DEALTALK-Private equity firms not immune as job cuts bite

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By Megan Davies

NEW YORK Dec 17 (Reuters) - Lucrative private equity firms have not escaped the avalanche of financial sector job cuts this year and insiders expect worse to come as raising and investing cash remains tough.

Large and small firms alike have been cutting back, including 3i Group Plc (III.L), Blackstone Group LP (BX.N), The Carlyle Group [CYL.UL] and American Capital Ltd (ACAS.O). Those who haven't yet wielded the ax are expected to start soon.

"I'd expect continued pressure on expenses and therefore compensation," said Michael Holland, founder, Holland & Co and a former Blackstone partner. "Until things change, there will be continuing pressure to downsize. It is directly related to how long it will take for this cycle to improve."

With an estimated 76,700 people employed worldwide by the industry at the beginning of 2008, according to research company Preqin, cuts haven't been as large or headline grabbing as the thousands of jobs lost at Wall Street banks. Financial companies have announced more than 250,000 job cuts this year alone, according to outplacement firm Challenger, Gray & Christmas Inc.

London-based 3i Group Plc has said it is reducing headcount by about 100 people, while American Capital is cutting 110 positions. Carlyle is cutting about 100 jobs and Blackstone about 70, sources previously told Reuters.

The impact of layoffs in the industry will likely be felt most in New York and London, where according to a study by Private Equity International, 52 percent of the largest firms have their headquarters.

But the industry could shed jobs in New York and London and still grow worldwide, said Josh Lerner, a professor specializing in private equity at Harvard Business School

"You can imagine that there's going to be considerable opportunities going forward -- but different opportunities," Lerner said in a recent interview. "You can imagine a bigger chunk will be more complicated deals in emerging market settings. So the absolute staffing levels may not go down, it may go up, but it could be a change or mix of personnel."

The structure of firms could change, said Dennis Carey, a senior client partner at Korn Ferry International who head- hunts executives and CEOs for companies.

Private equity companies over the last couple of years began to add functions such as chief human resources officers or strategic planners.

"They started to almost look as though they were developing a corporate-like structure," Carey said.

Some of those functions could be jettisoned and the roles pushed back to the portfolio company level.

"I think that's where the cuts will come from," he added.

FUND SIZE KEY

Predicting staff levels ultimately comes down to predicting fund sizes, Lerner said.

"Clearly, if there are considerably smaller funds there are less management fees to go round," he said.

Anecdotal and survey evidence indicates bad news on that front, too.

A recent survey by Coller Capital found four out of five large investors in the United States refusing to plow money into new fund-raising from private equity firms they previously backed if their funds had underperformed, diverged from their core focus or lost some key staff members.

But some thought the industry would be cushioned to some extent by the long-term aspect of private equity, with funds invested over a long period and investors expecting returns years down the road.

"I wouldn't expect to see lots of layoffs from private equity firms, although I would expect some fund-raising disappointment," said one private equity executive who requested anonymity. "Maybe hiring plans will be scaled back."

The bigger impact on employment would come from the knock- on effect of fewer deals, which translates into less leveraged finance and M&A positions at banks, the executive added. (Editing by Andre Grenon)