-focused GP Black Soil Capital Partners and former Asia managing director at Warburg Pincus. "People try to dress up their resumes with the likes of Goldman Sachs and Morgan Stanley, as if that's enough. But they may be working in the arbitrage department, or the fixed income department of these institutions. It may not have anything to do with their work today."

No reference point

The trouble spots pointed out by industry players point to a single, overriding concern: the lack of a common reference point of education and experience that can be used by both candidates and their potential co-workers and managers. This type of qualification is already well established in other branches of financials services, but several factors have prevented its establishment in the world of private equity.

One of the most significant challenges is the lack of pressure on GPs from those with the authority to demand it, particularly regulators and LPs. Regulators have not tended to hold private equity practitioners to the same kind of requirements as they hold those in other areas of financial services, in part because PE is not seen as being as risky as public market investing. For instance, capital is called for individual investments rather than committed up front, and direct participation is for the most part restricted to qualified institutional investors.

Of course, this is not uniform in the industry, as regulations differ from market to market. Indeed, in many markets funds must be registered and regulators make this conditional on meeting certain requirements. However, these usually apply to senior management rather than junior employees. Even if they sit a test, it may not make sense in the context of the industry.

John Levack, co-founder and managing director of Electra Partners Asia and chairman of the technical committee at the Hong Kong Venture Capital & Private Equity Association (HKVCA), points out that Hong Kong's Securities and Futures Commission (SFC) requires locally-based funds to have a regulated officer who has passed the exam for stockbrokers.

"A guy who had run the Hong Kong Monetary Authority, allocating $40 billion to private equity firms from reserves, recently had to pass this exam," he says. "He sat it and he said there wasn't a single question in it that was relevant to private equity. That's an insult to him."

Despite the lack of pressure from above to adopt new standards, several industry bodies have gone ahead with attempts to create industry standard qualifications. One of the most prominent is the Chartered Alternative Investment Analyst (CAIA) program, which was developed by the Alternative Investment Management Association and the Centre for International Securities and Derivatives Markets.

The CAIA Charter is designed to provide new entrants with a basic level of investment skills. Charter holders are expected to be able to evaluate investment opportunities, identify drivers of returns, and recognize sources of risk and operational implementation issues.

"PE professionals with a CAIA designation have a common understanding of techniques, terminology, and best practice within the PE industry," says Peter Douglas, a principal at CAIA Singapore. "They have an immediate global network and a unique understanding of many other investment techniques and assets, with good triangulation of PE within the universe of potential investment and asset classes."

Along with global designations such as CAIA, regional industry organizations can also contribute to industry qualifications. These efforts tend to vary, however, based on the relative level of enthusiasm within each region for the goal.

The HKVCA has established a particularly thorough approach. Its education program targets professionals at several career levels: the "Fundamentals of PE" course is aimed at junior professionals and back office employees and covers the basics of the industry, while the newly established "Mid-level Training" course is intended for experienced PE professionals seeking to raise their careers to the next level. It deals with topics such as negotiation, leadership skills, operational improvement, due diligence and fundraising.

Additionally, the association conducts master classes throughout the year on topical concerns, and is growing its outreach efforts for universities and other stakeholders - including the SFC and the Inland Revenue Department, for whom HKVCA set up tutorials in their own offices.

"What we realized was that they wouldn't come and attend our normal classes, because they'd be embarrassed, they wouldn't feel like they could put their hand up and ask a question," says Levack. "It was much better to do it there."

Other regional organizations have not made education as high a priority, however. AVCAL offers its PE 101 course on a regular basis to new PE professionals, and the China Venture Capital and Private Equity Association (CVCA) offers a similar program called CVCA Academy, but both are more limited than HKVCA's offering.

Overcoming obstacles

The inconsistency among these training efforts speaks to the challenges of creating an industry-standard qualification. Despite the benefits touted by some players, others are skeptical about the likelihood of following through.

One obstacle is the difficulty of getting GPs to cooperate on the development of a standard. Though firms are willing to spend money to benefit themselves, convincing them to invest in an effort that might help their competitors as well is a different story. Chang Sun remembers an attempted industry-wide compensation survey by Powers Watson several years ago that never managed to get the participation of a meaningful number of GPs.

"I think on their own the GPs won't do anything together. They might do things on their own; within each firm they will have their own training programs and their own standards," says Sun. "But I don't think it will be universal."

Another reason for skepticism is the specialization of GPs. While the idea of a global standard for private equity investors is appealing in theory, firms often are focused on such a narrow geography or sector that a universal qualification is too general to benefit most firms. However, others argue that this objection focuses on the wrong participant. The real reason for a qualification is to prove that one meets a certain standard of knowledge or judgment.

It is suggested that reticence in the industry could be overcome through pressure rather than persuasion. If LPs or regulators decide to encourage or require GPs to prioritize holders of a particular qualification in their hiring, the managers will be far more inclined to do so. With the insistence of enough investors or regulators, the presence of the qualification in the industry could reach a tipping point.

The Institutional Limited Partners Association's (ILPA) private equity principles offer an example of how this process could play out. Though the principles generated some resistance among GPs at first, their widespread adoption by LPs eventually caused most funds to accept them as a normal cost of doing business.

Indeed, some proponents of a qualification warn that it may not be a movement that the industry can ignore. Private equity is subject to more scrutiny than ever before, whether it is LPs demanding more regular and detailed information disclosure, the European authorities imposing stricter controls on who can market funds and how, or US regulators investigating fees and accounting procedures.

In other areas of financial services, pressure from multiple sources - and, in some cases, the weight of scandals - has resulted in formalization of standards, including training and qualifications. Private equity may be no exception, and GPs need to be part of the discussion, not on the receiving end of diktats.

"If we can get to the point of having a little certificate to say you're certified by HKVCA as a way of showing that you've achieved a level of knowledge about how the whole industry works, then that would be the decent outcome," says Levack. "The same way you have certified accountancy, this would just say you've achieved a certain base level of knowledge."

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