Morning Coffee: Consulting firm that wasted $600m asks students to defer for $1k a month. The problem with the new passion for carried interest payments
When banking has a cold, you can usually guess that other professional services firms are likely to be suffering from pneumonia. That's particularly true for elite-level management consultancy brands like EY-Parthenon. Lots of their services are transaction-related and involves fishing in the same revenue pool as the M&A bankers. And a lot of the rest of their work is the kind of strategic thinking that seems like a luxury to clients when revenues are tight.
That’s presumably why the Financial Times is reporting that EY has looked at “emerging business conditions and our assessment of our business needs” and told some of its graduate intake that they now won’t be needed until June 2024. This is the second time those students been deferred: they were due to start in July '23, but EY initially asked them to wait until December or February. Now they need to wait another six months again.
Some of the intake are apparently having their start dates accelerated, but there’s still a lot of cross young people out there – particularly the ones who had signed accommodation contracts after already having been delayed once, to December or February. “We could have planned something entirely different, such as an extra year of school or finding a better internship or job. Instead, we have been stuck in this in-between place,” one complained to the FT.
Delaying start dates isn’t by any means unknown in the industry, but delaying twice is. It stores up problems for the future. Either EY-Parthenon now reduces its graduate recruiting program significantly for 2024 (something big firms are always reluctant to do because it is seen as damaging the brand on campus). Or it will have to effectively deal with a 2024 intake that’s significantly larger than usual.
EY is trying to sweeten the blow, but it's not trying that hard. Students who've been asked to defer again are being offered $5k for the inconvenience, which won't go far towards paying rent. It doesn't look much alongside the circa $600m the firm wasted this year on its failed breakup plan.
It seems that EY believes it would be counterproductive to have the office filled with mopey young people without enough to do. The email announcing the delay says that “Your early experience in the practice is important for setting you on a strong trajectory, and we believe that you’ll have a better opportunity to grow, develop and progress in the practice with a July start date”.
Elsewhere, it’s pretty famous among the large quoted private equity firms that even though performance fees (“carried interest”) are fundamental to the economics of the industry, investors think they’re nontransparent and volatile, and so don’t value them anything like as highly as management fees. Consequently, it’s not surprising that the trend is to increase the extent to which shareholder dividends are paid out of the steady income while employees take a greater share of the carry. Apollo and KKR are the latest firms to move in this direction.
Cynics might say that there’s an implicit forecast here – if the private equity guys are volunteering to change the split in this way, it might imply that they’re expecting the carried interest to be surprisingly profitable on the current vintage of deals.
Which is one possibility. But there’s a problem with it – the industry is shifting, rapidly, in the direction of credit funds. And it’s very difficult earn the same kinds of outsize percentage returns on debt investments. That raises another possible motivation for the decisions to rebalance in favour of shareholders – we have now reached a point at which the top management of private equity firms own so much of their company’s own stock that the value of their holdings is more important to them than the carry on their deals.
So their interests are aligned with the shareholders. Which is good news – for the shareholders. For private equity partners a few rungs down the ladder, it’s not so great; the management incentives may no longer be so closely aligned with their people.
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