Interesting Times for Private Equity

I've written previously about the intense interest in private equity careers among my MBA admissions clients. From the article I referenced in that post:

Thirteen percent of Harvard Business School's 2006 MBA class took jobs in private equity, making it the most popular finance destination, topping even investment banking. At Stanford Graduate School of Business, the percentage of graduating MBA students taking the private equity path has steadily risen since 2002 and rose to nearly one-tenth of the class last year.

Some might argue that all that interest from MBAs means private equity is topping out. From a classic but still timely International Herald Tribune article from January 1994 ("Their Careers Hint at Where Not to Go"):

Do you want to find the perfect negative indicator? The investment industry abounds with negative indicators[,] financial slang for where not to put your money. Here is a relatively untried one: Keep an eye on people long on greed, long on debt and short on foresight - people who go where the short-term returns seem highest. Bet with them when they start to show interest in a sector; bet against them when their interest reaches a feverish high.

And who should we watch? Try graduating MBAs, and who better than those from Harvard? These debt-laden pinstripers have a history of chasing after the latest hot and soon-to-be-overvalued job in the latest hot and already overvalued industry. The equation can be observed time and again in industry after industry: The longer and bigger the boom, the higher the starting salaries, the greater the number of MBAs and the harder the crash.

The article looks at some interesting data from the years in which MBAs were flocking to investment banking and later consulting. It also tracks spikes in entertainment and media, health care and pharmaceuticals, real estate, what the article quaintly calls "computer systems," and energy. The data are pretty compelling and seem to suggest that private equity could be peaking.

On the other hand, it's not obvious that the industry is overhiring. This recent posting in the WSJ's Deal Journal blog demonstrates the grim odds of getting an offer from rock-star Cerberus Capital Management with its $26 billion in capital:

Cerberus hired 110 people since November 2006, according to a presentation put on by Cerberus operations chief W. Grant Gregory. And that was from 2,500 interviews, the presentation noted.

That equals a 4.4% hire rate. And that's from among those who are interviewed, not, obviously, from those who express interest, send resumes, or are recommended.

But even then be careful what you ask for. Gregory said "Frankly, our work ethic is pretty severe."

Still, the chatter about recent LBOs showing signs of strain, combined with new legislative assaults on the tax treatment of private equity profits in both the UK and the US, makes me wonder whether there are rocky times ahead for LBO-hungry MBA applicants.