PE & VC Careers: Harvard MBA Indicator and Recent Developments

 

The Harvard MBA indicator was started and maintained by Roy Soifer, consultant and former HBS student. It represents a long-term stock market indicator that evaluates the percentage of Harvard Business School graduates that accept “market sensitive” jobs in fields such as investment banking, securities sales & trading, private equity and venture capital. If more than 30% of a year’s graduating class take jobs in these areas, the Harvard MBA Indicator creates a sell signal for stocks. Conversely, if less than 10% of graduates take jobs in this sector, it represents a long-term buy signal for stocks. In addition, it is also useful to analyse the attractiveness of jobs in finance. Indeed, during the last decade, the indicator has been heavily skewed towards jobs in sectors such as Venture Capital and Private Equity and, in particular after the crisis, Harvard MBA alumni have even further shunned IB and IM.

The investment management industry has been on the decline for the last decade -especially after the crisis – reducing its appeal for potential employees. Active management has always been deemed by most an ideal career in finance thanks to its great work-life balance, but the industry has been recently under high pressure because of automation and the relentless rise of the passive management industry.

The first agent of disruption is the one that could impact more aggressively on the industry in the long term. In particular, the so-called roboadvisors could easily replace many jobs among asset managers. Even wealth management – meant as specialized asset and portfolio management for high net worth individuals – could be affected. Indeed, especially among the youngest, many clients in this bracket (HNWI, that is the most profitable segment), have been open to the possibility of taking investment advice from roboadvisors and thus giving less importance to the always-touted human touch and relationship building elements.

The second agent of disruption, the surge in popularity of passive investing, has more dramatically affected the investment management leading to massive outflows of capital from the actively managed funds to the passively managed ones.

As opposed to the aforementioned fintech innovation, traditional asset managers have limited leeway in reacting to the rise in ETFs because the causes of their popularity among investors are enrooted in the inherent nature of the markets. The main reason is pricing: one factor to consider is that over a 10-year horizon, 83% of the actively managed funds in the US were unable to beat their chosen benchmark. Not only did they underperform their benchmark but if fees are to be considered the situation gets even bleaker.[1]

Therefore, it is safe to say that the industry is experiencing an unprecedented bout of upheaval, translating into diminishing job security for those involved.

Investment banking, similarly, has suffered job-wise from trading automation but most importantly has been harshly affected by regulations established after the financial crisis. However, the disruption elements have taken their toll on the industry unheavenly: on the one hand, most financial institutions have revised downwards their headcount when it comes to investment banking; on the other, trading has been the most affected both due to automation, the ban on proprietary trading (Volcker rule) and in general due to a greater emphasis on risk management with measurements such as increased capital buffers and less lenient regulation overall regarding risk-taking.

It is undeniable that banks are currently facing a complex financial situation, as the sub-zero interest rates demonstrate, thus institutional investors are eager to get exposure to alternative investments, in their quest for index-beating returns.

All of that considered, the decline of the two sectors mentioned beforehand has brought upon us a constant inflow of assets and human capital from other asset classes to Private Equity.

That said, practically speaking, Private Equity has simply become a far more attractive sector for bankers: the PE lifestyle involves compelling work and typically higher pay, which certainly attracts many potential workers; at the same time, the peculiar nature of this sector combined with the fewer jobs opportunities available – compared to IB and IM – led to a higher competitiveness and efficiency of the whole industry.

Similarly to Private Equity, the aforementioned inflows have also heavily benefitted Venture Capital.

The logic behind its greater allure for workers is to be found in the overwhelming success of certain widely known VC-backed start-ups. Venture Capital firms tend to primarily focus on the high-tech sector, and as a matter of fact, a considerable number of Silicon Valley start-ups are linked by a common trait: whether making profits or losing money, they have all taken millions in funding from Venture Capital firms.

Furthermore, it is unquestionable that this sector has become even more glamorous thanks to the success of VC-backed start-ups such as Facebook or Google which could not have achieved the same result had they not been funded by Venture Capitalists.

In conclusion, we can say that the overall job market prospect will probably continue to be overwhelmingly positive for PE/VC and neutral to negative for IB and IM.  That said, regulatory interventions could make PE less attractive, such as the removal of the carried interest tax treatment or of the deductibility of interest payment or, on the other hand, the easing of post-crisis financial regulation may make Investment Banking more appealing.

 

Authors: Francesco Rassu, Goffredo Casadei

Editor responsible: Carmelo Spallino

Bibliography:

[1] https://www.ft.com/content/6b2d5490-d9bb-11e6-944b-e7eb37a6aa8e

Other sources: