Why more private equity firms are adding consultants to their investment teams

The private equity associate role is one of the most coveted positions for early-career professionals breaking into this competitive industry. It’s also a critical value-creation lever for both large and small firms.

Associates comprise private equity investment teams, which source, transact and manage business acquisitions.

Historically, there have been firms who only seek out analyst-level investment bankers to move into these roles; however, we’ve seen a growing number of private equity firms add management consultants to their associate ranks over the last few years.

Investment bankers vs. management consultants in private equity

Investment bankers remain the most sought-after profile for private equity investment teams, but consultants are becoming a more popular addition.

While investment bankers tend to be more specialized in transaction management, pipeline development and leveraged buy-out (LBO) modeling, which is ideal for the private equity associate position, consultants add strengths in landscape analysis, strategic due diligence and post-merger integration.

Having a mix of both investment banker and consultant talent in their associate ranks can be a unique differentiator, specifically for operationally focused private equity firms.

Related: Off-cycle recruiting back in style for private equity firms seeking dynamic talent

Additionally, private equity firms that hire associates from consulting backgrounds often have a hybrid approach, where associates split their time between investing and portfolio management.

Associates in a hybrid role may spend up to 50% of their time on portfolio company management versus investing, but this is almost always driven by the needs of the portfolio companies and the number of deals the private equity firm is looking at. When deal flow is high, it is not uncommon for portfolio management to fall secondary to investment responsibilities.

Dedicated portfolio operations teams are also becoming more popular for larger firms, where portfolio management and investing are kept separate entirely.

Read: Private equity firms continue to build and grow portfolio operations teams

When do consultants transition to private equity?

Private equity firms generally target consultants who are early in their tenure for associate-level roles. The ideal backgrounds tend to have 1-3 years of pre-MBA experience, healthy exposure to commercial due diligence projects, strong commercial instincts and a passion for investing.

High-performing managers in consulting can have a difficult time pivoting to private equity in an investing capacity, because firms are most excited about hiring associates who are early in their career, moldable and are spending the most time doing rigorous analytics and slide building – which are most applicable to the private equity associate role.

Consultants who are over three years into their tenure will typically focus more on influencing, leading and project management, which are less relevant to private equity associate roles.

Interviewing and onboarding best practices

To attract the best consulting talent to your investment team, you must recognize they have a different skill set than your typical investment banker. Reflect this in your interview process and onboarding plan to adequately judge your candidates’ strengths and weaknesses, and to bring them up to speed quickly once they matriculate.

Read: The ultimate Charles Aris guide to executive recruiting

A consultant-friendly interview process will typically evaluate your candidates’ strategic problem-solving abilities, analytics skills and commercial instincts, in addition to cultural fit with the firm and portfolio.

Some firms require consultants to possess the same LBO modeling capabilities as an investment banker, but others focus more on evaluating the strategic toolkit and cultural fit, with the understanding any additional skills can be taught to the right candidate.

Most candidates invest a lot of time preparing for private equity interviews by buttoning up the story around their relevant experience and interest in private equity, in addition to preparing for paper LBOs and case interviews. Often, candidates will do so with external parties like Wall Street Prep.

Communicating with candidates what your interview process will look like so that they can prepare effectively will give you the best shot at finding the right fit.

Private equity firms that onboard associates from consulting may have to invest more time in training associates, namely on LBO modeling. This can be done by leveraging resources already at the firm, through third-party external vendors or learning on the job in an apprenticeship model.

The takeaway:

While investment bankers continue to be a primary target profile, a growing number of private equity firms have been further diversifying their talent pool, recognizing the strong pre-MBA analyst/associate talent in the top-tier consulting firms.

We suspect more firms will consider this profile for their investment team associate seats in the coming years.

To learn more, visit our private equity webpage or contact us.